- S&P/TSX may fall as much as 12% or jump 8% depending on vote
- Cheap bullish options on Canada stocks a buying opportunity
Whether Britons vote to leave the European Union or agree to stay, Manulife Asset Management fund manager Steve Belisle plans to be a buyer in the Canadian stock market.
The bigger question at the moment is what he will be buying -- energy stocks in an exit or the big banks if the U.K. votes to stay.
“There’s more downside if there’s a leave at this point than upside in a remain scenario,” Belisle said in a phone interview Wednesday from Montreal. His team manages about C$3 billion ($2.4 billion). Manulife Asset Management oversees about $325 billion. “We will be a buyer in a leave scenario, looking at stocks we like that overreact. If there’s a remain, we will probably buy but to a lesser extent.”
The S&P/TSX Composite Index surged 0.9 percent as global equities rallied with Britons at the polls. The Canadian benchmark has jumped 8.7 percent this year, the most among developed markets tracked by Bloomberg amid rallies in commodities producers.
Belisle has an elevated 6 percent cash position in his portfolio, and suggests investors “play defense” in preparation for the voting results. Polls close in the referendum at 10 p.m. London time. Polling before Wednesday suggested the vote is finely balanced between the two camps, while financial markets and betting odds indicate “Remain” is on course to win.
In the event of a Brexit, developed world markets could plunge as much as 8 percent over the following two trading days, Belisle said. The Canadian market meanwhile could drop 6 percent to 12 percent. If there is a correction in crude prices, Belisle will be on the hunt for Canadian energy stocks.
“It gives us an opportunity to buy lots of oil companies at cheaper prices,” he said. WSP Global Inc., an engineering services company with offices in 40 countries, is another stock to consider, he said.
If the U.K. votes to stick with the EU, Belisle will consider Canadian and U.S. banks amid “more widespread buying” as the overhang of Brexit concern fades. In such a scenario, global stocks could gain about 5 percent over several days, with the S&P/TSX having as much as 8 percent upside.
With investors paying a premium for protection against calamity in the equity market, this presents an opportunity for options investors to take advantage by buying cheap calls if Brexit fails, according to Hans Albrecht, a fund manager at Horizons ETFs Management Canada Inc.
A measure of the spread in prices between 1-month bullish and bearish options, or skew, in the iShares S&P/TSX 60 Index exchange-traded fund, the largest, most liquid ETF in Canada, jumped to the highest level since 2011 Wednesday, according to data compiled by Bloomberg.
Even after the S&P/TSX rally this year, the too-close-to-call outcome of the vote and the low cost of contracts that pay in the event Canadian shares rise make now the time to boost bullish bets, Albrecht said.
“Right now you either have nothing going on in the market or you have everyone overdoing it on the fear side,” Albrecht said. Horizons manages about C$5.4 billion in ETF products. “With bullish sentiment levels at multi-year lows and in some cases multi-decade lows, buying inexpensively priced upside calls makes great sense. It’s a great time to own upside calls. They’re way cheaper than they usually are.”
The vote’s impact on Canada’s currency meanwhile is likely to be muted, said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia.
“Our fundamental ties with the U.K. make up a small portion of the economic pie,” Osborne said in a phone interview from Toronto. The U.K. is Canada’s fifth-largest trading partner, with about $21.2 billion in total trade last year, compared with more than $540 billion for the U.S.
Osborne estimates the Canadian dollar, or loonie as it’s known locally, may strengthen to as high as C$1.2650 in the event of a “Remain” vote, or fall to C$1.34 against the U.S. dollar in an exit. The loonie fell 0.7 percent to C$1.275 at 11:26 a.m. in Toronto trading.
Either way, the impact on North American equity markets will be short-lived, Manulife’s Belisle said. Once the referendum excitement dies down, investors will turn their attention back to more pressing issues including the upcoming U.S. presidential election and the pace of potential interest-rate increases at the Federal Reserve, he said.
“Things will settle down and then we will go back to our more typical concerns,” Belisle said.