Brexit - as the vote looms, how will it effect Canada?
Erica Szczech - Jun 14, 2016
Canaccord's Martin Roberge gives his views in his most recent article, where he asked our research analysts in Canada to evaluate the potential impact of a Brexit vote on Canadian stocks that have meaningful exposure to the UK and Europe. In his repo
Brexit - A Sterling idea, eh?
Canaccord's Martin Roberge gives his views in his most recent article, where he asked our research analysts in Canada to evaluate the potential impact of a Brexit vote on Canadian stocks that have meaningful exposure to the UK and Europe. In his report, he also provides commentary on such stocks.
Recent opinion polls and bookmaker's odds suggest that the UK vote on June 23rd is down to the wire. The latest FP Poll (as of June 13) indicates 45% in favour of staying in the EU and 47% in favour of leaving. The consensus amoungst investors is that Brexit could negatively impact global equities, the British pound and the euro relative to the US and Canadina dollars. It could also drive lower bond yields, weaker commodity prices (except for gold) and relapse in emerging market assets.
However, the direct impact apprears realatively marginal for the Canadian stock market, as only approximately 2% of S&P/TSX revenues come from the UK and ~14% from Europe (including UK). Of this total, financials have the greatest exposure at 6.1%, followed by consumer at 3.9% and industrials at 1.9%. This suggests to us that the relative outperformance year-to-date in Canadian equities will not be significantly impacted by the Brexit vote.
We are also not convinced that a UK vote to leave the European Union would result in a disastrous shock for gloabl equities. First, current legislation allows for a negotiation period of two years to resolve disputes on government issues and trade agreements. Second, we believe that a fair portion of Brexit risk has been priced in already. Indeed we conclude that Brexit uncertainty explains much of the underperformance of UK equities and UK banks, and the depreciation of the pound sterling so far this year. Last we saw through the 1995 Quebec referendum here in Canada, underperformance of UK assets before the vote could well correct itself if the UK votes to stay in the EU.
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