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Canada Banks, Consumer Stocks Still at Risk Despite Tariff Delay

CIO at Baskin Wealth Management Barry Schwartz shares strategies for investors navigating the market amid a tariff war.

(Bloomberg) -- Canadian stocks rose Tuesday after an agreement between Prime Minister Justin Trudeau’s government and the White House to delay proposed tariffs. But investors shouldn’t get lulled into thinking that’s the end of the trade drama, strategists at Canadian Imperial Bank of Commerce say. 

The deal between Trudeau and President Donald Trump, announced after equity markets closed Monday, heads off a trade war between Canada and the US for now. The delay allows the US administration “to see whether or not a final Economic deal with Canada can be structured,” Trump posted on social media — a warning shot about negotiations to come. 

“Even if we are presented with a fundamentally different set of actions (possibly lower tariffs and more exemptions) come March, the impact across the Canadian economy could be far reaching,” CIBC strategists Ian de Verteuil and Will Stevenson said in a client note. Sectors that are sensitive to trade and the economy, including auto parts, energy and banks, “are still vulnerable to the effects of eventual tariff and non-tariff actions.” 

Trump signed an order on the weekend to put a 25% import tax on most of what the US buys from Canada and 10% on energy. Hours later, Trudeau announced retaliation that included 25% levies on a huge list of US-manufactured consumer products and other items. 

An extended tariff war would have a serious impact on the economy, depress the Canadian dollar, and touch a wide array of consumer and industrial companies in the nation of 41 million people. 

Food is among the items that would be quickly affected by tariffs, and Canada’s largest grocers are likely to pass higher costs onto consumers. Fruits and vegetables are sourced outside of the country for most of the year and generally priced in US dollars, RBC Capital Markets analyst Irene Nattel said in a note published before the 30-day pause.  

If consumers become more sensitive to prices, Loblaw Cos. and Metro Inc. may be better positioned because of the strength of their discount supermarket banners, while Empire Co., owner of the Sobeys brand, might lag behind, National Bank of Canada analyst Vishal Shreedhar wrote in a separate note. 

Convenience store and gas station operator Alimentation Couche-Tard Inc. may face challenges in Canada and the US — the latter is about 65% of its revenue. “Impact of tariffs on low-income consumers in US could result in more cautious consumer spending,” said RBC’s Nattel.

Air Canada may face headwinds as the weakness in the Canadian dollar and recession risks might discourage travel, said RBC analyst James McGarragle.

Bombardier Inc., which makes private jets near Montreal, could be “significantly impacted” by the 25% tariff, said Bloomberg Intelligence analyst George Ferguson. “The manufacturer sells a large portion of its jets to US customers, which may be mitigated with buyers purchasing through offshore entities.” It also has a complicated supply chain that includes manufacturing in US and Mexico. 

“We have worked on multiple scenarios that will help us face this situation,” Bombardier spokesperson Mark Masluch said in an emailed statement.

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