Martin Pelletier: There may be a buying opportunity if a trade war causes sell-offs in exposed sectors
Canada is facing one of its most serious threats in decades, this time from its closest ally, the United States, with President Donald Trump having threatened us with hefty tariffs on our exports before his inauguration and whose full agenda will play out in coming months. According to NBC Economics, a 25 per cent tariffs could cause Canada’s GDP to contract by as much as six per cent, causing a recession deeper than in 1981, 2008, 1990 and 1974, with only the COVID-19 shut-down in 2020 being worse.
Given that Trump’s Art of the Deal negotiating tactic is to come out swinging and then back off later it makes the question of what will happen with the energy sector longer-term one major unknown, as most of our exports are in the form of energy sold to U.S. refineries. When excluding oil and gas, the U.S. has a US$58 billion trade surplus with Canada, not anywhere close to the US$200 billion number he keeps quoting. We also sell our oil at a discount into the U.S., greatly benefiting their refineries and ultimately their consumers.
There are many things we can do and lessons to be learned from all of this but it sure would be helpful if Prime Minister Justin Trudeau hadn’t initiated the prorogation of Parliament until March, leaving our country more exposed in the face of Trump’s threats without an active legislative process.
From an energy sector perspective, we would also be in a more powerful negotiating position if only we had built out the Energy East and the Northern Gateway pipelines. Having the ability to divert approximately 60 per cent of U.S. oil imports directly to Eastern Canada and other countries would be a huge hammer to hold over Trump. The same would apply for LNG exports, selling our inexpensive natural gas to regions in need like Europe and Asia.
Another course of action that we could take is to get our own house in order. A recent report by National Bank citing the C.D. Howe Institute, showed that Canada’s interprovincial trade barriers are equivalent to a huge 21 per cent tariff. It is quite shocking to think that it is more punitive to trade amongst ourselves than with the U.S.
From an investment perspective, we think any widening of the Canadian heavy oil differential and corresponding sell-off among Canadian oil producers would create an excellent buying opportunity, as we believe any tariffs on oil exports would be short-lived. In fact, we expect the Trump administration to want more Canadian crude rather than less and so any talk of pipeline expansions to tidewater would certainly help our cause.
Other areas could be exposed, such as manufacturing, agriculture and lumber, but we wonder how pronounced any tariff would be. For example, how could lumber be impacted, especially considering the substantial increased demand to come out of rebuilding Los Angeles following the fires?
The bottom line is, while this is a clear and present danger, perhaps it will lead to some much needed changes here at home. We may be looking at a change in federal government, away from one that imposed punitive policy aimed at small and medium business while expanding the government workforce by more than 40 per cent and imposed material tax increases on domestic capital sources.
This would potentially allow us to finally look at becoming a jurisdiction open for business, diversifying our markets away from just one client, including our energy sector, and breaking down trade barriers between each province.
This could, in turn, lead to an improved economy and a robust equity market that has significantly lagged the U.S. for the great part of the past two decades. This is something I’m sure most Canadians are willing to invest in.
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.
