CETA and Brexit: How Will Britain’s New Referendum Affect Canadians?

People are reacting in many different ways to Britain’s exit from the European Union. Some are supportive while others condemn the actions of the country that has long had mixed opinions among its populace as to whether they should stay a part of the conglomerate of European nations. One thing that many Canadians are wondering about is how Britain’s new referendum will affect their finances. Again, there are many possibilities, but it is important that people understand the facts of the situation before making major predictions.

How Brexit Could Affect CETA

The Comprehensive Economic and Trade Agreement is an agreement between Canada and the EU that allows Canadian companies access to the EU’s market. With the uncertainty created by Britain’s move to leave the EU, some think that Canada should avoid making any big moves until the effects of the Brexit can be better understood. The fact is that while it is likely that Britain’s referendum will go through, it is also possible that the country’s Parliament will reject the movement outright.

It is possible that the CETA will suddenly become an important strategic aspect of Canadian international relations in a way that it hasn’t before. If Britain attempts to remain in free trade with the EU, it is possible that it may face major concessions if it is to be allowed such access at all. The CETA is a way for Canadians to maintain ties with the EU in new ways.

Previously, relations with Britain were a major part of Canadian businesses’ entry into the rest of the EU. The new changes may open the doors to more diverse methods of trading that had previously not been considered when most Canadian CEOs enacted their transactions with the EU through their London offices. Now, Canadian businesses must find new ways to leverage the connections formed through the CETA, perhaps tapping into their links to France, Belgium, and Germany, along with other continental partners.

Reallocation of Resources

Some, such as Charles St-Arnaud, who works as an economist in London at Nomura Global Research, insist that the Brexit will be negative for Britain’s economy. However, how significantly this will impact Canada remains in question. For one, it will depend on how Britain chooses to act. In order to maintain its economy, Britain will have to allocate its resources towards other free-trade agreements, such as with non-EU countries and possibly the United States. St-Arnaud hypothesizes that Canada would be at the bottom of the UK’s list of potential new trade partners.

Whatever happens will surely have consequences for Canada, however, Canadian businesses will also have a say in the matter. The UK has been Canada’s biggest business partner in the European region, and if businesses in Canada wish to continue such exchanges in the wake of the Brexit, Canada’s government would first have to pursue a new trade agreement with Britain. As of now, Canadian officials will not discuss the possible impacts of the Brexit on trade relations. This is probably for the best until things stabilize.

What Financial Advisors Have to Say About the Brexit and Canada

While it is possible that the Brexit could bode significant consequences for Canadian business, it is impossible to be entirely certain as of yet. One thing to keep in mind is that the Canadian dollar has only fallen 1.5 percent in global stocks since the Brexit. Canada remains in active trade with the other nations in the EU, and it may turn out that the only country to really experience major losses as a result of the Brexit will be Britain itself.

In looking towards the future, financial advisors have their input on the situation. The words of Fisher Investments on Brexit remain skeptical and analytical. They have noted that in order to arrange an exit from the EU, member nations must negotiate exit terms, and they have two years to do so. It seems likely that the EU will wait until after elections in the UK. David Cameron himself stated that he would leave his office by October of 2016, leaving the question open as to whether the UK’s resolution will end up sticking in the long term. Vanguard’s Peter Westaway notes the Brexit impact on UK investors is significant, but comparatively minor for the Canada and rest of the world.

The Changes to Come

While things remain uncertain about the full scale of the impacts of Brexit on Canada and its businesses, it is best for people who hold large assets to be wary of making major moves regarding the EU and especially the UK. While CETA maintains its integrity, the shift in the EU’s economy may yet have unforeseeable consequences.

Stock Arbitrage: Tread Carefully and There Are Profits to be Made

When people think of Warren Buffett, the greatest investor of all time, they often focus on his knack for picking cheap stocks, or the extra free leverage gained by his massive insurance operations, or even Berkshire Hathaway’s new focus of buying whole companies to add to its already impressive empire.

What doesn’t get much attention is Buffett’s skill in stock arbitrage, a skill which has accounted for a surprising amount of his ability to generate wealth.

What exactly is stock arbitrage and how do investors use it to make money? Let’s take a closer look.

The basics of arbitrage

Arbitrage is the act of buying in one market and selling in another, taking virtually guaranteed profits in the process.

Say the price of gold was $1,000 per ounce in London and $1,005 per ounce in Paris. Since gold is gold no matter where it trades, a person could make a risk-free profit by loading up on gold in London and then selling it immediately in Paris.

Since information now moves so quickly, these types of situations never happen anymore. However, investors can still make money on stock arbitrage by investing in events that have a very high likelihood of happening.

The easiest situation is a friendly acquisition, like a company buying a competitor. Say shares of the competitor trade at $20 per share before the offer comes in. The acquiring company offers $30 per share, and everyone is happy with the deal. Closing is expected to take approximately six months.

In response, the market bids up shares of the target company to $28 per share. There are two reasons why shares don’t immediately trade at $30 each. Firstly, there’s a small chance the deal gets scuttled somehow. Perhaps regulators don’t like the amount of market share this new company will have. Or maybe the buyer’s financing is somewhat sketchy.

The other reason is because of the time value of money. Investors need a compelling reason to put their money into an opportunity. Without being compensated for both the risk and locking up capital that could be put to other uses, arbitrage opportunities wouldn’t exist.

A cash offer is the simplest arbitrage opportunity. Often, instead of offering cash for their prize, an acquiring company will offer a combination of cash and shares, or just shares. Investors can still make money on these sorts of arbitrage deals, but they’re much more complicated. I’d recommend leaving these deals up to the professionals.

Making money on arbitrage deals

There are two keys to making money on these kinds of situations.

Firstly, an investor has to be nearly 100% sure a deal will go through. It takes a lot of successful arbitrage transactions to make up for just one that goes badly.

You have to look at the details of the deal to determine the chances of success. A company with a controlling shareholder who wants the deal to happen is a good thing, for obvious reasons. So is a deal where everyone knows the company being acquired was for sale.

The ability of the acquiring company to buy should also be scrutinized. If a company agrees to pay $100 million for a competitor and it has $150 million in cash on its balance sheet, the deal is much more secure than if the same company has to borrow the $100 million.

Often, a company that needs to borrow the money for an acquisition will talk to bankers before the deal is even announced. Then the company will announce with the deal that financing is already in place. This is a good thing, almost as good as having the cash on hand.

But on the other hand, a company might have no idea where they’re going to get financing once an acquisition is announced. That could be bad news for the deal’s completion, which is what arbitrage investors want to avoid.

What kind of returns?

These days, depending on the deal, investors can expect about a 10% annual return on what I’d call safe arbitrage situations. Returns much greater than 10% annually are out there, but they’re from deals the market thinks are risky.

Generally, investors should be waiting until only a month or two before a deal is scheduled to close. Yes, returns are lower–at least compared to four or six months out–but these deals tend to have a higher completion rate. The key to successfully pulling off this strategy is minimizing losses, not going for the best gains.