The United States and China came out of the G-20 meetings in Osaka with more enthusiasm after a truce was declared in the ongoing trade war. Canada came out of the meetings with uncertainty over how its relationship with China will develop in the coming months and years.
Canada drew the ire of China when it arrested Huawei executive Meng Wanzhou back in December 2018. Since then, the two countries have been locked in a contest of wills. China has detained two Canadians in response and has picked new battles on the trade front. This latter point should concern investors in the second half of 2019.
Canada Goose (TSX:GOOS)(NYSE:GOOS) stock fell sharply in the aftermath of the Meng arrest. There were concerns that anti-Canadian sentiment in China could sabotage Canada Goose’s drive into the country. Anxieties were alleviated somewhat with the opening of its first Beijing store in late December. The response was extremely positive, demonstrating that the reputation of the Canada Goose brand in China was undimmed.
Canada Goose dipped sharply in late May after a revenue miss in its most recent earnings report. Its international segment was the bright point. Canada Goose’s rest-of-the-world revenue rose 60% in the 2019 fiscal year. This uptick is encouraging, but the company’s big bet on China could backfire if the geopolitical dispute is a long-term one.
Investors were perturbed by the calls to boycott, but the threat of direction action looms even larger. In such a case, Canada Goose could fall victim to a shot across the bow like the second stock we will cover today.
Maple Leaf Foods (TSX:MFI) stock was rolling into mid-spring this year, but it has fallen victim to several developments that call into question its near and long-term value. The success of the Beyond Meat IPO and the popularity of products from said company have cast a shadow over Maple Leaf’s bet on Lightlife. It was dealt even worse news on the trade front.
In late June, China announced that it would temporarily suspend all meat imports from Canada. The pretense for the ban was the Chinese claim that inspectors detected ractopamine residue, a restricted feed additive, in Canadian imports. The drug is approved for use in North America but is not in use in Russia, Europe, or China. China is the largest consumer of pork in the world.
Maple Leaf released a statement that said the company does not use ractopamine in its pig production operations. The company affirmed that it would work with government officials to resolve the matter with China.
Is there a light at the end of the tunnel?
The Canada-China relationship will likely be directly impacted by the ongoing trade negotiations between the U.S. and China. The extradition process for Meng is expected to last well into 2020. A “truce” is a small positive to glean from the G-20 meetings, but all indications are that the U.S. and China are still far apart on a concrete deal.
For these reasons, Canada Goose and Maple Leaf carry risk into the second half of 2019 and beyond. China has already struck in Maple Leaf’s sector. The threat of further action should keep Canada Goose shareholders on their toes.
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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.