A week ago, investors awoke to some of the wildest gyrations in global stock and foreign exchange markets, ostensibly, since 9-11. The panic that ensued left many baffled, leaving investors generally asking why on earth market participants were so uniformly unprepared by what was, in fact, a distinct possibility.
On one end of the pond, European markets were clearly affected, with red signals signaling distinct drops in asset values, clearly visible on all screens from chief headlines to technical financial indicators or Bloomberg terminals. Where does Canada's economy stand in light of the United Kingdom's resounding slash into the capital markets' expectations of the whole of Europe's economy in the short term?
While investors were wrong to panic as they did over the past days about the outcome of Brexit, there are a number of reasons for reasoned Canadian investors to be especially cautious with regards to development in the U.K. going forward.
Brexit is only the first of many such events to hit the global economy moving forward. The uncertainty with regards to policy will affect Canadian investment abroad, and the monetary policy implications of this uncertainty will have a direct impact on a number of Canadian assets at home, including the price of oil.
Many have already complained over the past few years that U.S. Federal Reserve chairwoman Janet Yellen's quantitative easing approach, a mass printing of money in order to stimulate lending in a skiddy American economy, is messing with Canadian asset prices. Well, this complaint is about to be even more irrelevant to policy decisions, as the political uncertainty caused by the Brexit vote directly translates into a greater need for central banking support in order to prevent a global return to economic recession.
This means that Canadian investors worried that the printing of excess cash in the U.S., the U.K., the EU and Canada will further inflate house prices beyond any level of reason indeed do fear correctly. It might throw more wrenches in Stephen Poloz's plan in the event that the Bank of Canada had any intention of cooling price rises in Canada's domestic housing market. Brexit just made it almost unreasonable to expect effective central banking action in Ottawa to rein in real estate prices.
Beyond the pall of monetary policy indecision, Canadian investors have every reason to pay particular attention to Brexit's implications for the price of oil and other prized commodities like gold and silver going forward.
As many know, the price of oil is vital to the health of Canada's economy. It's been recovering from its lowest price in recent memory since the beginning of 2016. This recovery of the price of oil is in question, as the U.K.'s political wrangling and uncertainty spills into widespread uncertainty as to what happens to the country's vast holdings of North Sea oil. This is especially so if Scotland's leader, Nicola Sturgeon, chooses to seriously pursue independence from the U.K. in order to retain its membership in the European Union, as is currently being hinted by news outlets worldwide. This uncertainty could work out in the Canadian economy's favour in the event that the political events in the weeks ahead lead the markets to push oil prices even higher. Another development to watch for.
So, what happens to the $23 billion in Canadian assets invested in the United Kingdom in light of Brexit? Will other financial assets be affected? The answer to these questions is not clear as of today.
The Canada Pension Plan Investment Board invested billions into the U.K.'s economy because of its inherent dynamism, and because of its key role as a launchpad onto the world's largest single market. Clearly, the vote to leave this very market is raising some serious questions as to whether London still deserves to be Europe's largest financial epicenter, whilst outside of the Union. Should Frankfurt replace it? Would Paris do, instead?
On balance, Brexit is forcing the U.K.'s policymakers to decide exactly how they will maintain London's attractiveness to international investors whilst outside of the EU, and the policies announced to confirm this possibility will have a direct impact the fate of Canadian foreign direct investment in the U.K. It will almost definitely raise a number of questions about Canada's banking sector, and its readiness to serve as one of many safe havens in the meantime.
Brexit also has some obvious implications for the immigration status of hundreds of thousands of Canadian expats working in the United Kingdom, many of whom must now rethink their professional arrangements, whether they would like to or not. Mass redundancies at firms such as J.P. Morgan in the financial services sector, and in several other major ones from the New York Times to Yahoo, are being announced this summer.
Though the outlook for employment prospects will likely clarify by the end of the season, it must be said that in fairness, Brexit presents Canadians with more opportunities than it does disasters. In a world of financial and economic inter-connectedness it would be foolish to suggest that there won't be any knock-on effects from the hitherto number four largest economy worldwide in its political convulsions, but from this particular writer's standpoint, Canada's economy is sailing safely going forward.
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