The Trump Tariff Trade (TTTT)
America is now taking on trade across all international fronts. Going up against Asia, Canada, Mexico, and Europe, meaning nobody is safe from the wrath of Trump’s tariffs and his claims to balance trade for the US. With all this talk, it is difficult to keep track of all the items that are now in line to receive a new tariff when crossing over international borders. Keep in mind, tariffs appear to be coming at least temporarily and that would mean higher prices for consumers and this would not be helpful to the global economy.
As consumer’s purchasing power stays the same due to their incomes, company profits go down because the same products cost more resulting in fewer people purchasing their products. While that is the bad side of tariffs and many international companies could struggle, there are some companies that will flourish given that they now have a competitive advantage over their international peers. A domestic company producing and selling in its own country will now be able to compete with the larger international corporations like never before. Also, a domestic worker may receive a manufacturing job that was previously given to a worker in another country with lower wage costs.
Tariffs along with many other economic detractors have come and gone throughout time. As with leaders with social, military, and economic agendas also come and go. Today, is unlike any other time in history and just like the times before, the world will go on and people will continue to live and consume. The key is to adjust with the times and position yourself accordingly. At times like these, we like to remember the quote:
“During times of war, don’t sell the market, buy the companies that make the bombs…”
While we are not in a military war currently, it is important to remember that while many companies will be affected by tariffs, there are companies that will actually perform better because of tariffs in addition to those companies that are not included in the tariff war.
Companies that are somewhat “tariff-immune” have been excelling as investors begin to pour money in until everything is sorted out. Netflix, for example, sells a service internationally that is not exposed to tariffs and is performing quite strongly this year. Visa and MasterCard which will be used with or without tariffs are excelling. Whereas companies directly affected are being put on hold, GM, Harley Davidson, and Yum Brands, all of which rely on international trade, are caught in the tariff crosshairs and are feeling the effects already.
It is also important to keep in mind the original goals of President Trump rather than focusing on all the small details. He wants more automotive, manufacturing and materials jobs to come back to the US that has moved internationally over the last 30 years. He wants China to loosen its rules around intellectual property and lower the cost of entry to sell American cars in China (currently a 25% tariff). Also, he wants the elimination of tariffs on US cars sold in the EU, which is currently at 10%. Everything else has been brought to the table to be used as leverage to achieve these goals, causing a lot of volatility within many sectors.
With tariffs being controlled by US politicians, it is also important to keep an eye on their political schedule. Once summer ends, we will be heading into US mid-term elections where many of the individual states will be voting to keep or replace their existing Governors. This is particularly intriguing because currently, the Republicans hold a majority amount of seats. This election could change the balance of power in the White House, making it much more difficult for the President to make significant changes without having others on his side. With this in mind, it would not be in Trump’s best interest to anger too many voters and potentially lose their support. Which means we could have much less volatility through the summer and heading into the end of the year.
In other news, President Trump met with the supreme leader Kim Jong-Un in a sign of easing tensions between the two countries. What long has been thought of a country on the brink of war, North Korea is beginning to take the steps to show the world that they no longer desire to destroy everyone around them. The time table has been set for one year to develop a plan to come to a de-nuclearized solution. Although there has been a lot of speculation on the participation of North Korea this is a step in the right direction. Next up for the US President is a meeting with Vladimir Putin on July 16th.
In Canada, putting aside NAFTA and tariffs, the main stock market index (TSX) has been recovering from the lows of the year in April. This was mainly attributed to the recovery of the price of oil over the last couple of months, as production caps remain from OPEC and Russia. This along with new upcoming Iranian sanctions has reduced the number of oil barrels being sold and is driving the price above $75 for the first time since 2014. Meanwhile, our other main resource, the housing market has reached a 13 month high (still off the peak of 15 months ago) as the demand vs. supply for housing remains high. These prices have been propped up by the condo market, which remains hot, while the higher-end family housing market remains level. It is also important to note that most homes in Toronto and its surrounding areas stay on the market longer, which would suggest a buyer’s euphoria may be leaving the market. This could be the result of buyers now making more sensible decisions and/or with the new rules they are reaching their mortgage limits.
It is hard to believe, but with oil pushing higher, the Canadian dollar has not followed suit. There are many variables attributed to the value of the loonie but here are a few main points. International investors are not injecting new capital within Canada, interest rates are not expected to rise as quickly as the US and the uncertainty around Canadian international trade.
Two large Canadian companies that have underperformed this year would be Bell and Rogers. This is a great example of protectionism vs. free trade. For many years these companies have been able to charge whatever they want and monopolize the Canadian telecommunications sector. Over the past few years, Canada has been loosening its grip by putting rules in place to make it easier for smaller companies to come in and reduce the commitment made to a service plan. This has brought in the emergence of internet and mobile phone providers to the mix, putting downward pressure on the prices for consumers. To combat this, we have seen the large companies introducing many low price internet and mobile service plans. While great for us as consumers, this along with other factors has put pressure on their stock price making them some of the worst performers this year. The protectionist rules have helped them succeed in the past and now the loosening of those rules is beginning to take away that advantage.
While Canada has been held back by the talk of tariffs/NAFTA and the US has been volatile, China has taken the brunt of trade on the chin. The main Chinese stock index (Hang Seng) is down approximately 15% from its highs this year and their currency (Renminbi) has fallen 7% in the last couple of months. From the start, it does appear that investors do believe that the tariffs will have a substantial effect on China, at least in the short term. They do not appear to be backing down from the threats from the US, but eventually, they will need to address their current trade rules with the US and the EU and make them fairer.
On June 29th, 2018, Bitcoin fell to its lowest level (below $6,000 USD) since October of 2017. This is quite the plunge from the high of $19,783 USD, but with all this decline, if you purchased a full year ago, you would still be up about 160% from your original investment. Bitcoin continues to struggle as the world has trouble adapting to cryptocurrencies and finding a practical use for them and until that happens, expect further volatility.
As Canada unveils its plan to roll out the legalization of marijuana, these companies stock prices continue to be similar to a rollercoaster. Many companies are emerging, claiming to have the right formula to take advantage of this new industry and investors are placing their bets on them. While cryptocurrencies have failed to carve out a direct path, marijuana uses are becoming more and more relevant as more products become available. While each has its own success plans laid out, many of these companies will fail in their execution and/or will get pushed aside by better companies. It is very important to select the ones with the highest potential for success and competitive advantage.
We continue to believe that a well-diversified equity portfolio with a mix of alternative investments can provide stability to a portfolio that has been impacted by volatility that keeps popping up in the market. In addition to providing growth in the portfolio in these current market conditions.a
Lastly, I wish to bring your attention to a charity that I (Konrad) lend my time to, ALS Cup for a Cure. It is in honour of my late father Krzysztof Kopacz that passed away 12 years ago to the crippling ALS (Lou Gehrig) disease. It is an annual soccer tournament held in Mississauga that tries to raise awareness and money to help find a cure for ALS. I’ve attached a link to our website www.alscupforacure.ca if you wish to learn more about the disease, donate or even participate in this great event. We aim to raise $15,000 by Sept 1st, 2018 and beat our last year’s total of approximately $13,000. Every penny helps and I hope you can support this great cause too. Thank you for your kindness.
Sincerely,
Konrad, Justin, and Merriel
Content Sources: Bloomberg, Trading Economics, Yahoo Finance, Reuters.
Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.
Echelon Wealth Partners Inc. is a member of IIROC and CIPF. This document has been prepared as a monthly market update and does not contain any recommendations for any particular investment. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any investment decision should be based on your own risk tolerance and investment objectives and reviewed with an investment advisor. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. The data used in this document is from various sources and is believed but in no way warranted to be reliable, accurate, complete and appropriate.
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