This Time It’s Different

--

Photo by REVOLT on Unsplash

We have now been through a challenging year of negotiations with the U.S. covering a variety of trade matters. While the outcome to many seems relatively benign, a concern is that the relationship with the U.S. has changed, maybe forever. With three quarters of Canada’s exports going to the U.S. and with Canada being so very dependent on exports, the relationship matters. Today, tariffs remain on steel, aluminum, and lumber. They are meaningful tariffs that are costing our industries a tremendous amount of money. That money is being held by the U.S. Department of Commerce. It is money not available for investment in the productivity or expansion of our Canadian industry. In the past, such tariffs have been recovered, albeit only after going through the lengthy World Trade Organization (WTO) process. There is not the same hope of recovery today. Maybe those funds are lost.

That would be different.

With the U.S. heading into an election cycle, there is very little political incentive to settle these matters in a way that would benefit Canada. Our concern is that Canadians become complacent in assuming that tariffs will be recovered. We’re not so sure about that assumption, and we are sure that complacency is a bad strategy. Both Canada and the U.S. benefit from the supply chains for our industries that have evolved over the century resulting in two countries being significant trading partners. Disruption of those supply chains and turning the relationship from collaborative to combative will be expensive, and we worry that Canada will suffer more than the US.

The U.S. vs. China trade battle is ramping up and Canada is presently in the crossfire. That makes the replacement of U.S. markets with Chinese customers more difficult. In the other direction, Europe is increasingly dysfunctional, making trade in that direction a challenge.

Difficulty in accessing those markets is different.

What this means for us? For Kensington, the strategies we are focused on include conservative leverage to empower management to be able to jump on opportunities; we look for businesses that are less likely to be impacted by the cross-border conflicts that is growing all over the world, and we look for a very high degree of engineering and value adding intellectual property (IP) in the product offering of the business. Businesses that today are struggling with the impact of tariffs are looking for additional value-added processing, and additional regional markets to offset the tariff cost and in some cases eliminate it.

While being small and overly dependent on the U.S. is a Canadian-made weakness, we look for ways to make it an advantage. Niche opportunities that function below the radar of the big guns in the global trade wars may allow us to profit from rather than suffer during this storm…..and hopefully will position us to be able to grow businesses in a new global trade order that may well be different.

Visit us at www.kcpl.ca for more information. Follow us on Twitter @kensingtonfunds.

--

--

Kensington Capital Partners Limited
Kensington Capital Partners Limited

We're a leading Canadian alternative asset manager with $2.8 billion in assets under management in #PrivateEquity #HedgeFund #VC | www.kcpl.ca