Morningstar
Stock Insight

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
Facebook Twitter LinkedIn
Font-Size

 

 


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.

TAGS
Facebook Twitter LinkedIn
Font-Size

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy       Disclosures        Accessibility

The Morningstar Star Rating for Stocks is assigned based on an analyst's estimate of a stocks fair value. It is projection/opinion and not a statement of fact. Morningstar assigns star ratings based on an analyst’s estimate of a stock's fair value. Four components drive the Star Rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market price. This process culminates in a single-point star rating that is updated daily. A 5-star represents a belief that the stock is a good value at its current price; a 1-star stock isn't. If our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Morningstar Star Rating for Stocks, please visit here

Quantitative Fair Value Estimate represents Morningstar’s estimate of the per share dollar amount that a company’s equity is worth today. The Quantitative Fair Value Estimate is based on a statistical model derived from the Fair Value Estimate Morningstar’s equity analysts assign to companies which includes a financial forecast of the company. The Quantitative Fair Value Estimate is calculated daily. It is a projection/opinion and not a statement of fact. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Quantiative Fair Value Estimate, please visit here

The Morningstar Medalist Rating is the summary expression of Morningstar’s forward-looking analysis of investment strategies as offered via specific vehicles using a rating scale of Gold, Silver, Bronze, Neutral, and Negative. The Medalist Ratings indicate which investments Morningstar believes are likely to outperform a relevant index or peer group average on a risk-adjusted basis over time. Investment products are evaluated on three key pillars (People, Parent, and Process) which, when coupled with a fee assessment, forms the basis for Morningstar’s conviction in those products’ investment merits and determines the Medalist Rating they’re assigned. Pillar ratings take the form of Low, Below Average, Average, Above Average, and High. Pillars may be evaluated via an analyst’s qualitative assessment (either directly to a vehicle the analyst covers or indirectly when the pillar ratings of a covered vehicle are mapped to a related uncovered vehicle) or using algorithmic techniques. Vehicles are sorted by their expected performance into rating groups defined by their Morningstar Category and their active or passive status. When analysts directly cover a vehicle, they assign the three pillar ratings based on their qualitative assessment, subject to the oversight of the Analyst Rating Committee, and monitor and reevaluate them at least every 14 months. When the vehicles are covered either indirectly by analysts or by algorithm, the ratings are assigned monthly. For more detailed information about these ratings, including their methodology, please go to here

The Morningstar Medalist Ratings are not statements of fact, nor are they credit or risk ratings. The Morningstar Medalist Rating (i) should not be used as the sole basis in evaluating an investment product, (ii) involves unknown risks and uncertainties which may cause expectations not to occur or to differ significantly from what was expected, (iii) are not guaranteed to be based on complete or accurate assumptions or models when determined algorithmically, (iv) involve the risk that the return target will not be met due to such things as unforeseen changes in changes in management, technology, economic development, interest rate development, operating and/or material costs, competitive pressure, supervisory law, exchange rate, tax rates, exchange rate changes, and/or changes in political and social conditions, and (v) should not be considered an offer or solicitation to buy or sell the investment product. A change in the fundamental factors underlying the Morningstar Medalist Rating can mean that the rating is subsequently no longer accurate.

For information on the historical Morningstar Medalist Rating for any managed investment Morningstar covers, please contact your local Morningstar office.

For more detailed information about conflicts of interest, including EU MAR disclosures, please see the “Morningstar Medalist Rating Analyst Conflict of Interest & Other Disclosures for EMEA”here

Select Your Site Edition To make sure the site is relevant to you, we need to know if you’re an individual investor or a financial professional.