One of the biggest news stories to come from Donald Trump’s successful reelection bid as the forthcoming president of the United States was the announcement of a 25% tariff being placed on goods from both Canada and Mexico.

Trump’s reasoning for this legislative taxation is to incentivize production of goods within America, effectively making the country more self-sufficient and economically diverse. He has also written on Truth Social how these tariffs are a form of penalization for a supposed crisis of illegal border crossings with neighbouring nations — and can be levied if he notices positive improvement.

However, during a recent press conference, the former Apprentice host admitted to using economic pressure to make Canada cede governing power to its southern neighbour, effectively pushing Canada into becoming what Trump calls the “51st state” of the United States.

Whatever his fluctuating reasoning may be, Trump’s proposed tariffs, alongside Canada’s current economic outlook, will have far-reaching implications for Canadians, especially those with an investment portfolio.

To assess the impact, we spoke with Stephen Johnson, a private equity manager and director of Omnigence, a Canadian private equity firm, about why Trump’s tariffs could accelerate Canada’s descent into grinding economic stagflation, what investment markets will be hit hardest and how to avoid catastrophic losses.

How will these tariffs impact Canadian investors?

According to Johnson, the impact of Trump’s tariffs will be felt by all Canadians, regardless of province of residence or size of portfolio.

“We can expect an increase in inflationary pressures, such as loss of purchasing power from Canadian dollar weakness, and recessionary pressures like increasing current account deficit and GDP contraction,” he said.

“This will be a material exacerbation of Canada’s already challenging stagflation, which is a fusion of inflation and economic growth problems.”

Johnson warns that these tariffs can reduce already low capital inflows to Canada, which, in turn, can reduce the nation’s already low investment in fixed capital. It’s a situation that puts Canadians perilously close to the dreaded state of stagflation.

What is stagflation?

Stagflation combines positive inflation with lower nominal gross domestic product (GDP) per capita growth, resulting in negative real GDP per capita, according to a report conducted by Omigence entitled Addressing Canada’s Stagflation Challenge: A Modest Proposal.

Here are some of the key factors influencing stagflation:

Economic Fundamentals:

Demographic Pressures:

Housing Market Issues:

Energy Costs:

Savings and Investment:

What investment sectors will be impacted the most by Trump’s tariffs?

The sectors most at risk from Trump’s tariffs include: the automotive industry, aviation, and heavy machinery manufacturing sectors. These sectors are the most exposed given Trump’s stated goal of onshoring production and manufacturing — a process of bringing these jobs back onto American soil

However, the widespread uncertainty of whether or not these tariffs will be enacted, coupled with his threat of using economic pressure, can create enough instability that all market sectors are impacted.

And while Canada has already hedged tariffs during Trump’s previous presidential tenure, this time things could get much worse.

“Proposed tariffs will be a very serious issue for the Canadian economy given its already very weak fundamentals versus Trump’s previous presidency,” explains Johnson.

What’s worse is that even if the tariffs are not introduced, the uncertainty of the current Canadian and American political landscapes means the market will react to the uncertainty anyway — meaning a reduction in investments throughout the Canadian economy.

“Even without an imposed tariff, the uncertainty will impact the investment market. Yes – transmission mechanism is likely to be CAD$ weakness and reduced capital inflows in the near term.”

Additionally, Johnson believes that there is nothing that the Canadian government can enact in the short term to soften the blow of tariffs without adding to the nation’s current fiscal deficit.

“Doing so will add to downward pressure on the Canadian dollar and inflationary pressures,” he said.

Are there any investment sectors that may be more resilient?

Tariffs or not, as an investor, it’s important to ask yourself whether your portfolio has the following three things:

  1. Recession hedging factors
  2. Inflation hedging factors
  3. Low reliance on middle-class demand as a return driver

For Johnson, the answer to all three should be a resounding yes to generate alpha — or create excess returns — over the next decade.

This may also result in having to rethink portfolio allocations that have worked in the past as Canada continues to endure an unsavoury economic climate and the threat of tariffs.

“Traditional 60/40 portfolio allocations — 60% equities and 40% fixed income — that have worked well in the last two decades of below-trend inflation and above-trend GDP growth are unlikely to generate the same level of returns in a macro climate of above-trend inflation and below-trend GDP growth that Canada faces,” Johnson added.

However, despite a feeling of economic unease, there are certain sectors where Johnson sees opportunities.

His top pick: farmland, which hedges both inflation as a non-depreciating, real asset, as well as recessions, due to inelastic food demand.

Plus, the production of goods from farmland go beyond our trade reliance on the US.

“Canada exports to markets outside the US, such as China and the Middle East, with strong and growing incremental demand for agricultural products,” Johnson said.

Automotive maintenance is another sector Johnson believes has strong investment potential. Johnson chalks up the strength of this sector to a shrinking middle class and dwindling purchasing power.

“People drive their cars for longer before replacement – this reduces demand for new cars and increases demand for ongoing maintenance,” he said.

“The resulting growth is forecast to be well above overall Canadian GDP growth rates, and could outperform even in a low aggregate GDP growth climate.”

Environmental services are also immune to GDP growth since it is largely driven by regulation, which Johnson believes is worth pursuing for investors looking to create a durable portfolio that can withstand market volatility

Johnson’s final pick is the building products distribution sector. This is due, in part, to the lucrative residential housing shortfall of more than three million homes. This shortfall means that a refresh of the “Canadian infrastructure” will be required as well as “significant increase in domestic investment in fixed productive capital in order to grow the economy,” Johnson said.

This article How Trump’s proposed tariffs will impact Canadian investors originally appeared on Money.ca

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.