It’s been over a month since Britain decided to leave the Euro and since then, Brexit has nearly been forgotten from the popular Canadian news stream. Trade with Britain is only a small part of the Canadian economy – many estimate it’s as low as 3% – making its direct influence very minimal. However, we do live in an increasingly connected world and we can expect future economic ripples to affect Canadians.
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The first part of this article can be found here.
Stocks/Mutual Funds and ETFs
Likely, the biggest impact to Canada will be from increased global instability that will periodically spike from future Brexit decisions and problems. This instability will also have the potential to persist for extended periods of time. Undoubtedly, we can expect future moments of panic that will cause investment markets to become increasingly volatile.
Stocks, mutual funds and electronically traded funds will be affected in the short-run by this increased volatility. Many corporations operate globally and have direct exposure to the United Kingdom. These companies are found within popular mutual funds and ETF. Meaning that many mutual funds and ETFs have direct exposure to Brexit.
If volatility is powerful enough, it has the potential to expose other global financial weakness that can create a domino effect. This is a worst-case scenario, but is unfortunately a possibility.
On the bright side, these periods of volatility will yield investment opportunities. Companies that have strong fundamentals and are temporarily undervalued can be very profitable.
With the increased risks of future global instability, the Bank of Canada will be more hesitant to increase their overnight lending rate. The Bank of Canada will add Brexit to their growing list of global economic concerns and then weigh these against any reason to raise the overnight rate. Issues that are on the Bank of Canada’s collective minds include; the slow down in western Canada’s oil production, persistently low global inflation, a stubborn unemployment rate and other global economic concerns.
This means that there is a greater probability that interest rates will remain low for a longer period of time. This will translate to a continuation of our low-interest rate environment with low savings account, GIC and mortgage rates.
It’s good news for travellers that are venturing to the United Kingdom for their summer vacation. We’ve seen a 17% degradation of the Sterling Pound’s value over the last year. So your Canadian dollar will go much further than it has in the past.
There’s also a fairly high chance that Brexit’s instability will reverberate to the Euro and cause it to fall in value too. Right now, the Euro is pretty much unchanged from a year ago, but that could easily change.
Another area that may be affected by instability is the prices of commodities. Commodities include quite a few items like oil, gold, silver and more.
For example, investors put their money into gold and silver when there is global instability or high inflation. The idea behind this is that investing in gold provides security and this is exactly what’s happened over the past year. The price of gold is up by 23% over the last year; admittedly, this is not just due to Brexit but it did play a part.
Likely, Brexit will not cause a disaster, but it will play a role in some future economic volatility. The unwinding of Brexit will take several years and we will see occasional economic fluctuations that emanate from it. In Canada, we’ll see a moderate affect on our investments with some being affected more than others.
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