The Upside – How politics will affect your wallet in 2025

[00:00:47] Emily Anonuevo: Hello and welcome to a special live episode of The Upside. I'm Emily Anonuevo. It's been an unnerving start of 2025 for Canadians, our political landscape shifting as we wait for new leadership, tariff threats on Canada escalating then de-escalating, creating a lot of uncertainty with the US, and inflation still affecting many aspects of our everyday lives. According to regulatory research two in three Canadians say they have some sort of investment in the market and that their savings are being affected by market movements, movements that are up and down because of political uncertainty. What effect does this all have on the Canadian consumer, on our investments, on our wallets? Joining me today to unpack all of this and more is Fidelity's institutional portfolio manager Ilan Kolet. Ilan is part of the Global Asset Allocation team where he manages many multi-asset funds on behalf of investors. Ilan, welcome.

[00:01:43] Ilan Kolet: Thanks very much. Nice to see you.

[00:01:44] Emily Anonuevo: Thanks so much for being here. You are a regular guest here so really happy that you can join us today and sort of dig deeper into all these issues affecting investors. I should say that we are live right now so please, viewers, send in your questions for Ilan and we'll try to get to them as much as we can during the show.

[00:02:02] Ilan Kolet: Sounds good.

[00:02:04] Emily Anonuevo: I feel like there is a big cloud of uncertainty sort of hanging on Canadians right now. Obviously, the threat of tariffs, rising unemployment and just  political uncertainty in general, and inflation, of course, too. If you can sort of put this all into perspective for us, Ilan, how does all of this uncertainty affect the markets, our economy and, essentially, Canadians and their wallets?

[00:02:32] Ilan Kolet: Just as a reminder, what we do, myself and the team, David Wolf and David Tulk, we manage about $100 billion in fund of funds, so funds made up of stocks and bonds and other asset classes, and a whole host of other managers within the funds that we manage. There has been a lot of news, a lot of it fairly concerning, but at a very high level what we're trying to do is choose the best managers we can from within Canada, internationally or in the US and then lean in or out of asset classes. Lean in or out of stocks or bonds or geographies or currencies in order to provide long term investors with a good experience and above benchmark returns and beat our peers. That's exactly what you see at that one, three, five, seven, ten year type of horizon.

[00:03:24] Again, it's been a very consistent approach, a very deliberate approach. I don't want to downplay any of the news that we've had in the last week or two but we don't want to overreact to individual headlines. Honestly, if I'm speaking completely honestly, it's not our edge. Our edge is not positioning the funds based on how we think a tariff headline may land and then get reversed a few hours later. That's just not the way that we manage these funds. The way that we manage these funds is use really strong managers and a very deliberate research based process to provide those investors, those long term investors with the experience they're expecting.

[00:04:08] Emily Anonuevo: Fantastic. Fantastic overview there. We will dig deeper into all of this and more as the show continues. Over the last few weeks we've spoken to many political experts, and, of course, our portfolio managers, on what effect political movements could have on the markets and what that all means for investors. Just yesterday we spoke to Steve Verheul, Canada's former chief trade negotiator who's previously been at the table with President Donald Trump discussing trade matters. Here's what Steve had to say about the recent tariff pause and what this could mean for Canada.

[00:04:40] Steve Verheul: We have to accept that there's going to be continued uncertainty with respect to our relationship with the US. President Trump is a president who's going to be fairly volatile, fairly unpredictable and we're going to have to just accept that that's the pattern we're going to have to face during the tenure of his administration. We've got to get used to that but I think Canada has many fundamentals whether it's on the autos  side, we talked about electric vehicles, whether it's on critical minerals, our key resources on energy, gas, electricity. We've got a lot of very positive fundamentals and it's a matter of whether or not we can convince the US to try to move towards a more North American approach to many of these economic issues rather than have the U.S. trying to go it alone.

[00:05:37] Emily Anonuevo: Perfect. Aome interesting thoughts there from Steve talking about the volatility we probably will experience for the next four years. But 25% on tariffs on Canada is a serious matter. I mean, is this all bad news or is there some pockets of positivity let's say if tariffs are imposed on Canada?

[00:06:01] Ilan Kolet: I'm tempted to just say yes but it's a little bit more complicated than that. What he mentioned was exactly on point. It was spot on but I think it might be helpful just to kind of frame the tariff discussion with a few numbers. To put things in perspective, we don't know how big the tariffs are going to be, we don't know whether it's 25% or zero, we don't know what the list of products it's going to be on and we don't really know how long these are going to last. Those are all three significant unknowns. In terms of the importance of exports for Canadians, everyone I think can probably realize we need trade with the US much more than the US needs trade with Canada. That's a fact. To put that in perspective, I think there are some numbers that might help.

[00:06:52] 30% of Canadian GDP are exports, 75, 80% of those exports go to the US. The way to think about this, it's a bit of the back of the envelope math, but 20% of Canadian GDP are just exports to the US. That's huge. That is huge. What Steve mentioned in the clip is sort of promoting these trade relationships, absolutely. Even if the US turns off or tariffs Canadian imports from Canada supply chains don't shift overnight. You don't just suddenly change the supply chain to adjust overnight. Another important fact is that the US actually relies pretty heavily on Canadian oil. The US consumes about 20 million barrels a day of oil. About 40% of that is imported and 60% of those imports come from Canada, meaning 15 to 17% of US oil consumption is Canadian. There are strong linkages there that you don't just turn the tap to the right to make more US oil. It's not as easy as that.

[00:08:00] In terms of the damage, it would be damaging. To your original question, the Bank of Canada has done some simulations on this and they say a 25% tariff on all Canadian exports would be, call it a 4 to 6% decline in GDP. To put that in perspective, that's bigger than the financial crisis, the '90 recession or the '80 recession, '81 recession. An upward shock to inflation of, call it 2 1/2 to 3%. This is coming at the wrong time. Prices are already up 20% from where they were pre-COVID, and a really significant depreciation of the dollar in the magnitude of 17 to 25%. That takes the Canadian dollar to the 57 to 51 cent range. That's not good.

[00:08:48] In terms of the silver lining though, I would love if this risk, and I do agree that this is just going to be a more volatile period, maybe this is the art of the deal, who knows, but I hope it brings the fire a little bit closer to policymakers to actually do some things that would raise Canada's growth profile. Removal of interprovincial trade barriers, this is an obvious and easy one, I would think. The other one is we should diversify our export market. If 75 to 80% of our exports are going to one customer that customer controls us. Again, that's not an overnight solution, that's not an easy thing to do but countries have done it. Countries have managed to diversify their export base and just like diversifying in our world, diversifying exports is a way to ensure a little bit of stability.

[00:09:43] Emily Anonuevo: Wow. Really, really interesting points there. There could be some positive possibilities if tariffs do come through. Now, on the flip side there's been lots of talk about it's on pause right now but what if tariffs don't come through at all? Has the damage already been set, though, in terms of all this sort of tariff talk since really the beginning of January? Where do we stand there in terms of our markets, our economy, Canadians if tariffs actually don't come to fruition?

[00:10:11] Ilan Kolet: The way I think about that is, I mean, 25% tariffs, we sort of kicked the can on this, and 10% on oil. Those would be absolutely damaging, incredibly damaging. Retaliatory measures would be damaging for a long time. But even zero, even if we've kicked the can and suppose we continue to kick the can and we don't actually get a policy decision, that dark cloud of tariffs hanging over consumers and business leaders is damaging. Suppose you and me own, I don't know, a plant that makes widgets and the widgets mostly go to the US. We export 90% of the widgets we make and they go to the US and we want to open a second plant. We're not opening that second plant until this dark cloud has been fully removed. You're actually seeing headlines in some sectors in Canada where business leaders have sort of pushed off capital expansion or capital spending because of this risk. It is a risk but as we just saw I sort of think that we should just accept that this is a bit of a new normal in terms of a more volatile period for policymakers and certainly for markets.

[00:11:34] Emily Anonuevo: Absolutely. I wanted to squeeze in one more question before we get to our next clip. You touched upon it at the beginning, as part of the GAA team what's your thought process right now? What are you thinking right now at this moment as we're sort of in this holding period during this 30-day pause?

[00:11:52] Ilan Kolet: Again, one of the things we've always mentioned is we will not react to headlines. This is just not the way these funds are managed, but we're following it very closely. We work very closely with researchers both in the US and Canada that help us think about these things. The way that we're building in defensiveness into our portfolios, meaning a smoother ride for the end investor and insulating our portfolios for some of these shocks is by being underweight the Canadian dollar. It's a bit of a nerdy concept, I mean, surprise...

[00:12:25] Emily Anonuevo: Explain that for investors, what does that mean exactly.

[00:12:27] Ilan Kolet: It means by taking positions in our funds like underweight Canadian equities or Canadian bonds and being overweight US equities we can construct less exposure, an underweight to the Canadian dollar meaning less exposure to the depreciation of the Canadian dollar. Meaning, if the Canadian dollar depreciates, which we certainly think it will, we believe the direction of travel is lower, and we have less exposure to the Canadian dollar we get hurt less. It's an important lever for us, it's an important way for us to protect our end investors against the damaging effects of a depreciation. And, we were underweight well before any of these headlines sort of started to churn. We were even underweight as long as I can remember.

[00:13:14] Emily Anonuevo: Fantastic. We actually will get to the currency point later on but before then, we all know potential tariffs will have an impact on Canadians and our wallets on everyday goods and items. Here's more from equity research analyst Andrew Hall on how tariffs could affect the Canadian consumer.

[00:13:32] Andrew Hall: What you're going to see is the price on a lot of different items that retailers, particularly grocers, import go up, go up for two reasons. One, the likely depreciation of the Canadian currency, and two, because of the tariffs that are, obviously, on those products. Where is that going to be most acute? Likely in produce which is one of the areas that we import a lot, particularly during the winter months. It would be acute and probably noticeable in the grocery store right away.

[00:14:01] Emily Anonuevo: Interesting point there. We know this, higher taxes, higher tariffs affect our everyday life, really. Ilan, can you sort of explain and expand how tariffs could trickle down to the consumer and how that could kind of lead to higher prices on everyday items. How does that work?

[00:14:21] Ilan Kolet: Exactly. I think it was really well explained in the clip. We shouldn't sugarcoat it. A tariff is a tax, it is a tax on imported goods. Just think about every single thing that you buy at the big box store or the groceries that you buy. Very little of it actually comes from Canada, especially in the big box store and certainly in produce as well. What was explained in that clip is if the oranges that come from Florida, this is a classic example, are facing a 25% tariff — well, let me back up — anything that we send to the US would face a 25% tariff for American so it gets more expensive for them. The retaliatory measures would be a 25% tariff for anything imported into Canada, if that retaliatory measure is even, which makes every single thing you buy in the grocery store that's imported more expensive. That's the tax part. That's a one-time shift.

[00:15:24] The other issue is the depreciation of the Canadian dollar. When something gets more expensive that upward movement in price would result in a pullback in demand, a pullback in demand because things are getting more expensive. One of the functions of a flexible exchange rate, which Canada certainly has, a depreciation of the Canadian dollar helps to buffer that shock a little bit. Unfortunately, a depreciation of the Canadian dollar is another sort of hit in terms of that makes everything that you import even that much more expensive. This has actually happened.

[00:16:03] The tariff on the US side, I lived in the US from 2014 to the middle of '21 and in 2018 or '19 Trump levied a 20% tariff on imported washing machines. The price for washing machines, you may remember this, if you look at the data it rose 19.9%. I'd say they weren't passed on dollar for dollar, they were passed on penny for penny. Even the washing machines that were made domestically, which is very few of them, those manufacturers took the 20% bump, because they could. Even dryers which didn't face the tariff, they also took the 20% increase in price because they thought they could pass it through.

[00:16:45] It's unequivocally negative, it's unquestionably negative. For Canadian consumers the way I would think about this is that Florida orange juice gets a lot more expensive and then the depreciation of the Canadian dollar, even if it doesn't face a tariff, makes that avocado more expensive because we're importing those as well. So breakfast gets a little bit more expensive.

[00:17:10] Emily Anonuevo: Like you mentioned, another potential ripple effect of tariffs is the Canadian dollar and how that could be affected and possibly go up and down based on tariff talks. We recently spoke to Fidelity Canada's Chief Investment Officer and portfolio manager, Andrew Marchese. Here's his thoughts on tariffs and currency.

[00:17:28] Andrew Marchese: What misses a lot of people's radar screens is implications for the Canadian currency. A weakening Canadian dollar, what that does for CapEx and capital expenditures that would otherwise be priced in US dollars, all that CapEx just all of a sudden became more expensive. Therefore, does it derail Canadian companies' future plans for spending? What are the implications for profits and cash flow predominantly?

[00:17:57] Emily Anonuevo: Interesting there. Andrew's really trying to hit the point that we need to maybe be looking at companies and their earnings and their profits. Let's take the time to do it now as we're on pause. Obviously, the Fidelity team is doing well before then. What do you think about what Andrew said?

[00:18:14] Ilan Kolet: Andrew's point was entirely on point, with a fantastic blazer as well. Exactly on point. We talked about the consumer effects, making that Florida orange juice and the imported avocado more expensive, but bigger picture, this absolutely affects Canadian manufacturers as well. If we have a manufacturing facility and we import some of the inputs into our final good those just became a lot more expensive because of the retaliatory tariffs. But then the depreciation of the Canadian dollar further makes that import of the intermediate input even more expensive as well. This will absolutely affect company and corporate decisions.

[00:19:00] We're working through the details and the results kind of as we speak with our analysts and what it might mean for earnings and then what it might mean for those Canadian equities in the Canadian market. It will absolutely affect these Canadian companies. Again, it'll affect it mechanically from what we just talked about, the tax and the Canadian dollar depreciation, but then there's this other chunk which goes back to the first clip about just a more volatile period that we're in and this cloud sort of not really clearing and hanging over us.

[00:19:37] Even if we come to an agreement at the end of this 30-day extension what's to say that 30 days from then there isn't something else? I think consumers, and certainly businesses, value certainty. Now, you're never going to have certainty across the board but certainty of sort of business interaction and prices is pretty critical for these businesses.

[00:20:02] Emily Anonuevo: It's definitely a grey area right now but really, really helpful to have yourself and our other PMs and experts here to piece everything together for investors and for Canadians. Let's switch gears. Canadian politics is obviously changing under a potential new government. There could be a carbon tax cut and other changes to the regulatory landscape. Back in January, we spoke to Hamish Marshall, pollster and former Conservative national campaign manager, on what new leadership could look like in Canada.

[00:20:33] Hamish Marshall: This new leader could very well be one of the shortest prime ministers in Canadian history. We expect that the federal election will probably take place in the first half of May. Parliament was back on the 24th of March, before the 31st of March, the end of the government's fiscal year, they have to pass what's called supply. If the government does not pass supply in those six days about 40% of government funding stops, which will be a problem for a lot of things. I think the biggest one for an individual Canadian is going to be abolishing the carbon tax which is going to make filling up your car cheaper, it's going to have a big impact on the cost of almost everything in this country, help reduce that. That will be the big signature focused tax cut.

[00:21:27] Beyond that there could be other things in the future but those have not been publicly announced up till this date. We'll have to see what the fiscal situation is because I think one of the things that people are going to realize is that when the new government gets in one of the first things they really have to do is really dig into the books and really understand what the situation is, as opposed to the rose coloured glasses that have been presented by the current government. I think until that new situation, the true situation is really understood we won't see anything beyond what has already been promised, like the carbon tax.

[00:22:01] Emily Anonuevo: Lots of changes in Canada's political landscape, to say the least, sort of at a standstill right now as we sort of make our way towards March. I mean, all of these policy changes, all this political change, what does it mean for the Canadian, average Canadian consumer?

[00:22:20] Ilan Kolet: There is certainly a heightened level of political uncertainty right now. I mean. I thought that clip was sort of somewhat interesting. What I would say right now is there's a lot of headlines but the way that we think about things in the context of our funds is this is policy versus politics. What I mean by that is we will never position our funds or reposition our funds based on politics, based on this person winning or this person winning. To be quite frank, that's not our edge, that's just not our edge. It's not what we believe to be the demands of the end investor in our funds are expecting us to do. We're managing these funds for the sort of medium to long term investor, they're not expecting us to sort of tactically tilt the funds based on who may win a leadership race or an election and what might the outcome of that be and what might certain asset classes do. We're certainly thinking about those things but it's not our edge, if I'm being honest. Our edge is having the best-in-class managers and combining them in a great way and let them follow their process to beat their benchmarks and then lean in or out of asset classes. That's sort of how I think about that.

[00:23:38] The other thing I would mention is one of the things that has come up in conversation recently. A couple of weeks ago, maybe three weeks ago I had a chance to meet people at very senior levels on Bay Street, chief economists, and one thing that came up was this idea of a sort of Canada hope dividend or Canada hope bump, meaning certain sectors in Canada, for example, have been hamstrung for a while, namely the resource sector, and perhaps if the political landscape changes you see a sudden sort of boom in resource extraction in Canada and that lifts the Canadian equity market. As you'll notice in that last sentence there were like 17 ifs. If this, then this.

[00:24:25] Emily Anonuevo: So many unknowns.

[00:24:26] Ilan Kolet: A lot of unknowns. Again, that's possible but we don't have an election date — well, we don't have a Liberal leader, we don't have an election date, we don't have the outcome of that election, and we don't have pen to paper policy. On top of that we have this cloud of tariff. For us, the way that we think about it is we're cautious around Canada, we're underweight Canadian equities, we have a meaningful underweight to the Canadian dollar but we have a fantastic team of underlying managers, Andrew Marchese being one of them, that can choose these names over these ones. If they beat their benchmark and we own them in our funds they boost the performance of our fund.

[00:25:06] Emily Anonuevo: Absolutely. Let's go to our last clip and wrap up before we go. As Canadians take a moment to reflect and take a breather, really, from this pause in tariff talk and political uncertainty here's Fidelity's portfolio manager, Joe Overdevest, on what could investors do to stay the course.

[00:25:22] Joe Overdevest: What do you do in a situation like this? Number one, don't get emotional with your personal investments. Number two is what we do. We look at who the winners and losers are. Look in your portfolio, do you have something skewed one way or the other? If you do, diversification usually solves a lot of your stress. Number three, try to in this environment look for opportunities. Is something sold off? Many things sell off in the beginning across the board with no variability and often there are some great opportunities where you can take advantage of. Take advantage of, most importantly, as a great starting point to build cap over time. Let the power of compounding take hold as a steward of your capital. That's what we are doing here, trying to make sure you stay invested.

[00:26:07] Emily Anonuevo: Just to expand on that, Ilan, how can investors stay the course? How can they move forward and protect their and their family's financial health and wellness?

[00:26:17] Ilan Kolet: That was the best clip, I think, out of all of them. I mean, they were all great clips but Joe's was absolutely on point. I could not have said it any better. You want to stay invested. You need to speak to your advisor at this sort of particularly tricky time. That's what we're really focused on. We're focused on the long term performance and helping folks achieve their goals, and a steady hand and not overreacting to every single headline. Exactly like Joe mentioned. I really couldn't have said it any better.

[00:26:49] Emily Anonuevo: Absolutely. Reach for that steady hand, reach for your value advice through your financial advisor. Ilan, I want to thank you so much for joining me here in the studio sharing your thoughts and insights. It's always a pleasure to have you here. Really appreciate your time.

[00:27:02] Ilan Kolet: Thanks so much. I enjoyed it.

[00:27:04] Emily Anonuevo: To our viewers, in this moment in time we can't stress enough again the importance of reaching out to your financial advisor during these times. Fidelity research shows working with a financial advisor adds value and makes Canadians feel better prepared financially. Remember, the value advice could have a significant impact going forward. The tariff story continues and as it develops stick with Fidelity Canada for ongoing commentary for advisors, our live Fidelity Connects webcast are every day at 11:30 a.m. For more investor content connect with Fidelity Canada on LinkedIn as well as our Fidelity Connects podcasts which are available as video podcasts on YouTube, Spotify, Apple Podcasts and more. Thank you so much for watching and we'll see you on the next episode of The Upside.