Brookfield, CGI, Great-West Among Canadian Firms at Brexit Risk

  • Stocks with European exposure join rally on ‘Remain’ Optimism
  • Brexit would have limited impact on Canada’s economy

Brookfield Asset Management Inc., CGI Group Inc. and Great-West Lifeco Inc., the Canadian firms most exposed to the European market, have led a stock rebound ahead of the U.K. referendum amid growing optimism voters will back the status quo.

Canadian stocks with the most assets in Europe have gained 1.6 percent this week, double the increase for the broader Canadian market as a shift in the polls show the Remain camp has a slight edge over those urging the U.K. to break away from the European Union.

Canadian companies with revenue and real estate in the U.K. will be watching the vote closely, said Ian de Verteuil, a Toronto-based analyst with Canadian Imperial Bank of Commerce who created a Brexit index to track Canadian stocks most tied to the vote. For the year to date, the 19 so-called Brexit stocks have risen just 2.8 percent, less than half the 7.7 percent gain for the benchmark S&P/TSX Composite Index.  

"Like many variables that investors deal with on a daily basis, Brexit is a known unknown, one where very different investment actions will be required depending on the outcome," de Verteuil said in a report last week.

The outcome of Thursday’s vote is far from certain. A Survation poll showed 45 percent of voters backed the Remain camp, while 44 percent were in favor of the U.K. leaving the union. Bookmakers, on the other hand, are firmly in the Remain camp, pegging the probability of a vote to quit the union at about 26 percent, according to Oddschecker.

Other firms with relatively large exposures include software company Open Text Corp.; plane and train maker Bombardier Inc.; aircraft simulator maker CAE Inc. and engineering firm WSP Global Inc.

Collectively, less than 3 percent of the S&P/TSX company revenue is derived from the U.K., according CIBC’s estimates, so a decision to quit the EU should have a limited effect on Canada’s economy.

"The impact will be pretty marginal overall," said Richard Nesbitt, chief executive officer of Toronto-based research firm Global Risk Institute.

He said the larger concern is the instability an exit vote would bring the global economy, in particular in the embattled EU.

"The world is approaching a crescendo of volatility," he said. "This just adds to their problems."

Canadian companies with most at stake:

Brookfield

Canada’s largest alternative asset manager has the greatest exposure for Canadian firms with about 13 percent, or $32 billion, of its $240 billion in assets under management in the U.K. and Europe. Those investments include London’s Canary Wharf, which it owns in partnership with Qatar Investment Authority, and British resort operator, Center Parcs, which it has acquired in recent years.

Bruce Flatt, Brookfield’s CEO, said an interview last week he’s firmly in the Remain camp, saying the U.K. and the EU are “inextricably tied for trade and commerce."

“We have a significant business in London and the U.K. in general. Some businesses we have will be impacted and some won’t be,” he said at the company’s annual general meeting Friday. “We’re strong in the camp that the U.K. should remain.”

Open Text

The Waterloo, Ontario-based software firm gets about a third of its revenue from Europe, according to its most recent financial statements.

Open Text’s customers include EU institutions like the European Central Bank, and the biggest portion of its European business is in Germany, Austria and Switzerland, CEO Mark Barrenechea said in a phone interview.

"We’re going to be relatively neutral in our business whether Britain remains or leaves,” he said. Open Text moved its European headquarters to Germany three years ago so it won’t face any issues with labor laws if the U.K. departs.

“We run the U.K. out of the U.K.; we run Europe out of Germany,” he said.

Lundin Mining

There is a risk that additional EU countries would would follow the U.K. lead if it chooses to leave the union, said Paul Conibear, CEO of Lundin Mining Corp. He said that potentially includes Sweden, where about 10 percent of Lundin’s revenue is derived, according to data compiled by Bloomberg.

“Stability is always better than instability and a Brexit will lead to a period of instability in European currencies," Conibear said in an email, adding that any currency weakness would provide a short-term boost. 

"A period of extreme instability in Europe and economic uncertainty would shake international economic confidence and base metal prices almost inevitably could fall," he said.

Former Canadian Prime Minister Brian Mulroney said the British are “too sensible” to leave the EU.

“It would be disastrous for the United Kingdom if they voted to leave,” Mulroney said Tuesday before an interview on Bloomberg TV Canada in Toronto. “They would be excluded from much of if not all of the advantages that come from membership in Europe.”

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