Trump tariffs pose asymmetric risk to Toronto equity investors

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Equity investors in Toronto and New York face vastly different risks following U.S. president-elect Donald Trump’s threat to ramp up tariffs on cross-border trade to 25 per cent from previous expectations of 10 per cent.

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There are 30 S&P/TSX Composite members that derive over half of their revenue from the U.S. with Boyd Group Services leading the list at 92 per cent, according to data compiled by Bloomberg. T-shirt and sweatshirt maker Gildan Activewear Inc. isn’t far behind at 90 per cent, and hydrovac company Badger Infrastructure books 89 per cent of its revenue from the U.S.

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Those are merely the names with most exposure to the U.S. economy. More than a third of the stocks on Canada’s main stocks benchmark have revenue booked in the U.S., including some of the country’s largest companies like Canadian National Railway Co., Barrick Gold Corp. and Cenovus Energy Inc. Some of country’s largest manufacturers, including auto parts company Magna International Inc. and watercraft maker BRP Inc., are doubly exposed — producing goods in both Mexico and Canada.

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“The risk at hand is not being fully appreciated,” said Jim Thorne, chief market strategist at Wellington-Altus Private Wealth Inc. in Toronto, who said his firm has been aggressively reducing exposure to Canadian equities.

He said that Canadian investors have a “legendary home bias” and may see their portfolios take a big hit if the tariffs are implemented broadly, as Trump has indicated. “When do the Canadian investors wake up?”

U.S. investors, by contrast, have significantly less to fear in the form of retaliatory tariffs from Canada and the impact to revenue and earnings.

Indeed, the S&P 500 Index member with the highest proportion of its revenue coming from Canada is Dayforce Inc. at just under 22 per cent, Bloomberg data show. Exxon Mobil Corp. and Costco Wholesale Corp. round out the top three with 16 per cent and 14 per cent of their revenue coming from Canada.

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That level of exposure would not crack the top 60 in Canada. Indeed, Dayforce’s level of trade exposure across the 49th parallel between Canada and the U.S. would rank it 63rd, after fuel retailer Parkland Corp. and ahead of insurance provider Manulife Financial Corp.

Even in the face of tariff threats, strategists have remained upbeat on the S&P/TSX Composite Index, which has now closed at a record 43 times this year. “Canada has moved in tandem with the U.S. as a decisive outperformer,” Tim Hayes, chief global investment strategist at Ned Davis Research, wrote in a research note Nov. 29. He added that even after the rally, Canadian stock “valuations are far better and it is less dependent on the sectors of the megacaps.”

Some Toronto investors have expressed a preference for Canadian stocks that have large U.S. businesses, like insurance companies, rather than the industrial stocks that sell goods across the border.

Still, in the face of super-sized tariffs, Scotiabank last week urged investors to “roll up their sleeves” and get granular on stock picking in Toronto.

Bloomberg.com

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