Exploring the Potential Benefits of Tariffs for Certain Canadians

US President-elect Donald Trump unsettled investors when he pledged to impose 25% tariffs on imports from Canada. But even if some tariffs are imposed, it might not be all bad for certain stocks. Analysts stress the difference between tariffs, the threat of tariffs, and the ways they could affect individual stocks. If tariffs are imposed, they could be less of a risk to Canada’s stock market, even if they significantly impact some parts of the economy. That’s because any tariffs are unlikely to target the biggest names in Canadian equities: energy companies and banks.

A key variable would be the impact tariffs have on the value of the Canadian dollar. If the loonie extends its recent declines, that could benefit the profits of Canadian exporters. “The Canadian economy is more vulnerable than the Canadian stock market because the largest businesses in the stock market are global businesses, not just Canadian businesses,” explains Brent Joyce, chief investment strategist at BMO.

Taking Trump Seriously but Not Literally

The incoming US president has called tariffs “the most beautiful word,” and has repeatedly tried to use tariffs as a bargaining tool to strike deals and further his America-first goals. The consensus among analysts is that Trump should not be taken literally, but should be taken seriously. They don’t expect tariffs across the board, but believe they are a looming threat and a significant source of uncertainty.

“While aggressive rhetoric is certain to be commonplace in Trump 2.0, our base case is there will be more smoke than fire concerning Canada,” says Ian de Verteuil, head of portfolio strategy at CIBC Capital Markets. He adds that “the tariff bark will likely be worse than the trade bite.”

The Global Nature of Canadian Stocks

One reason de Verteuil believes tariffs may not directly hurt Canadian stocks is that more than half the revenues in S&P/TSX companies are earned outside of Canada, with over a quarter booked in the United States. In theory, he thinks that in the long term, a weaker Canadian dollar should benefit Canadian companies.

A good portion of the TSX is mostly insulated; energy, financials, and materials make up roughly 70% of the market. Analysts largely believe no material tariffs will be imposed on commodities, and that services would also be untouched.

Canada is benefitting from a C$8 billion trade surplus with the US, largely in commodities such as oil and metals, as well as motor vehicles. Joyce explains that these commodities are of strategic importance to the US, and the vehicles are produced by US-owned companies. “Americans like cheap gas, so we don’t see President-elect Trump putting tariffs on oil,” Joyce says. He thinks it would also be surprising to see tariffs on critical metals and uranium needed for a nuclear power renaissance.

Assuming there are no tariffs in the energy and materials sectors, de Verteuil expects companies with primarily Canadian operations to benefit, as they have CAD expenses and USD revenues. Cenovus Energy CVE, Suncor Energy SU, Canadian Natural Resources CNQ, Imperial Oil IMO, Tourmaline Oil TOU, and Cameco CCO are seen among the winners in the energy sector, according to de Verteuil, while Agnico Eagle Mines AEM and Nutrien NTR are seen as most likely to benefit in the materials sector.

“Tariffs on auto parts would harm well-established supply chains (and US companies) and would likely boost the selling prices for cars for Americans,” says de Verteuil. However, the uncertainty on trade and tariffs certainly reduces the appeal of Canada and Mexico as locations for incremental investment on the automotive front.

Sectors like financials and technology are not expected to face many challenges, as tariffs are expected to continue focusing on goods and not services, and most of these companies have large US profits. The US-domiciled operations of any foreign business should not see any tariffs, but would benefit from lower US corporate taxes, and Joyce says deregulation and revenue streams also would not be negatively impacted.

Financials make up a large portion of the TSX, and many Canadian banks and insurance giants already have a large footprint on US soil. Joyce says this is exactly what Trump wants: “Hey, big successful global businesses, want to sell to America? Then build and operate in America.” For many Canadian businesses, this is already the case. “Timmies outlets in the US, Popeyes, and Burger King—no tariffs, either. All three brands are owned by an S&P/TSX-listed company [Restaurant Brands International QSR].”

Industries Vulnerable to Tariffs

“Tariffs conjure images of steel, forest products, foodstuffs, and auto parts. These are important to the Canadian economy, but their weighting on the Canadian stock market is minimal,” says Joyce. Among the companies in the S&P/TSX, steel makes up 0.1% (Algoma Steel ASTL, Labrador Iron Ore LIF), paper and forest products are 0.4% (West Fraser WFG, Stella-Jones SJ), food products are 0.3% (Saputo SAP, Maple Leaf MFI), and automobile components 0.5% (Linamar LNR, Magna MG). In comparison, metals and mining account for 10%, energy 18%, and financials 33%. Joyce thinks metals, mining, and energy should get a light touch (perhaps benefit) under the Trump administration.

While analysts don’t expect automotive parts suppliers to be targeted, there are still concerns. CIBC analysts flag companies like Magna, Linamar, and Martinrea International MRE, as all three have scattered manufacturing facilities across North America. “We believe Martinrea is most exposed because of its large Mexican manufacturing base,” says de Verteuil.

Ultimately, analysts expect more threats but believe direct across-the-board tariffs within the automotive supply chain are unlikely. Various parts cross the border multiple times before ending up in a finished product, and there would be pushback at the industry level in some cases. Additionally, de Verteuil points out that major US automakers have sprinkled manufacturing across the three countries, so tariffs would be difficult to implement and filter into end prices for consumers.

The industrial sector could face challenges. Bombardier BBD.A sells into the US, but most of its facilities are in Canada, so there is an elevated risk from any tariffs. There is also some concern about Mexican exposure for Canadian Pacific Kansas City CP. “Domestic investors would probably rather own companies that report in Canadian dollars, as these would likely report improved EPS trends, though economically investors should be agnostic on reporting currency,” says de Verteuil.

How Tariffs Could Impact Stocks Through the Canadian Dollar

The impact of tariffs could also flow indirectly to Canadian stocks through the currency markets. Tariffs may lead to the loonie depreciating against the US dollar as investor confidence wanes and concerns increase about economic stability. “A weaker loonie could make Canadian goods cheaper for foreign buyers, potentially benefiting exporters and offsetting some negative effects of tariffs. However, this depreciation may also lead to increased costs for imported goods, contributing to inflationary pressures within Canada,” says Michael Ashley Schulman, chief investment officer at Running Point Capital.

In the discretionary space, exporters to the US are vulnerable, as are retailers who source products in USD. BRP DOO, Gildan Activewear GIL, and Aritzia ATZ are among the companies that import into the US and therefore are vulnerable to tariffs, CIBC analysts wrote. Canadian Tire Corporation CTC, Dollarama DOL, and Pet Valu Holdings PET would face headwinds from a weak Canadian dollar.

Within staples, retailers that source products in foreign currency could see challenges. Grocers buy fruit and vegetables in USD, so a weak Canadian dollar would create headwinds. Alimentation Couche-Tard ATD has a large USD business, and would thus win should the Canadian dollar be weak.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Source link