It's Your Money  

Trump's tweets costly

Are your investments at risk from protectionism?

Will U.S. President Donald Trump’s Twitter happy fingers cause permanent damage to your retirement plans?

These are the questions that many Canadian investors are asking right now and the answers they’re receiving seem to be varying wildly.

With ongoing NAFTA uncertainty and talk of global trade wars in the headlines daily, many investors are wondering what it all means to their personal finances.

The protectionist risk has been on the table since Trump took office last year, but has certainly increased in the last month.

The chances of a new NAFTA deal before the Mexican presidential election (July 1) are near zero and a new agreement before the fall mid-term U.S. elections is looking unlikely as well.

If NAFTA is shredded, the participating countries would, as World Trade Organization members, likely default to the most favoured nation tariff rates.

These tariff rates alone would not pose a significant threat and the positives from U.S. tax reform would still outweigh the negatives from this new world order.

The tariffs applied and threatened (so far at least) represent more of a modest global economic drag than a full-blown crisis. Protectionist measures would need to increase significantly more still to reach real trade war status.

So globally, things aren’t looking too bad (yet).

Canada has, however, a very un-diversified economy and we could be hit harder domestically at the already proposed protectionism levels.

Currently, all eyes are on potential auto tariffs as this is one of the few industries we participate in outside of resources. Furthermore, Trump appears to look at the auto sector as a symbolic issue of what he believes is wrong with the current NAFTA rules and he may push more forcefully in this area.

Unfortunately, Canada has the most to lose if things continue to intensify.

A significant trade spat with China has much bigger global consequences though we’re not near there yet. In response to recent announcements of new U.S. tariffs on Chinese imports, China announced that it would retaliate in kind.

But U.S.-China tensions don’t end there; Washington is also set to release a June 30 proposal to limit Chinese investments in the U.S. unless they agree to ease U.S. investment restrictions on their soil.

$1.2 trillion of U.S. debt is held by China and some have speculated that they may flood the market with this debt if the trade spat gets bad enough.

Having said that, while the number is a big one, it represents approximately five per cent of all U.S. debt and there would likely be enough buyers (including the U.S. federal reserve) to absorb this amount.

Such a move would additionally pose economic hardships for China as well, so they likely won’t act on this unless forced into desperation. 

While the global trade situation is not at a critical level yet, there are a few things you can still consider to ensure that you are well protected.

As I’ve written before, portfolios at the most risk are the ones that still hold too much of their investments in Canadian equities.

A broadly diversified portfolio across companies, industries and regions is imperative. Canada is only three per cent of the world markets, yet it represents as much as 90 per cent of investment portfolios for many people.

It may not hurt to take a little more risk off the table as well if your accounts are equity heavy.

I don’t think that you need to be fully positioned for a massive trade war at this time, but you can’t ignore it completely either.   

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About the Author

Designated as a chartered investment manager and certified financial planner, Brett holds life insurance and investment licenses in B.C., Alberta and Ontario.

In addition to being the owner of Kelowna-based SPEIR Wealth Management Inc., Brett also serves as the vice-chair of the Financial Planning Standards Council of Canada’s board of directors. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FPSC board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

For more information or to see a database of previous columns, visit www.speirwealth.com.

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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