Episode 104: Navigating tariffs, policy and Canada-U.S. trade tensions

This communication is not and under no circumstances is to be construed as an invitation to make an investment in the Manulife Real Asset Investment Fund (the “Fund”), nor does it constitute a public offering to sell the securities of the Fund. The offering of units of the Fund is made pursuant to its Confidential Offering Memorandum only to those “accredited investors” in certain jurisdictions of Canada who meet certain eligibility and cannot be sold in Canada to the general public. The offering memorandum contains important information regarding the fund’s investment objectives, strategies, restrictions, risks, fees, redemption limitations, liquidity and other matters of interest. There are no assurances that the stated investment objectives of the fund will be met. Applications for investment in the Fund will only be considered on the terms set out in the Confidential Offering Memorandum, a copy of which can be obtained from us. Eligible investors should review the Confidential Offering Memorandum carefully before deciding to purchase units and should note that alternative investments can involve significant risks. The Fund is not guaranteed, its values may change frequently and past performance may not be repeated.

The opinions expressed are those of Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Manulife Investment Management disclaims any responsibility to update such information. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management Limited, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Manulife Investment Management.

Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

4270080

Kevin Headland

Commentaries for general information purposes only. Clients should seek professional advice for their particular situation.

Macan Nia

Historically, Canada and the United States have been the strongest of allies. The United States is Canada's largest trading partner, while Canada is the United States close second behind Mexico. Canada and the U.S. share the longest border in the world. Their supply chains are integrated. They rely on each other for natural resources. Canada has often been considered the US's little sibling.

Macan Nia

But like all sibling relationships, tensions can occur. The tension volume has been dialed up a notch recently over tariffs. The Trump administration has threatened several tariffs, including an across the board tariff, which has been which has been delayed with specific tariffs on industries including oil and gas, automotive and softwood lumber, to name a few. Canada has threatened retaliatory tariffs.

Macan Nia

All of this has created a rare tension between these nations. Look no further than the passion and emotion that was the Four Nations Cup final between the two countries, where Canada beat the US in the in overtime. Though Canada, as rhetoric increases and the fear of this economic impacts rises, we thought we'd take a big picture view of the dispute.

Macan Nia

How does it impact Canada? Does it impact the US? Is there a risk of inflation increasing? What will central banks do? While it's impossible to accurately quantify the impact, we try to gauge the likelihood and extent over the long term. Listen on. This is investments unplugged.

Macan Nia

Welcome to Investments Unplugged. I'm your host, Macan Nia, chief investment strategist at Manulife Investment Management, and joined here, as always, with my partner in crime, Kevin Headland.

Kevin Headland

What’s going on Macan?

Macan Nia

Not too much, how are you?

Kevin Headland

I'm fantastic. Recording this the day after the big win by Team Canada over team USA in the Four Nations face off. This is a great day for celebration.

Macan Nia

Yeah, it was a very exciting game, Kev. You know, I kind of fell out of love with the NHL years ago, and I found myself watching hockey for the first time last night. So

Macan Nia

it speaks to the audience that that team or that game really garnered

Macan Nia

exciting patriotic. And I think actually it's a very good tie in for our discussion today.

Macan Nia

And today we're going to talk about

Macan Nia

top of mind of Canadians in here. When my mother is asking me what tariffs are and how they work. A couple of weeks ago I know it's hit mainstream media. I also know I think the game last night, obviously Canada US historic rivalry. But you up actually seemed a little bit more political this time around.

Macan Nia

And we know why. Because of the, the threats of a tariff dispute or trade war between our two countries. And I thought what we would do is before we bring on our, our guest. So for this month, we're very lucky to have Dominique Lapointe, who is a senior strategist at Manulife Investment Management within our team.

Macan Nia

That or our broader umbrella team. The macro strategy team. And before we bring Dom on, I thought we may we would let we set the stage. Now this is going to be very comical. Probably by the time they released this is the list is probably grown in terms of tears because it seems like every day there's a new announcement.

Macan Nia

So I thought I'd start Kev, in terms of what has been proposed. So far. As I said, 21st, this is probably going to be very different within a couple of weeks. But let's go with our base. And what I thought I would do is look at it from the U.S. lens and very, broad based. We know on set forth it was written that there would be across the board tariffs for all Canadian imports of 25%, an extra 10% extra, but a 10% levy on Canadian energy.

Macan Nia

We know that has been delayed for 30 days. So we will see what that happens in the next couple of weeks. But since then, we've got even more announcements. So apparently supposed to put into place on March 12th, an across the board, again tariff on basically 25% on all aluminum and steel imports. Now, this could hit Canada particularly hard.

Macan Nia

Given that I think it's like a quarter of our steel goes to the US, 60% of our aluminum, 90% or sorry, the U.S. gets 25% of their steel from us. They get 60% of our aluminum from us. But our exports of steel, steel and aluminum is 90%. So it's a massive, massive amount add on top of it.

Macan Nia

There's also, the new one is on, you know, the Canadian car industry. What that looks like, the shape it takes on. We will talk about it. But again, at 25% across the board and one that recently came out and I kind of missed this one because it's just got lost. And all the noise is a potential of another 25% across the board on semiconductors and pharmaceuticals less likely to impact us.

Macan Nia

But as you can see, this has been almost a month since the inauguration. And you've seen it's it's fast and furious. If you watched the movie this, they should make one on Donald Trump Fast and Furious a tariff edition, because every week it seems like there's a new threat coming out. Now let's look at it from the Canadian perspective.

Macan Nia

Potential retaliatory tariffs from our side of the border.

Kevin Headland

Yeah. Just go back really briefly on the aluminum story. It's kind of interesting how, how important we are as trade partners, because while the U.S. imports our aluminum, it's actually, smelted and, manufactured into cans that are then exported back to us for things like beer and, canned goods. So it is a, you know, kind of quid pro quo exchange where something like that will actually hit both sides of the other of the border.

Kevin Headland

So not just on Canada. Right? In terms of retaliatory tariffs, of course, our government has decided to be, more aggressive and said if anything is imposed on Canada and from a tariff perspective, we will, also impose tariffs. The first one was announced again to the retaliatory tariffs or the tariffs on February 4th. Was the idea we would immediately put in $30 billion or tariffs on $30 billion of goods, things like, orange juice, peanut butter, wine, spirits, beer, coffee appliances, apparel, footwear, motorcycles, cosmetics and pulp and paper.

Kevin Headland

And then additional $125 billion worth to be tariff, with a 20 public, comment period on how that happens. But, additional ones in terms of now passenger vehicles and trucks, electric vehicles, steel, products as well, fruits and vegetables, aerospace products, beef, pork, dairy trucks, the list goes on and on. And there's actually a whole list of, potential products that we tariff, on the Korean government website.

Kevin Headland

So quite interesting, obviously, as you said, there's a bit of a reprieve here. We'll find out what happens as negotiations happen. We got a reprieve, on the, on the, Monday the third. We just got here, just after a few phone calls. Now, mocking a little, interesting story in advance of the potential tariffs.

Kevin Headland

Of course, Premier Doug Ford had said the Lcbo would be taking off all American made, liquor from the store shelves. I do like my Cabernet from California, so I ordered some wine in advance, to be picked up, and and and I've been picked up by Monday morning, and I got a phone call from the Lcbo to let me know that if they didn't, if I didn't pick it up by 8 p.m. that night, Monday night, February 3rd, my order would be canceled as a result of, the directive, to stop selling all American, liquor products at the LCBO.

Kevin Headland

So it's kind of fun. Of course, I did go and pick it up on Monday just in case the tariffs came in place, and I know how long I would not be able to get, any wine from the US. So it kind of got.

Macan Nia

To sorry that the excuse you use get yourself a case of wine that, there going to be, tariffs apply to them. But if you're also an old fashioned drinker, if, you know, you can't get American bourbon up here, then good luck to you getting your old fashioned. But you know what? I think that's a good time.

Macan Nia

Good transition. Dominic Lapointe, as I mentioned before, a senior strategist on our macro strategy team,

Macan Nia

long winded title. We call him the Canadian guru. You want to know anything about the Canadian economy? Dom has a very interesting lens into it.

Macan Nia

Welcome to the podcast Dom.

Dominique Lapointe

Thanks, Macan.

Macan Nia

Yeah, I think we've put you you know, this is kind of an impossible position to put anyone in in terms of give us your view in terms of the impact of tariffs on certain industries, on the economy, because as we've noticed over the past couple of weeks, the goalposts are always changing and they're changing on a daily basis.

Macan Nia

And even the tariffs that are being applied, there's nuances even within industry. So the automotive industry, there's massive amount of nuances. So it's kind of like I said, give us a review how the Canadian economy is going to be impacted to the decimal point. From a GDP perspective, that's not the point of this discussion. The point is they just get a holistic approach of what may or may not happen as we walk through it.

Macan Nia

So and this is not necessarily like I want to hear your view like you're you're doing all the analysis on a daily basis. You're seeing the difference is you're following policymakers. What do you think? Again, who knows how this looks like? Well, let's start off here. How do you see the end of the year in terms of tariffs.

Macan Nia

Like are we in. Is this a negotiation type. This is this likely to be structural and based on your view what's the challenges for the Canadian economy as we navigate throughout 2025. Given the challenges we already have as an economy entering 2025? Without all this uncertainty around tariffs.

Dominique Lapointe

Yeah. Thanks, Nick on there's a lot there. But I will say from the start, as a as we're speaking there's no tariffs. There are so-called announcements. And you labeled some of them. There are other ones like reciprocal tariffs that would be applied to tariffs that if countries that are actually putting in tariffs on the US imports right now.

Dominique Lapointe

So those would be more emerging markets. But Canada would also be hit indirectly through those. And there is,

Dominique Lapointe

a more comprehensive review of trade practices that the US is conducting on Canada and Mexico trade. And that is usually seen as the opening salvo to a renegotiation of the free trade agreement that we have with the US.

Dominique Lapointe

And before November 25th, when the first steps were announced, it was probably the way through which we were envisioning the trade tensions with the US as through a formal negotiation of Usmca, or in early 2026, which is when it's due to be renewal if the US wants to do it. And there would be concessions that Canada would have to make there.

Dominique Lapointe

Now, obviously, we're in we're in a different world. Right? When you're talking about 25% on all Canadian goods, that is massive. If you consider that right now they're, they're basically at zero and that, like 75% of our exports go there. And I think Canada as a country,

Dominique Lapointe

took for granted this access to the US market that was, that started in the 1990s with the free trade agreement and has never made, very intense efforts to diversify away.

Dominique Lapointe

And, and I, I understand why it's such a large market, so close. The infrastructures are built so that we can export there. The companies that are importing and exporting are often the same. So if you tax them, they're paying their own tariffs. So there's a lot of reason why it's not happening. But we do see now the result is you're, heavily relying on the access to that market.

Dominique Lapointe

And if you do impose those tariffs, well, it's going to be, I think, a net negative for most U.S industries impacted. But in terms of Canada, you're talking about reduced business almost immediately across many industries and over the long run. And then when I speak about the long run now and then about maybe 4 or 5 years, the U.S. companies will try to diversify away from Canadian goods, trying to gain other suppliers either not taxed by tariffs or U.S. producers.

Dominique Lapointe

And that mean that it's businesses maybe lost forever. Very hard to take back. So that's the entire manufacturing industry in Canada is actually being threatened by those 25% tariffs. Now. Now we don't work on there. That that is some shame. We work under the assumption that and that's one of the teams perspective. So it's very subjective.

Dominique Lapointe

But we work under the assumption that some tariffs will be imposed. And it they do make sense more when you look at them from an industry perspective. Not saying they're not going to have a negative impact on the US or that but we think that in terms of imposing them and seeing the impact, we'll probably going to see more targeted tariffs than the broader one that has been previously announced.

Dominique Lapointe

And to that point, when we came very close to, getting them on February 3rd, I think, the, the there was a deal made for building them for a month. And that is not based on trade relationship. That is more based on the perception that there are issues with the Canadian US border, that needs to be addressed.

Dominique Lapointe

But it seems like the Canadian commitments, to deploying efforts to solve these issues, was enough to, to grant a month exception. So that's why we think when we as a working assumption, we have to think that, in a couple of weeks when this will come up, the efforts made will still prove to be enough to sort of delay the broader 25 year Dom.

Macan Nia

If the if this economist thing doesn't work out for you, you'd be a great politician. I love that one sentence. The perception of security. Border security. You, said it. As good as that, that's for sure. The perception is very, very accurate.

Dominique Lapointe

Well, I'm sorry I'm saying that. And it's not, the focus of the podcast, but I think it's been fairly well documented that the issues brought up by the US government, concern Mexico more than would concern Canada, but it's being treated in the same way as the tariffs response to them. So that's why I'm talking about a perception.

Dominique Lapointe

There are issues. It's just that it's been well documented that the magnitude of those issues are we different. But the US response seems to be the same. Yeah. Fair enough.

Kevin Headland

As you just mentioned, I think you're I agree, where I think lumping Canada in with the US and the current, reasonings for creating tariffs is really but, renegotiate Usmca. The ironic part is that's exactly, free trade agreement that was negotiated last time President Trump was in power. So it's it'll be interesting to see what has changed in terms of what, the US wants, from the to what country, other countries.

Kevin Headland

When it was announced as well, Premier Ford had mentioned that we could lose 500,000 jobs, in the automobile industry in Ontario. That seems, quite large.

Kevin Headland

You let's play a game here, let's scenario and say, listen, let's say, you know, we do get the tariffs. What do you think would be the immediate impact on GDP?

Kevin Headland

Is this is this a really big is 500,000 real number? How bad could it be for for Canadian economy.

Dominique Lapointe

So you really have to take it industry by industry because it's not all industries that are exposed the same way. And they would face this same distortions. Let's say I leave cars aside from now because that's probably where it's so integrated. And you have, factories in all three countries trading between each other and the same sort of large businesses owning many of the smaller businesses trading between each other.

Dominique Lapointe

So they're going to be the tariffs. They would be the tariffs multiple time. And so that's why you even had some of the industry representative or actually people working in these companies saying we're not even sure the industry would survive 25% tariffs over a long run because those costs would I would add up. Right. If the goal of the US government is to make the entire car out of the US, well, that's something I'd say theoretically possible, but it's not something that can happen overnight.

Dominique Lapointe

Yeah. So that's when the disruption would be heavy on both sides of the border. It's first. And that's why I think the odds of those there's you just looking at them from the constraints that the this impose are quite low. But if you take another industry like aluminum for instance, where you mentioned it's first where we, we export most of our aluminum to the US, it's mainly produced in Quebec.

Dominique Lapointe

There's a couple of things that happens. If you do you get those tariffs right. And it all depends on the negotiating that happens. So first the US producer that needs to import you aluminum either it's for beer cans or appliances that you're building to build homes cars you know it goes into everywhere. Then you you either you're going to eat it some of it's through your margins, which is not

Dominique Lapointe

good for the U.S. importers.

Dominique Lapointe

Right. You can do that and then pass on some of that cost to your end consumer in the US, which ultimately can lead to some inflation. Your customers are not happy, they're going to buy less. Or you can go to your Canadian supplier of aluminum and say, we gotta do something. So can you eat some of it for me?

Dominique Lapointe

So can you make me a discount to offset some of the tariff? And so that's when it starts to impact the Canadian producer because it needs to make the decision. Well I'm going to try to keep the business in the U.S. I'm going to reduce my prices. So it's going to be a split. And like who has the negotiating power to do so?

Dominique Lapointe

In the case of the aluminum, I would say because the US, don't produce enough aluminum right now and they're far from it to sort of compensate,

Dominique Lapointe

not importing from Canada, then it's gonna be probably going to be a split between the US aluminum producer or importer. We'll have to eat some of it. So you have that or you just decide to reduce overall your production.

Dominique Lapointe

Right. You import less, you produce less because now it's too expensive. And in that case, it also means reduced business in the US, but mostly reduced business for the Canadian producer, because now it has all those capacities and no real way to sort of export that aluminum. So that's when you see the hit would come from multiple fronts, but you know, the exact impact down the line on the Canadian producer.

Dominique Lapointe

Bottom line, the US producer bottom line will result from some sort of negotiation that they have. And that will also add to that the the some other layers of uncertainty, which is well, probably that the aluminum contracts are not priced every week. They're probably priced long term. So it if you impose the tariffs now, the same price that prevailed are probably in place for a couple of months.

Dominique Lapointe

Right. So maybe maybe the US producer doesn't have the ability to renew renegotiate the contract, which is more bad for the US and for Canada. Now. But what could also help on the other side is if you have, significant depreciation of the Canadian dollar at the same time as the tariffs being imposed, let's say you have a 25% depreciation, sorry, 25% tariffs on Canadian aluminum and steel.

Dominique Lapointe

But the Canadian dollar depreciates by 5%. Then effectively the tariffs become 20%. And now the negotiation is about who's going to eat the 20% not the 25% tariffs. So that could that could help. But you know, to give you a good answer of what's going to be the net impact. And having a number of that is very difficult.

Dominique Lapointe

But I wouldn't know that for aluminum. Well, the impact will be felt on Canadian producer. But I because there's no alternative in the US currently. It's probably going to take a bit of time so that we're losing a lot of jobs in Canada. But in terms of the car industry like you mentioned, then it becomes more problematic because the cut is, as I said, as the cost would add on more quickly and the industry is way more integrated.

Macan Nia

Done. You mentioned cost a lot, increased costs. And since Covid inflation has been front of mind of investors and it seems that we've had a success there, central banks have had a successful attempt in bringing down inflation without really putting economies into recessions. Now, if these tariffs are structural, if they're not short term in nature, what is the impact for inflation south of the border here at home?

Macan Nia

And what implications does that have for Bank of Canada policy and fed policy moving forward.

Dominique Lapointe

Yeah. So there's a there's a lot there to consider. And if you go back to 2018 and 2019 where it's like the last time we we had tariffs from the Trump administration, most of them were directed towards China. You had tariffs on Canadian steel and aluminum as well.

Dominique Lapointe

You look at the overall inflation, you don't see meaningful impact on the overall CPI inflation.

Dominique Lapointe

But if you go dig down and you look at product by product, right. So appliances from China, some electronics, even steel and aluminum that were exported from Canada to the US, you do see some of the price being reflected down the line to the CPI. It's not the tariff. The it's not the entire tariff, as I said, because there's always a negotiation between who's going to have the cost.

Dominique Lapointe

But there is some, however, because who would it put into perspective? Those stares were small as a percent of overall US international trade,

Dominique Lapointe

you didn't really see a large impact on CPI inflation. And that's why you have people that will refer to. These are just saying, well last time we had tariffs on there was no inflation. Well the numbers that are being floated right now are much higher and broader.

Dominique Lapointe

So that's why when we modeled what would be the pass through, we have to assume that the impact on inflation would be larger. And in terms of Canada, then it all depends on if we retaliate dollar for dollar to it, which product, which industry were US product or industries were hitting. And then again, how much of that will be reflected to Canadian, to the Canadian CPI down the road?

Dominique Lapointe

So that's what I would say about that. We don't have right now enough information on what actual tariffs will be put in place, on what industry to sort of know with a good estimate, what would be the impact on CPI inflation at the at the end? However, going to the second part of your question on central banks, I think I'll make a distinction between the fed

Dominique Lapointe

and the Bank of Canada in that situation because, if you're first of all, the US economy right now, take a picture of both is looking stronger than the Canadian economy.

Dominique Lapointe

Right. The unemployment rate is lower. All proportion, taking into account that the unemployment is lower, GDP much stronger over the past two years with actual productivity gains. While in Canada we had negative productivity gains, which is something on the heard of almost. But it's under a whole set of issue. And at the same time, because of that strong economy, partly because of that strong economy, the US inflation has been much sticky.

Dominique Lapointe

Right. So you're looking at inflation in the US now it's 3%, core inflation surprising to the upside in the past couple of months. And you look at the breakdown. Well sure. Goods continue to sort of deflate. But the services inflation are still somewhat problematic. And housing doesn't go that go down as fast as we think. So for from the fed perspective, when you add tariffs to that picture,

Dominique Lapointe

you could think about it as well.

Dominique Lapointe

The tariffs are probably if they come in at once their price shock right. Their supply shock prices are being raised. Once you predict yourself a year from now they start to roll over from the numbers in the CPI inflation like mathematically, if you get only one at one time, the tariffs they roll over. However, as I mentioned, since the fed is still in the in an environment where they want to see inflation go down, where they don't feel that they have to stimulate the economy, they don't feel that they have to support the economy by lowering chase interest rates.

Dominique Lapointe

Our view from our team is that the fed will not do the classical analysis of saying, this is a price shock. I'm not considering it and I keep doing what I can, what I what I need, which is maybe lower interest rates down the road they're probably going to leads to are not lowering interest rates for longer

Dominique Lapointe

as they face those tariffs, especially if they come through several announcement like one at a time for the Bank of Canada.

Dominique Lapointe

Again, the economy is in a weaker position. It's not in a recession, but it's arguably it's the weak footing. Right. And it's very fragile. And then you add on top of that what the tariffs would do. To the Canadian economy, which is reduce demand from the US, huge uncertainty about future business decisions on am I expanding my factory?

Dominique Lapointe

Am I hiring people at the factory? Well, probably not, even if the cars don't come, but they're still threatened. It's very hard to make that business decision of saying, I want to hike very increase my Canadian capacity. That depends on the access to the US market. So make of getting those this so that's why we think even if you have the tariffs and Canada retaliates and impose tariffs and that's inflationary down the road for Canada.

Dominique Lapointe

The Bank of Canada is in this situation right there.

Dominique Lapointe

The the make the the the the flip decision from the fed saying we need to stimulate growth. Our focus will not be the one time increase in prices.

Dominique Lapointe

Our focus will be on making sure that we encourage business to take that investment decision, which support the housing market, support hiring.

Dominique Lapointe

So we're going to lower interest rates further, even if on paper inflation will start to rise if, the Indian government retaliates. So that's our view, for how they would how both central banks would react to the tariffs.

Macan Nia

So I know a lot can change depending on what the actual policy is. But as of right now, with the data that we know or the policy that we know, what's the team's view in terms of how many times or what the fed does, I shouldn't say how many times they cut what the fed does in 2025, and what the Bank of Canada does for 2025.

Dominique Lapointe

Yeah, so

Dominique Lapointe

tariffs are one part of that discussion. Obviously there's not only tariffs going on in the world right now, especially since as I said actually right now there's well there's 10% more tariffs on Chinese goods. But that's it. The rest are still intentions. So the fed from the start the fed historically is not making decision based on policy speculation.

Dominique Lapointe

We've seen a shift in the Fed's communication and thinking in December about this. When they came out and took out some cuts that they were projecting in their official forecast, called a summary of economic projections, you took out two of those,

Dominique Lapointe

and now there's only two. And that was reflecting some of the Trump, administration's likely policy. So that's a departure from not taking, not paying attention to it at all.

Dominique Lapointe

And so as official to sort of try to speculate on what he would do, but then you go into the, the, the discussion about, well, there's it's not only about tariffs for the US. You're talking about efforts to reduce immigration flows, more than it was done in prior administration. We know it's ongoing, but, we're not sure yet.

Dominique Lapointe

And the fed is unsure or completely unsure about what the net impact would be. But if you if you take some of the number that have been floating around during the campaign on millions of people being impacted by this policy, well, many businesses rely on foreign labor or new immigrants to fill the positions. If you take out some of that supply, maybe you need to try to find you as born workers.

Dominique Lapointe

Are they there? Can they work? Are you going to ask for a higher wage? That's the question. Do they want to work? Yeah. In for.

Macan Nia

Certain industries.

Dominique Lapointe

Well, yeah I mean culture is a big one, right. And so well, at the minimum, you would assume all else equal. This leads to higher wages in some industries. But people working in factories is manufacturing like on the floor are often foreign foreign labor. So you have that to take into consideration. And then you have the possibility that, Congress extend the 2017 tax cuts that were passed by the Trump administration.

Dominique Lapointe

That's assumed that it would do that. They would do it because they actually control Congress. So that adds to the deficit, but at the same time could stimulate growth. And then finally, you need to dig to consideration

Dominique Lapointe

the big basket of

Dominique Lapointe

deregulation, which so far we we've seen some of it through the financial industry, but we're expecting more but also deregulation into other industries like oil and gas.

Dominique Lapointe

What impact will it have on the economy. So if you're the fed it's very difficult situation because you're not supposed to really look at these things. But they're there's been like an unofficially announced to some different means. They often change. And so you sort of have to now think that some of it at least will be, will be won't be implemented.

Dominique Lapointe

And that means that you're more cautious. And that's, that's what we see from the fed. When they go out and speak now they're talking about being cautious, waiting for more clarity on the net impact. But the, the the subtle message, not so subtle that comes out of it, is that those policies lead to more sticky inflation in the US.

Dominique Lapointe

Probably a big no go ahead.

Macan Nia

No. Go ahead. I'm sorry, could you have.

Dominique Lapointe

I just said on some instances could be negative for growth at the same time, right. If you cannot find workers you have to reduce the hours of your factory. That's where I think it is. But I'd say overall the the concern from the fed looks to be on

Dominique Lapointe

the inflation front about this. And that's why they're talking about doing more more cautious even if they, they don't know.

Dominique Lapointe

And traditionally they haven't looked at these eventual policies.

Macan Nia

And I think that's a good point. Kev. Do you want to say something.

Kevin Headland

Yeah. No, I was I think the idea here is the way I'm framing it or been framing with clients is the the Federal Reserve has the ability or the benefit to be cautious because the economy is stronger. Canada and the doc a little bit less because of a weaker economy, because of the, looming refinancing of the mortgage markets.

Kevin Headland

It's not about today's, you know, economic impact or, or consumption, but perhaps the next five years as, Canadians refinance and they have less money to spend. It's not a, housing issue. It's a, it's a whether it's a consumption issue, right. Whether they have money in the pocket to spend. So I'm just a, close the loop on on that on the bank Canada.

Kevin Headland

Does the bank have to go two more times. Two more times. Four more times this year? What's what's the, views of the team?

Dominique Lapointe

Yeah. So. Well, Kevin, if you don't mind, because I, I, I realize I didn't know even the answer directly. Mic on and on the fed and I did like I didn't give the conclusion of my. It's my sir, I and I, I like to be specific when when I'm asked about these things. So I prefer the fed. You know the market sees only one cut now and we've been in that situation since the last, fed the fed decision.

Dominique Lapointe

I think once we're past the first quarter, and the tariffs impact, starts to roll in. But you do see the negative impact on growth of those through uncertainty. You also see some of the impact of the immigration policies, maybe through growth. And we also are of the view that structural inflation in the US is trending down.

Dominique Lapointe

And we could do a whole podcast on what's going on right now with these seasonal issues. Right now with CPI inflation. But that's why we think once we're past the Q1, maybe the inflation prior to tariffs starts to look like it's declining once again. And that's why we're still on the view that we're going to cut. They're going to cut more than once right.

Dominique Lapointe

It's probably gonna be 2 or 3. Yeah. Well it's hard to pinpoint when but maybe June maybe June and September. But what you, you sort of need to pass through the Q1 pass through some of the uncertainty on tariffs and see if it has a negative impact on growth. Then once you have that clarity, you can go and you can you can go at least 2 or 3 times.

Dominique Lapointe

So the morning with the market expects you end of the year a little lower. For the Bank of Canada. Again, it's a different situation. They don't

Dominique Lapointe

need to be is patient on wait on waiting on the net impact of inflation of tariffs because inflation in Canada is still at 2% and now they're trying to manage around 2%.

Dominique Lapointe

But because the economy is smaller, it relies so much more on international trade and business investment from the start is weaker. Like structurally, it's very hard, to have a strong year for business investment in Canada, except from the oil and gas industry, which are doing well in the past couple of years. It's a weaker economy that will need more support.

Dominique Lapointe

And that's why we're looking at our forecast. We had forecasts for 2025 when we did our outlook. We had one in January. We think March. They're going to pause. This they can actually afford a little bit of patience,

Dominique Lapointe

but then they'll come back to the reality of seeing the numbers actually roll back towards weaker, towards weaker business investment, reduce exports to the US, maybe people losing their job and they're going to need to provide support.

Dominique Lapointe

So in our base case since we only have targeted tariffs,

Dominique Lapointe

well you don't cut you don't go if you don't go for easing cycles towards zero based on targeted tariffs, you still provide that easing through cutting significantly more to support the economy as much as you can.

Macan Nia

Yeah. And I think that's a good transition maybe to the end part is

Macan Nia

as I'm listening to what we discussed over whatever the last half an hour, the main word is uncertainty, right. And that's the reality is none of us have a strong conviction in terms of how this is going to play out in the near term, but I feel that any.

Kevin Headland

Conviction.

Macan Nia

Any conviction, but I feel like we have a little bit more. Maybe I speaking for myself is a little bit more. Confidence is how this looks structurally by the end of the year, right? Like I don't know what's going to happen week to week, month to month. But what I do know or hope, maybe it's a hope, but what I feel like from a rational perspective is what would concern me as an investor if if there is broad base tariffs across all industry, all products, then that makes me very, very concerned.

Macan Nia

But if it's more isolated or it's more targeted, similar to the Trump 1.0 experience, those industries, yes, they may be impacted, but negative impact across the broader economy is less. And I think it for me it comes down to both Kevin Dom, it comes down to how integrated our economies have become over the last couple of decades.

Macan Nia

It's not that if this is implemented, one side gets impacted negatively, the other doesn't. It's both sides. And I'm going to talk to two industries as an example. So it kind of blows my mind. It kind of surprises me if we look at North America i.e more I think Canada, US, we're the largest. Basically we produce more oil than anywhere else in the world, which is kind of interesting to think about that these two countries have that cachet, and over the years our dependance on each other has increased.

Macan Nia

So I'm looking at it from a couple perspective when you look at it from oil. So just from the infrastructure and pipelines that these two countries have produced 25 years ago, we used to basically export and export. There'd be 140,000 barrels of oil a day between our borders over the last 25 years. That's gone from 140 to 450,000.

Macan Nia

So you see the increase of that. And I think this is the big one. It's like the refining capacity. So when you look at the refining capacity in the US, I think there's roughly 130 refineries in the US,

Macan Nia

25 of them use Canadian heavy on, so almost 20% of them use Canadian heavy oil. It's for the Trans Kenny transition.

Macan Nia

Yes, it will take time. Absolutely. Will it cost billions of dollars? Yes. And I thought Don Ewing made a point with autos. Right. Like they talk about us wants Trump wants to bring all of Canadian all auto production back to the US. So when you look at the number, it's a million and a half. I think it was TDI, that did the work.

Macan Nia

And they said basically the US has to build six new plants just to keep up with that. And that's very hard to do and expensive. And if you consider all the if you do the full on shorting aspect of it, they say that they have to boost production capacity by 75%. So it's easy to talk about that, but the implementation of it is much harder.

Macan Nia

And let's look at it from and I'll leave it to you after. This is a variety perspective. Sure. If you want to produce everything in the US, the variety of cars to the US consumer takes a big hit too, in the sense that. So in the US last year, there's roughly 330 models of cars bought, 120 of them were only produced in the US.

Macan Nia

So you want to go down that route. But that's also a choice aspect for the U.S. consumer that may not necessarily like it, moving forward. So I think for me, it's, you know, in the near term, who knows what happens, as we can see, a week to week of changes. But I think from a structural perspective, given how much we rely on each other, the tariffs are going to be much more targeted.

Macan Nia

And it's in no one's interest to make this a structural battle between the two countries. Have any thoughts?

Kevin Headland

Yeah, I think that the key, as you said, is uncertainty. And I think, you know, for our perspective, it all boils down to, what do you do for investments? Of course. And, when you get this uncertainty, it impacts a lot of the inputs we look at, for example, the data that comes out. You know, Don talked about about data, we can look at manufacturing.

Kevin Headland

And manufacturing was actually stronger, in the last months of 2024. Is it because the economy is improving or is it perhaps some of the manufacturers were front running potential tariffs. So we're getting that untrue impact from the actual data. How does that translate to our forecasts for markets, industries, even companies. You're looking at the the earnings announcements, this for the fourth quarter coming out, over the last few weeks and the mentions of tariffs during those earnings announcements is extremely elevated.

Kevin Headland

So companies are uncertain. Are you going to add production or not like has an impact earnings of those companies. And that creates uncertainty in the markets. And we've seen it day to day. Whether it's actual news or headline news it's creating that I don't see volatility but choppiness. It's almost non-directional. I think a lot of our investors were worried that perhaps, this time around would be a repeat of 2018, fourth quarter 2018.

Kevin Headland

The S&P 500 was down just under 20% for all intents and purposes, we could say a bear market. Was that a result of tariffs? Perhaps it was impact. Of course, there was a lot of, you know, called, trade dispute, between China and us and some other uncertainties there. But it was only one quarter.

Kevin Headland

And actually, if you would take your money out during that period or, held money out during that period, you would have missed extremely strong 2019 fast be 500. So when it comes to us right now, I think it's about balanced, being aware of what you're invested. Don't react too much to the headlines. As you said, strong conviction, no conviction.

Kevin Headland

What's going to have of tariffs? Let's look at just the business and look at the longer term. Then in front of our nose right now perhaps could be the impact the short term. Yeah.

Macan Nia

And I think that's it. And that's one that I think I'm most concerned about is the impact on profit margins in terms of a long disputed trade or long trade dispute. And we've all talked about, you know, valuations are above their 510 year averages across indices. But when you look at the empirical work and the evidences, high valuations are always supported by high corporate profit margins.

Macan Nia

So you can have high valuations. A lot like if corporate profit margins are high, if they start getting impacted then that brings the valuation discussion, up to the forefront. But again a lot of uncertainty. Who knows. I think the balanced approach, stock picking is important in this market. Not every company in U.S or Canada is going to be impacted by tariffs.

Macan Nia

The same. And maybe Dom, I'll give it to you for your last comments. Before we sign off in terms of how do you look at tariffs like, okay, you started off with my mom asking me about tariffs. Let's say, how do you, how do you talk to, you know,

Macan Nia

the everyday Canadian about how because they're being bombarded from a negative headline perspective and it can seem very overwhelming, I feel, to the end.

Macan Nia

Investor, how do you look at tariffs and how to think about them when it comes from an investment perspective?

Dominique Lapointe

There's two ways. One, that is rationale. And I would use,

Dominique Lapointe

the, the weight of you've laid it out very well in, on, on the integration of the US economy and the American economy. The fact that it's would take time, it would be disruptive to for the US to find other suppliers and entirely do things in the US, which makes it tariffs, irrational in some way.

Dominique Lapointe

Right. But then there's another way of thinking about it, which is there are some in the US administration, we think that see, this tariffs as, a mean without an end, right, or an end to I mean, I don't know, I'm not sure I'm getting the expression right here, which is more worrisome because that would imply that

Dominique Lapointe

there is a tolerance for some economic pain to achieve the result that you want to see in the long run.

Dominique Lapointe

So there's this tension between these two views in my head of the rational way of thinking about it is can't be apply because, it's would be this disruptive and it would not make sense from an economic perspective in the short run. But there's the other way, which is, well, maybe that maybe there it maybe that doesn't matter as much as we think from some in the administration making those decision, which in my head increases the odds of the tariffs, meaning that when I look at the market, well, I think that the market now is taking a side on the first perspective, which is not going to happen.

Dominique Lapointe

Doesn't make sense, but underestimate the odds of them. And so that's why I'm also concerned of possible shock of if they're announced or when. Then the shock will be larger than if we'd have some protracted, ordered integration of the odds that they could have happen. So that's how I see that's how I think about them. And I don't have a clear answer.

Dominique Lapointe

Like there's no way to resolve these two things in my head at the moment. This is really where you guys, it's a tension. And I think unfortunately, that's how it's going to play out in the next four years. It's that tension between rationality and irrational that it's very hard to reconcile it.

Macan Nia

Maybe I'm being rational, thinking of it this way because I completely agree with you. We all understand the rational aspect of it, but within the administration there's some irrational players. But if these were structural, especially oil, I would think oil goes up, gasoline prices come up, and those irrational people within the Trump administration become very rational because, you know, there's a midterm election coming up, you might get kicked out.

Macan Nia

So we will see. But I think that's a good place to stop. These are typically half an hour, but the discussion has been very interesting. It's top of mind. And maybe this is a good stop to, to stop. I want to thank you for your time. We know how busy you are. Especially now with the daily announcements and the work that's required from you and your broader team.

Macan Nia

But thank you, Dom, for joining us.

Dominique Lapointe

Thank you. That was fun.

Kevin Headland

We my thoughts I just say we might have to have a, a part b a second part, when we have maybe some more no knowns about what's going on with tariffs. Maybe a couple months down the road. Well, we'll have to see it. So stay tuned.

Macan Nia

Yeah, exactly. I think we got to have weekly announcements or additions of this based on the past six weeks, but I want to thank everyone for dialing in.

Macan Nia

Yeah, we will leave it there. If you, listen to us on any of the platforms, please rate us if you find these, useful. If not, please don't rate us.

Macan Nia

We don't want our rating to go down. Please feel free to share these with like minded individuals. We have found that that's the greatest way for organic growth of the podcast. I think last year we had 8 or 10,000 subscribers added on. So we want to thank you. But again, thanks for listening in to this episode of Investments Unplugged.

Kevin Headland

I'm Macan Nia and Kevin Headland.

Macan Nia

Like take care.

Macan Nia

This podcast is provided as a general source of information and should not be considered personal legal accounting, tax or investment advice orchestrated as an endorsement or recommendation of any entity or security discussed. Investors should seek the advice of professionals prior to implementing any changes to their investment. Certain statements in this podcast are forward looking that are predictive in nature depend upon or refer to future events or conditions.

Macan Nia

Forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those set forth. Although the forward looking statements contained herein are based upon what MIM and the portfolio manager believe to be reasonable assumptions, neither MIM nor the portfolio manager can assure that actual results will be consistent with these forward looking statements.

Macan Nia

Certain statements contained in this podcast are based in whole or in part on information provided by third parties, and MIM has taken reasonable steps to ensure the accuracy. Market conditions may change, which mean pack the information contained in this podcast. Commissions, trading commissions, major fees and expenses. All may be associated with mutual fund investments. Please read the prospectus before investing.

Macan Nia

The indicated rates of return are the historical annual compounded total returns. Net of fees and expenses payable by the fund, including changes in security, value and reinvestment of all dividends or distributions, and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security older that would have reduced returns. Mutual funds are not guaranteed.

Macan Nia

Their values change frequently, and past performance may not be repeated.