The inbox is full again, with many readers concerned about the looming tariff threat when Donald Trump is sworn in as U.S. President on Jan. 20. But that’s not all people are concerned about. Let’s take a look.
Trump’s tariffs
Q – With Trump’s tariff increase policy and a weakening Canadian dollar, will it be better to invest in U.S. stocks/ETFs in U.S. dollars? On the Canadian side, which sectors will benefit in such an environment? – M.M.
A – The Canadian dollar is at its lowest level in more than four years and is vulnerable to further losses if Mr. Trump hits Canada with his America-first tariff policies. Clearly, the market sees it as a risk. Owning U.S.-dollar denominated securities will provide protection against a further drop in the loonie, but remember this is a two-way street. If the Canadian dollar recovers, you’ll face a foreign exchange loss.
As for the second part of your question, no one except the U.S. Treasury really benefits from tariffs but there are some Canadian sectors that should feel less impact than others. Remember that Trump’s primary concern is to protect or create domestic jobs. Imposing tariffs that don’t achieve that goal does nothing but drive up costs and fuel inflation.
That suggests that Canadian natural resources that are scarce in the U.S. or that are strategically important to Washington may receive an exemption from the tariffs. Oil is an obvious example.
In a rational world, gold should be exempt from trade wars. The metal is priced in U.S. dollars and jobs can only be created where there are viable deposits to be developed. However, Mr. Trump has his own agenda and it’s not always rational.
Banks and insurance companies, retailers, REITs, and utilities should see little direct impact from tariffs. But they will be negatively affected if the economy is hammered into a recession by Trump’s actions, which many economists fear.
So, to answer your question, yes, I think the safest course if you want to hold equities is to buy U.S. dollar securities. I hate writing this, but that’s how I see things unfolding. – G.P.
Brookfield confusion
Q – Somehow, I’ve accumulated a lot of versions of Brookfield. I have four: BN, BAM, BIP, BIPC.
I think they split off a few years ago. Do you still like all four of them? – Craig K.
A – Brookfield has created an alphabet soup with their various spinoffs. To summarize the stocks you have:
BN is the parent company, Brookfield Corp., and is performing well right now.
BAM was originally the symbol for the parent company but now covers just one part of the business – asset management. When Brookfield made the change in 2022, investors received one share of BAM for every four shares of BN they owned.
BIP is Brookfield Infrastructure Partners. The TSX symbol is BIP.UN, the U.S. symbol is BIP. It’s a limited partnership.
BIPC is the corporate version of BIP. It was created to make it easier for institutional investors to take a position in the company.
Most Brookfield entities are performing well, and the company is internationally diversified. In the case of your holdings, the only thing I would suggest is that you sell either BIP or BIPC. They’re the same package in different wrappers. – G.P.
Element Fleet Management
Q – I own shares in Element Fleet Management (EFN-T). Is it possible to ask for a review of this security? I have an excellent gain. Would your recommendation be to sell some, continue to hold, or what? – Bruce B.
A – This Toronto-based company is the largest pure-play automotive fleet management firm in the world. It’s a profitable business, with third quarter revenue of $280-million, up 12 per cent year-over-year. Adjusted earnings were 29 cents a share, up from 26 cents in 2023. The company increased its annual dividend by 8 per cent to 52 cents a share. Element has a history of steady dividend increases. Note that the company reports in U.S. dollars.
The company’s chart shows slow but steady growth since spring 2022. The p/e ratio is not unreasonable at 21.47.
Overall, this appears to be a sound investment. I would rate it as a Hold/Buy. – G.P.
Taking profits
Q – I am considering taking profits. What would be your advice on the Canadian banks? For the most part they had a very good year. However, I don’t understand how they would be affected if a 25-per-cent tariff comes to be. As always, thank you for your help. – Steve A.
A – Banks won’t be directly hit by tariffs, but their stocks are economically sensitive. If the tariffs are enacted and remain in place for any length of time, the impact on the Canadian economy will be significant. Many economists have stated that it would likely pitch us into a recession.
Banks thrive during periods of economic growth when people and companies are borrowing, IPOs are coming to market, merger and acquisition activity is strong and wealth management services are in demand. When the economy sags, business falters, putting downward pressure on share prices.
Long term, bank stocks will recover as the economy rebounds. But who knows how long Trump will apply the pressure. It seems he wants a lot more from us than border security.
If you’re prepared to ride it out, hold on to your shares and collect the dividends. Royal Bank of Canada (RY-T) will still be a great company 50 years from now. But if you have good profits and want a more defensive portfolio in the face of this threat, consider taking some money off the table. Look first at any registered plans you have, where selling will not trigger a taxable gain. – G.P.
Bond ETFs
Q – I note your recommendation to move to cash by buying iShares 0-5 Years TIPS Bond Index ETF (XSTP.U-T). While this ETF is ahead 4.43 per cent over the past year (to Dec. 26), how much of this is due to the USD/CDN exchange rate? If the USD comes back down, I’m not convinced this will be a good ETT to hold. Is there not a better CDN bond ETF to hold as interest rates fall? – Norman M., London ON
A – The Canadian dollar version of this ETF (XSTP-T) is ahead 13.9 per cent for the year, as of Dec. 26, compared to 4.43 per cent for the U.S. dollar units. That’s where you see the exchange rate differential. The U.S. dollar version reflects the pure return in American currency.
That said, short-term bond funds won’t normally generate gains of this magnitude. This is a rare event, caused by the inverted yield curve earlier in the year that meant short-term rates had farther to fall than long-term ones. Hence short-term funds generated higher capital gains. Add the exchange rate differential in XSTP and you have a once in a generation gain on a short-term fund.
Remove the foreign exchange factor from the equation and it may be easier to understand. As of Dec. 26, the iShares Core Canadian Short Term Bond Index ETF (XSB-T), which only holds Canadian bonds, was up 5.28 per cent year-to-date. The iShares Core Canadian Long Term Bond Index ETF (XLB-T) had gained 0.43 per cent. Under normal conditions, we’d expect the opposite scenario.
The yield curve is now closer to normal, so I don’t expect this pattern to continue. If we assume interest rates will drop in 2025, which is very likely, XLB would be a good choice if you’re prepared assume more risk. If want lower risk and you don’t like XSTP, then go with XSB. – G.P.
If you have a money question you’d like answered, send it to me at gordonpape@hotmail.com and write Globe Question on the subject line. I can’t guarantee a personal response but I’ll deal with as many questions as possible in this space. – G.P.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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