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What the Trump effect could mean to Canada

The personal finances of Canadians -- their pension plans, individual retirement savings, where they vacation and where they buy or sell property – will be greatly affected in 2017 by uncertainty caused by things happening outside of Canada, particul

The personal finances of Canadians -- their pension plans, individual retirement savings, where they vacation and where they buy or sell property – will be greatly affected in 2017 by uncertainty caused by things happening outside of Canada, particularly the inauguration of United States President Donald Trump, British exit from the European Market, plus elections in France and Germany.

“Dour Donald” is the elephant in the room, with his middle-of-the-night Twitter lambasting of individual people, countries and companies. His “buy American, hire American” mantra includes changing or pulling out of the North American Free Trade Agreement, imposing taxes on imports coming into the U.S. that are manufactured in or include parts from foreign countries, plus reducing American corporate and personal taxes. His policies would cause Canadian exports to fall dramatically, the value of the Canadian dollar to weaken, Canadian interest rates to drop, and the Canadian economy and stock markets to underperform those of the United States.

Human resources and advisory firm Willis Towers Watson warns that Canadian pension plans should expect a decrease in returns across all asset classes and a weakening in investment opportunities in 2017. Thus the Canada Pension Plan Investment Board or the Alberta Investment Management Company would jump at a chance to turn the Queen Elizabeth II Highway between Edmonton and Calgary into a toll road. That would dovetail nicely with the Alberta government's new carbon tax, part of “The Canadian Disadvantage” when Trump drops U.S. plans to tax fossil fuels.

Changing trade agreements or imposing tariffs on Canadian goods entering the U.S. could cripple Canadian automakers and auto parts manufacturers, plus softwood lumber producers and shippers. A promise to repeal strict banking American banking regulations will cause U.S. banks to outperform Canadian banks, at least until unfettered American banks blow up again. Oil-friendly Trump is expected to okay building of the Keystone XL pipeline between the countries, but Canadian energy companies worry about their competitiveness against American energy firms that aren't dragged down by carbon and climate change costs and who will be given incentives to increase shale oil production.

Avery Shenfeld, chief economist with CIBC, expects the loonie to dip from the current 75 cent US level to 72 or 73 cents if oil prices remain stable and the difference between interest rates in the countries continues. However, he says Trump trade barriers or tariffs could lower the loonie to 65 cents. An anemic loonie could cause Canadian snowbirds used to vacationing in Florida, Arizona or Hawaii to holiday instead in British Columbia. Canadians may abandon thoughts of purchasing property in the U.S., while folks already owing property there may well consider selling to lock in currency exchange profits in addition to any increase in property value. Meanwhile, realtor Royal LePage reports huge interest by Americans wanting to buy in Canada, with a 40.9 per cent increase in traffic on its American website in late 2016 over late 2015.

Interest rates in the two countries will continue to go in opposite directions. The U.S. Federal reserve raised rates in December and expects three more rate hikes in 2017, while the Bank of Canada reduced rates twice in 2015 and Governor Stephen Poloz says another rate cut “remains on the table,” largely due to concerns that Trump policies could shock the Canadian economy.

Poloz has steadfastly tried to talk down the value of the Canadian dollar to make Canadian exports more attractive, but the Trump dump on trade with Mexico caused the peso to fall to a record low value and make Mexican goods more alluring than Canadian exports.

Canadians concerned about shaky pension plan returns and looking to shore up their personal retirement savings should consider investing in American stocks and funds and a few select Canadian energy companies and pipelines for equity growth, while buying companies with secure dividend payments or U.S. bonds for fixed income. During times of volatility, think of the long run, and reduce risk. Also, it may be more prudent to pay down mortgage or credit card debt rather than making insecure investments until political and economic situations in the U.S. and Europe settle down.

Ray Turchansky is an income tax consultant.