How we approach investment decision-making in heated times

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There are five stages of grief: denial, anger, bargaining, depression and acceptance.

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Through the disastrous breakdown of Pax Americana generally and Canada-United States relations in particular, Canadians have round-tripped through denial, anger and bargaining and back to denial again, as we cognitively and emotionally process recent events and grapple with the mercurial tendencies of the U.S. administration.

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Last month, U.S. President Donald Trump announced tariffs on Canadian goods, only to defer the effective date, affording Canadians an extra month in the denial stage. Tariffs were enacted on March 4 and swiftly countered by retaliatory Canadian tariffs on U.S. imports. Then, two days later, Trump again deferred his tariffs until April 2.

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In the interim, we witnessed an impertinently televised meeting between Ukrainian President Zelenskyy and U.S. leaders devolve into a shocking repudiation of the longstanding rules and values based global order, while in microcosm, and in parallel, our countries squared off in Montreal’s Bell Centre and Boston’s TD Garden for the Four Nations hockey tournament.

It’s been an emotional roller coaster, to say the least.

As professional investors, my colleagues and I owe a fiduciary duty to our clients to protect and prudently grow their hard-earned capital. Investing is neither nostalgic nor patriotic, but rather is disciplined, forward-looking and pragmatic.

It would be disingenuous, however, not to acknowledge that we and our clients are proud Canadians first and investors second, and to deny the raw emotion that events of the past few weeks have unleashed. But allowing the cold calculus of investment decision-making to be subsumed by these feelings would amount to dereliction of duty. The first four stages of grief have no place in the investor’s toolbox. Acceptance is empowerment, and empowerment is the precursor to actionable strategy.

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Harry Markowitz, an early pioneer of modern portfolio theory, observed that, “Diversification is the only free lunch in investing.” Accordingly, a core tenet of our practice is building portfolios that are resilient to macroeconomic shocks, comprised of Canadian and U.S. stocks, bonds, cash, private equity and private real estate.

Stocks and private equity are to varying degrees “fragile,” whereas bonds and cash tend to be more “robust,” acting as ballast in a well-diversified portfolio. And since “all real estate is local,” it’s axiomatic to note that it never crosses an international border, and it, too, serves as a worthy diversifier amidst today’s DEFCON 1 tariff risks.

Within equity portfolios, tariff risk can be entirely sidestepped by investing in sectors that are domestic in scope, like telecoms and utilities. Elsewhere, the service sectors comprise 70 to 75 per cent of the Canadian and U.S. economies and services are scoped out from tariffs — for now. Even in the traded goods sector, opportunities arise to take measured risk in owning businesses resilient to tariffs due to, for example, lack of foreign substitutes (Canadian potash or uranium) or inelastic demand for their products (U.S. branded pharmaceuticals).

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These investment strategies and tactics, we expect, will serve investors well, while at a higher level, our leaders continue to strategically negotiate for a return to sanity in the U.S. trade relationship. Whatever the outcome of those negotiations, swift acceptance of the newly adversarial Canada-U.S. paradigm crystallizes national unity and forges a crisis mentality — and as Churchill said, “Never let a good crisis go to waste.”

Canada is on the cusp of federal leadership renewal at a critical juncture. What low hanging fruit can a new leader with a strong mandate reap? What red tape and other economic sludge accumulated through decades of complacent and fragile dependency upon on the U.S. can be purged? A recent Conference Board of Canada paper cites a study estimating that eliminating interprovincial trade barriers could add four per cent to Canadian output.

What innovation, entrepreneurship and productivity renaissance might be unleashed — reversing years of decline — were tax and regulatory burdens dismantled to reposition Canada as a welcoming jurisdiction for investment of human and financial capital? What economic clout might be developed were immigration reform undertaken to be more targeted and selective, cherry-picking the best, brightest and most promising newcomers to plug strategic and vital gaps in our labour force? What latent human and economic potential could rightly and justly be realized were Canada to fast track recognition of overseas credentials for newly arrived Canadians, so their skills don’t languish and atrophy behind the wheel of an Uber?

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What new export markets can be opened up by business leaders — whether themselves or supported by the resources of Export Development Canada and its army of trade commissioners? There can be no sacred cows. These opportunities and others must be on the table for thoughtful consideration.

Can structural economic reforms realize outsized shareholder value creation in an underperforming economy with an undervalued stock market and an undervalued currency like Canada’s? Ask the Japanese. A slate of bold economic, labour and corporate governance reforms undertaken just over a decade ago have quietly propelled the Nikkei 225 index to fresh all-time highs after three lost decades.

On February 20, in the heat of the tariff threats, Canada needed a hero. At the 8:18 mark in overtime, Connor McDavid answered the call, burying the puck in the back of the American net, electrifying a nation and cementing Canada’s supremacy on hockey’s biggest stage, as Four Nations Cup champions. Today, on a bigger and broader stage, we are steadfast in the belief that not one, but countless heroes will emerge… around kitchen tables, boardroom tables and Cabinet tables.

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As investors, we consider the possible, estimate the probable and invest accordingly. What was always possible, given Canada’s abundance of resources — human and natural — now appears increasingly probable, considering the gelling national consensus around economic resilience to face a newly insular neighbour and trading partner. The last decade belonged to America. Accepting and embracing the idea that the next is ours for the taking will reward politicians, business leaders and investors very well indeed.

Brian Madden is the Chief Investment Officer of First Avenue Investment Counsel.

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