By Canada Life Investment Management | March 26, 2025

The Investment Manager Research (IMR) team reviewed Canada Life Mutual Funds with high exposure to the countries most affected by U.S. tariffs, including Canada, Mexico, China, Japan and Germany, and gathered insights from sub-advisors on potential risks and tariff-proofing strategies.

Brandywine Global, C WorldWide Asset Management, J.P. Morgan Asset Management and Northcape Capital have been proactively assessing the impact of these tariffs on their portfolios and are using scenario analysis to navigate the uncertainty.

Brandywine Global
C WorldWide Asset Management
J.P. Morgan Asset Management
Northcape Capital
IMR

External risks remain a source of uncertainty, particularly amid ongoing U.S.-Mexico trade tensions; however, the position has performed well amid these concerns. For our long Mexican government bond position to continue performing well, Banxico (Bank of Mexico, Mexico’s central bank) must ease rates without triggering inflation or foreign exchange (FX) instability. A stronger commitment to fiscal discipline or reduced social spending could help flatten the yield curve further. However, risks remain. A significant tariff implementation would negatively impact the Mexican economy and weaken the peso (MXN), which could, in turn, steepen the yield curve by worsening the fiscal outlook. While the peso's valuation is now closer to fair value compared to some LatAm peers, fiscal risks are elevated, and ongoing domestic political uncertainty – especially in areas like energy sector policies and rule-of-law reforms – could deter foreign investment. That said, bond fundamentals are supportive. If tariff concerns continue weighing on business confidence, Banxico may accelerate rate cuts, which could ultimately support bond prices. However, prolonged uncertainty or actual tariff implementation could erode investment flows and put further pressure on Mexico’s fiscal position. We continue to monitor these developments closely and believe Mexico's efforts to maintain strong trade ties with the U.S. will be a crucial factor in mitigating risks.

The majority of the portfolio is allocated to shorter dated U.S. corporate credits. These credits have fared well in a volatile rate environment given their low spread duration and substantial yield cushion (7.5% to 8%). While tariffs could slow growth and widen credit spreads, we believe that if tariffs are further pared back, other Trump policies like lower corporate tax rates, greater government deficit spending, more mergers and acquisitions, and reduced regulation will be beneficial for the positions. We also have an allocation to floating rate U.S. RMBS (residential mortgage-backed securities) which has held up well amidst tariff concerns and a volatile rate environment. Our base case is a higher-for-longer rate environment in the U.S., and with tariff and fiscal policy uncertainty, we are comfortable with our overall underweight duration profile. Our outlook on the portfolio’s Mexican bond exposure remains constructive, but we acknowledge key risks, particularly potential U.S. tariffs. While the threat of tariffs lingers, we believe sustained broad, sweeping tariffs on Mexico are unlikely, as Mexico has strong incentives to align with U.S. trade priorities. Recent developments, such as Mexico’s investigation into steel dumping from China and Vietnam, suggest that the country is taking steps to maintain favourable trade relations with the U.S. and avoid tariffs.

Our exposure to tariffs levied against Japan and Germany is limited. Five companies in our portfolio generate a significant portion of revenue in the U.S. and have a large manufacturing footprint in Germany (Siemens) or Japan (Keyence, Hoya, Daikin, Sony).

1. Keyence outsources manufacturing and details are scarce, but we believe many suppliers are Japanese. Tariffs on Japanese imports would likely affect 5 to 10% of total costs.
2. Hoya’s manufacturing is widespread across Asia. Tariffs on Japanese imports would likely affect ≤5% of total costs.
3. Daikin does a fair bit of manufacturing in the U.S. ≤3% of total costs would be in scope.
4. Siemens also manufactures in the U.S. Tariffs on German imports would likely affect ≤3% of total costs.
5. Sony’s sale of physical goods in the U.S. is modest. Tariffs on Japanese imports would likely affect ≤1% of total costs.

We estimate that, on average, 6% of our holdings’ total costs are at risk of getting hit by tariffs. Consequently, if the U.S. implemented 20% tariffs on imports from all countries, our holdings’ total costs would increase by 6% x 20% = 1.2%. Since their U.S. revenue share is 29%, on average, U.S. costs would increase by 1.2% / 29% = 4.1%.

However, there is considerable variation between holdings. For example, we estimate that approximately 50% of TSMC’s (Taiwan Semiconductor Manufacturing Co.) total costs; up to 20% of Ferguson’s total costs; and 10+% of Assa Abloy’s total costs could be subject to tariffs. On the other hand, nine of our holdings do no business in the U.S. or import virtually no physical goods to the U.S.

We are still big believers in the Japan corporate governance reform story and its capacity to drive returns to equity holders. As of the end of last year, the absolute level of buybacks by Japanese companies has doubled versus 2019, and dividend growth is far outstripping other regions over all time periods. There is more room for improvement with close to 50% of Japanese companies having net cash balance sheets (versus 20% in the U.S. and Europe). There is also a massive opportunity in de-conglomerating corporate Japan given only 35% of companies have revenue exposure to just one sector (versus >55% in all other major regions). Divesting of non-core businesses and focusing on areas of clear competitive advantage could create a more dynamic economy. Hitachi, a stock we own in portfolios, is a good example of a company that has done just that and seen its share price treble since the middle of 2022.

There has been a fair amount of activity over the past six months to make portfolios more tariff-proof. Within an international universe, this means adding to countries relatively immune to a trade war with the U.S., such as Australia, where we have been buying domestic oriented businesses such as Medibank and Telstra. We have also boosted exposure to companies with U.S. revenues such as Compass, a U.K.-listed contract caterer with 60% of revenues from the U.S. and Koninklijke Ahold Delhaize, which is one of the largest supermarket operators on the U.S. East Coast. From a sector/industry perspective, this means reducing exposure to auto manufacturers which rely on multiple cross-border trade flows for parts and also spirits companies where provenance is a key part of the appeal of the product. Not all auto companies are made equal though; we recently bought a position in Suzuki Motor which derives the vast majority of its revenues in Japan and India with local production servicing local demand. 

J.P. Morgan Asset Management is the sub-advisor to the Canada Life Sustainable Emerging Markets Equity Fund (mutual fund) and Sustainable Emerging Markets Equity (segregated fund) – exposure to China.

As of end December 2024, the portfolio weight in China (including Hong Kong) was approximately 26.5% (approximately 1.2% underweight to the benchmark). While the U.S. administration’s specific approach to tariffs and trade restrictions remains unclear, it is imperative to note that since the 2018-2019 U.S.-China trade war, China has diversified its export markets, reducing its reliance on the U.S. To mitigate tariff impacts, China is likely to lean more on fiscal policy than currency depreciation and may choose to be reactive rather than proactive. A complete decoupling from China remains unlikely given its integral role in global supply chains; that said, the potential tariff hikes against China will likely further accelerate existing supply chain reallocations. Additionally, China's equity market remains largely domestic-focused with MSCI China deriving 87% of its revenues domestically and only 4% from the U.S. However, uncertainty may harm sentiment and cause volatility. 

With respect to Chinese holdings within our portfolio, nearly all of the exposure is to consumer, industrials and communication services, where revenues are generated domestically. However, there is a portion in stocks that export to the U.S. and may be exposed to tariffs in varying degrees. These include a pair of home appliance names, a clothing manufacturer, a power-tool maker and a relay manufacturer. We have run some analysis and consequently, have been managing position sizing and avoiding companies with high valuations. We remain focused on identifying long term structural winners which should retain secular growth opportunities and competitive advantage irrespective of geopolitics.

For Mexico, we believe it will be a redux of 2017 with respect to tariffs. That is, in 2025 (like 2017) there will be a lot of talk by Trump about penalising Mexico, but in the end, we envisage little impact. The U.S. and Mexico supply chain systems are large, complex and tightly linked, so imposing steep tariffs on a permanent basis could cause a growth shock in both countries. Plus, if the tariffs do go ahead permanently, they may force Mexico to counter the U.S. by pivoting to China for investment and military support – a foreign policy failure for Washington. As such our base case view assumes Trump and his advisors are aware of this dynamic, and thus there is unlikely to be a permanent increase in U.S. tariffs on Mexico. Rather any increase is likely to be transitory, tactical. The USMCA would then be successfully negotiated in 2026.

The most vulnerable Mexico export sectors are auto, electrical and information technology (IT) equipment, building materials, aerospace and agriculture. The Northcape portfolio has no direct holdings in these sectors, except for Vesta Real Estate Corp. (Corporacion Inmobiliaria Vesta SAB de CV) – an industrial property group, who leases space to companies associated with exporting. Vesta is the smallest position in our Mexico exposure, accounting for 1% of our total assets. Northcape’s Mexico exposure largely address the country’s domestic economy (traversing consumer retail, telecoms, banking and airport infrastructure sectors). All the companies owned by Northcape in Mexico are typically the dominant, lead operator in their sector, so have pricing power and scale advantages to limit and potentially mitigate negative impacts from U.S. tariffs on Mexico’s exports.

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The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

This document may contain forward-looking information which reflect our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of March 26, 2025. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.

The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.

The views expressed in this commentary are those of Brandywine Global, C Worldwide Asset Management, J.P. Morgan Asset Management, and Northcape Capital as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Prospective investors should review the offering documents relating to any investment carefully before making an investment decision and should ask their financial security advisor for advice based on their specific circumstances.

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