The recent news of a potential trade war between the U.S. and Canada is a stark reminder of why in both investment portfolios and economies, it’s important to reduce dependence on any single country where possible. While Canada and the U.S. maintain one of the world’s largest trading relationships, any disruption, whether from tariffs, policy changes, or supply chain restrictions, can create volatility for investors heavily concentrated in either market, as well as risks to businesses and workers on either side of the border.

For Canadian investors, having a home-country bias is common. While there are some advantages to owning Canadian stocks such as preferential tax treatment, stability, and familiarity, it can also increase exposure to local economic risks. A well-diversified portfolio that includes international equities and fixed-income assets can help mitigate regional risks.

Canada’s Ongoing Trade Diversification Efforts: A Parallel for Investors

With nearly 75% of Canada’s exports being sent to the United States as of 2022, Canada has one of the highest trade concentrations with a single partner in the world, second only to Mexico of all major economies. Even North Korea has a less concentrated trade relationship with their largest trade partner (China), albeit the dollar value of trade is significantly lower for North Korea. There are many reasons that this high degree of this trade with the U.S. makes sense for Canada, but the size of the U.S. economy, and our proximity to them make it unlikely to change significantly.

 

Where Does Canada Export To? (2022)

Source: oec.world

 

In response to potential tariffs on Canadian goods, Canada has been working to reduce its reliance on the U.S. as a primary trading partner. The federal government has been pursuing trade agreements with various global markets to expand economic opportunities beyond North America for years, but the recent trade disputes between Canada and the U.S. give extra urgency to this. Most recently, Global Affairs Canada announced a free trade agreement between Canada and Ecuador which marks the 16th such deal since the Canadian government launched its trade diversification push 8 years ago. Canada has also been in trade talks with Indonesia, the Philippines and other ASEAN (Association of Southeast Asian Nations) countries, with plans to begin discussions with Australia and Singapore this month as well.  

Canada’s effort to expand trade partnerships globally has many parallels to the principles of sound portfolio diversification:

• Reducing Concentration Risk: Just as Canada seeks alternative trade partners to hedge against U.S. dependence, investors can reduce their portfolio’s dependence on any one country’s performance by holding assets across multiple regions.
• Access to Opportunities: Nations outside of Canada can present investment opportunities, products, and industries that may not be available domestically
• Currency and Market Cycles: Exposure to international assets can help mitigate risks tied to fluctuations in the Canadian dollar and economic cycles unique to North America.

 

The Case for Global Investing

While Canada is an economically diverse and stable nation, we cannot be the best at everything. Due to our geography, demographics, and policy, there are products that Canada relies on other nations to produce for us. This isn’t going to change regardless of what happens in this trade war. Just as Canadian consumers can benefit from cocoa beans from Ecuador that we’re unable to produce ourselves, Canadian investors can benefit from the diversification and access to new sectors that investing globally can provide.

While recent news has been top of mind for many, being well diversified should provide comfort in knowing that your portfolio does not entirely depend on the economy of any one country.

If you’d like to review your portfolio’s global diversification strategy, don’t hesitate to reach out.