Finance Professor Craig Geoffrey, CFA, explains how Canadians may be impacted Donald Trump’s policies
With President Trump now firmly installed in the White House, many investors are nervous. The possible impacts that the 45th President’s promised new policies could have for both the Canadian economy and investors remain unknown, and some are concerned that a combination of Trump’s protectionist ideals and general recklessness could have seriously negative consequences. But for Assistant Finance Professor and former proprietary equity trader, Craig Geoffrey, CFA, the feelings of market uncertainty may be worse than the actual uncertainty itself.
“Right now, we don’t really know which policies will and will not be enacted, which is an issue for the markets because investors don’t have direction,” Geoffrey says. “Trump’s trade policy does have the potential to upset the apple cart that’s been consistent between Canada and the U.S. for more than 20 years. A lot of habit and tradition is built up so that’s making people nervous, but I think that nervousness may exceed what is going to actually happen.”
It does seem as though Trump will follow through with one of his policy promises: renegotiating the terms of NAFTA. In a redrafted version of the agreement, Geoffrey believes that Mexico (and not Canada) will be Trump’s target. Canada is not a lower labour jurisdiction than the states so hardly any U.S. factories relocate here to cut costs. And, as well as creating huge trade disruptions, renegotiation of Canada-U.S. trade policy would create a massive upfront cost.
“I don’t think it will have a huge impact on Canada. It doesn’t make sense for the U.S. to put a tariff on energy exports to the U.S. because U.S. energy independence depends on Canadian oil production,” he says. “I don’t think Canada needs to worry. In fact, Canada may be in a position to benefit from the coattail effect of tariffs put on Chinese or Mexican imports.”
Trump’s plans to increase infrastructure spending don’t seem to fit into the U.S. budget. To make that spending a reality either taxes will have to be increased, spending cut in other areas, or borrowing increased. It’s hard to see how the new President’s plans can be feasible, but the reality is – as with so many other aspects of the new administration – no one can be completely sure about the direction Trump will take.
“If there is going to be more fiscal stimulus from the U.S. government that will give the Fed more room to follow through with rate hikes in 2017,” says Geoffrey. “If the U.S. does start raising rates and Canada does not follow, that differential may start to weaken the Canadian dollar vs the U.S. dollar, which is good for exporters. So, the Bank of Canada may be looking for that differential to help boost Canadian economic growth.”
Considering the numerous situations currently impacting the geopolitical climate, markets have been remarkably quiet. For Geoffrey, no asset class looks terribly attractive moving forward in 2017.
“The balance of risk is on the downside because the usual relationship between stocks and bonds has been broken,” he says. “Yields don’t have much room to fall; so that natural rotation between asset classes has kind of disappeared. I’d advise investors to be disciplined and stick to their asset allocation. As apocalyptic as people are feeling about Trump’s election, I don’t think anything major will happen in the markets, at least not in the first 100 days.”
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“Right now, we don’t really know which policies will and will not be enacted, which is an issue for the markets because investors don’t have direction,” Geoffrey says. “Trump’s trade policy does have the potential to upset the apple cart that’s been consistent between Canada and the U.S. for more than 20 years. A lot of habit and tradition is built up so that’s making people nervous, but I think that nervousness may exceed what is going to actually happen.”
It does seem as though Trump will follow through with one of his policy promises: renegotiating the terms of NAFTA. In a redrafted version of the agreement, Geoffrey believes that Mexico (and not Canada) will be Trump’s target. Canada is not a lower labour jurisdiction than the states so hardly any U.S. factories relocate here to cut costs. And, as well as creating huge trade disruptions, renegotiation of Canada-U.S. trade policy would create a massive upfront cost.
“I don’t think it will have a huge impact on Canada. It doesn’t make sense for the U.S. to put a tariff on energy exports to the U.S. because U.S. energy independence depends on Canadian oil production,” he says. “I don’t think Canada needs to worry. In fact, Canada may be in a position to benefit from the coattail effect of tariffs put on Chinese or Mexican imports.”
Trump’s plans to increase infrastructure spending don’t seem to fit into the U.S. budget. To make that spending a reality either taxes will have to be increased, spending cut in other areas, or borrowing increased. It’s hard to see how the new President’s plans can be feasible, but the reality is – as with so many other aspects of the new administration – no one can be completely sure about the direction Trump will take.
“If there is going to be more fiscal stimulus from the U.S. government that will give the Fed more room to follow through with rate hikes in 2017,” says Geoffrey. “If the U.S. does start raising rates and Canada does not follow, that differential may start to weaken the Canadian dollar vs the U.S. dollar, which is good for exporters. So, the Bank of Canada may be looking for that differential to help boost Canadian economic growth.”
Considering the numerous situations currently impacting the geopolitical climate, markets have been remarkably quiet. For Geoffrey, no asset class looks terribly attractive moving forward in 2017.
“The balance of risk is on the downside because the usual relationship between stocks and bonds has been broken,” he says. “Yields don’t have much room to fall; so that natural rotation between asset classes has kind of disappeared. I’d advise investors to be disciplined and stick to their asset allocation. As apocalyptic as people are feeling about Trump’s election, I don’t think anything major will happen in the markets, at least not in the first 100 days.”
Related stories:
Advisor: my clients aren’t concerned by the Trump factor
Loonie rises against U.S. dollar after Trump remarks
