Canadian investors add gold, uranium stocks as trade war risk grows

By Fergal Smith

TORONTO (Reuters) - As the threat of a trade war grows, Canadian investors are seeking protection in gold and in shares of companies producing goods with few substitutes, such as uranium, while looking to take advantage of a weaker loonie and expected volatility.

U.S. President Donald Trump has threatened to implement a 25% tariff on most Canadian imports in March, with steel and aluminum facing even stiffer levies after new orders signed by the president on Monday.

Canada sends 75% of its exports to the United States and tariffs are a major risk to the Canadian economy.

Financial, telecom, real estate, energy and materials shares account for roughly two-thirds of Canada's main stock market index, the S&P/TSX Composite, and those sectors would likely escape the direct impact of tariffs or benefit from carve-outs.

But analysts say there could be an indirect hit to earnings if the Canadian economy slips into recession.

Shares of trade-sensitive companies have already fared badly since Trump was elected on Nov. 5, with planemaker Bombardier Inc down about 19% along with declines for auto parts, steel, lumber and dairy product stocks.

"All this uncertainty around trade and geopolitical tensions has definitely gotten gold back on the front burner," said Greg Taylor, a portfolio manager at Purpose Investments.

"Across our multi-asset funds we have been adding gold in the real asset sleeve as an area to try and offer some protection but also some absolute return," Taylor said.

The Toronto market's materials sector, which includes metal mining shares, is up nearly 15% this year, including a gain of 26.5% for the shares of heavily weighted Agnico Eagle Mines Ltd, as safe-haven demand helped drive the price of gold to a record high.

Together with strong gains for technology shares, stocks linked to metals have helped keep the TSX within reach of the record high it posted in January despite the tariff threats.

"Tariffs are going to hurt all parties quite a bit but if you're going to spare some industries, you probably spare industries that you don't have a substitute for and are currently reliant on," said Ben Jang, a portfolio manager at Nicola Wealth, noting U.S. dependence on Canadian oil, critical minerals and uranium.

Major producers of uranium include TSX-listed Cameco Corp, shares of which Nicola Wealth owns. Cameco has pulled back from an all-time high in December but has still managed to advance roughly 46% since early September.

"The U.S has a concern over energy security and has talked about a focus on energy independence. In our view, nuclear power is part of that solution," Jang said.

The Canadian dollar has been hit hard by trade uncertainty, touching a 22-year low last week of 1.4793 per U.S. dollar, or 67.60 U.S. cents.

"We had a modest TSX allocation going into this and are now looking to increase our exposure to oil & gas and materials," said Victor Kuntzevitsky, a portfolio manager at Stonehaven Private Counsel, part of Wellington-Altus Private Counsel.

"Many oil and gas and materials firms generate revenue in USD while incurring costs in CAD, creating an inherent currency advantage," Kuntzevitsky said.

The Bank of Canada's interest-rate cutting campaign has also weighed on the loonie but could help support the economy. Government spending on impacted sectors could also lend support, analysts say.

"There's a lot of talk around this (trade war) and it's creating some volatility, which is probably going to create some opportunity at the end of the day," Taylor said.

(Reporting by Fergal Smith; Editing by Caroline Stauffer and Mark Porter)