Following the strength of equity markets in 2024, financials market participants this year are doing their very best to keep up with the constant flow of news related to the US government and potential trade policy changes. Subsequent to the initial announcement of incoming tariffs by President Trump, an extension was announced following discussions between Mr. Trump and the respective leaders of Canada and Mexico who agreed to take (or continue) certain steps related to border security and the mitigation of trafficking of illegal goods. Although still very uncertain as to what the potential timeline for tariff implementation could be, it seems that this may be the beginning of a bumpy road of trade negotiations, concessions and escalations as world leaders jockey for position for the next 18 months leading up to the USMCA agreement re-negotiation deadline on July 1st 2026.
Outlook and Challenges
For the Canadian Equity Large Cap Investment team at Fiera, it’s important to remember that their focus has been and remains on identifying high quality, attractively valued business and owning them for a long time. That being said, as part of their ongoing company research they remain vigilantly aware of the global and domestic economic environment and make sure to integrate it into their areas of focus within the portfolio. In the current environment, there are no shortage of potential challenges as business weather the uncertain political climate and with the potential for a resulting economic downturn.
Investment Opportunities
As they consider the current market environment, there are some elements that can shed light on opportunities within their investment thesis.
Localized business model
If the U.S. decides to implement import tariffs, the most significant effects should be felt by raw material or industrial manufacturers. Think of companies producing lumber, car parts or building materials and shipping them south across the border. Within the portfolio, although many of the companies in generate significant revenue outside of Canada, most of them either generate local service revenue from their global clients or they will locally fulfill product demand via a global manufacturing and distribution network. In other words, they are present where their clients are and therefore are less exposed to cross-border trade issues.
Pricing power
Steep U.S. tariffs on imports from Canada and Mexico would likely lead to higher costs across the continent – even if those countries did not retaliate with duties of their own. As North American supply chains have become increasingly integrated this has led to the creation of a complex network of supply chain flows throughout the three countries. For some industries, a product or some of its components could cross multiple borders before reaching the end client. As a result, inflationary pressures could return as these costs increase make their way through the supply chains of various industries. Within the portfolio, the investment team owns many businesses who have demonstrated significant pricing power either through their brand strength and operations (i.e. Dollarama and Loblaw) or inflation linked contracts (i.e. Waste Connections). The investment team sees these companies performing well during an inflationary environment and have the ability and experience to manage and optimize their pricing strategies. Furthermore, as companies seek to navigate supply chain disruptions, companies who offer shipping and inventory management solutions like those provided by Descartes Systems will become increasingly important.
Fund Strategy
Overall, the portfolio continues to be composed of high-quality businesses that can withstand tough times and is currently trading at an attractive discount to its intrinsic value. Both of these elements should position the portfolio well for long-term compounding of returns.