Institutional investors are facing tough choices about their allocation choice amid a trade war launched by U.S. President Donald Trump, says Dustin Reid, vice-president and chief strategist of fixed income at Mackenzie Investments.
“I think there’s a broad theme in the market, . . . that some of the things that have happened tariff-wise or otherwise maybe geopolitically, are causing global institutional investors to at a minimum reassess or rethink allocations to the U.S.”
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However, any consideration of changing asset allocations relates to reviewing potential overweight positions in a portfolio compared to pulling out entire allocations in the U.S.
Trump’s trade priorities include a strict tariff policy towards Canada as part of a strategy to annex the country as its 51st state. A trade war between the two countries kicked off in March when the U.S. slapped Canada with an introductory 25 per cent tariff on all product imports and a 10 per cent tariff on energy resources and critical minerals. Canada responded with its own 25 per cent tariff on about $30 billion worth of U.S. products imported in the country. Trump has since upped tariffs on steel, aluminum and auto imports.
“We’re in the early innings here of probably trying to figure out if firms are going to reallocate capital globally,” says Reid.
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By design, Canadian pension funds’ investment portfolios are focused on the long term, says Colin Ripsman, president at Elegant Investment Solutions Inc. Even if a decision is made to change the allocation strategy, he adds, making a move like that could take three or four months before an organization is ready to switch up its asset mix.
“We don’t often see large movements as a result of a sudden correction in the marketplace. These pension plans take a long time to make a move.”
Reid says the market has priced in a lower global and U.S. growth outlook level, but hasn’t fully digested concerns around higher inflation related to tariffs. The impact of this inflation will likely appear sometime in the next two to four quarters.
“I think going forward, we will continue to see elevated cross asset volatility and that’s likely with us here for a little bit.”
Ripsman says this uncertainty is lowering growth expectations in the U.S., Canada and all around the world. This shift, he adds, could significantly change the capital market assumptions used in the asset mix of organizations.
“High-growth stocks with higher growth multiples get hurt a lot more than value-oriented stocks. So, you might very well see a bit more of a rotation in portfolios to value away from growth.”
He adds the strains put on companies with global supply needs could necessitate a closer look at local companies capable of producing and selling locally.
“I think there is some value in having domestic stocks that focus on the domestic economy and aren’t necessarily as globally focused.”
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