Large tariff or low tariff? That is the question. There have been months of negotiations, but rarely has there been an outcome that is welcoming to all. Such is the state of global trade. Protectionist measures by the world’s largest consumer, the United States, have made it expensive for the world to access the American market. The tariff uncertainty has made investors and companies indecisive about the road ahead and, consequently, affected stock markets worldwide.
Source: Getty Images
Why the tariff uncertainty?
Recently, U.S. president Donald Trump negotiated a 15% across-the-board tariff with Europe and Japan, a shift from the previously 30% and 25% tariffs suggested on August 1. The two countries also promised to invest in the United States. While these negotiations were considered a win by the two countries, Trump did not negotiate on steel and aluminum imports to the United States.
The next in line is Canada. Europe and Japan are not as dependent on the United States as Canada. Canada’s Prime Minister Mark Carney stated that the country’s geographical closeness and energy exports to the U.S. put it in a different situation. Canada has a free-trade agreement on certain goods and expects to retain that. Bombardier was a beneficiary of this agreement.
Moreover, Canada has a lower tariff of 10% on oil exports. The negotiations will determine if the 20% tariff on other goods increases to 35% or is reduced. When such uncertainty exists, investors, consumers, and businesses stall their decisions.
Low business and investing activity stagnates growth. At times, it creates panic among investors, who then opt for safer stocks that continue doing business or benefit from the situation.
Two stalwart Canadian stocks to buy during tariff uncertainty
Canadian energy stocks have the biggest exposure to exports to the United States. Whereas Canada imports several grocery items from the United States. As Canada’s dependence on the U.S. exports is greater, it is only imposing counter-tariff policies on products for which it has alternatives. Loblaw’s (TSX: L) second-quarter earnings reflected that.
Loblaw
Loblaw noted that Canadians are seeking value, quality, and service. Its food retail business saw growth in same-store traffic, basket size, and item count as the grocer focused on Hard Discount and Real Canadian Superstores banners. The grocer’s pharmacy brand, Shoppers Drug Mart, saw strong growth in specialty drug and prestige beauty categories.
Loblaw is expanding rapidly. It is on track to open approximately 80 new stores and 100 new pharmacy clinics this year to increase its reach to more communities across Canada. More stores will lead to more revenue.
Loblaw’s cyclical rally can be attributed to a shift in consumer buying trends towards discounted products. In a tough economy, Loblaw outperforms but underperforms in a growing economy as buying shifts to discretionary.
Loblaw stock surged 30% between February 21 and May 30, during the first round of Trump tariffs. That was the time when the entire Toronto Stock Exchange (TSX) fell. If the tariff negotiations move in Canada’s favour, Loblaw stock could remain stagnant. But if the negotiations go sideways and a higher tariff is implemented, Loblaw stock could rally as consumers may stock up on goods before the new high-tariff goods hit the shelf.
Loblaw is also splitting its shares 4-for-1, effective August 18, to make them accessible to retail investors. It means you won’t have to shell out over $220 to buy one share. They will be available for under $60, depending on what the share price is in August.
Descartes Systems
While Loblaw gives you a contrarian approach, Descartes Systems (TSX: DSG) gives you a buy-the-dip approach. At present, the stock is down 16% from its February peak when tariff uncertainty began. The supply chain solutions provider is affected by a slowdown in trade activity as companies adopt a wait-and-watch approach. A favourable negotiation could pump up trading activity as companies prepare for the holiday season.
The August 1st tariff deadline has stalled Descartes’s seasonal rally. Now is the time to buy the stock as the seasonal rally could increase the stock price by more than 30%. The company is well prepared to take on higher trade volumes.
In conclusion
Every scenario presents an opportunity. Following the money trail will tell you where to look. As long as money is not locked in vaults and is exchanging hands, there will be growth somewhere.
