The equity markets south of the border have certainly cast a vote of optimism on Donald Trump’s victory. The US markets have rallied strongly and investors clearly believe that the possible upsides of a Trump administration - growth in the short-term and tax cuts – outweigh the downsides: the threat to trade and the resulting long-term impacts. The Canadian markets have not reacted as much, but what could his policies mean for our economic future?
“In terms of growth stimulus from short-term policies, we can’t help but be pulled along if the US grows faster, so we will benefit from that,” says Stephen Rogers, Investment Strategist at Investors Group
Investment Management. “One of the weights on the Canadian economy in the last year has been the energy sector and Trump’s energy friendly policies (less regulation and encouraging more energy development) should help the Canadian energy sector recover.”
Although Canada’s energy sector will likely get a boost in the short-term, Rogers does believe those positives will be outweighed by the trade disruption that Trump has been touting. “Before the election and in the immediate aftermath, I was taking the view that we shouldn’t overreact too much about the rhetoric of tearing up NAFTA: my perception was that Trump was railing against Mexico and didn’t have Canada in his sight lines,” Rogers says.
“But then CNN saw a memo from Trump’s transition team which suggested that some Canadian sectors, particularly the lumber and livestock industries, are on the hit list, so maybe I underestimated how much we do need to worry. Trade disruption could be the dominant force on the Canadian market for the foreseeable future.”
Rogers advises Canadian investors to stay away from the fixed income proxy investments that have benefitted from the recent low rate environment. “We had a long period where REITs were big beneficiaries and dividend stocks gave big solid yields, but the wind has clearly been taken out of their sails in the last week,” he says. “I don’t know whether that’s a long-term thing but the market consensus seems to be that there’s been a fundamental shift and perhaps the 30 – 35 year bull market in bonds is over. That would imply a true inflection long-term for the interest rate environment and might mean those who benefitted from low rates are now going to be under pressure.”
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