Does Rising Protectionism Threaten Canadian Stocks?

A recent simulation from CMHC supposes oil price declines and a housing correction, which would mean trouble for Imperial Oil Ltd. (TSX:IMO)(NYSE:IMO) and Home Capital Group Inc. (TSX:HCG).

| More on:
The Motley Fool

On October 18, Canada Housing and Mortgage Corporation (CMHC) released results from internal modelling it conducted to test severe economic scenarios. Some of the scenarios in question included a significant housing correction, further oil price declines, and intensifying protectionism across the globe.

In its protectionist, or “anti-globalization” scenario, CMHC showed housing prices falling by as much as 31.5% and unemployment reaching as high as 15%. Some of the events sparking a rise in levels of protectionism include a break-up of the Eurozone, debt levels in China erupting into crisis levels, and rising interest rates in the United States causing economic shocks.

Home Capital Group Inc. (TSX:HCG) caused grave concern for analysts and policy makers alike during its spring crisis in 2017. Fortunately, due to public and private bail outs, the company was able to survive and prevent further calamity. Its stock has dropped 57.5% in 2017 as of close on October 23.

Beyond external events precipitating a worst-case scenario, there are many factors that could hurt Canada housing in 2018 and beyond. New mortgage regulations introduced from the OSFI could cool a housing market, as uninsured borrowers will now be subject to more stringent stress tests. A record high debt-to-income ratio continues to be an issue worrying policy makers, and recent reports indicate that rising interest rates are already hurting many Canadians.

In the case of Canada housing, it is not protectionism, but a domestic crunch that could result in further corrections. The Bank of Canada finds itself in the unenviable position of “normalizing” rates after almost a decade of record low interest rates put in place following the 2007-2008 Financial Crisis. This is not a problem unique to Canada; central banks all around the developed world are entering a period of uncertainty, as policy makers work to unwind loose monetary policy initially introduced to combat the crisis.

An area where anti-globalization could deal immediate damage is in the oil and gas industry. A lack of cooperation is especially concerning when it comes to the relationship between nations in the Organization of Petroleum Exporting Countries. Members have agreed on a production halt extending into March 2018, but some have levied accusations against others for failing to adhere to production caps.

A breakdown in relations and an end to the production halt could see supplies spike and oil prices plummet rapidly. Shares of Imperial Oil Ltd. (TSX:IMO)(NYSE:IMO) have declined 10.8% in 2017 and 5% year over year. The stabilization of oil prices in September and October above the spot $50 range has brought the stock priced at $30.98 as is stands after trading hours on October 23.

Investors in oil gas may also want to consider that a breakdown in relations could have the opposite effect. For example, increasing tensions between the U.S. and Iran could see sanctions against the latter re-imposed if the Iran nuclear deal is dissolved. This could see Iran pushed out of the oil market once again, which would put downward pressure on supplies, albeit likely not enough to have a significant impact.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned.

More on Investing

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

Hourglass and stock price chart
Stock Market

It’s Not Too Late: Invest in These TSX Growth Stocks Now

Solid fundamentals of these top TSX growth stocks could help them maintain strong upward momentum in the years to come.

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

stocks climbing green bull market
Stocks for Beginners

3 TSX Stocks Soaring Higher With No Signs of Slowing

Don't ignore stocks just because they look like they're at a high price. Instead, see exactly why they've driven so…

Read more »

dividends can compound over time
Bank Stocks

Is TD Bank Stock a Buy for Its 5.2% Dividend Yield?

TD Bank stock offers a rare 5.2% dividend yield—can it rebound from challenges and reward contrarian investors? Here's what to…

Read more »

chart reflected in eyeglass lenses
Investing

How Should a Beginner Invest in Stocks? Start With This Index Fund

This Vanguard index fund is the perfect way to start a Canadian investment portfolio.

Read more »

analyze data
Bank Stocks

Is BMO Stock a Buy for its 4.7% Dividend Yield?

Bank of Montreal is up 20% since late August. Are more gains on the way?

Read more »