Market turmoil gave investors a sneak peek at trade war winners and losers

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Canadian investors got a sneak peek into the potential winners and losers from a trade war on Monday, as markets tumbled to start the day before recovering after it was revealed that U.S. President Donald Trump had paused tariffs for 30 days, first on Mexico and then on Canada.

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Analysts have been trying to grasp the short and long-term effects of potential tariffs on different industries and most have concluded that a trade war with Canada’s biggest trading partner would be losing scenario for investors.

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“It’s going to be hard to find any real winners because this is bad on Canada,” said Barry Schwartz, executive vice-president and chief investment officer at Baskin Wealth Management. “It hurts our economy. It could cause a recession. That’s not good for consumer spending. That’s not good for animal spirits.”

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Schwartz said Monday’s biggest large-cap losers on the S&P/TSX composite index were companies that rely heavily on moving goods across the border, such as oil producer Imperial Oil Ltd., industrial equipment dealer Finning International Inc., powersport products manufacturer and dealer BRP Inc., mining and metals company First Quantum Minerals Ltd., auto parts manufacturer Magna International Inc., transport and logistics company TFI International Inc. and railway holding company Canadian Pacific Kansas City Ltd.

While most of their stock prices picked up after Monday morning’s plunge, Schwartz said the declines told the tale.

“The market reacts in real time with who the winners and losers will be,” he said.

“If there is a prolonged trade war against Canada, obviously it will be the oil companies, anything to do with automotive, anything to do with shipping or minerals,” he said. “Those kinds of companies are going to be the most affected.”

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Schwartz said energy companies like Tourmaline Oil Corp., ARC Resources Ltd. or Peyto Exploration & Development Corp. could benefit if the price of natural gas goes up and the loonie continues to weaken, which could help offset tariffs.

“It’s just how much of the impact of the tariffs hurts them versus the Canadian dollar,” he said.

While tariffs don’t apply to Canadian banks, a trade war could bring “serious negative implications” for Canadian bank stocks, as “their fortunes are intimately tied to the health of the Canadian economy,” Bank of Nova Scotia analyst Meny Grauman said in a Feb. 3 note.

Canadian banks could see “significant downside and volatility in the short term as a result of the tariffs and related economic uncertainty,” RBC Capital Markets analyst Darko Mihelic said in a note on the weekend, before Monday’s tariff pause.

Mihelic said bank stocks could be impacted by volatility in capital markets, an “abrupt and potentially volatile change” in Canada’s economic situation, slower loan growth, a large increase in performing provisions for credit losses and potential measures from provincial and federal governments and regulators aimed at protecting Canada’s economy.

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Canadian life insurance company stocks may have a more muted reaction than bank stocks because more of their earnings come from outside of Canada, Mihelic said, but “equity market, interest rate, and spread volatility” could be a source of short-term pain. In particular, iA Financial Corporation Inc. — “the most ‘Canadian’ of the lifecos” — may be more negatively impacted by short-term volatility than other life insurance companies.

One financial services winner Schwartz sees could be TMX Group Ltd., which owns and operates stock exchanges in Canada including the Toronto Stock Exchange.

“There’s going to be heightened volatility and increased trading, and they make money on stock trading and the tariffs have no impact,” he said.

Sectors such as telecommunications and utilities were not likely to be materially impacted by tariffs, said Rebecca Teltscher, portfolio manager at New Haven Asset Management Inc.

The infrastructure and client base of telecom giants such as BCE Inc. and Telus Corp. are predominantly located in Canada, Teltscher said, and those companies should be better positioned to weather a recession compared to other sectors because they have stable revenues and provide critical services.

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“If a consumer is trying to cut down spending, they are most likely going to stop travelling or eating at restaurants before they decide to cut their internet or cell phone service,” she said.

Canadian utilities companies such as Emera Inc. and Fortis Inc. do have cross-border operations, but their operations don’t rely on cross-border supply chains.

“Utilities are rate regulated by the different jurisdictions they operate in,” said Teltscher. “Emera and Fortis own distribution utilities in both Canada and the U.S. but they operate as standalone entities and are not impacted by cross-border trade.”

If tariffs on Canadian goods are implemented, analysts don’t expect them to last long — but even if the tariffs are temporary, “the implications of this trade war will be with us for a long time,” said Scotiabank’s Grauman in his note.

Schwartz said the market pullback could be an opportunity for investors to buy Canadian companies they’ve been eyeing, especially if the stocks aren’t impacted by tariffs or are just down due to selling from index funds.

But as the tariff situation develops, investors shouldn’t panic and react to day-to-day changes in the market, said Craig Basinger, chief market strategist at Purpose Investments.

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“Even as the day progresses, things dramatically change. I don’t think you can react to it overnight, nor do I think you should,” he said.

The question of how long potential tariffs could last, Basinger said, depends on whether common sense prevails or whether the Trump administration is conducting an economic experiment.

“I’m optimistic it doesn’t last very long. That’s sort of our base case, because I think it’s going to, on the margin, be inflationary in the U.S.,” he said. “I think that’s a bigger problem on the U.S. side from a political perspective. I don’t think it prevails at these rates. But again, there’s a lot of illogical arguments going on out there.”

• Email: jswitzer@postmedia.com

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