A lot has been said about Britain’s decision to leave the European Union—it was a vote against immigration, a desire to become more independent, a referendum on the Conservative government—but one of the recurring reasons the vote came back as it did was because of a growing disdain for globalization. What worries investors most is that this anti-trade sentiment that’s taken hold in the United Kingdom gains sway in other major economies too.
In America, presumptive Republican presidential nominee Donald Trump has said that, if elected, he’ll slap a 45% tariff on Chinese imports, opt out of the Trans-Pacific Partnership and possibly even leave the North American Free Trade Agreement. While it’s up to Congress, not the president, to revisit signed trade deals, there’s no question that more and more people are rethinking free trade. Unfortunately, any move to halt or reverse the decades-old trend of trade liberalization could have terrible consequences for stock markets.
Steven Lingard, a portfolio manager with Franklin Templeton Investments, believes protectionist sentiment is gaining momentum because many people find themselves worse off since the last recession. While layoffs and stagnant wages may have more to do with technology than foreign competition, the latter makes an easy target. “It’s striking a chord with all the people who feel left out of this economic recovery,” Lingard says.
As the aftermath demonstrated, though, if anti-globalization forces prevail, the economy and stock markets are going to suffer. Trade, says Lingard, is unequivocally good for corporate profits. Firms can sell more of their goods to more people, pay less in tariffs, and ultimately make more money. Those earnings then get passed to shareholders in dividends or capital gains. Raising barriers between nations again will lead to layoffs and retrenchment, he says.
“You’d have a massive recession,” says Paul Harris, a partner and portfolio manager with Avenue Investment Management, should tariffs and other trade barriers be reinstated. Every country has its own competitive advantages, and free trade allows companies to focus on what they do best, he says. Take that away and you have a lot of middling businesses trying to fill the gaps at a higher cost. NAFTA in particular “has made us more productive and made our businesses much more global,” he says. “It’s helped our country concentrate on the area where we have that advantage.”
If Trump or other anti-trade politicians take office, investors should think twice about buying firms with global supply chains. Technology companies would have a difficult time, Harris says, as would consumer discretionary businesses, which tend to import a lot of their inputs and export their finished products. It’s usually manufactured goods, such as cars or value-added foods, like milk and cheese, that are subject to tariffs.
The companies that would see less damage would be those that don’t sell physical items over borders. Services don’t face the same kind of restrictions. Companies that generate most of their revenues domestically and defensive sectors, such as consumer staples and utilities, would not see much change. “You still need stuff to eat,” says Harris.
In the near term, it’s a good idea to stay defensive, says Lingard. He’s holding onto more cash than usual that he may deploy at some point in the future. It’s unclear where the world economy is headed, how it’s going to grow and whether Trump really is the protectionist he’s making himself out to be. People need to be mindful of what’s happening, though. “This has put some legitimacy to these populist movements and people need to pay attention,” says Lingard. At least until we know the outcome of the U.S. election on Nov. 4, markets will be on their guard.
Five stocks to consider now:
Allied Properties REIT
1-year total return: 15%
This Toronto-based real estate trust focuses on office properties in Toronto, Calgary and Montreal. It’s also in the business of redeveloping historic buildings, which is a hot part of the market.
1-year total return: 65%
While this property development management firm is based in Toronto, it manages condos and gated communities mostly in the U.S. “It’s not going to be affected by trade agreements,” says Avenue Investment’s Paul Harris.
JPMorgan Chase & Co.
1-year total return (C$): 4%
While this New York–based bank is international, it’s not subject to tariffs and taxes in the way a manufacturing multinational might be. It’s got enough lines of business that it won’t be unduly affected by tighter trade rules.
1-year total return: 1%
Raw materials like crude oil and gas are seldom subject to tariffs, meaning protectionism shouldn’t affect this Calgary-based operator of energy pipelines.
1-year total return: 9%
This Montreal-based REIT owns 72 commercial, office and industrial properties in Quebec and eastern Ontario. It also has a
property management business.
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