'Buying equities when it feels the worst is usually the right time,' says Franklin Templeton's head of Americas portfolio management
The prospect of tariffs on Canadian goods and services has institutional investors on edge but Michael Greenberg is sticking to first principles.
While the initial shock of tariff announcements can spark market swings and quick impulses, the head of Americas portfolio management at Franklin Templeton cautions against knee-jerk reactions.
"Our view is Canada's probably a least likely target for any real severe tariffs, compared to maybe some other areas," Greenberg said. "If we had overreacted that weekend with the initial announcement of 25 per cent tariffs and sold everything, it wouldn't have worked out so well. Obviously, within the day, it got reversed so it’s hard to predict what can happen.”
That unpredictability is precisely why institutional investors should avoid overexposure to any single asset class or geographic region. Notably, Greenberg noted Canada might not be the primary target of sweeping tariffs compared to other trade partners.
"It just points back to being diversified, having a solid portfolio that's built for the long term, and sticking with a plan," said Greenberg.
However, he does believe the tariff threat is a serious one and likely a long-term tool for Trump’s administration, citing a few reasons why the US believes in the benefits tariffs serve.
In the short term, he suggests they serve as leverage to force concessions, as seen in past U.S.-Canada disputes. Whereas, over the longer term, they generate government revenue and support domestic manufacturing.
"They really believe that having a strong domestic manufacturing base is really important to the health of the economy," he said.
“To me, it suggests that tariffs are going higher, not lower, in the aggregate. I don’t know if 25 per cent is what we're expecting necessarily, but we should expect higher and more sustained tariffs on places like China,” he added.
If tariffs do escalate, equity returns could take a hit, while bonds might see gains as yields fall. The key for institutional investors will be maintaining discipline.
"If you see a 15 to 20 per cent drop in equity markets, but then you see bonds outperform, you rebalance. Buying equities when it feels the worst is usually the right time," he said.
Should government policy shift toward incentivizing domestic investment through lower taxes, reduced regulation, or targeted fiscal spending, it could help strengthen the economy in the long run. But if tariffs hit hard, Canada could see a slowdown.
“If tariffs do come, you could easily see a shallow recession. With more severe tariffs, it could be a much deeper recession," Greenberg said.
Greenberg emphasized the importance for active management, being able to stay agile as long-term stability matters more than short-term volatility. He asserted maintaining a diversified approach rather than reacting to the latest political developments.
"Don't spend 45 minutes trying to predict what Trump will do next, because you're probably going to be wrong. Spend that time on strategic asset allocation," he said.
Consequently, if tariffs lead to increased demand for Canadian-made goods and services, it'd be positive for the Canadian economy and equities. But he cautioned that the supply chain may not be able to meet that increased demand quickly, which could lead to inflationary pressures.
"Obviously, if you're a business and you don't know the state of tariffs, it's kind of hard to do capital planning over the long term," he noted.
At the same time, Greenberg sees potential for Canada to use this moment to diversify its economic reliance.
"Some of these trade tensions probably remind us, as Canadians, that we probably want to try to diversify our economy a little bit. It's like the Walmart effect, where, if you sell into Walmart, and they're your only buyer, they have a lot of power over you," he said. “And we know how that can turn out.”
The role of CAD
A weaker Canadian dollar is another concern for institutional investors. Tariff-driven economic slowdown would likely weigh on the currency, while broader macroeconomic conditions in the US also put downward pressure on the loonie.
To make things even more complicated, Greenberg compared the Canadian dollar to “a chameleon currency because it prices itself off different things at different times,” pointing to examples like commodity pricing and geopolitical risks.
"If tariffs are stronger, our economic growth will be a lot weaker. That would suggest a weaker Canadian currency," Greenberg explained, cautioning against overexposure to any single currency.
"A low Canadian dollar probably means that their US equity exposures have done quite well," he said, adding that many institutional investors hedge their fixed-income holdings against currency fluctuations.
“We've seen a bit of a bounce more recently, but we still expect a little bit of weakness in the Canadian currency in our portfolios,” he added. “If we get past some of this and start to move on, there could be a point this year for Canadian dollar strength.”
While some Canadian investors may consider shifting allocations toward emerging markets, Greenberg is sceptical of an outright "boycott" approach.
"I don't know how overt we as Canadians want to be on ‘Let's boycott the US.’ Because let's be realistic on who holds the stick and who holds the gun," he said.
Instead, he offers a more pragmatic path forward.
"If you have the choice to buy Canadian goods and support the local business, that's always good practice," he said.
