President Trump’s tweet threatening a global trade war has rattled markets across the world and has been the cause of great concern in Canada. Michael Craig, Senior Portfolio Manager, TD Asset Management, talks about tariffs, the impact on the loonie, and how investors could protect their portfolios.
Welcome to the show. I'm Kim Parlee. Glad to have you with us. From health care, to immigration policies, to once again lifting the ban on importing elephant trophies, President Trump has been known to change his mind once or twice. But one issue he has been consistent on since his campaign days is his hawkish stance on trade. Recently, he said, countries, including Canada, may be slapped with hefty tariffs on steel and aluminum entering the US, but has since softened his stance, suggesting Canada may get some form of exemption. With more on what all this could mean for the country, for the loonie, for the markets, is Michael Craig. He is Senior Portfolio Manager at TD Asset Management. Nice to see you.
Thank you, Kim.
We bring you in for the easy stuff, right?
I want to start with, I guess, just the news, of course, that there's going to be or could be steel tariffs, aluminum tariffs, and then you've got NAFTA thrown in there as part of this. And then you get the last minute note today that maybe there was going to be, quote, "a national security carve-out for Canada." What does this all mean for Canada? What do you think? Or trade, I should say.
Very, very noisy in the short-term. I saw on nat news today, the loonie rallied about a half a cent. So I think there is some optimism that Canada and Mexico get excluded from this. And I think Trump started to see that, particularly with the Europeans, there is a real pushback as to sectors they'd target if the US does slap on these tariffs. So it's in flux, so to speak, for the next few days.
Yeah. I mean, it's been-- gosh, I feel like it's been in flux since he's been in office. But anyway, you brought a chart-- and I want to bring this up-- about just the impact of all this could have on trade, and specifically, on investment in Canada. Let's bring the chart up. Tell me what we're looking at and why you think this one is important. Actually, I think that's the wrong one. We're going to bring the other one out first, which takes a look at-- it's Canadian real estate and non-real estate activities as a percent of GDP.
That's right. So if you look at the economy, there's various sectors of the economy that are running. This chart here-- the orange line is the amount that we're investing into the real estate sector, so that's real estate building and so on. And the green line is nonresidential real estate activity. And they're both based off the size of our economy.
And what you see is that over the last 10 years or so, the amount of our economy tied to real estate investment has grown tremendously, probably about $60 billion in additional every year over the last 10 years. And the problem with that is that, sure, it's great, and we're building lots of homes, more people are moving here. But it's not productive investment. Productive investment is when you build businesses that create future cash flows.
So you're building things that build things, basically.
Absolutely. Yeah. And so our economy isn't really durable, or it's not as durable as it once was. And so we have these older industries that have been around for a long time. And because of this lack of investment in the productive sector, we're going to be much more affected by trade than other countries.
Just on that issue of being vulnerable, when we talk about tariffs-- I mean, you think about the steel, you think about forestry and all that kind of stuff. I mean, that chart actually worries me. When I see that, I'm like, ugh, this is not good for the Canadian economy.
And there's been some hopeful-- well, we can retaliate with further measures with the Americans. But it's important to remember, in the US, exports are about 10% of their GDP. In Canada, it's three times that. So we're very much reliant. And they are our biggest customer for our goods. So we are reliant on them for a lot of our trade and our GDP. So it's really important that we keep open borders. We have much more to lose than the Americans if a trade war develops.
I think one of the most interesting things I want to talk about is the loonie. And I'm not going to go there yet, though. Before we go to there, who wins and loses if there is a trade war with Canada? I mean, I'm not looking for names, but I guess sectors in terms of maybe who wins maybe from the US's standpoint, maybe who loses from the Canadian standpoint.
Bigger picture-- a trade war is bad for everybody, but it's not equally bad for everybody. It's much worse for companies or countries that are reliant on exports. So Europe, parts of Asia, Canada, Mexico are all going to be hurt much worse than the US if a trade war develops. And so that's the key. With country to country, it's a question of what type of good are you dealing with, a commodity or a good that's really specialized, which isn't replaceable. So if we start doing tariffs, it's not likely people are going to start trading their iPhones for another cent-- they're going to keep buying iPhones-- whereas with wood, steel, dairy, there's not a lot differentiation in these sectors and so--
You could go elsewhere.
--it's easy to swap out. Yeah. And so we're very, very vulnerable if this does escalate further.
OK. What does this mean for the loonie? And let's bring up the chart that we brought up initially. You've got a piece here that shows us twin deficits to weigh on the loonie, but factor in the trade side too.
So there's been plenty of commentary about the US dollar of late. So just to give you a corollary about the twin deficits in the US with Trump's recent tax proposal, they're going to be running deficits for a long time. And therefore, there's been a bullish thesis put on the US dollar. I just want to turn that a bit and say, well, actually that same environment has been the case in Canada for a couple of years now. We were running a current account deficit-- it means we're reliant on foreigners for capital to run our economy. And we're also running fiscal deficits. So when you look at the provinces and the government, we're running about 1.5% deficit to GDP.
Now, that's important because our growth has been as good as it's going to get. Last year, Canada led the G7 or G10 in growth. A lot of it was consumption-based. Bank of Canada has started hiking. Growth has started to slow. You see real estate transactions starting to slow in major cities, consumption starting to slow. So we can't balance our books at the peak of growth. As growth rolls over a little, that deficit is going to worsen. So it will be more negative. And with those two twin deficits, that's going to be a real headwind to the loonie in the next couple of years.
How much of a headwind?
So always tough to put a number on it. A lot of factors at play. I wouldn't be shocked to see a $0.70 loonie over next 24 months.
And so we all kind of think it states the world, and that would be certainly one case where I could see easily a $0.70 loonie in the next 24 months.
I mean, the only upside, I guess, to that, from a Canadian perspective, is when you get the lower loonie that could kick-start some of the exports again to offset. I mean, it could.
Great if you're an exporter, not so good if you're going on a vacation.
Right or buying things, I guess--
--US capital, those kinds of things too.
How do you, as a professional investor-- I mean, those of us who are living headline by headline right now, watching Twitter to see what the president is thinking-- what are you doing right now in terms of just watching the trade headlines and how that affects your day-to-day?
Yeah. So it's a tricky one right now. These aren't easy markets. We're late cycle-- meaning we've been in 10 years of growth. It's getting a bit harder. US is basically at full employment. Markets are becoming much more volatile, particularly over the last month or so.
For us, it's a few things. One, with the weaker loonie, it makes foreign assets and global equities far more attractive than domestic. Not only do you have a likely better return on your asset, but I'm pretty certain you're going to have a better return on your currency as well. So you get those two tailwinds for your investment portfolio. So first off, global diversify is really helpful.
In the more immediate turn, there's two things that we're doing. One is we're using more cash. You're actually getting a lot more income now for cash than you did a year ago. It's not huge, but it's better than nothing. So we're getting income from having more of a high cash balance. And the options market provides a pretty nice way to give you some downside protection in these environments, which has been quite timely in the last six weeks or so.
Fascinating stuff. Michael, thank you.
Thank you for having me.
Michael Craig, Senior Portfolio Manager with TD Asset Management.