Market News

By Geoffrey Morgan and Stephanie Hughes

(Bloomberg) -- Up and down Toronto’s Bay Street, investors and strategists are rewriting the playbook for Canadian stocks. The reason, naturally, is Donald Trump. 

Canadian markets were struck by twin political shocks last week — the resignation of Prime Minister Justin Trudeau, followed by an extraordinary Trump press conference in which the US president-elect casually threatened to use “economic force” to make Canada the 51st state.

Trump’s menacing comments — and his reiteration of an earlier threat to start a tariff war — put downward pressure on Canadian stocks that stand to get caught in the crossfire. That has some portfolio managers reassessing their risks, while others look for bargains among the wreckage. 

Private jet-maker Bombardier Inc. ended last week at its lowest level since mid-November. The company is exposed on multiple fronts because it has a complex supply chain that includes facilities in both Canada and Mexico. Canadian manufacturers from Algoma Steel Group Inc. to auto-parts supplier Martinrea International Inc. all suffered heavy losses, while shares of dairy producer Saputo Inc. closed Friday at an 11-year low.  

Investors say the volatility, driven by what Scotiabank called “headline tape bombs” from politicians, is concerning partly because Trudeau’s resignation has opened up a short-term leadership vacuum, just as Trump assumes office. 

It “creates a black hole in Canada here politically, which timing-wise is probably the worst for adding to that level of uncertainty,” said Chris McHaney, head of investment management at Global X Investments Canada.

McHaney is urging investors to stay focused on high-quality names and defensive sectors like consumer staples and insurance companies. Others, including AGF Investments portfolio manager Mike Archibald, are giving some thought to buying the beaten-down names like Bombardier if the price is right. 

Christine Poole, co-chief investment officer at Toronto-based Davis Rea Ltd., said there’s a way to stay invested in Canada and dodge tariff risk: focus on providers of services. She owns names like engineering firm WSP Global Inc. and technology-services provider CGI Inc. The two Quebec companies have large US operations and contracts that are less likely to be hit by Trump’s actions.

In the longer run, some Canadian equity fund managers says there’s reason to stay optimistic about the domestic stock market. 

The political situation will be clearer soon. The Liberal Party will choose a new leader on March 9 to head the government, and a national election will follow soon after. Conservative Party Leader Pierre Poilievre is leading in opinion polls, and if his party wins, he has said his government would loosen regulations, reform taxes and encourage growth in the energy and mining sectors.

“The path forward for Canada is going to be very different in the next five years,” said Philip Petursson, chief investment strategist at IG Wealth Management. It’s “realistic” for the S&P/TSX Composite Index to rise between 12% and 15% this year, he added.

Indeed, many Toronto-based investors see the Canadian market as still undervalued, even after last year’s 18% rally in the TSX. 

Craig Basinger, chief strategist at Purpose Investments, recommends holding excess cash while going market weight on equities, with a bigger positioning in international stocks. “In Canada, we certainly have our problems but we also have more reasonable valuations,” Purpose’s Basinger said by phone.  

“As long as you have a longer term view, Canada’s probably the best place to be right now,” said Jay Bala, chief executive officer of Toronto-based AIP Asset Management. He’s focused on the long game, arguing that demand for Canadian resources from copper and oil to lumber helps make the country attractive. 

To be sure, Bloomberg Intelligence equity strategist Gillian Wolff said the Canadian market could experience long-term pain as tariffs put higher costs on US consumers and companies. That could lead to a reshoring effort, potentially causing Canada to lose some business investment to the US. She called it a potential “momentum killer.”

Fund managers are bracing for the barrage of Trump pronouncements via social media and press conferences that’s sure to unleash more volatility.

“This is where we have the biggest challenge: it’s a big unknown and it’s not something you can take lightly,” IG’s Petursson said. “You don’t know what’s going to come out of his mouth, you don’t know what he’s going to push forward.”