A $230 Billion Fund Scorns Trump Tariffs as `Last Thing We Need'

(Bloomberg) -- U.S. tariffs on steel and aluminum would add to a “cocktail of uncertainty” that threatens to slow business investment, stoke inflation and derail global growth, said the head of Canada's second-biggest pension fund manager.

“Since the crisis, business investment has really been one of the weak links” behind global economic expansion,  Michael Sabia, Caisse de Depot et Placement du Quebec's chief executive officer said Friday in a telephone interview. With C$298 billion ($230 billion) in assets, the Montreal-based Caisse manages the pension plan of retirees in the province of Quebec, as well as other insurance plans.

Companies globally “have been very cautious -- sitting on lots of cash, worrying about the kind of return they will earn if they invest,” Sabia said. “Over the last eight to 12 months, that has looked better, and businesses are beginning to invest. So the last thing we need is a circumstance where they start putting their foot on the brake again.”

President Donald Trump said Thursday he intended to impose tariffs of 25 percent on steel imports and 10 percent on aluminum imports for “a long period of time.” The formal order is expected to be signed next week.

Trump's aggressive stance has stoked fears of trade retaliation and roiled global markets. The U.S. dollar weakened for a second day against a basket of currencies, while stocks fell across the U.S., Asia and Europe. The Canadian dollar declined, poised for its biggest weekly drop in a year.

Chinese Reaction

China's reaction will be critical in determining whether a full-blown trade war erupts, Sabia said.

“The Chinese have been pretty moderate in how they reacted to just about everything,” he said. “If they react to that fairly strongly, and the Europeans follow suit, you are setting the stage for a conflict on trade that frankly is in no one's interest.”

A trade war would constitute a “headwind for global economic growth, and in particular for corporate confidence, which will play into levels of corporate investment,” Sabia said. “Those are issues that need to be watched very carefully, and can have a very meaningful impact.”

Steel and aluminum tariffs will undoubtedly cause inflation, which might spur the U.S. Federal Reserve to speed up planned interest rate increases, Sabia added.

Inflation Pressure

“Steel and aluminum are an important input,” he said. “The more a market closes itself off, particularly on products like steel and aluminum, that's likely going to pass through in terms of higher prices eventually. You put all of this together and maybe you begin to see more inflationary pressure in the United States. How does the Fed react to that? That becomes a major question mark.”

For now at least, Sabia said he expects the Fed to avoid taking “a more aggressive track” on interest rates. He pointed to recent comments by Fed officials that suggest “three to four 25-basis-point hikes” are possible this year.

The selloff in global stocks since the tariff announcement “just demonstrates the extent of the market's sensitivity to interest rates,” Sabia said. “This is difficult terrain. It requires a lot of vigilance from people like us.”

If the stock-market drop evolves into an outright correction, Sabia reaffirmed the Caisse's determination to plow billions of dollars into equities.

“For an investor like us, with a very long-term focus and lots of liquidity, if we do find ourselves in a sustained market correction, that just spells opportunity,” he said. “Whenever markets correct, they also rebound. So our goal is just to make sure we're well positioned when that rebound happens.”

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, David Scanlan, Tony Robinson

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