Monthly commentary - Mackenzie Bluewater Team

Written by the Mackenzie Bluewater Team

On February 1, President Trump signed an executive order imposing a 25% tariff on all non-energy imports from Canada and a 10% tariff on energy imports, initially to be effective February 4. In addition, a 25% tariff was to be levied on all imports from Mexico and 10% on all imports from China. Canada was going to respond with 25% retaliatory tariffs on C$155 billion worth of imports from the U.S. As of yesterday afternoon (Feb 3), the tariffs were delayed by at least 1 month.

The tariffs are unquestionably negative for the Canadian economy.  The US is Canada’s primary export market, with annual exports of around C$600 billion which is roughly 20% of Canada’s GDP.  Canada’s primary export categories to the US are:

• Energy products (oil) [33% of exports]
• Other commodities [25%-35% of exports]
• Vehicles and parts [20% of exports]

From a direct investment standpoint, these are all areas that we have avoided.  We do expect a (limited) negative impact on CN and CP Rail, as, over time, tariffs would be a headwind to cross border volumes.  In addition, our portfolio holdings are generally unaffected by tariffs as we continue to hold companies that are either “service” oriented or produce products more locally, without relying on extended supply chains. Although any slowing of the broad economy from tariffs would have some impact on most companies, we have selected businesses that are notably less reliant on general economic growth.  This portfolio positioning should serve the funds well in the event of a further escalation in the trade war.  In addition, from an overall fund standpoint, we continue to have a significant underweight in Canada.

Other impacts include:

Consumer

Overall, tariffs would be a further negative for the Canadian consumer, as we would expect production to move from Canada to the US over time, increasing Canadian unemployment.  To put this into perspective, there are an estimated 46k companies in Canada that depend on exporting to the US, supporting around 2MM jobs – which is ~10% of total employment.  In addition, retaliatory countermeasures by Canada would introduce a upside risk to consumer prices, exacerbating the impact on the consumer. 

With Canadian consumer wallets already stretched, tariffs should continue to pressure an already muted discretionary spending environment given current high consumer debt levels and a slowing economy. The portfolio has low exposure to discretionary retail, with Dollarama having the most direct exposure.  However, given its positioning as a discount retailer, they should benefit from consumers trading down.  On the other hand, essential categories such as grocers should remain resilient.  We expect grocers to benefit from the rising food inflation, particularly those with a discount footprint (such as Loblaws which is 60% discount). 

Financials

For Canadian banks, unemployment is the single largest determinant of loan losses.  We expect the banks to be impacted from weakening growth, and a potential credit cycle from rising unemployment, the latter of which we do not believe is fully reflected in bank stocks.  The offset is any relief measures (as have been contemplated on Sunday) for impacted companies or possibly relief measures for consumers in the event of job losses, similar to the pandemic. Given we are underweight banks, our positioning should help our relative performance. 

Energy

Canada currently exports ~4 mmbbl/d of crude oil to the U.S. with the largest share (~60%) ending up in PADD2 (U.S. Midwest) refineries. Mid-west US refineries have been optimized to take heavier Canadian crude with few substitutes outside of Venezuela and Russia.  Meanwhile, Canada does not have the physical infrastructure in place to export large volumes of crude to other markets.  Based on our dismal track record of LNG development, this would not change quickly.  As a result, the shorter-term effect will be to increase prices paid by US consumers, as the tariffs are passed through.

Gold

With rush to safety, gold should outperform, which we expect to be a headwind to relative performance.  Gold is ~8% of the TSX and stylistically not businesses we invest in.

Countries targeted by tariffs will likely suffer more, but the US economy will also feel the impact. Estimates suggest around a 50-basis point hit to GDP and inflation. The USD has already strengthened against most currencies, posing a headwind to US companies with significant international revenue.

The challenge in assessing any future effect continues to be the erratic manner in which the US is behaving; it is impossible to forecast what future measures President Trump may impose and whether the current proposals are merely a bargaining chip to force Canada and Mexico to curb migration and illegal drugs moving across borders (to which Canada has already announced a ‘strong commitment’ to increasing border security), to force concessions come the USMCA renegotiations in 2026, or as a renewed warning to other countries (particularly China) that the US is once again willing to use tariffs, even to it’s own detriment, as a lever to pressure for change. 

The situation is fluid, and at the time of writing, both Canada and Mexico had struck a deal with the US to delay tariffs by one month. 

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