What institutional investors need to know about Trump's trade tensions

Institutional investors have started the countdown, with less than two weeks to go until US President Donald Trump announces another tariff decision.

Richard Boyce believes the trade war is generally far from over and that investors should expect more “uncertainty and volatility” in portfolios as Trump’s seesaw announcements have everyone on edge as they brace for more unpredictability on April 2.

“There's just so much we don't know, given the leadership in the US and the direction they're heading, that just planning for the unexpected is what institutional investors should be ready for,” said Boyce, managing director, North America at Ortec Finance.

The on-again, off-again nature of Trump’s tariff threats and ongoing negotiations with all levels of government have added a layer of complexity, notably to portfolio management.

“It's creating a large sense of uncertainty. It's really hard to plan for all of the different avenues that this trade war can take,” Boyce said. That’s why Ortec has turned to available historical trade war data and market models to forecast and analyse potential outcomes.

While historical trends suggest long-term economic damage from trade wars, Boyce acknowledged that the current situation is highly unpredictable.

“Having tariffs paused, put on, taken off, paused, is very unique. Historical data has shown, obviously, that trade wars are not beneficial long term to the economy,” he said.

So, what are the main implications of Trump’s trade war for institutional investors? Boyce underscored one of the immediate ones is liquidity pressure, as cash flows become more scrutinized because of trade restrictions disrupting markets.

“The increased volatility will cause the risk management teams make vital decisions going forward on asset class selection as well as just understanding cash flows,” he said. “We don't know how long this is going to last and we don’t know what’s going to go through and what's not going to go through, in terms of the tariffs.”

As for pension funds, lower yields are putting increased pressure on pension fund liabilities, making cash flow management and liquidity measures more critical than ever, Boyce explained. With market uncertainty driving a shift toward private assets and private equity, understanding liquidity risk has become a key priority for institutional investors navigating this landscape.

Meanwhile, short-term effects of trade wars are evident in heightened volatility and market instability, said Boyce.

“In the short term, institutional investors should weather the storm, and we’ll see them go to more safer assets and more known geographies of the G8 rather than some of the higher allocations we've seen to emerging markets,” Boyce explained.

Over the long term, he underscored the impact could be more severe, potentially driving inflation, slowing productivity, and reducing GDP growth.

Trade and monetary policy in the US also have direct implications for Canadian institutional investors as Boyce underscored trade policy affects all asset classes.

“When you get into a trade war, it's very difficult for institutional investors to plan and understand what the best plan of action is to benefit them, he said, adding that many are taking a more conservative approach, either holding cash or increasing allocations to private equity investments.

Certain asset classes, like equities, are particularly exposed to the risks of a trade war, noted Boyce, as they’ve seen recent volatility.

Additionally, with inflation historically being spiked during trade wars, the bond market could be affected as well, “which greatly affects pension plans with assets and liabilities on the balance sheet,” he said.

While Boyce made clear there's no benefits in a trade war, he does acknowledge that it’s helped put a spotlight on Canadian investment opportunities.

“We’ve seen the ability for Canadians to really showcase that we do have great productivity. We have great local investment avenues,” he noted, while adding that this comes with the challenge of navigating global market uncertainty.

“When demand and productivity drops, the markets usually drop along with it,” he added.

Despite the widespread disruption, the strategy for institutional investors remains focused on managing risk rather than making reactionary moves as Boyce asserted strategies are typically informed between one and five years. 

“You're not making really any knee-jerk reactions in the short term, but you also want to be able to plan for the long term, given the information we do have today,” he said.

To best manage these risks, Boyce pointed to stochastic scenario analysis and external capital market assumptions which “can really shed a non-biased light on where we think asset classes are going, especially in this time of volatility,” he said.

With another tariff deadline on the horizon, Boyce stressed the importance of staying informed and avoiding knee-jerk reactions by “monitoring the newswire closely” and watch for any decisive action from Canadian leadership.

Rather than making sudden or reactionary changes to asset allocations, he asserted institutional investors should take a cautious approach.

“Make careful decisions with scenario analysis, with the proper risk management information to drive decisions in the future,” said Boyce.