Diversifying key strategy in Trump era
Alternative Investor
In the months since Donald Trump’s U. S. election victory, the question that I have been asked most often ( other than, “How did this juvenile, bombastic, bloviating, narcissistic, bullying, misogynistic know- nothing ever get elected?”) is “Will President Trump be good or bad for Canada and Canadian investors?”
The answer to this important question is, as with all important questions, “It depends.”
In mathematics, it is possible to solve multi- variable problems, but not to solve problems with nothing but variables. Unfortunately, each problem posed by a Trump presidency and how it relates to Canada falls into the latter category.
Take the TransCanada Keystone XL pipeline as an example. President Trump was in the news this week for issuing an executive order that may pave the way for the pipeline’s eventual construction.
No matter where you fall on climate change, from an economic point of view this must be seen as positive for Canada generally and its oil producers specifically. With oil and gas representing such an integral component of the Canadian economy (keeping in mind that it’s not just the producers who benefit when distribution channels open up), both the economy and the Canadian stock market would be expected to be buoyed by this decision.
On the other hand, we must remember that President Trump can’t be counted on to keep only his reasonable campaign promises. Which means that as content as we might be with him keeping his promise about the pipeline, we must brace for a range of other executive and legislative “America first” initiatives that would be less welcome to our economy.
Take, for example, his promise to tear up the TPP and NAFTA and start again from scratch, combined with his promise to slap trade tariffs on all goods coming into the U. S. from any other country.
Aside from the fact that virtually all actual economists would agree that limiting trade in a global world is very bad for GDP growth in the long term, there is no question that restrictionist activities would negatively impact Canadian exporters, including oil producers, in the short term.
Add to that the fact that closing borders to trade is a two- way street that could lead to a softening of the U.S. dollar ( it being in less demand by would-be importers of U. S. goods), which in turn leads to a strengthening of the Canadian dollar in U. S. terms, and the nirvana of exporting through a U. S. pipeline could become more apparent than real.
And this is if President Trump acts predictably. As Donald Rumsfeld (who, in comparison to Trump now appears to have been a reas onable man) f amously said, it is the “unknown unknowns” that we must be most wary of when planning.
There is perhaps no leader in the history of modern democracy who has the potential to be as unpredictable as President Trump. It is this fact that results in the addition of many variables to the problem we’re trying to solve, leaving it insoluble.
This is why the only answer to the question of how President Trump’s administration might affect the Canadian economy and, by extension, Canadian investors, is “it depends.” It depends on which promises Trump intends to keep and how he intends to go about keeping them. It depends on what new “amazing” ideas he has or is given while in office. It depends on how his relationship with a Republican- run Congress evolves. And it depends on events that are impossible to predict, such as natural disasters and terrorism at home and abroad.
For equity investors with a slant toward Canadian companies, it is hard to argue that they should be liquidating, especially since there are few alternatives to equity investing in such a low interest rate environment. And it’s equally as hard to predict how the U. S. and global stock markets will fare in the Trump era.
For those sitting on idle cash, it’s also hard to argue that now — when the stock markets are at all-time highs coincidental with Trump taking the reins in the White House — is the right time to become fully invested, hoping that he does all the “good” stuff, l eaving the “bad” stuff alone.
And so the prudent move at this juncture seems to be what it is almost all of the time: be diversified by asset class, be diversified by sector, and be diversified by geography. This diversification will certainly achieve lower returns if things go well for Canada in the era of Trump. But it will also be somewhat protected if things go awry.