Update (June 24): Britain has voted to leave the European Union
While the average Canadian portfolio isn’t highly exposed to Europe, the effects of a “leave” vote could still be felt here. In that scenario expect a sudden surge of money flowing out of Britain and the European Union into the safety of U.S. assets like gold and treasuries, sparking a rally in the U.S. dollar.
A surge in the U.S. dollar in response to a “leave” vote would likely be the biggest effect on Canada, but it wouldn’t be the only one. While Canadian equities are fairly insulated from Europe it could affect certain companies and sectors, says Paul Taylor, a senior vice president and chief investment officer at BMO Global Asset Management. Magna, for instance, has some European exposure as do some of the other heavy industrials like WSP, the global engineering service company, notes Taylor.
Stay or go, there could be implications for Canadian investors, but a vote for Brexit is the outcome investors need to be most concerned about. “There is more downside than there is upside,” says Taylor, noting a “remain” vote isn’t likely to spark a rally. “I would argue from an equity market perspective there is two-and-a-half to three dollars on the downside for every dollar on the upside, leave versus remain.”
In some ways much of the activity on global markets in recent weeks can be tied to a growing awareness of just how close the vote is expected to be. Clearly, the biggest impact of the vote will be on U.K. and European markets. For investors with a diversified portfolio, with some exposure to Europe, a “leave” vote will likely mean a drop in U.K. equities while gilts, or British Treasuries priced in sterling, will likely move higher. The U.K. sterling and euro will both trade lower as well. “If they vote to leave then the risk-off would be in vogue,” he says, meaning a shift to safer, lower-yielding investments. “Sterling would fall and flow to hard currencies like the U.S. dollar.”
A bigger concern among market watchers if Brexit gets the green light is who’s next. If Brexit faces a resounding defeat then the issue will go away for a while, but if the vote wins or loses narrowly—as polls suggest may happen—then it could lead to a referendum somewhere else in the EU. “It’s not completely implausible to see this as the beginning of the end of the euro,” says Jurrien Timmer, Director of Global Macro at Fidelity Canada. If this is the start of a larger systemic trend, then he feels the vote could have larger implications, particularly for the U.S. dollar and gold.
“If you lose the second-largest currency then you can imagine that gold will catch a bid,” says Timmer. “That would be the most actionable investor play.” In that event, he suggests sticking with gold bullion rather than investing in miners, even though they could have more upside.
Regardless of how the vote turns out, investors would be wise to stick to their current plan, says Timmer. Taylor agrees. Should markets pull back, investors can seize the opportunity to buy while prices are low. “If the market has a bit of a hissy fit I would argue that investors buy into that dip,” he says.
Both Timmer and Taylor add that even in the rare event of a “leave” vote it will take years before anyone will really know what this will mean for the EU in the long term. Through that lens, the Brexit vote isn’t all that different from Russia invading Ukraine or the Greek debt crisis: it may lead to a short term disruption, but in a few weeks the market will realize this, will take some time to sort out and likely rebound in the event of a sell-off.
But all things considered a “stay” vote is probably best for your portfolio.