Christian Charest: For Morningstar, I'm Christian Charest. International trade has been at the forefront of economic news over the last several months, but how much of a threat do tariffs and other trade barriers really pose for investors? I'm here today with Candice Bangsund, Vice President and Portfolio Manager at Fiera Capital, to talk about how trade issues impact her firm's economic forecasts.
Candice, welcome back. Nice to have you with us again.
Candice Bangsund: Thanks for having me.
Charest: Last time, we spoke back in April, you had mentioned that trade protectionism was the main threat to your base case scenario. But at the time, you assigned it a fairly low 20% probability of coming to pass. Has that changed since then given all that's happened over the past several months?
Bangsund: On the trade side, a lot has come to fruition in the last several months. The rhetoric around protectionism has really ramped up from the Trump administration. So, we did raise that probability from 20% to 30% back in June in response to more threats for even auto tariffs and to some of the U.S.'s closest trading allies, Europe, obviously Canada, Mexico -- NAFTA negotiations essentially stalled out there. So, it was becoming obvious that it was more than just noise, that there are actual threats of a global trade war.
Since then, I would argue though, those risks have receded. We've seen a number of positive developments here over the last several weeks actually. NAFTA negotiations are back and there's also a willingness for U.S. and China to reengage in negotiations as well on the trade front and of course, the agreement between the U.S. and Europe last week was very notable in that regard and really, reiterated our base case that a global trade war is in nobody's interest, including the U.S. And we believe that it's going to revert the focus now back to China which was the number one target for this protectionist agenda from the beginning. So, essentially, we are seeing that risk likely receding back toward the 20% mark.
Charest: You mentioned the NAFTA negotiations. Obviously, for Canadians that's one of the top priorities for Canadian investors. Is there any chance that given the optimistic signs that you've been seeing lately, is there any chance that this will turn into a protracted trade war or is it likely to come to a favourable outcome like it did with Europe?
Bangsund: Yeah, we expect a more favourable outcome. Again, there seems to be a desire from all three parties within NAFTA to come to a trilateral agreement and get a deal inked here. We've seen some very good progress on U.S. and Mexico here in the last week actually. And again, that arrangement between the U.S. and Europe last week to sideline the auto tariffs, I think that's going to bring Canada and Mexico obviously back to the negotiating table and allow them to come to some sort of agreement so that the U.S. can revert back to China on the trade front.
Charest: For individual investors it maybe hard to cut through the rhetoric and actually understand what's going on. How much do all these trade deals and trade conflicts really impact the markets?
Bangsund: So, they are essentially weighing on the market through the confidence channels and creating some sporadic bouts of volatility and impacting flows into riskier assets. And a perfect example is the Canadian market. Our view has been for a while now that the Canadian market has been unfairly punished due to the overhang from NAFTA. Because fundamentally, the Canadian economy and the Canadian stock market should be doing better in this environment. So, I think, in the near term, you are going to see a little bit more volatility, but we are cautiously optimistic that a resolution to these trade headwinds will help to reignite asset prices, particularly on the equity side.
Charest: Fiera is the portfolio manager for various mutual funds and ETFs including a range of ETFs sponsored by the Horizons family. How have you adapted your portfolios recently in light of what's going on on the trade front?
Bangsund: From a global asset allocation perspective at Fiera, at the end of 2017 actually, so going into the new year, we expected 2018 to be a little bit more of a politically-charged environment. 2017 was all about pro-growth policies from the Trump administration. Obviously, equity markets were running all year long. Lots of complacency in the market. 2018 is becoming a little bit more volatile. We've seen trade flare-ups; we've seen Italy, vulnerabilities in Europe; Brexit is still undergoing negotiations. So, from an asset allocation standpoint, we decided to reduce our equity positioning.
So, right now, we are sitting in neutral and holding on to some cash opportunistically to redeploy or reestablish an overweight equity position at some point because the fundamental backdrop is still quite positive. But we are positioned right now cautiously optimistic, waiting for a better buying opportunity, hoping for some of this volatility to dissipate. And when you roll that into our Horizons lineup on our global fixed income mandate, similarly we reduce risk via high-yield and corporate bonds, holding on to some more cash and also, implemented a long position in the Japanese yen.
Charest: Candice, thank you very much for sharing all your insights with us today.
Bangsund: You're welcome.
Charest: For Morningstar, I'm Christian Charest. Thank you for watching.
