Why Canadian assets are still insulated from tariff shocks
How global uncertainty supports Canadian equities
The export sectors of the Canadian economy currently feeling the brunt of US tariffs are underrepresented on the Canadian stock market. At the same time, traditional sources of stability, such as Canadian banks and gold miners are overrepresented. Those companies actually seem to benefit from some of the wider forces driving global macro uncertainty now, including the Trump administration’s trade policy, Nye explains. US foreign policy in the Middle East has also been supportive for Canadian energy names given the increase to global oil prices.
There is still an uncertainty overhang in the Canadian economy, one that has simmered since the first signs of trade tension emerged at the start of this Trump administration. Nye notes that earlier in the year we saw signs that Canadian businesses were beginning to digest that uncertainty in survey data. However, the fact that some of these tariffs now impact goods that had once been protected by CUSMA could reintroduce that uncertainty for Canadian business owners. Still, Nye’s overriding message that the economic damage from these tariffs should be narrowly based and that the sectors most likely to be harmed by the tariffs are not major components of the TSX.
Bond markets and debt levels in a trade war
While the current tariffs are likely to set back Canadian GDP growth and introduce additional inflationary pressure through reciprocal tariffs, Nye says it’s unlikely that the Bank of Canada cuts rates in response. He notes that the timeframes for monetary policy simply don’t match with trade policy, which could see the current dispute resolved at any moment. Moreover, with tariffs presenting both downside risk to growth and upside risk to inflation, the Bank of Canada may feel its hands are tied.
The Federal government has also announced a range of fiscal supports for affected industries, which does add to the wider market narrative around developed nations’ bonds and high levels of debt relative to GDP. Rather than focusing on domestic fiscal policy, however, Nye says that global bond investors are likely to tie Canadian bonds on the long end of the curve to the wider trends in developed bond markets. That means if bond yields are rising in Japan or the United States, we may see Canadian 10-year bond yields rise as well.
Setting client expectations
The relative stability and strength of Canadian assets should be a source of positivity for advisors and their clients, even as the news looks bleak and the economic outlook appears to be weakening. Nye believes that overreacting is probably the biggest mistake advisors and investors could make at this juncture. He repeats the mantra that the Canadian economy is not the Canadian stock market, and that even the impacts on the Canadian economy should be relatively narrowly based as things currently stand.
