Knowledge Centre

The global economy succeeded in making a soft landing in 2024 although some countries stuck that landing better than others. However, in 2025, policy changes are coming fast and furious; from tariffs to taxes, immigration policy to national sovereignty – the world has been flipped seemingly upside down. The sheer volume of potential outcomes is in a constant state of flux which is problematic as the one thing that is certain is that markets crave certainty. With so many balls in the air most markets are surprisingly muted; realizing the best thing to do, really the only thing to do, is nothing and not create any self inflicted wounds.

Mixing politics with investment decisions can lead to big mistakes. The U.S. has proposed, then imposed, then announced exceptions and then delayed tariffs on Canada, Mexico, and China (countries that account for roughly 40% of U.S. imports) leaving many investors exasperated. The potential hit to Canada obviously could be very severe and may result in a recession but it will not likely be a calamity as the world will adjust and take steps to repel the barbarian at the gate. As much as we might bemoan our fate; do spare a thought for our U.S. cousins who will be going through far worse as their entire infrastructure is being challenged. The best course is seemingly to hunker down and carry on.

Canada’s core economic data was doing well as the country kept adding jobs, continued easing inflation gradually, and dropped interest rates quickly. Unfortunately, that was yesterday’s news and there is a new sheriff in town who is threatening to change the game. And it might not be pretty as pundits have no limits to the range of prognostications: low to high tariffs, short term impact to years of downturn, meager retaliation to severe response, cratering currency and interest rates, massive job loss and skyrocketing inflation. The bottom line is it could be simple rhetoric or a new reality, no one knows. We are in a reality TV program that leaves everyone guessing to the end, with twists and turns along the way.

The U.S. was in the midst of the longest expansion in history. Now cracks appear to be showing and growth does not appear to be as robust. Investor confidence has dropped to a 12 year low. The housing market appears to be cooling. The central bank has paused rate cuts while policy makers assess the impact of the fiscal, trade and immigration policies. The sheer level of persistent policy uncertainty is paralyzing decision making and could lead down a very dark path.

Europe’s economic outlook had dimmed. Lower inflation has boosted incomes but consumers are still reluctant to spend. Political uncertainty in France and Germany has come down. There is also a boost as more interest rate cuts from the European Central Bank are anticipated. However, the potential hit from U.S. tariffs on European exports could do seismic damage and has triggered landmark spending packages to unlock hundreds of billions of euros for defense and infrastructure and ending decades of budget austerity and economic malaise by abandoning caution and seeking growth.

Chaos in the U.S. has led investors to invest in markets that are less chaotic. U.S. equities surprisingly were the worst performers dropping 4.4% (all returns are in C$ terms). Canadian equities did manage to earn a positive return in the first quarter of 1.5%. International equities spiked 6.8% in the quarter, propelled by Europe’s strong performance at 9.7%. Emerging market equities climbed 2.8%. Even bonds got into the act, climbing 2.0% in the first three months of the year.

The markets are not the economy. While macroeconomic uncertainty remains elevated and markets are vulnerable, investors will weather this storm like they always have. Not fearing tariffs is naïve but remember the current tariff situation will likely be temporary so do not make decisions based on how you feel about a person, politician, or the headlines. Patience is an undervalued and underutilized quality today so, amid all the uncertainty continue to stay disciplined.

The first quarter has been dominated by heightening global uncertainty amid threats from the U.S. administration to levy tariffs against major economies around the world. Canada, despite having one of the most equal trade relationships with the U.S. for decades, has not been spared with the potential imposition of broader and sector specific tariffs. The inflation trajectory for Canada was upward in January and February with respectively 1.9% and 2.6% annualized rates, a sizable jump as most of the GST and HST temporary tax breaks came to an end. Nonetheless, the Bank of Canada (BOC) concluded that cutting the policy rate 25 basis points to 2.75% was the appropriate move as increased uncertainty has reduced consumer confidence. Unemployment is climbing slightly as per the latest February numbers. Canadian markets have held up stubbornly amid the unprecedented surge in macro uncertainty related to tariffs. The S&P / TSX, posted a modest 1.5% gain versus a 4.4% loss for the S&P 500 (in Canadian dollars terms).

Zooming through the sectors, Materials were way ahead of the pack with a 19.7% gain over the quarter followed by Utilities and Energy, gaining 3.7% and 2.8% respectively. The outperformance of Materials, especially gold, was remarkable. Bullion climbed to a new all time high at more than 3140 USD per ounce in March, a widely expected move amidst ongoing trade tensions and economic growth concerns. Central banks and gold backed ETFs continue to be the main drivers for gold demand. Additionally, despite the 80% surge of gold bullion, gold equities have broadly lagged over that period, returning only about 40%. A trend reversal appears underway as January saw a 16% outperformance of gold equities versus 6.8% for bullion. As for the Energy sector, American oil stockpiles shrank by more than 3.3 million barrels in March. Additionally, there have been significant natural gas storage withdrawals and these tight supply dynamics within the sector were supportive for prices. All other sectors have detracted from the index with Health Care losing 14.8% followed by Technology with an 8.1% loss.

2024 handed over an economy growing faster than anticipated as the GDP expanded at an annualized 2.6% at year end. However, the outlook reverted into a more pessimistic mode when Trump’s administration started imposing tariffs on key US trade partners. This ignited one of the most uncertain economic environments in modern Canadian history. The CFIB (Canadian Federation of Independent Business) reported in March that business confidence collapsed to a 25 year low. BOC also concluded in its latest consumer expectations survey that households are becoming more cautious. All eyes are now focused on the ongoing negotiations between the key players. Unless a new trade agreement is enacted, risks of continued higher prices and even a technical recession in Canada are on the horizon. There is a belief that tariffs are unlikely to be permanent and appear as negotiation tactics although their enactment present significant downside risk to the Canadian economy and markets. The Canadian government and BOC will undoubtedly deploy some resources from their toolbox similar to the rapid response during the Covid pandemic. However, BOC’s tools might be limited in this crisis if tariffs become long lasting as BOC’s does not have much leverage to avert lower growth and higher inflation at the same time.

The resilience of Canadian markets amid these unprecedent times stems from their cheap valuation as well their value biased sectors. These fundamentals helped smooth the Canadian index from the global markets’ correction of the last few weeks notably in the US. At this stage where tariffs will continue to make headlines in the months ahead, Canadian materials, especially gold, are well positioned to shine as investors shift emphasis to capital protection.

The Canadian Bond market continues to play its role in 2025, giving some respite to investors after Donald Trump was elected as the 47th President of the United States and quickly raised tensions among his North American neighbors. The FTSE Universe Bond Index returned 2.0% in the first quarter of the year. Soon after the U.S. Federal Election, the newly elected President aired his grievances for Canada and Mexico, accusing its closest allies of unfair trade practices and lax border security. In Trump’s first term he shared a similar sentiment on trade and created the current USMCA (United States-Mexico-Canada) agreement in October 2018. Tariffs seem to be the President’s tool of choice to address his problems with not only Canada and Mexico but European allies as well. By treating tariffs as almost a game, Trump is making it increasingly difficult for investors, businesses, and allies to forecast supply and demand. Equities do well in stable, predictable markets but when bouts of volatility arise investors need to find ways to provide protection in their portfolios against turbulence and potential market downturns.

Canada and America rely on each other heavily for trade. Car parts, plastics, oils and much more go back and forth over the border, supporting each country’s automotive and industrial sectors, American farmers depend on Canadian potash and American housing relies on Canadian lumber. This is just the tip of the iceberg when it comes to the value of Canada and America’s economic partnership. The trade war will have long lasting consequences and serves as a wake up call for Canada to seek more economic partnerships with its global allies and to become less dependant on the U.S. for things like defence and auto production. In the last week of March, Trump announced a 25% tariff on cars made outside of the U.S.

In response, Liberal Party leader Mark Carney announced a two billion dollar “all-in-Canada” strategic response fund that would increase auto parts production in the country. Carney also called for a federal election which will take place on April 28th, 2025. There is a strong “Buy Canada” sentiment rising across the country as Canadians are taking not only tariffs but Trump’s threats of making Canada America’s 51st state seriously. Travel demand for Canadians to go south of the border has dropped significantly and Canadians are now required to register with the U.S. government if they plan to stay more than 30 days. Canada has a large “snowbird” population who travel south in winter months for warmer weather and they have previously only needed a visa for stays longer than six months. Canada has slapped retaliatory tariffs of 25% on $155 billion worth of imports and many provinces have pulled American liquor off their shelves. Provinces are working more closely together as the Federal Government looks to reduce regulatory requirements for interprovincial trade, a move that would boost productivity and unlock economic growth over the long term.

The current market environment is a good setup for bonds as investors search for stability. The Bank of Canada announced in March that they would have likely hit pause on the interest rate easing cycle if not for the substantial uncertainty around tariffs from the United States. Bond prices have an inverse relationship with interest rates. As rates drop, the price of bonds increase with the trade off being lower coupon payments. The next rate decision is set for April 16th.

Preliminary data shows that GDP growth stagnated in February and that inflation ticked upwards. This lends to a more accommodative monetary environment compared to the U.S. Fed which should help narrow the yield differential and boost exports. The shift in sentiment to a more Canadian centric economy will require patience and forward thinking.

Coming into 2025, it was clear that there was going to be an uptick in volatility with a new administration taking residence in the White House after a scintillating year for equities in which the S&P500 Index returned 36.4%. Coming off a relatively quiet four years of Joe Biden’s administration, Donald Trump retook the white house and immediately stirred up geopolitical frictions resulting in market uncertainty. President Trump was inaugurated as the 47th President of the United States and wasted no time in launching threats of a trade war with long-standing allies and reliable trade partners Canada and Mexico. Trump threatened both of America’s neighbors with 10% tariff on Canadian energy and 25% on Canadian and Mexican goods set to begin on February 1st. Threats of tariffs caused a weekend frenzy before they were briefly delayed until March and then again until April 2nd after outgoing Canadian Prime Minister, Justin Trudeau and Mexico’s President Claudia Sheinbaum held talks with Trump over border security. Trump would continue to play red light / green light with tariffs throughout the quarter, citing claims of what he feels is a long history of unfair trade between the U.S. and its trading partners. The current trade agreement, USMCA (United States-Mexico-Canada Agreement) was proposed by Donald Trump in October 2018.

Investors prefer predictability and stability so when the President of the country which boasts the largest stock market in the world can’t make up his mind on who to levy tariffs on and how much, the market reacts accordingly. The S&P500 retracted during the first quarter of 2025, returning -4.3%. Adding to the uncertainty surrounding the developing trade war, Trump has seemingly upended America’s relationship with not only its neighbors but Ukraine as well. In a fiery and unusually public confrontation between the leaders of the two counties, Trump embarrassed Ukraine’s President Zelensky before having him escorted from the White House without a peace deal in place. One of Trump’s promises on the campaign trail was to end the Russian and Ukraine conflict on his first day. The meeting prompted more uncertainty around the future of Ukraine and America’s relationship with its European allies; something to watch closely moving forward. In March, Britain, Germany, and Denmark issued a travel advisory warning for people travelling to the U.S.
The pullback of technology stocks and in particular, the “Magnificent Seven” was the primary contributor to the index’s negative return for the first quarter. The primary example here is Tesla, which started the year as the sixth largest stock in S&P500. Shares of Tesla soared, returning 60% from election night to the end of December before losing over 40% of its value in the first quarter. Tesla CEO and one of the richest men in the world, Elon Musk, was tasked with leading “DOGE” a government agency tasked to reduce the deficit and clean up Federal Government “waste and corruption.” This is a massive undertaking which requires tact and careful consideration so Musk taking a chainsaw to the U.S. public sector is not exactly encouraging.

In the previous quarter, the Federal Reserve commented on an improving and strong American economy as they cut the borrowing rate three times in 2024 to a range of 4.25%-4.5%, while signalling that it would likely lower the rate twice more in 2025. In January, Powell indicated that the Fed would pause any further cuts amid signs that inflation has remained stuck above its target. The uncertainty of tariffs and sweeping government layoffs make it difficult for businesses to plan ahead, lowering confidence.

There is a clear disconnect between America’s policy and its fiscal goal of cleaning up the deficit. While the corporate tax cuts have driven corporate profits to all time highs, wages are near their lowest ever when measured as a share of gross domestic product. It is normal to see a market correction every few years and we are seeing some signs of a correction unfold. That being said, the U.S. stock market is the biggest in the world and has an excellent, long term track record of delivering positive returns to investors. The current trade war is unfavourable for equities, but the resiliency of the U.S. stock market is one of its primary attributes. As always, we will continue to look for the best opportunities available.

The risk to global economic growth remains high as the impeding friction of a global trade war could dampen exports and weaken the global economy. The U.S. President is likely to launch a global trade war, abandon Ukraine, cozy up to a Russian dictator, and whimsically seems determined to colonize Greenland, Canada, and Gaza. The tariff onslaught could soon do some serious damage to Europe and spread like a virus to the rest of the world. However, so far it has actually triggered something glorious for Germany, as it has shifted into debt spending mode to bolster its economy. Still, the current environment is very uncertain, somewhat chaotic, and pretty disruptive.

Europe’s growth remained weak in the first quarter despite expanding at its fastest pace in seven months. The economies of Germany and France both contracted in the final quarter of last year and Italy stagnated leaving Spain as the only country with positive growth. Still, wage growth is easing, the labour market is softening, and inflation is dissipating which has allowed the European Central Bank to cut interest rates six times since June 2024. However, the prospective fiscal bazooka of tariffs from the U.S. and doubt of its willingness to defend NATO allies has triggered the need for change. Expectations of significant defence and infrastructure investment is starting to raise optimism for a turnaround in Europe’s fortunes.

The U.K. economy has barely grown over the past six months. Even going back to the global financial crisis of 2008-9, the British economy’s growth has been historically lackluster. And future projections have just been cut in half for this year. The Bank of England has cut interest rates for the third time in six months to the lowest level since mid-2023, and still expectations have not been bolstered. Given the new government has made extra public spending the cornerstone of its latest budget which will be funded through increased business taxes and borrowing, the U.K. is in danger of heading down a debt death spiral.

The Japanese economy is gradually recovering. Rising food costs and stronger than expected wage growth have pushed up underlying inflation for the third straight year, but this has been one of the Bank of Japan’s long term strategies which was meant to wrest the economy out of deflationary tendencies and boost growth. With this goal likely being achieved key interest rates are now moving upward and additional hikes are likely. Unfortunately, heightening global economic uncertainty due to the fallout from potential U.S. tariffs overshadow everything else as the U.S. is Japan’s biggest export destination and the hammer appears ready to drop.

Despite all the fidgeting caused by all the pundits talking of doom and gloom, the world’s stock markets for the most part took a different path and rallied. International equities as a whole gained an impressive 7.0% (all figures in US$ terms). European stocks led the charge, surging up 10.6%, propelled by Germany’s 15.6% and Spain’s 22.5% jump in the first quarter. Even the U.K.’s dire situation could not stop stocks from gaining 9.7%. The other side of the world was not as rewarding, with Japanese stocks only eking out a meagre 0.5% return while Australia dropped 2.6% in the quarter.

The level of uncertainty in the global economy is palatable. The looming U.S. imposed great unknown is already holding back investment, awaiting clarity on the magnitude of the problem and possible responses. It is safe to say reforms are coming, from the fiscal sea change for Germany, to cutting bureaucracy and surging military and infrastructure spending. As the old saying goes “from chaos comes opportunity.” Stay calm and stay invested. The biggest mistake investors make is moving to the sidelines when they are worried.

The global economy is at an inflection point as trade policies reshape markets. Countries with heavy exports exposed to the U.S. market need to brace for potential disruptions. Emerging market countries that are ranked highest in dependence to the U.S. are as follows: Mexico is 2nd; China is 3rd; South Korea is 8th; Brazil is 9th and Taiwan and India are 12th and 13th respectively. The interconnectedness of global supply chains means that trade policies can have far reaching consequences, especially if the U.S. squeezes emerging market funding by following through with its threat to pull out of the World Bank and the Inter-American Development Bank.

Deflation is becoming entrenched in China which contrasts with the inflationary pressures elsewhere in the world. It is a symptom of weak demand, falling housing prices, slowing economic growth, excess manufacturing capacity, and inefficient state industries which make goods that it cannot absorb and a reluctance by consumers to spend and businesses to invest. China is cutting interest rates and has launched programs to buy unsold apartments to rent out as affordable housing while encouraging banks to lend more money; all with an emphasis on reviving domestic demand and consumption. The U.S. has imposed 54% tariffs on Chinese exports but they pose the little threat to an economy as just 3% of China revenues come from the U.S. So new government support could help offset the impact of higher tariffs in the world’s second biggest economy.

Pandora’s tariff box is now open and the laws of unintended consequences will soon strike. Mexico has spent decades integrating auto operations with factories near the U.S. border for parts and final assembly of vehicles. In fact, Mexico supplied the U.S. with 43% of imported motor vehicle body parts. Mexico accounts for 23% of total U.S. food imports. There is no escaping the fact that the Mexican economy would be hit hard by the tariff hikes. Unfortunately, the U.S. will drive up its own inflation rate, cut its economic outlook and sap its growth rate. Reinforcing the fact no one wins in a trade war.

India’s projected growth is well above the global outlook and that of other emerging markets. Structural factors like demographics and rising productivity are supporting its long term economic outperformance. With a working age population that is set to grow by over 140 million in the next 20 years, while many major economies face declines, it is creating a foundation for sustained growth. However, it is highly suspectable to reciprocal tariff threats as it imposes tariffs that are more than 10% above what the U.S. levels. Retaliation is on the way with India now facing tariffs of up to 27%.

The majority of trade in Asia is with Asia and the majority of foreign direct investment in Asia is also from Asia. This creates a situation where the region can build off its internal growth dynamics and still sustain growth momentum. For example, 1% higher growth in China increases growth elsewhere in the region by around 0.3%. Still, Thailand, South Korea, Pakistan, and Bangladesh are among the most highly vulnerable economies in the region and their fates are intertwined.

Overall, Emerging Markets achieved solid returns in the first quarter gaining 3.0% (all figures in US$ terms) but results varied greatly. Asian emerging market stocks excluding China fell 1.6% (on weakness in South Korea, Taiwan, and Thailand); while Chinese stocks surged 15.1%. Latin American equities spiked 12.8%; and emerging European stocks rallied 16.8%.

Global growth is on course to slow slightly. Tariffs could weigh on global business investment and boost inflation, leaving central banks little choice but to keep interest rates higher for longer than previously expected. Market disruptions tend to provide excellent buying opportunities. The only mistake investors can really make is selling low and not being positioned for the eventual rebound.

2025 started with a continued rally in global markets, building on the gains of the two previous years on the backdrop of falling inflation and resilient global economies. However, a slew of negative headlines coming from the Trump administration in the first quarter, particularly the threat of tariffs against its major counterparts, reignited a volatility not seen in months and triggered a correction in some global markets such as the U.S. The Canadian economy has been strained for the most part in the early months of 2024 but showed a rebound at year end with a 2.6% annualized GDP growth (faster than the anticipated 1.7%). Though the U.S. imposition of tariffs on Canadian exports could have widespread consequences, economic growth is expected to remain positive albeit at a moderate pace. Globally, the REIT sector has shown impressive resilience in most markets while the major broad market, the S&P 500, has entered correction territory. In Canada, REITs posted a modest loss early in January but recouped them with a positive 2.1% and 0.7% returns respectively in February and March. The rebound was spurred by Bank of Canada’s (BOC’s) dovish stance, even after some pickup in the inflation rate. The index ended the quarter with a 1.9% gain, outperforming the broader S&P / TSX which returned 1.5%. The MSCI Global REIT on the other hand returned 1.5% while its counterpart the MSCI World Index posted a 1.8% loss in Canadian dollars terms.

The last few months have seen significant improvement in the retail segment with more customer trips to the brick and mortar stores. This is a shift from the Covid era when the prioritization of ecommerce was the norm. The segment has been constrained by high construction costs resulting in tight supply and upward pressure on rents. The industrial segment, once a standout performer, has been facing headwinds with softer demand. As of the end of 2024, the industrial vacancy rate reached 3.1% in select regions in Canada such the GTA (The Greater Toronto Area), the highest since 2015. 2024 ended with some optimism in the beleaguered office segment with increased activities and stabilizing vacancy rates. The segment continues to exhibit confidence and saw a decrease in the availability of office space in some major regional markets for the first time in five years.

The outlook is positive for Global REITs despite geopolitical risks, policy shifts, and tighter financial conditions. 2024 paved the way as global office leasing volumes increased 10% in the final quarter versus the third quarter of 2024. The U.S. posted the strongest growth with an 18% jump in leasing activities at the end of 2024 compared to 2023, amid increased office attendance. The global retail segment has experienced some rise in bankruptcies, especially in the U.S. and Europe, along with subdued consumer spending though the demand remains decent notably for prime locations.

The months ahead are showing mixed signals in Canada as well as in the U.S. with expected GDPs going predictably lower as the tariff war continues to erode business and consumer sentiment. The Canadian Federation of Independent Business (CFIB) reported that small business confidence dropped to an all time low while the U.S. consumer confidence tumbled for the fourth consecutive month to a 12 year low as of March 2025. This might spill over into the REIT sector in the form of weaker demand as some Canadian provinces reported slower housing activities in residential segments due primarily to tariff uncertainty. In Canada, the macro events have been overshadowing REIT fundamentals, creating a disconnect between market prices and intrinsic value. Likewise in global markets such as the U.S., tariff uncertainties and interest rate volatility remain a sentiment overhang in the short term. However, REIT generally have disciplined balance sheets (notably low leverage ratios) which can provide a key buffer for a swift upside rerating as soon as these macro headwinds subside.