Trump and his Tariffs.. a perspective from Mackenzie investments

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Trump and his Tariffs.. a perspective from Mackenzie investments

Looking out for your investments and how a trade war may effect your financial advice.

US President Donald Trump declared on
March 8, 2018, that the United States would
impose tariffs of 25% on imported steel and
10% on imported aluminum, with exemptions
for Canada and Mexico. Those exemptions
are conditional on a satisfactory renegotiation
of NAFTA. Other countries will have to justify
why they should also be exempted from the
US tariffs.
Five of Mackenzie’s investment teams share their analysis
and reactions to the proposed US tariffs:
Mackenzie Ivy Team
US protectionism has been a consistent topic since the 2016
election with the US having considered a border tax, pulled out of
the Trans-Pacific Partnership, threatened as much for NAFTA and
now unveiled tariffs on steel and aluminum imports. The steel and
aluminum tariffs have a limited direct impact on our holdings as
we have globally-diversified portfolios with little US manufacturing
or construction exposure. It’s worth noting, however, that the threat
of trade wars has negative implications for global economic stability.
With regard to NAFTA, which has broader implications for our
holdings than the selective tariffs, there are many views floating
around about the potential outcomes of the renegotiations.
The fact is that the range of outcomes cannot be determined and
includes anything from the status quo to politically-motivated
scenarios that may be economically irrational. We have no way
of assigning probabilities to this sort of situation and we have
not positioned the fund for any particular outcome. Instead,
we continue to focus on investing in strong businesses that
can adapt to changing market environments and, in many
instances, capitalize on market disruptions such as this through
the use of their strong financial positions.
This is not to say that we are ignoring the threat posed by
NAFTA renegotiations, as we have estimated the business at risk
for potentially-impacted holdings to ensure that our exposure
to a negative outcome is manageable. For example, we estimate
that approximately 10% of CN Rail’s revenue (CN is held in Ivy
Canadian) is at risk and that some portion of this could go away
if punitive tariffs were imposed. We believe that this adverse
scenario could be absorbed by CN with limited fallout. Looking
at our holdings in this way across our portfolios, we believe our
overall exposure is quite manageable.
We believe that the best way to invest in an unpredictable world is
to buy strong businesses that protect themselves against potential
shocks by maintaining financial flexibility and continuously
investing in their value proposition.
Mackenzie Cundill Team
US President Donald Trump cited national security (Section 232
of the Trade Expansion Act of 1962) when he proposed tariffs
on steel and aluminum imports. Those tariffs are scheduled to
come into effect on March 23. Canada and Mexico are exempted
for the time being and Trump seemed to dangle it as a carrot
pending successful NAFTA negotiations. Other countries can
propose reasons as to why they should be exempted from the
tariffs, too. According to the Wall Street Journal, China supplies
2% of US steel imports and 11% of US aluminum imports.
The headlines of a potential trade war are certainly causing market
concerns. Our base case, however, is that things will not morph into
anything major. We examined our portfolio holdings to determine
the level of impact such a US policy may have. Only one position
of around 2% of the Mackenzie Cundill Value Fund could potentially
be affected directly in some way, Posco. Posco is a Korean steel
Trump and his Tariffs: Portfolio Perspectives
from Mackenzie Investments
producer that exports to the US. However, only 4.2% of its
production is exported to the US so the impact of tariffs should
be quite limited. Moreover, as tariffs could raise global steel prices,
there may be some indirect benefit to Posco’s margins. A few
other names such as Union Pacific, Wabtec, Fiat Chrysler and
Borg Warner use steel in their products, and could see an
increase in related costs. The impacts appear manageable and
likely transitory however.
Mackenzie Bluewater Team
In what appears to be a negotiating tactic, President Donald
Trump temporarily exempted Canada and Mexico from his steel
and aluminum tariffs in an attempt to incentivize speedy NAFTA
negotiations. We have no material exposure to businesses impacted
by the proposed tax should Trump decide to withdraw the exemption.
In addition, the Mackenzie Canadian Growth Fund is already
positioned to reflect concerns we’ve had for some time with
NAFTA and a slowdown in Canada:
• The Canadian equity component is at the minimum allowable
allocation threshold: 50%
• Within our Canadian holdings, we are focused on companies
that have meaningful international exposure, that are less
constrained by the domestic economy and are able to capitalize
on growth opportunities elsewhere. Greater geographical
diversification in their business mix lowers reliance on any one
particular region, which ultimately translates to lower risk. This
includes companies like CCL Industries, Spinmaster and CAE.
• Our pure domestic exposure remains limited and defensive in
nature, including best-in-class dollar stores and telecom
providers Dollarama and Telus.
Mackenzie Growth Team
President Trump’s tariffs on steel and aluminum imports would
not have a material impact on our portfolios. But we agree with
our colleagues that a global trade war, sparked by US tariffs, would
hurt businesses and capital markets. At this point, there’s no way
of knowing the dynamics of Trump’s tariffs in terms of how other
countries will respond or not, whether a trade war escalates and
any corresponding impacts on our holdings. We are monitoring
the situation but have not made changes to our portfolio.
Mackenzie North American Equities Team
The market is nervous about the risk of rising trade tensions after
the Trump Administration announced plans to impose tariffs on
imported steel and aluminum. Canada’s stock market has minimal
direct exposure to the steel and aluminum industries. Our primary
focus is on the potential broader implications of any trade policy
announcements on the NAFTA negotiations. The indefinite
exemption of Canada and Mexico from the aluminum and steel
tariffs does offer some hope of a reasonable outcome from the
NAFTA talks.
We caution against reading too much into any one announcement
as we have seen many twists and turns in the Trump Administration’s
policies and the outcome of the NAFTA negotiations remains
uncertain. It is also noteworthy that Gary Cohn, head of the
National Economic Council, recently left the White House, and
Peter Navarro has become a more prominent advisor in recent
days. This suggests a shift to a more protectionist agenda in the
White House. The possibility of escalating trade tensions remains
a key risk for global markets. We are cognizant of these risks and
have constructed well diversified portfolios to help mitigate some
of these potential risks.