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Conversations about Trump’s tariffs continue to dominate market discussions. Although it could be different this time, historically these announcements cause volatility in the short run. By about the time they become reality, if not before, their effects are absorbed by the market with barely a hiccup to most stocks. As Christina Hooper, Invesco Chief Global Market Strategist, wrote today that she is “I’m cautiously optimistic that while we may see lots of drama, we may not see a meaningful long-term market impact.” This is based partially upon the overall effect of the 2018 China tariffs and partially because the truth espoused by John Maynard Keynes that in the short-term the market is a voting machine. In the long-term, it is a weighing machine as its focus eventually returns to earnings.

The three countries in questions are Canada, China, and Mexico. This blog dives into several major companies domiciled in one of those three countries. We’ll start with the seven companies currently rated Buy or Strong Buy in Canada.

First Quantum Minerals Ltd., (FQVLF) together with its subsidiaries, engages in the exploration, development, and production of mineral properties. Germane minerals include: copper, nickel, pyrite, silver, gold, and zinc. Its strong compound earnings growth rate sets it somewhat apart from its rivals in this sector. The company is based in Vancouver, Canada.

Canadian Imperial Bank of Commerce (CN), a diversified financial institution, provides various financial products and services to personal, business, public sector, and institutional clients in Canada, the United States, and internationally. The company operates through Canadian Personal and Business Banking; Canadian Commercial Banking and Wealth Management; U.S. Commercial Banking and Wealth Management; Capital Markets and Direct Financial Services; and Corporate and Other segments Canadian Imperial Bank of Commerce was founded in 1867 and is headquartered in Toronto, Canada.

Shopify Inc. (SHOP), a commerce company, provides a commerce platform and services in Canada, the United States, Europe, the Middle East, Africa, the Asia Pacific, Australia, China, and Latin America. The company's platform enables merchants to displays, manages, markets, and sells its products through various sales channels, including web and mobile storefronts, physical retail locations, pop-up shops, social media storefronts, native mobile apps, buy buttons, and marketplaces. It also sells custom themes and apps, and registration of domain names; and merchant solutions, which include accepting payments, shipping, and securing working capital. The company was formerly known as Jaded Pixel Technologies Inc. and changed its name to Shopify Inc. in November 2011. Shopify Inc.(orig. Jaded Pixel Tech.) was incorporated in 2004 and is headquartered in Ottawa, Canada.

Brookfield Corp. (BN) is an alternative asset manager and REIT/Real Estate Investment Manager firm focuses on real estate, renewable power, infrastructure and venture capital and private equity assets. It manages a range of public and private investment products and services for institutional and retail clients. It typically makes investments in sizeable, premier assets across geographies and asset classes. It invests both its own capital as well as capital from other investors. Within private equity and venture capital, it focuses on acquisition, early ventures, control buyouts and financially distressed, buyouts and corporate carve-outs, recapitalizations, convertible, senior and mezzanine financings, operational and capital structure restructuring, strategic re-direction, turnaround, and under-performing midmarket companies. BN has a strong and consistent historical record of profitability. Brookfield Corporation was founded in 1997 and based in Toronto, Canada with additional offices across Northern America; South America; Europe; Middle East and Asia.

Manulife Financial Corporation (MFC), together with its subsidiaries, provides financial products and services in the United States, Canada, Asia, and internationally. The company operates through Wealth and Asset Management Businesses; Insurance and Annuity Products; and Corporate and Other segments. The company was incorporated in 1887 and is headquartered in Toronto, Canada.

Royal Bank of Canada  (RY) operates as a diversified financial service company worldwide. Its major operating segments are: Personal & Commercial Banking;  Wealth Management;  Financial Institutions; Insurance; and Capital Markets. The company was founded in 1864 and is headquartered in Toronto, Canada.

GFL Environmental Inc. (GFC) offers non-hazardous solid waste management and environmental services in Canada and the United States. The company was incorporated in 2007 and is headquartered in Vaughan, Canada.

Here are the ratings, average trading volume (important for foreign stocks trading on US exchanges) along with the current market price vs. fair value.

FQVLF is the only top-ranked 5 (Strong Buy) stock according to ValuEngine’s predictive forecast model. The other six stocks are rated 4 (Buy). Even though all seven stocks are rated buys on a relative basis, our valuation model has them all trading above fair value. This would be indicative of a market that is largely overpriced at current levels. That said, these stocks still are forecast to outperform their market peers. 

In terms of the Trump tariffs, firms that ship a lot of physical exports to the USA would be the most vulnerable to getting disproportionately savaged in profit margins and sales. Of this group, only top-ranked First Quantum is a heavy exporter. The other six stocks would get some potential peripheral pain if and when key customers have their sales and earnings impacted negatively by the tariffs. Typically, that would take longer for the market to digest and by that time, tariffs might be abated or waived altogether. 

Equally important in examining firms that could be hurt by Trump tariffs is to look at the stocks forecast to underperform in 2025. In Canada, these include:

Celestica Inc. (CLS) provides supply chain solutions in North America, Europe, and Asia. It operates through two segments: Advanced Technology Solutions, and Connectivity & Cloud Solutions. The company offers a range of manufacturing and related supply chain services. It also provides hardware platform solutions and management of programs including design, supply chain and manufacturing. Celestica Inc. was incorporated in 1994 and is headquartered in Toronto, Canada.

Lululemon Athletica Inc., (LULU) together with its subsidiaries, designs, distributes, and retails athletic apparel, footwear, and accessories under the lululemon brand for women and men. It offers pants, shorts, tops, and jackets for healthy lifestyle, such as yoga, running, training, and other activities. It also provides fitness-inspired accessories. The company sells its products through a chain of company-operated stores; outlets; interactive workout platform; yoga and fitness studios, university campus retailers, and other partners; license and supply arrangements; as well as through mobile apps and lululemon.com e-commerce website. Lululemon Athletica Inc. was founded in 1998 and is based in Vancouver, Canada.

Canadian Natural Resources Ltd. (CNQ) acquires, explores for, develops, produces, markets, and sells crude oil, natural gas, and natural gas liquids (NGLs). The company offers light and medium crude oil, primary heavy crude oil, Pelican Lake heavy crude oil, bitumen (thermal oil), and synthetic crude oil (SCO). Canadian Natural Resources Limited was incorporated in 1973 and is headquartered in Calgary, Canada.

Canadian Pacific Kansas City Limited (CP), together with its subsidiaries, owns and operates a transcontinental freight railway in Canada, the United States, and Mexico. The company transports bulk commodities, merchandise freight, and intermodal traffic. It also provides rail and intermodal transportation services over a network of approximately 20,000 miles. Canadian Pacific Kansas City Limited was incorporated in 1881 and is headquartered in Calgary, Canada.

Teck Resources Limited (TECK) engages in exploring for, acquiring, developing, and producing natural resources in Asia, Europe, and North America. The company operates through Steelmaking Coal, Copper, Zinc, and Energy segments. Its principal products include copper, zinc, steelmaking coal, and blended bitumen.  Formerly Teck Cominco, it was founded in 1913 and is headquartered in Vancouver, Canada.

Unlike the list of seven buy-rated companies, the five stocks rated 2 or below are major exporters to the USA. Our models don't account for tariffs, so analysts may have already slashed earnings estimates due to potential protectionist policies by the Trump regime. At any rate, these stocks are seen as particularly vulnerable to underperformance in the next 12 months. Here are the data for these five stocks. Please note that all five are trading substantially above their fair value targets.

Moving on to China, currently five of the US-listed stocks associated with China-domiciled companies are rated 5 (Strong Buy). 

Three of them are internet-based companies.  JD is a massive e-retailer that has branched into other areas such as health care; it has been referred to as the Amazon of China.  Alibaba Group Holding Limited, through its subsidiaries, provides technology infrastructure and marketing reach to help merchants, brands, retailers, and other businesses to engage with their users and customers in the People's Republic of China and internationally. Tencent Holdings offers value-added services (VAS), online advertising, fintech, and business services in the People's Republic of China and internationally. The company's consumers business provides communication and services, such as instant messaging and social network; fintech support; and digital content including online games, etc. 

The other two 5-rated Chinese companies are Yum China and ZTO Express.  Yum China owns, operates, and franchises restaurants in the People's Republic of China. The company operates through KFC, Pizza Hut, Taco Bell and is similar to the US version of Yum Brands.   ZTO Express provides express delivery and other value-added logistics services.  There is just one stock trading a bit below its fair value, Yum China. In contrast to these highly rated stocks, none of the Chinese ADRs above $10 billion market cap that we cover are rated below 3 (Hold).  In terms of the potential effects of the tariffs, YUMC and ZTO do not operate outside China so it seems probable that any effects on their revenues or profits would be peripheral.  The three internet companies derive most of their revenues from within China, not from exports, so they also seem unlikely to have major impacts to their profits from the tariffs. As far as Mexico is concerned, none of the market-cap-qualifying ADRs covered by ValuEngine are rated anything but a 3 (Hold).

From stocks, we move on to the major US-listed ETFs for Canada, China and Mexico.  Altogether, there are 34 ETFs that cover China. There are three ETFs apiece that cover Canada and Mexico.  The following table lists the top 10 non-leverages funds in descending order of assets under management.

This list is comprised of six Chinese, three Canadian stock and one Mexican equity ETFs. Given the number of ETFs in total and the relative sizes of the countries and their stock markets, it is not surprising that ETFs covering China dominate this list.  What was surprising to me was that the top ETF in terms of assets under management represented Canada and not China. 

Also surprising is that the ETF in question, JPMorgan BetaBuilders Canada (BBCA) since August of 2018 making it the youngest ETF on the list. The implication is that it has had the shortest amount of time to gather assets. Yet it leads this top 10 list with nearly eight billion dollars under management. Also interesting is the fact that while BBCA leads the list in AUM, it is only eighth highest on the list in daily dollar trading volume. In fact, iShares China Large Cap ETF (FXI) is second on the list in assets under management and tops in trading volume. FXI trades an average daily dollar volume of more than 150 times that of asset-leader BBCA.  Is this because traders can make money trading China but investors prefer to invest in Canada?  That certainly isn’t the entire story.  Expense ratios may also play a factor.  BBCA charges an expense ratio of 0.19% as compared with a whopping 0.74% for FXI. The expense ratio means virtually nothing to traders with a holding period of a week or less.  More than half a percent per year amounts to a sizable amount of money for long-term buy-and-hold investors. It could also be that JP Morgan excels at raising investment assets from institutions but does not focus on the needs of trading desks as much.  

FXI is one of four ETFs that charge expense ratios of 65 basis points or higher.  All four of these ETFs focus on a particular area of the Chinese stock market rather than one of the generic country indexes. The rationale may be that such “value-added” index require more research materials and time.  FXI has the best one-year performance of 56% as the China ETFs dominate the top performers for the one-month and one-year periods.  The story gets reversed when the time frame is stretched to five years.  Franklin FTSE Canada ETF (FCLA) delivered the best return of 9.8%. Its holders also profited from it having the lowest expense ratio of 0.09% (9 basis points). In fact all three Canada ETFs on the list handily outperformed the China ETFs over the 5-year time frame with returns between 9.1% and 9.8%. In fact, Mexico with 4.9% finished fourth overall behind the three Canadian ETFs. The only China ETF to exhibit a positive return during the 5-year period was X-Trackers Harvest CSI 300 China A-Shares (ASHR) with 0.6%. 

The questions about what affect Trump’s tariffs will have on US investors with holdings in these three markets will remain unanswered for quite some time. In the long-term scheme of things the fundamentals of the companies behind these ADRs and stocks are likely to be more deterministic than any geopolitical factors.   

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