From changes to direct-to-consumer parcel rules to on-again, off-again levies imposed on dozens of trading partners to increasing tariffs on steel and aluminum, American trade policies continue to impact the global economy, with important implications for Canadian investors.
For many, the question looms: what does all this political and economic uncertainty mean for my portfolio? Eric Morin, director of global macro and strategy, multi-asset and currency management for CIBC Global Asset Management, says there are ways to navigate the current investing environment and ensure investors remain on track to achieve their long-term investment goals.
Eric Morin, director of global macro and strategy, multi-asset and currency management for CIBC Global Asset Management.SUPPLIED
What is a tariff anyway – and why should we care?
“Tariffs are fundamentally a tax that is imposed on imported goods,” explains Mr. Morin. When a tariff is imposed, a domestic importer must pay it in order to bring foreign goods into their home country’s market. However, Mr. Morin notes that “at the end of the day, the higher cost introduced by a tariff is split between consumers, the importer and the producer.”
U.S. tariffs are part of a broader strategic effort to reshape commercial and geopolitical relationships with key trading partners – including allies like Canada, he adds. As negotiations unfold, Canada may end up with a more limited or diluted free trade agreement, potentially involving targeted tariffs on certain Canadian (and American) exports.
Direct economic pain from tariffs on Canadians, on average, has so far been relatively minimal, Mr. Morin says. The duties imposed on goods flowing into the United States primarily affect American consumers and Canadian exporters.
“So far, the direct impact from [Canadian] exports on the economy and labour markets has been negative, but contained, and the retaliation by the Canadian government has been limited and targeted, limiting upside pressures on Canadian inflation,” he says.
How do tariffs affect investments?
Tariffs – both implemented and scheduled – are “weighing negatively” on global markets, Mr. Morin says. Key factors include the direct impact they have on demand and profit margins in the U.S. (where tariffs are imposed on most trading partners), the upward pressure they bring on U.S. inflation, the challenges they pose for Canadian and global manufacturers exporting to the U.S. and the uncertainty surrounding their broader macroeconomic impact and future tariffs policies. There is also the question of whether trade negotiations between the U.S. and myriad other countries will successfully reduce the size and scope of tariffs.
When businesses experience slowing demand and heightened uncertainty, including regarding trade policy, they may hold back on investment spending, which can further slow economic growth and adversely affect corporate earnings expectations, Mr. Morin explains. In response to the ebb and flow of tariff announcements, financial markets will likely continue to experience periods of heightened volatility, with outsized price changes – up and down – in stocks and other financial assets.
“Impacts include more volatility in portfolios, and a more difficult situation to navigate than in a world without tariffs,” he says.
What can Canadian investors do to reduce the impact of tariffs?
As it stands now, Canadian investors remain stuck in a volatile and less predictable market, underscoring the value of good advice and a well-constructed, suitable portfolio strategy.
“The first piece of advice is to stay invested, because a well-constructed portfolio should perform better than cash most of the time,” Mr. Morin says. “The second thing to keep in mind is the importance of a well-diversified portfolio free of bias, particularly excessive home bias, because many investors here are too heavily exposed to North American markets.” The goal is to mitigate any concentrated economic and political risk that does not provide a corresponding reward. A well-diversified portfolio – which takes into account co-movement of assets – should also result in smaller drawdowns when markets become turbulent.
A balanced portfolio will typically include a mix of equity and bond assets, Mr. Morin advises, and often may include a range of alternative investments that can help smooth, diversify, and potentially enhance portfolio performance.
He adds that despite the trend towards self-managed portfolios and do-it-yourself investing strategies, Canadian investors would be wise not to attempt to time the market, as this has proven highly difficult to do well on a consistent basis, particularly in periods of heightened volatility. A trusted advisor can help you understand and manage market volatility while helping you to realize your financial goals.
“Stay focused on your long-term objectives,” he says. “The headlines are becoming more erratic, so there is more risk of overreacting. It’s important not to be influenced by emotion, and instead to use your advisor as a trusted partner to remain focussed on achieving those long-term objectives.”
Want to learn more about reducing the impact of tariffs on your investments? Connect with a CIBC advisor today.
Advertising feature produced by Globe Content Studio with CIBC. The Globe’s editorial department was not involved.