Well, it’s here – we’ve now got a pretty ugly scenario for North American trade.
Hello, I'm Brent Joyce, Chief Investment Strategist at BMO Private Investment Counsel. It's Monday, February third. Welcome to our Global Markets Commentary.
Global equity markets had made it through January in the green, but the positive start to the year is in jeopardy as the U.S. launches its initial salvo of tariffs.
The tariffs themselves are disruptive. How businesses, consumers, currency, stock, and bond markets react is the requisite amount of uncertainty in any shock.
This situation has a unique layer of additional ambiguity that calls for extra vigilance against emotional reactions. Is this still just a negotiating tactic? What legal challenges will be launched? What influence can public or corporate backlash have on the situation?
Our advice is to remain calm – panicked, knee-jerk reactions to any market calamity are never the best course of action.
Here are our quick takes on the implications for major asset classes and our advice for investors.
Canadian dollar
The Canadian dollar has already depreciated roughly 10% since early last year. BMO Economics forecasts CAD$1.49 by autumn.
Equities
For investors, parsing out the combined impacts of tariffs on corporate earnings is the bottom line. The impact is negative. However, global equity markets enter this period of uncertainty on decent footing. Earnings growth expectations are solid and recent reports are surprising to the upside across much of the world. Valuations in non-U.S. equity markets aren’t overly onerous, some are quite low (like China).
Tariffs are a disruption; and disruption has been the name of the game for five years or more. Corporations have become quite skilled at navigating challenges, particularly supply chain challenges, including the 2018 trade war, COVID shut down and reopening, and the war in Ukraine. Add on cracks in the U.S banking system (Silicon Valley Bank failure), inflation’s spike and retreat, coupled with a coordinated global central bank tightening cycle. All of this has made businesses hardened and more resilient and better able to meet this new challenge.
Bonds
BMO economists now expect the quarter-point pace of Bank of Canada policy easing to continue each meeting through to October, landing the overnight rate at 1.50%. We expect bond yields to decline on demand for safe haven investment, the prospect of an economic slowdown, and expectations of the stepped-up Bank of Canada easing.
Our advice – No knee-jerk reactions, rely on diversification.
Discipline, patience, and balance are key to navigating periods of heightened uncertainty and market volatility. Well diversified investors need to remember the role various assets play in their portfolios under the current circumstances.
U.S. equities exposure brings U.S. currency exposure. The investments remain compelling on their own merits, with the additional benefit of a currency offset to Canadian investors at a time when the Canadian dollar is under pressure.
The Canadian stock market is not the Canadian economy. Tariff threats conjure up images of steel, forest products, food stuffs and auto parts. While these are important to the Canadian economy, their weighting on the Canadian stock market is minimal. These industries combined are a low-single-digit weight of the S&P/TSX. The big weightings are metals and mining at 12%, energy 17%, and financials 33%. Resource companies are seeing a lighter tariff impact; while financial services face none.
Even Canadian companies in industries subject to tariffs have significant plants, facilities and operations inside the U.S. – none of which are subject to tariffs.
We see Canadian medium- and longer-term bond yields falling, bringing price appreciation to high-quality bond positions. This is the role these bonds play in balanced portfolios.
Bottom line
Equity markets have a time-tested ability to weather external shocks including wars, terrorist acts, pandemics and many an assorted economic shock. Sharp reactions in the short-term as new information unfolds are to be expected, but it is important to not let fear or emotion drive decision making.
Our advice is to remain calm – we repeat, panicked, knee-jerk reactions to any market calamity are never the best course of action. This is evermore the case given the level of uncertainty and the pace and fluidity of the current situation.
As always, maintaining a well-diversified portfolio across asset classes, sectors and individual issuers is the best defense against bouts of market volatility.
That’s our take on the current situation. Thank you for joining us; we look forward to you tuning in next month.