White House confirms Trump's tariffs are coming Feb 1 — How they will impact Canadian investors

How will these tariffs impact Canadian investors?

According to Johnston, the impact of Trump’s tariffs will be felt by all Canadians, regardless of province of residence or size of portfolio.

“We can expect an increase in inflationary pressures, such as loss of purchasing power from Canadian dollar weakness, and recessionary pressures like increasing current account deficit and GDP contraction,” he said.

“This will be a material exacerbation of Canada’s already challenging stagflation, which is a fusion of inflation and economic growth problems.”

Johnston warns that these tariffs can reduce already low capital inflows to Canada, which, in turn, can reduce the nation’s already low investment in fixed capital. It’s a situation that puts Canadians perilously close to the dreaded state of stagflation.

What is stagflation?

Stagflation combines positive inflation with lower nominal gross domestic product (GDP) per capita growth, resulting in negative real GDP per capita, according to a report conducted by Omigence entitled Addressing Canada’s Stagflation Challenge: A Modest Proposal.

Here are some of the key factors influencing stagflation:

Economic Fundamentals:

• Low GDP growth: Canada's GDP growth is the lowest among OECD countries.
• Poor labour productivity: Productivity levels are stagnant or declining.
• Capital flight: Net capital outflows (ie: money leaving Canada) increases with average capital flight around ~$40 to $60 billion annually.
• Structural deficits: Persistent fiscal and current account deficits.

Demographic Pressures:

• Aging population: Rising dependency ratio increases entitlement spending and tax burdens.
• Rapid immigration: High immigration rates add to the strain on housing and social systems.

Housing Market Issues:

• Supply-demand imbalance: A shortage of more than three million housing units.
• Over-reliance on housing investment: Crowds out productive capital formation — the process of investing money in goods and services that are meant to maintain or stimulate economic growth.

Energy Costs:

• Increasing energy costs reduces competitiveness.

Savings and Investment:

• Low household savings: Leads to chronic underinvestment in productive capital.

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What investment sectors will be impacted the most by Trump’s tariffs?

The sectors most at risk from Trump’s tariffs include: the automotive industry, aviation, and heavy machinery manufacturing sectors. These sectors are the most exposed given Trump’s stated goal of onshoring production and manufacturing — a process of bringing these jobs back onto American soil

However, the widespread uncertainty of whether or not these tariffs will be enacted, coupled with his threat of using economic pressure, can create enough instability that all market sectors are impacted.

And while Canada has already hedged tariffs during Trump’s previous presidential tenure, this time things could get much worse.

“Proposed tariffs will be a very serious issue for the Canadian economy given its already very weak fundamentals versus Trump’s previous presidency,” explains Johnston.

What’s worse is that even if the tariffs are not introduced, the uncertainty of the current Canadian and American political landscapes means the market will react to the uncertainty anyway — meaning a reduction in investments throughout the Canadian economy.

“Even without an imposed tariff, the uncertainty will impact the investment market. Yes – transmission mechanism is likely to be CAD$ weakness and reduced capital inflows in the near term.”

Additionally, Johnston believes that there is nothing that the Canadian government can enact in the short term to soften the blow of tariffs without adding to the nation’s current fiscal deficit.

“Doing so will add to downward pressure on the Canadian dollar and inflationary pressures,” he said.

Are there any investment sectors that may be more resilient?

Tariffs or not, as an investor, it’s important to ask yourself whether your portfolio has the following three things:

1. Recession hedging factors
2. Inflation hedging factors
3. Low reliance on middle-class demand as a return driver

For Johnston, the answer to all three should be a resounding yes to generate alpha — or create excess returns — over the next decade.

This may also result in having to rethink portfolio allocations that have worked in the past as Canada continues to endure an unsavoury economic climate and the threat of tariffs.

“Traditional 60/40 portfolio allocations — 60% equities and 40% fixed income — that have worked well in the last two decades of below-trend inflation and above-trend GDP growth are unlikely to generate the same level of returns in a macro climate of above-trend inflation and below-trend GDP growth that Canada faces,” Johnston added.

However, despite a feeling of economic unease, there are certain sectors where Johnston sees opportunities.

His top pick: farmland, which hedges both inflation as a non-depreciating, real asset, as well as recessions, due to inelastic food demand.

Plus, the production of goods from farmland go beyond our trade reliance on the US.

“Canada exports to markets outside the US, such as China and the Middle East, with strong and growing incremental demand for agricultural products,” Johnston said.

Automotive maintenance is another sector Johnston believes has strong investment potential. Johnston chalks up the strength of this sector to a shrinking middle class and dwindling purchasing power.

“People drive their cars for longer before replacement – this reduces demand for new cars and increases demand for ongoing maintenance,” he said.

“The resulting growth is forecast to be well above overall Canadian GDP growth rates, and could outperform even in a low aggregate GDP growth climate.”

Environmental services are also immune to GDP growth since it is largely driven by regulation, which Johnston believes is worth pursuing for investors looking to create a durable portfolio that can withstand market volatility

Johnston’s final pick is the building products distribution sector. This is due, in part, to the lucrative residential housing shortfall of more than three million homes. This shortfall means that a refresh of the “Canadian infrastructure” will be required as well as “significant increase in domestic investment in fixed productive capital in order to grow the economy,” Johnston said.