Tariff commentary: Assessing sector impacts

00:04.037 --> 00:08.074

Hi, I'm Bobby Reynolds from the Canadian Equity Research Team to talk

00:08.074 --> 00:12.779

about the impact of the latest Canada-US trade news on

00:12.779 --> 00:16.216

Canadian banks, industrials and the automotive sector.

00:17.283 --> 00:21.354

So trade talks, we appear to be close to a deal with the US to reduce

00:21.354 --> 00:25.291

the Section 232 Terrace on steel, aluminium,

00:25.291 --> 00:28.762

autos and lumber over this past weekend.

00:28.762 --> 00:32.832

Those talks broke down, both sides gave differing reasons for

00:32.832 --> 00:34.634

why there was a breakdown.

00:34.634 --> 00:39.305

And then Trump came out with a truth post threatening up

00:39.305 --> 00:43.276

to 50% tariffs on Canadian autos, including auto

00:43.309 --> 00:48.048

parts, to be effective January 1, 2027,

00:48.048 --> 00:50.517

if a new deal isn't reached by that time.

00:50.550 --> 00:52.485

So the market is reacting to that.

00:52.485 --> 00:56.790

We see some of the more potentially impacted socks selling off significantly

00:56.790 --> 01:01.227

on it. From my perspective as an analyst, what I'm looking is,

01:01.227 --> 01:05.331

what are the potential earnings implications of these

01:05.331 --> 01:09.302

moves if they play out versus what are the off-ramps now for

01:09.302 --> 01:13.740

both sides? So from the earnings implications, we could start with the banks.

01:13.740 --> 01:17.777

From a high-level economic impact, the overall US

01:17.777 --> 01:22.248

tariff burden on Canada is still relatively low.

01:22.248 --> 01:26.286

It's estimated Canada had about a 5% effective tariff rate on

01:26.286 --> 01:30.523

our exports to the US. Before the new tariffs became effective

01:30.523 --> 01:35.095

over the weekend. Now that bumps up to about 7.5%.

01:35.095 --> 01:39.632

The Canadian banks have actually been provisioning for a worse outcome,

01:39.632 --> 01:42.969

potentially a 10% plus effective tariff rate.

01:42.969 --> 01:47.073

So the banks are likely well positioned to

01:47.073 --> 01:50.944

see this through as long as things don't continue to escalate further from

01:50.944 --> 01:55.048

here. There's also obviously the prospect that

01:55.048 --> 01:59.119

Carney mentioned over the week that we'll see more government stimulus to

01:59.119 --> 02:01.387

counteract the impact of these U.S.

02:01.387 --> 02:03.323

Tariffs on the affected sectors.

02:03.323 --> 02:07.293

And I should also mention that there's a large Canadian investment summit

02:07.293 --> 02:11.798

in a couple of weeks where Carney's invited investment

02:11.798 --> 02:15.935

leaders from around the world in an attempt to showcase the investment projects

02:15.935 --> 02:20.173

that we have in Canada. So the Canadian government is really pushing into

02:20.173 --> 02:24.210

this domestic investment agenda, I believe likely to be led by

02:24.210 --> 02:26.312

investment into the natural resources sector.

02:26.312 --> 02:30.450

In. To me, this trade outcome makes a doubling down on that

02:30.450 --> 02:32.752

policy initiative more likely.

02:32.752 --> 02:37.190

When it comes to the automotive sector, Canada has large

02:37.190 --> 02:38.892

automotive suppliers.

02:38.892 --> 02:43.062

It's important to note that under the current regime of the 25%

02:43.062 --> 02:47.167

tariff on finished vehicles made in Canada, it's had very

02:47.167 --> 02:51.070

little to no impact on Canadian auto parts suppliers for a couple reasons.

02:51.070 --> 02:55.208

One, the tariffs are paid for by the auto OEMs, which are.

02:55.208 --> 02:57.443

Either U.S. Or Japanese-based.

02:57.443 --> 03:01.915

They are the importers of record into the U.s., the Finnish vehicles.

03:01.915 --> 03:05.919

Secondly, USMCA compliant parts have been carved out with

03:05.919 --> 03:07.654

a 0% tariff rate.

03:07.654 --> 03:11.691

I think that's one of the uncertainties that the Trump tweet or two

03:11.691 --> 03:15.962

social posts introduced is that, are they going to maintain that

03:15.962 --> 03:20.099

USMC compliance or USMCE carve out

03:20.099 --> 03:23.102

for parts, or are they gonna tariff all parts made in Canada?

03:23.102 --> 03:24.904

If it's all parts in Canada.

03:25.905 --> 03:30.376

Bad for broad auto affordability in North America, not necessarily

03:30.376 --> 03:34.380

specifically for Canadian auto parts manufacturers, as again, it will

03:34.380 --> 03:38.418

be the OEMs that will have to eat that tariff and then pass it on

03:38.418 --> 03:39.819

to final consumers.

03:41.554 --> 03:45.525

The third is just to talk about the impact on Canadian

03:45.525 --> 03:49.462

industrials. There's the broad economic impact to think about.

03:49.462 --> 03:53.766

The actual Section 338 tariff list that was implemented

03:53.800 --> 03:58.037

on the weekend. Doesn't really materially impact any large

03:58.037 --> 04:00.039

Canadian listed industrials.

04:00.039 --> 04:03.476

It's more about, are there further rounds of escalation?

04:03.476 --> 04:07.313

Who are the large Canadian exporters with exposure to the US?

04:07.313 --> 04:11.351

That it may be sidestepped or escape tariff treatment

04:11.351 --> 04:15.755

to date, and could they be targeted in a future round of retaliation

04:15.755 --> 04:19.492

by the US. I think that's what the market is at least pricing in today.

04:19.492 --> 04:22.161

Whether that's right or wrong, we'll see.

04:22.161 --> 04:24.197

From our perspective, again, we're Bye.

04:24.197 --> 04:28.835

Looking at all of the scenarios, which stocks provide the best risk reward,

04:28.835 --> 04:32.872

and staying on top of what all of this means for the earnings of

04:32.872 --> 04:36.242

all the companies that we're investing in and potentially investing in.