In the face of uncertainty around the business and political relationship between Canada and the U.S., Canadian institutional investors aren’t considering allocation strategy changes just yet.
Kim Hart, principal investment consulting at Eckler Ltd., says immediate discussions with Canadian plan sponsors show they aren’t looking to move away from U.S. investments or to decrease allocations in the country. On Tuesday, the U.S. introduced a 25 per cent tariff on products coming from Canada and Mexico. In response, Canada has introduced tens of billions of dollars worth of tariffs on U.S. goods.
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Indeed, she says an informal poll of nearly 60 investment managers conducted by Eckler found that more than half of respondents had done no top-down changes but were assessing the impact from the tariff policy on a company-by company basis.
“[The implications for individual plan sponsors are] going to be a by-product of how those investment implications might impact their investment portfolios,” Hart says, noting any response strategy from within an investment organization is going to be informed by their specific governance structure.
Amid the trade dispute between the two countries, Greg Taylor, chief investment officer at Purpose Investments, says he’s optimistic about a conversation that could potentially push business-friendly policy in Canada that could make it less dependent on the U.S.
“We need to lessen our development on trading with the U.S. and I think that could be a bit of a positive surprise coming out of this, if the country does start to galvanize and work together.”
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In a market note to investors, Tiffany Wilding, managing director and economist at Pimco, said Trump’s strategy seems keen to accelerate a review of the existing U.S.–Mexico–Canada Agreement that was enacted during his first term in office. This review will focus on dairy protectionism, Canada’s digital sales tax, Chinese import content and foreign direct investment with Mexico.
The U.S. sees a stable deficit with Canada driven by energy flows but if those considerations are excluded the U.S. would have a trade surplus instead, she says.
The threat of tariff policy from the U.S. could push other countries to rethink their own growth models with more thoughtful industrial policy that stimulates growth and productivity increases, says Wilding, with Canada potentially tapping into fiscal supports for “a more thoughtful industrial policy over the longer term.”
Even though there’s no immediate motivation to move away from the U.S. in response to the ongoing public political dispute between the two countries, Hart says there’s been a long running trend of reducing Canadian allocations by investors.
She adds most institutional investors have a bias to Canada from an equity perspective since their weight to Canada is larger than would be implied by Canada’s market capitalization. “Canada is less than three per cent of global equity market capitalization, so if more than three per cent of your equity portfolio is in Canadian equities, then you are overweight and most investors do display that.”
For Canadian institutional investors, any notion of divesting from the U.S. would be a challenge, she notes, since U.S. equities are by far the largest component of global equity space. “It will be interesting to see if that somewhat reverses the change.”
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