As tariff retaliations heat up, National Bank reconsiders investing strategy

In response to U.S. tariffs on about US$50-billion worth of Chinese imports, China announced last week that it would retaliate in kind with its own tariffs.

Read: China responds swiftly to U.S. tariffs on $50B in imports

National Bank has taken note as U.S. President Donald Trump threatened, also last week, to impose tariffs on an additional US$100 billion of Chinese imports if Beijing retaliated.

And U.S.-China trade tensions don’t end there, notes the bank.

“In addition to tariffs, Washington is also set to release a June 30 proposal to limit Chinese investment in the United States unless Beijing agrees to ease investment restrictions for American investment in China,” says Stéfane Marion, National Bank chief economist, in a report.

The rising trade tensions have prompted strategic analysis by the bank.

“It’s getting a lot more complicated on the geopolitical front at a time where the Federal Reserve is still inclined to hike a few more times in 2018 despite a stronger USD,” says the report.

Tariffs and rate hikes would combine to challenge earnings growth and equity markets, says the report. As a result, the bank is changing its asset mix recommendation.

Read: Finding bargains in U.S. equities

“We are reducing our equity exposure by three percentage points in favour of cash,” says the report.

Though a weaker loonie will help support earnings, currency alone can achieve only so much if U.S. trade policy turns more aggressive on Canadian products, says the report, and it refers to potential auto tariffs.

“A negative development in autos could expose the industrial and consumer discretionary sectors of the S&P/TSX, both of which have surged to record highs in recent weeks on CAD weakness,” says the report. “Some profit taking is called for at this time with proceeds to be redistributed in consumer staples and telcos.”

National Bank says it stands ready to reassess its position as global trade tensions develop.

Read: Canadian and U.S. stocks to watch as trade heats up

Europe retaliates

The European Union said it will start imposing duties on a list of U.S. products as of Friday in response to Trump’s decision to slap tariffs on steel and aluminum imports.

The 28-nation EU was first expected to do so only next month, but EU Trade Commissioner Cecilia Malmstrom said they would introduce “rebalancing” tariffs on about 2.8 billion euros’ (US$3.4 billion) worth of U.S. products this week.

The targets include steel, agricultural and other products, including bourbon, peanut butter, cranberries and orange juice.

Malmstrom said that “we are left with no other choice.” Trump imposed tariffs of 25% on steel imports and 10% on imported aluminum from the EU on June 1. Europeans claim it is simply protectionism and breaks global trade rules.