02/06/2025
Some commentary on Tariffs:
How will Tariffs Affect the Canadian Economy?
Even with a weakening Canadian dollar, a 25% tariff on Canadian exports could reduce GDP by 2.5% to 3.0%. However, given Canada’s current interest rate trends and public finances, the severity of any recession may prove limited.
The Bank of Canada modeled a scenario where mutual 25% tariffs would cause a 2.5% GDP decline in year one and an additional 1.5% drop in year two, raising concerns about a potential recession this year.
It is crucial to distinguish the Canadian economy from the Canadian stock market. Many large Canadian companies are multinational and do not rely solely on domestic revenues. Over 50% of S&P/TSX revenues come from outside Canada, with over a quarter generated in the U.S. Financial and technology sectors (which make up 33% and 10% of the S&P/TSX index, respectively) should be less affected, as tariffs primarily target goods rather than services.
How will Tariffs Affect the US Economy
Tax and regulation cuts for US corporations will drive greater returns for those companies and those returns will be passed on to shareholders.
The US economy is healthy and in the short-medium term can absorb the larger impacts of a tariff war, however, political unrest will likely put pressure on the administration to avoid tariffs long term. Partial Tariffs vs. 25% is a more likely scenario and those impacts would be felt less.
March 1st is the next major news cycle around tariffs and then again in April when the US releases a trade report ordered by the President on his first day in office.
Wider Impacts
The broader economic impact depends on the availability of substitutes and how easily businesses and consumers can find non-tariffed replacements. If alternative suppliers aren’t available, tariffs will likely drive higher inflation. The longer tariffs remain in place, the greater the potential disruption.
To mitigate economic harm, the Canadian government is planning on introducing remission processes to provide exceptional relief from tariffs where necessary.
Canada’s next election will be fought around trade and diversification of trade away from the US. Trade with other allies and an effort to reduce interprovincial trade barriers will open up new markets and opportunities long term for Canadian companies.
What the Portfolio Managers Have Been Doing
Many managers have been reaching out to the companies they hold since November of last year inquiring about their exposure to tariff pressures and if they can source non-tariffed alternative materials.
At the individual stock level, our sub-advisors focus on opportunities that arise when tariffs create market distortions. While tariffs may cause economic pain, some sectors and companies will benefit from these shifts.
Historically, equity markets have recovered from major external shocks, including the 2008 financial crisis, the COVID-19 pandemic, and even world wars. Short-term volatility is expected, but it’s critical to avoid emotional decision-making.
A well-diversified portfolio—including multiple asset classes and investment managers—remains the best defense against market instability.
All the best,
David Dennis, BA
Financial Advisor
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