Author: Martin Pelletier

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During my trip to Europe last week I was asked by many locals about the reason for U.S. President Donald Trump’s recent aggressive positioning against its once closest economic allies, Canada and Mexico. This, while appearing to be taking a much softer position against adversarial countries such as Russia. I really didn’t have an answer but one thing is for certain: What we are witnessing is a fundamental shift in geopolitics that could have a profound and lasting impact on the global stage.

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As portfolio managers, we worry that this uncertainty has the potential to cause real economic damage, even a global recession. Our thesis is that a global trade war will cause a temporary spike in pricing causing consumers to reduce spending and debt levels.

The U.S. isn’t as protected as it thinks it is, as targeted countries respond with counter-tariffs of their own. Canada responded on Tuesday with counter tariffs totalling 25 per cent on $155 billion of U.S. imports, though tariffs remain in flux as the U.S. tinkers with deadlines and relief measures and world leaders attempt negotiations with Trump. The Chinese Embassy in the U.S. posted on X that, “If war is what the U.S. wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end.”

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Meanwhile, all of this is happening at the same time as Elon Musk is undertaking massive government cuts that will have a negative multiplier effect on the economy. According to Apollo Investments, DOGE-related layoffs could potentially be closer to one million when including contractors.

And just earlier this week, the Atlanta Federal Reserve model is predicting that U.S. gross domestic product (GDP) will contract by 2.83 per cent in the first quarter, revised lower from its 1.48 per cent contraction forecasted at the end of February.

We think this has the potential to suck liquidity out of the market, sending the highest-valued, levered beta segments such as U.S. tech companies like Nvidia Corp. and Tesla Inc. even lower than what we’re currently witnessing. The safety of the broader segments of the U.S. market, such as the Russell 2000, will also be affected by this.

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Closer to home, about one-third of Canada’s GDP comes from exports with more than 70 per cent of that going to the U.S. So our economy is certainly going to be harmed with tariffs. The issue is that Canadian households are among the most levered in the G7 but hopefully we will see timely rate cuts by the Bank of Canada and ideally some smart policy out of Ottawa, such as the immediate scrapping of the carbon tax, that will help ease some of the pain.

That said, the S&P/TSX Composite could be affected, as it is dominated by Canadian financials and energy sectors, both of which are exposed to the broader economy. We do have to admit some stocks within these segments have currently sold off to some enticing levels and would be well poised for a nice bounce should Trump soften his current positioning.

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The bottom line is we think the world will look different in six months than it does now and perhaps so should your portfolio. Therefore, having a game plan is essential to navigating today’s uncertainty beyond simply buying the dip, as so many pundits are recommending.

One area that we like is the Canadian and U.S. bond market, which has gone nowhere in the past few years. We are seeing the best opportunities at the longer-end of the curve, meaning 10 years and longer. This ties into our thesis that rate cuts are on the horizon as the temporary inflationary impact of tariffs wears off and deflation ultimately sets in. Those with bond duration exposure will directly benefit from this, finally returning this asset to its historical relationship as a hedge against equity corrections.

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In case we get it wrong on the equity front, as there is always the chance that tariffs become reversed and markets recover, we have a large weighting to structured notes that offer varying levels of upside exposure but with built-in downside protection.

We are favouring those called contingent coupons with 30 per cent downside barriers and on average seven to nine per cent annual coupons paid out monthly. This way investors can get an attractive yield while markets do their thing. Maximizing exposure to this within registered accounts has proven to be very beneficial, as notes are not tax efficient.

Finally, we are not going to cash but admittedly have been shoring up cash levels a bit in order to have some dry power to boost our equity allocations on any meaningful correction. Or, as Warren Buffett describes, using cash as a tool to take advantage of the inefficiencies in the market, not as a fixed part of his portfolio.

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There can be uncertainty in markets, in economies and in geopolitics but it doesn’t have to live in your mind rent-free. Having a plan to mitigate risks is something not only within your control but also a great first step to at least collecting rent from your portfolio while the world is becoming a more hostile place.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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