CIO and Portfolio Manager outline the headwinds that Canadian equity markets now face even after tariff threat has been postponed
Monday’s market whipsaws as we approached the imposition of US tariffs on Canadian exports might just have been a preview of what’s to come. The deal struck late on Monday only postponed the imposition of tariffs for 30 days, meaning Canadian stocks could still be facing some headwinds until a deal is reached at the very least. This leaves advisors and their clients with the question of what they might expect from Canadian stocks in the context of ongoing trade tensions.
“The base case is that this is going to be a risk that overhangs markets and economies going forward,” says Chhad Aul, Chief Investment Officer and Head of Multi-Asset Solutions at SLGI. “I think it goes down to the micro level decisions that firms and companies are going to be making in terms of where they invest the next dollar in their supply chain.”
While Aul believes that Canadian firms will likely begin to diversify their supply chains and customer bases, he argues that much of the damage has already been done. He notes that Monday’s market performance may be instructive as these trade tensions continue.
At the open, he notes, Canadian markets gapped slightly lower than their US equivalents and where the futures market had priced Canadian stocks. Resource sectors, namely gold and energy, helped to offset that selloff through the day. Aul highlights the global nature of many Canadian-listed companies’ operations as well as those resource exposures as potential insulation against what tariffs or trade tensions might do to Canada’s economy.
As we look out longer term, however, to the potential resolution of these trade issues and an eventual new deal, Aul notes that there may be an erosion of trust. Investors may not believe, anymore, that a renegotiated USMCA deal will hold.
Tim Caulfield argues that Canadian equities are not, in large part, on the immediate receiving end of proposed tariffs. Caulfield is a Portfolio Manager and Director of Canadian Equities Research at Clearbridge Investments, part of Franklin Templeton. The sectors that look most set to be impacted, such as manufacturing, are underrepresented on Canadian stock exchanges, he says.
He notes that on Monday the Canadian sectors most impacted by the looming threat of tariffs were financials and Canadian rail stocks. Those businesses won’t be paying tariffs directly, but their businesses would be significantly impacted by what would be done to their customers. While the threat of tariffs remains in place, he says, there may be significant headwinds for these downstream businesses.
“If you’re a business that’s considering pushing ahead with an ambitious project, maybe you put that on the shelf until you have more clarity,” Caulfield says. “In the parlance of a portfolio manager, the cost of capital for Canadian businesses went up and that’s likely to deter investment. While there’s some short term relief, we know we’re going to be back at the table in 30 days facing similar or incremental demands in order to just stand still. The uncertainty that comes from this is pretty devastating for Canadian businesses.”
Both Caulfield and Aul observed the growing calls to buy Canadian as the tariff plans became more clear. While many of those calls remain in place despite the 30-day delay, they both note that the impact on Canadian equities will likely be minimal. US purchasing power is simply too large of a force to meaningfully offset.
Aul also explored the idea of investors pulling away from US equities and reallocating to Canada as a result of these trade tensions. He argues that, first and foremost, investors should seek the best returns from a globally diversified portfolio. Moreover, he believes the only Canadian stakeholders who could potentially make an impact with such a reallocation would be the maple eight pension funds, who have already confronted calls to invest more in Canadian equities. Such a decision by those players, he says, is “a big if.”
As advisors work with clients to offset volatility and control for the risks now in Canadian equities, Caulfield believes they should continue to focus on high quality businesses that have shown resilience in different economic environments. Predictability of cash flow, he says, is crucial at this juncture. He and Aul agree that advisors’ messaging at this moment should be on staying the course and avoiding rash decisions.
“You have to be really careful not to let emotions get the best of you,” Caulfield says. “The way you feel about this personally or professionally may differ from the best way to internalize this as an investor. You want to assess the situation objectively, thinking through probabilities of different outcomes and having a defensive element in your approach.”
