GLC Insights - Trade war threats don’t have to threaten your portfolio

Two boxing gloves with arms of cargo containers collide.

The US government continues to turn up the heat on trade. Understandably, you may be wondering what this means for the economy, the markets, and your investment portfolio.

With trade uncertainty being just one of the risks we see in the later stage of the business cycle, we recommend investors move toward a neutral portfolio position – one that is commensurate to their specific risk tolerance and time horizon. This is particularly true should trade policies threaten to hasten the end of the current bull market run. 

Impact on economies versus equities

For now, much of the actual outcomes of the trade rhetoric remain speculation. However, markets don’t like uncertainty, and bouts of short-term ‘trade-related’ market volatility are beginning to appear.

Notwithstanding the near-term fears of tariffs and deconstructed trade agreements like NAFTA, it is important to differentiate the impact to the Canadian economy versus Canadian equities.

Knock-on effects of trade action hurt economic growth, but may have less direct impact on stock values. For example, the tariffs on steel and aluminum will be an economic hit. However, this particular tariff has little direct impact on the Canadian equity market given the S&P/TSX Composite Index has very limited direct exposure of these two industries. Likewise, some of the top contributors to Canada’s index performance year to date (a diverse group that includes Suncor, TD Bank, Shopify, Bombardier, Magna, Waste Connections, and the railways) have significant ties and/or operations in the US. The jobs and investments from these companies will remain welcome in the US, while the benefits of those non-Canadian operations flow back to Canadian shareholders.

Did you know? We estimate 2/3rds of the S&P/TSX Composite index’s earnings are derived from outside of Canada, with the lion’s share coming from the US.

Still, tariff threats and rhetoric cloud business decisions with uncertainty and are taking a toll on business confidence. This in turn can lead to a dampening of business investment – a key component required to extend the current economic expansion.

The lack of business confidence has already hit our Canadian dollar. Recently, the loonie hit a 1-year low. A weak currency is negative for some companies and sectors. However, for the substantial set of companies who derive significant amounts of revenue from outside of Canada, the weaker loonie feeds into higher revenue and all else being equal, stronger earnings growth.

At present the outcomes are uncertain. For now, talk of trade wars is largely based on speculation and posturing.

Did you know? Much of the recent trade news headlines are highlighting the most extreme of speculated outcomes, which few experts consider likely. We have yet to see evidence that these scenarios are based on solid forecasts.

We do agree that angst over trade is creating market volatility. Our base case remains that “cooler” heads will prevail and trade frictions will remain manageable. We do so while acknowledging the reality of President Trump and his administration’s approach to reduce the US trade deficit and be perceived as protecting American jobs. As a result, the prospect of trade wars, or increased protectionist policies, cannot be fully dismissed. Should there be substantial changes to trade agreements, there will be winners and losers. Overall, the net result would be a dampening of economic growth and, as such, a negative for equities and a positive for safe-haven fixed income.

Portfolio positioning

Strategically balancing equity and fixed income holdings aligned with long-term investment goals remains key, while tactically stepping back from the highest-risk components of a portfolio is prudent at this stage of the market cycle.

We believe active portfolio management shines during times of heightened uncertainty. GLC’s portfolio managers are continuously assessing the risks and rewards in their respective markets, aiming to take advantage of market volatility where appropriate and avoiding outsized risks. At GLC, for several months we have been de-risking our asset mix in the balanced portfolios, specifically reducing our exposure to higher risk areas, such as emerging market equities and high yield bonds. Likewise, the suite of asset allocation funds managed by GLC’s Portfolio Solutions Group shifted toward a more neutral position within both equity and fixed income components. These highly sophisticated, actively-managed funds are tailored solutions designed to align with specific risk tolerances, investment needs and time horizons.


Bottom line:   We are already late in the business cycle,  and trade action is another risk to take into account. As such, this is not the time to overreach with aggressive, growth cycle positioning.

■       Move toward a neutral portfolio position (risk and time horizon aligned);

■       Strategically diversify your assets (within both your equity and fixed income positions); and

■       Maintain long-term thinking.


We see these as key steps to navigating this late stage of the market cycle, and to help guard your portfolio against trade war induced volatility.

GLC’s capital market outlook

For GLC’s market forecasts and to learn more about the factors we see affecting capital markets through to the end of the year, check out GLC’s Mid-Year Capital Market Outlook available on our website.

Copyright 2018 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).

This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.