Scotiabank raises Canada equity rating amid US tariffs

Investing.com -- Thursday, Scotiabank (TSX:BNS) Global Equity Research announced adjustments to its equity ratings, responding to the recent imposition of broad tariffs by the US administration. While most countries are affected by these tariffs, Canada and Mexico have been exempted for goods compliant with the United States-Mexico-Canada Agreement (USMCA). Non-compliant goods, however, will face a substantial 25% tariff.

Scotiabank analyst Hugo Ste-Marie noted that businesses in Canada are likely to expedite efforts to align their products with USMCA standards, despite the detailed and cumbersome paperwork involved. This shift comes as steel, aluminum, and auto tariffs continue to be enforced. The analysts at Scotiabank have not yet determined how Canada might retaliate to these trade measures.

In terms of asset allocation, Scotiabank reiterated its Underweight (UW) equity recommendation, citing ongoing risks to valuation and earnings expectations. The firm's US asset allocation model also indicates a negative outlook for equities, leading Ste-Marie to express a preference for bonds (market weight) and cash (overweight) in the current environment.

Scotiabank remains cautious about completely dismissing prospects for 2025. Ste-Marie speculates that countries might engage in negotiations with the US to reduce the range of products affected by the tariffs or to decrease tariff levels. Additionally, they suggest that less controversial aspects of the Trump administration's policies, like tax cuts and deregulation, could potentially improve market sentiment later in 2025.

Regionally, Scotiabank has downgraded equities in the US and emerging markets, while upgrading Canadian equities. The firm has also decided to increase their sector allocation to defense.

Ste-Marie stated, "While we could envision a bounce in some Canadian stocks following the less negative tariff announcements for Canada, the tone in the equity market around the world is likely to remain depressed. Hence, TSX outperformance could occur in a tough tape around the world."

These changes reflect the analysts' assessment of the evolving trade landscape and its potential impact on regional markets.