The Motley Fool

Will China Trade Worries Cause Another Week of TSX Index Losses?

Image source: Getty Images.

S&P 500 futures tumbled again over the weekend after U.S./China trade talks stalled and China vowed retaliation against Donald Trump’s 25% tariff on Chinese goods. The news hit tech stocks particularly hard, while almost every sector suffered losses in what’s shaping up to be the worst selloff since last year’s correction.

Although the current selloff is mostly affecting U.S. equities, the TSX has been hit as well, falling 2% last week. While the TSX isn’t directly affected by any of the tariffs being discussed, it’s indirectly impacted, both because of Canada’s trade with the U.S. and the fact that many TSX stocks are disproportionately owned by U.S. institutions.

Therefore it’s entirely possible that any U.S. economic slump or market selloff could lead to long term losses on the TSX — although probably not as severe as what we’re seeing in the U.S. To understand why that is, we need to look at how integrated the U.S. and Canadian economies are.

Canada-U.S. trade

The Canadian and U.S. economies are highly integrated. Canadian exports to the U.S. add up to 20% of Canada’s GDP, and many Canadian companies depend on U.S. exports for a large percentage of their revenues.

Consider Canadian Pacific Railway (TSX:CP)(NYSE:CP). Canadian Pacific transports goods all across North America and has a particularly lucrative business in the U.S., where it benefits from the high U.S. dollar. The current trade spat with China won’t hurt Canadian Pacific’s business immediately; in fact, it might even boost certain exports. However, to the extent that it signals a tariff-happy president whose aggressive trade policy will probably not end with China, it could send shares lower on anticipation of future tariffs on Canadian exporters.

China vows to retaliate

Another factor to consider is China’s retaliation against the U.S.

China won’t take a massive tariff hike lying down and is already considering retaliation against President Trump’s actions. China has demonstrated it’s willing to put its money where its mouth is, having ceased imports of U.S. soybeans last year. How far these retaliatory measures will go is anybody’s guess, but if they put a significant dent in the U.S. economy, Canadian stocks will suffer as well.

Mass selloffs

Because the U.S. is such a massive export market for Canadian companies, any U.S. slowdown would likely hit Canadian corporate earnings across the board. However, such a slowdown needn’t even occur for Canadian stocks to tank. American institutions are some of the biggest owners of Canadian stocks, so if they start selling equities, there’ll likely be some downward movement on the prices of Canadian stocks. This holds whether there’s an actual decline in underlying earnings or not.

Foolish takeaway

As Warren Buffett has said, trade wars are bad for the whole world. So far, the spat between the U.S. and China has corroborated that observation, sending stocks lower and increasing economic jitters. It’s too early to say whether the current trade strife will have long-term consequences. For now, it may be best to stick to stocks that aren’t too reliant on exports.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Andrew Button has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.