Seeking shelter from war of words over trade

Seeking shelter from the escalating global trade war? For investors in Canadian markets, technology, health care and real estate stocks, along with government bonds, are the places to park money until the storm passes, strategists say.

Canada’s S&P/TSX Composite Index retreated Tuesday, joining most equity markets lower, as the U.S. and China threatened punishing tariffs on each other’s imports. The loonie also tumbled while government bonds rallied.

Canada may not seem like the safest place to invest in the middle of the global trade spat, given stalled Nafta talks and new U.S. tariffs on Canadian steel and aluminum exports. But investors shouldn’t flee the market entirely, said Luc Vallee, chief strategist at Laurentian Bank Securities.

“Keeping some funds in the Canadian index is not such a bad idea,” Vallee said in a phone interview. “The world economy is still growing fast, demand for commodities, demand for oil — I think they will compensate over the next year for any fallout in the other sectors.”

He recommends exposure to technology companies like CGI Group Inc., a fastgrowing IT provider that has operations on both sides of the border and won’t be seriously affected by potential tariffs. He also likes healthcare stocks, real estate investment trusts and insurance companies like Power Corp. of Canada that have growing exposure to China.

These sectors don’t have much impact on the broader S&P/TSX, with technology and health care accounting for 4.2 per cent and 1.4 per cent of the benchmark’s weight respectively. But that doesn’t mean the Canadian market as a whole will underperform. In fact, Vallee sees the S&P/TSX doing better than the S&P 500 Index in 2018, forecasting a total gain of 11 per cent for the Canadian benchmark and about 5 per cent for U.S. stocks. Canada’s main equity gauge has risen less than 1 per cent this year, trailing the 3 per cent U.S. gain.

“A lot of companies on the U.S. stock market are exposed to trade as well, much more than the economy itself,” he said. A stronger U.S. dollar will take a bite out of those companies’ earnings, and U.S. stocks are also trading at higher multiples than their Canadian counterparts, he added.

Canadian investors “are going to have to be tolerant of a lot of uncertainty, particularly as it relates to the trade negotiations,” but the market still looks reasonably valued and earnings expectations continue to accelerate, said Candice Bangsund, vice president and portfolio manager of global asset allocation at Fiera Capital Corp.

“We still think there’s opportunity here, particularly in those later-stage sectors of the marketplace” like resources and financials, said Bangsund, who sees the S&P/ TSX hitting 17,300 by yearend as oil prices rise to US$72 a barrel. That implies a 5.8 per cent gain for Canadian stocks from current levels.

Canadian companies with a high percentage of foreign revenue have outperformed domestic-focused companies this year and should continue to do so, Brian Belski, chief investment strategist at BMO Capital Markets, wrote in a recent note.

“We believe the passage of U.S. tax reform and the associated surge in U.S. growth are likely the main drivers,” he wrote.

S&P/TSX firms with the highest foreign revenue exposure, excluding resource companies, include Dream Global Real Estate Investment Trust, Enghouse Systems Ltd., Valeant Pharmaceuticals International Inc., Onex Corp. and Mitel Networks Corp. Other potential winners include Boyd Group Income Fund, the auto-repair operator that gets almost 90 per cent of its revenue from the U.S. market. Boyd, based in Winnipeg, jumped to a record high Tuesday of $119.60.

Canadian firms with U.S. revenue will also benefit from a weaker loonie, which has tumbled more than 5 per cent this year. The Canadian dollar slipped to a one-year low of US75.24 cents Tuesday, and is the second-worst performer among major currencies against the U.S. greenback over the past month.

Even the loonie may be finding a bottom, as most of the damage from the trade war rhetoric has been done, according to Juan Perez, a Washington-based senior foreign exchange trader and strategist at Tempus Inc. He was among the top three loonie forecasters in the first quarter, according to a Bloomberg ranking. He sees the currency rebounding from about $1.33 to the dollar.

“Tariffs are on and off depending on tweet storms,” Perez said. “Oil and commodities will catch a break in the second half of the year and propel the Canadian dollar to ranges of $1.2951.305 per U.S. dollar.”

As a last resort, Canadian government bonds are always a good haven. Government debt has been a beneficiary of the global flight to safety, with the yield on the country’s 10-year securities falling five basis points to 2.15 per cent Tuesday, the lowest since April 9.