Service businesses offer tariff-risk management

Canadian equities face an unusually broad range of potential outcomes in 2025, driven by shifting economic policies, trade tensions and volatile interest rate expectations, says Natalie Taylor, portfolio manager at CIBC Asset Management. 

In a Feb. 25 conversation, recorded for the Advisor to Go podcast, Taylor said she expects global markets to end the year higher, but warned that the journey will be far from smooth.

“The market backdrop has shifted significantly over the last six months, from a soft landing with low interest-rate trajectory to a market where tariffs and a global trade war could both slow growth and re-accelerate inflation,” she said. 

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Taylor said this shift stems largely from policy changes under U.S. President Donald Trump, whose return to office has introduced heightened uncertainty. 

“While Trump has been clear on his priorities — improved government efficiency, lower immigration, a rebalancing of global trade, lower energy prices, deregulation and a weaker U.S. dollar — the market has been struggling with the pace, prioritization and chaotic delivery of new policy initiatives,” she said.

For Canadian markets, potential renegotiations of the Canada-United States-Mexico Agreement and tariff threats loom large. 

“Our largest exporting sectors are energy and auto manufacturing, which notably are in Trump’s crosshairs,” Taylor said. 

If tariffs are implemented, she said, “a hollowing out of these industries could have significant negative implications for the economy overall, to a tune of 5% contraction in GDP.” 

Such an economic shock could prompt substantial monetary and fiscal stimulus from the Canadian government. 

In this climate of uncertainty, Taylor said dividend-growth investing stands out as a practical strategy. 

“Dividend-paying stocks and funds tend to do well in periods of uncertainty,” Taylor said. “As an investor, you get paid to wait and have certainty of return with regards to the yield.” 

Beyond providing income, dividend stocks offer downside protection, thanks to stable business models, consistent cash flow generation and disciplined capital management. 

“They are generally higher quality businesses,” she said.

Historical returns reinforce the appeal of dividends. In 2022, when most markets struggled, Canadian dividend stocks delivered flat returns, outperforming many asset classes. By 2023, Canadian dividends achieved a respectable 10% total return, followed by a 20% gain in 2024, keeping pace with global equities. 

“You don’t need to sacrifice upside if the market recovers,” Taylor said. “Underlying fundamentals are solid, with a healthy consumer base and businesses continuing to grow and invest.”

With tariff uncertainty weighing on certain sectors, Taylor sees attractive opportunities in service-oriented companies with less direct exposure to trade policies. 

“Investors appear to be hiding out in service businesses with little tariff risk,” she said.

Taylor named Element Fleet Management, a Toronto-based fleet services provider. While the company has exposure to the auto sector and Mexico, Taylor said concerns are overblown. 

“At first glance, Element Fleet appears at the nexus of tariff risk. However, the services it offers are likely to become more sought after in a more complex backdrop if tariffs are imposed,” she said.

Taylor describes the company as “relatively defensive” and “attractively valued.”

Taylor also sees potential in defensive, interest-sensitive sectors like telecommunications and utilities, which have sold off amid rising rate fears. 

“If tariffs in Canada are imposed, we expect significant monetary and fiscal stimulus and much lower rates over time,” she said. 

Companies like Telus are well positioned to benefit. 

“Telus, yielding over 7%, appears to be out of the crosshairs of direct competition and is reasonably valued,” she said.

While certain sectors present opportunity, others face elevated risks. The transportation sector, including companies like TFI International and Canadian rail operators, has been in a prolonged freight recession. 

“Low consumer confidence in the face of tariffs is delaying a potential recovery,” she said, though she expects these companies could benefit when restocking cycles resume.

The technology sector, particularly artificial intelligence (AI), remains key, with advancements by Chinese company DeepSeek potentially reshaping the AI value chain across semiconductors, hyper scalers, industrials and power companies. 

“If these efficiencies can be harvested, enterprises and users of AI stand to benefit, versus the infrastructure companies,” said Taylor. 

While AI development is expected to continue, she noted that a period of consolidation and optimization is becoming increasingly likely in the near future.

With a broad spectrum of possible outcomes in 2025, Taylor said investors should focus on quality and diversification. 

“The biggest risks facing the markets currently are not the risks that we’re aware of but the risks that we’re not aware of,” she said. 

Exogenous shocks, while difficult to predict, can have outsized impacts. 

“The only way to protect against this is to invest in high-quality, well-managed businesses that can withstand challenges that come their way, and to invest in a well-diversified portfolio.”

Despite the uncertainty, Taylor remains cautiously optimistic. 

“Ultimately, we believe that global markets will end the year higher,” she said. “But the path to get there will be choppy.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.