Chamber member Leith Wheeler Investment Counsel has shared a guest blog post on Trump, Trudeau, & the Markets 

The article helps provide some perspective on frequent questions on the potential impact on the Canadian dollar and fixed income rates, and how the Trump presidency may impact Canadian political decisions.   

For questions on the article and the impacts discussed, contact Matthew Kidwell, CFA with Leith Wheeler Investment Counsel at 604.602.8377 or mattk@leithwheeler.com 

 

Trump, Trudeau, & the Markets

Given the current heightened uncertainty for the Canadian economy and markets, we put some questions to senior investment professionals on the equity and fixed income teams:

Jim Gilliland, Managing Principal, President & CEO – Head, Fixed Income
Dave Jiles, Managing Principal, Portfolio Manager – Head, Canadian Equity
Ryan Goulding, Principal, Portfolio Manager – Head, Interest Rates

How much weight should we give to Trump’s tariff threats?

We have had some experience with a Trump presidency, given his 2016 to 2020 term. That history showed that Trump’s tendency is to make pronouncements without having all the details in place. He also has a history of making outlandish statements in an attempt to build negotiating collateral or capital ahead of negotiations, making both Canada and Mexico potential targets ahead of the joint review of the US-Mexico-Canada (USMCA) Agreement in 2026. In Trump’s prior term, he discovered that governing is complicated, and we expect more bluster than action. Put another way, we should take him seriously, but not take him literally.

Unfortunately, given Prime Minister Trudeau’s plans to step down, Canada has a leadership vacuum with few significant cards to play. Trump wants the optics of a win on the trade front and some real wins on the military commitment. A potential factor is a deal for larger access to the Arctic, since the only country making a stand there is Russia – which won’t be tolerated. The Panama Canal and Northwest Passage could also be seen as bookends for a long-term “Fortress North America.” These longer-term factors may be under-appreciated, while tariffs’ potential near-term impacts are probably over-played. Republicans have mid-terms to think about, and a 25% tax on everything for an extended period would be challenging.

We expect that Trump’s central legislative focus will be on renewing the tax policy that was passed in his first administration as many of these provisions are set to expire at the end of 2025. If lawmakers are unable to pass legislation, more than six in 10 individual tax files would face a tax increase in 2026, according to analysis from the Tax Foundation.

One scenario would see Trump imposing tariffs as a means to raise the revenues he needs to extend tax breaks. The current US fiscal situation limits Trump’s playbook on taxes and a 10-year yield over 5% would not only increase the US debt burden but also signal the market’s concern about rising inflation.

While China is vulnerable to tariff increases, because Canada exports so much energy to the USA, a huge tariff on our energy would increase inflation concerns and slow the US economy at a time that Trump needs lower inflation and a strong economy.

UPDATE: As we write on Trump’s inauguration day, he has just deferred immediate implementation of the threatened 25% tariffs on Canada and Mexico, possibly to February 1. Given our style is not to be geopolitical traders, we don’t act on every soundbite but rather acknowledge the overall uncertainty that’s created and incorporate that into our trade sizing. If the volatility offers up opportunity in our core competency for long horizon trades, then we’ll act.
 

How might the Trump presidency impact Canadian political decisions?

If Trump is successful in improving the domestic economy, being a close neighbour to the US will be a benefit to Canada. If we step back with a longer-term, bigger-picture perspective, there are some potential wins for Canada here. If elected, the Conservatives will want a quick win in Canada. There will be pain from any cuts they want to make, and even shaving the deficits in half will be a drag on growth, compounded by any deceleration in population and GDP growth from the Liberals’ recent immigration policy reversal. Therefore, if a new government is able to secure a win on the trade side with Trump, additional infrastructure and military spending in Canada – as well as the potential for deregulation to improve energy and banking sectors – would all be positives for Canada.

How has Prime Minister Trudeau’s resignation affected negotiations?
Unfortunately, PM Trudeau's resignation has weakened our position when we need one of strength, as it delays our ability to engage in negotiations, exposes our inner weaknesses, and will likely, ultimately, result in inferior deals with the US. We technically have uncertainty until as late as October if the Liberals aren’t forced to call an election before then; dropping the writ as quickly as possible is preferable so the PM negotiating with Trump has the support of the people and the longevity to see it through. Regardless of the outcome of the Liberal leadership race, the US won't take us seriously until after our federal election.

With the vacuum at the top, near-term the premiers may hold the cards, and we're going to see the full flex of the confederacy structure. The provinces have more power than many of us think and with Alberta already flexing, Quebec likely will, too, and the rest will pay attention. In terms of the impact on stock markets, currently US equities are expensive while Canadian equities are cheap. Canada manufactures very little and most of our manufacturing companies like Magna and BRP have diversified business models and could survive in a world of higher tariffs. Even if tariffs are imposed, most of the companies in our portfolio have the pricing power to withstand this issue.

From a productivity perspective, Canada has been dismal and has much room to improve. A reduction of cheap labour and additional risk from tariffs may provide needed incentive. It may sound counterintuitive but we suspect that companies can do better, and will with this incentive, making it a positive for Canada in the long run. We are only at the beginning of what will be a long process and we will continue to monitor potential impact on our clients’ portfolio investments.
 

What is the impact on the Canadian dollar (CAD)?

Currency is the ultimate scorecard for how the country is managed. Ultimately, the value of the paper we create and offer to the world is a reflection of all factors – the fiscal, monetary, regulatory, capitalist, and labour we pour into it. At the moment, Canada is scoring low on the global stage, and the headwinds for the currency will continue. We're looking at this through the lens of interest rate differentials (i.e., the differences in interest rates between Canada and other nations), which we expect can continue to widen until deals are forged and progress is made.

International capital is unlikely to invest without more clarity on regulations, the new government, and trade deals, while a declining population will further limit capital inflows. Near-term, the CAD is likely to continue to disappoint as capital flows to where it is treated better and has more clarity for investment.

On a longer time horizon, we see incredible potential for the CAD to appreciate. Trade deals, regulatory streamlining, interprovincial trade barrier removals, and long-term certainty of domestic and international policy could unleash a torrent of capital flows into Canada that we haven't seen in well over a decade. A return to unlocking our natural advantages of resource wealth, accessible coastlines on three oceans, an educated, motivated workforce, and geographic trading advantage with the global powerhouse economy … all prime us for huge upside. We just need to get out of our own way.

What is the potential impact on fixed income rates and sectors? (Warning: The following section gets a little technical.)

The weakened negotiating position and extension of uncertainty are headwinds for rates. With no leadership at the top, no candidates from any party having released a platform, and the premiers now negotiating for themselves, it will only serve to hamper a unified response. The drag on growth from mortgage renewals, the anticipated drops in population and passthrough to aggregate GDP, and lack of clarity on fiscal direction all point to a continued widening of the gap to the US. As for rates, we can see Canada yields remain lower and steeper than the US until our fog passes, which may not be until the third quarter. Meanwhile our global competitors for trade with the US will be making headway on negotiations.

As far as specific sector impacts go, it will be hard to predict what they are without any knowledge of the scale and timing of tariffs. Aside from autos, none of the sectors that would be affected immediately such as oil and gas, mining, and forestry are large issuers in Canada. But with Canada being so dependent on trade with the US, broad-based tariffs will have wider impacts across the board if the adjustment period results in a deep recession.

We see opportunities in issues from provinces that are more likely to align with the US administration. Alberta has been the most proactive in negotiations and considering that they already sell oil to the US at very attractive rates we see continued outperformance from them. Additionally, they hold the wildcard from reinvigorated spending on oil sands capex, as well as the tailwind of a younger, growing population.

Nova Scotia also looks attractive given the investment the province has made to position it as the shipbuilding powerhouse of the East, and the port with best access to the US East Coast. We are trimming exposure to Saskatchewan, though we'll likely remain long given their prime positioning in resources.

Manitoba will remain a key long with their hydro capabilities and energy export to the US, backed by sound manufacturing and agriculture. Key underweights will be in Ontario, which is most susceptible to the US wrath and BC, which has never managed to shift from real estate reliance and lack of policy support for diversifying the industrial base.

Finally, pension issuers will remain the anchor in our public sector portfolio as they are all AAA rated with spreads at or wider than Ontario, provide exceptional liquidity, and have upside optionality to global money increasing allocations to Canada. Their distance from political cycles and non-reliance on borrowing programs gives them flexibility in a risk-off environment, so we see them providing excellent downside protection without sacrificing spread.