The Brexit blueprint for Canadian investors

What is the end-game, and what value can British equities bring to portfolios today?

Ruth Saldanha 15 March, 2019 | 2:00PM

 

 


Ruth Saldanha:
Theresa May's Brexit deal proposition was defeated for the second time on the 12th of March, just 17 days before the Brexit deadline, the day after the U.K. parliament voted against leaving the European Union without a deal and a day after that they voted to extend the March 29th Brexit deadline. What does this mean for Brexit? And what should Canadian investors look for? Asset Allocation Director at WisdomTree Jeff Weniger is here to share his perspectives.

Jeff, thank you so much for being here today.

Jeff Weniger: Absolutely.

Saldanha: First up, what do you think is going to happen?

Weniger: Yeah, I know it's a Brexit discussion, it's fascinating, Ruth. I think that the key to understanding and getting your mind around the interrelationship between Britain and the Continental Europe is to really look at the history of Europe and the European project, the European question, various referendums in the last generation. Essentially, what will happen is, is that the Brits will be treated much as the Dutch and the French and Irish were in various European questions through the year.

So, back in '05 the Dutch and the French were asked to essentially ratify the Lisbon Treaty for an EU constitution. They voted no and so they got ignored. This is essentially the way it went. Then in '08, the Irish were asked to ratify Lisbon, they voted no, and they said, no, no, revote. So, they did a publish relations program and they re-voted and voilà, they voted yes. And so, this is where this is going, I think, is the series of extensions. Maybe you extend once, maybe you extend five times. Until you end up getting the initiative, which is the endgame here, which is to get them to vote a second time and then vote, okay, we are sorry; we made a big mistake; we are going to stay. This has been the European game plan for generation. I don't see any reason why the fourth country to do this would be any different than the prior three.

Saldanha: Do you think U.K. equities are attractive right now?

Weniger: Yeah, absolutely. I would say U.K. and European equities. So long as you are hedging back to CAD as your default, we don't see any reason necessarily to be bearing undue pound or euro risk. Because the Brits have their own situation as we've discussed, but the Europeans have parliamentary elections coming up in May. There's big questions as to will the protest parties end up rising there and what good is it losing a nickel or a dime on your exchange rate when you could just own the equities and hedge back to CAD. So, that's something that's a key consideration there. But British equities have a 5% dividend yield. Continental European, Eurozone equities, 3.5%. It's considerably higher than what you can get in the low 3s on something like the TSX Comp. So, there's a value trade there for those that are willing to bear that incremental risk, the political risk.

Saldanha: From an investor's standpoint, you recently analyzed companies that have their revenues both in the U.K. and in the Eurozone. What were some of your key findings?

Weniger: Yeah, absolutely. And you saw this everywhere in 2018. What we do a lot at WisdomTree is screening out companies based on whether or not they had big export businesses, because a lot of the currency hedging concepts that we do at the firm have to do with exporters are more susceptible to the vagaries of their home domestic currency, particularly relative to USD but generally against all payers. And what we found was whether it was in Europe or in Japan or even in China, you've seen it within the state-owned enterprises and the non-state-owned enterprises in China was that there was a key, a critical directional gap performance-wise in 2018 because of trade wars. So, it's going to be the other side of the trade in '19. If trade wars going to get wash your hands of it, Trump ends up making nice with Xi Jinping, everything kind of becomes the opposite of the 2018 trade, then it would the exporters that would end up theoretically regaining market leadership because they woefully underperformed last year.

Saldanha: Thank you so much for joining us with your perspectives, Jeff.

Weniger: Sure, Ruth. Absolutely.

Saldanha: For Morningstar, I'm Ruth Saldanha.

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca