Despite global challenges, 2025 should see economic growth

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Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

Leslie Alba, head of portfolio solutions, CIBC Asset Management 

So, we’re optimistic for equity and fixed-income investors in 2025. The economic picture in Canada looks quite positive for this new year. Q3 GDP print of last year continued to show growth. And inflation came in at 1.8% in December, which is currently around the middle of the Bank of Canada’s target range. 

And then, when we look globally and at a broad array of forecasts, the global economy is expected to continue expanding into this new year. 

Meanwhile, inflation is projected to continue to decline globally, though we expect it might remain elevated and not yet in the comfort zone of most central banks. 

But, overall, we’re constructive on equities — especially U.S. equities — but also a bit cautious. The U.S. is forecasted to lead economic growth. But the gap between the U.S. and the rest of the world is expected to narrow. 

And with other major economies experiencing less-resilient growth than the U.S., as well as the threat of U.S. trade tariffs, we expect outperformance of U.S. equities to persist for the foreseeable future. 

That said, we’re also positive on our domestic equity market, which should perform relatively well, as growth recovery in 2025 is expected to be a pretty strong tailwind for corporate earnings. 

And this is in contrast to our view on European equities, where, relative to Canadian equities, corporate profits in Europe have been more resilient than expected, especially in the context of a weaker economy. So, the potential for further positive performance, in our view, is pretty limited in relative terms. 

We also expect Europe to be at a bit of a higher risk of headwinds, given its sensitivity to global growth and the threat of U.S. tariffs. 

And then, on the emerging markets front, although the Chinese stock market — which remains a substantial proportion of emerging markets overall — pulled back in the last quarter of 2024, the MSCI China Index is still up over 30% in Canadian-dollar terms over the year. 

So, with that, we believe Chinese stocks carry downside risk through excessively positive expectations for economic growth, where despite the government’s unexpectedly announced stimulus package from Q3 of 2024, we think that stimulus package can fall short of what’s required to resolve a pretty vicious cycle between low inflation, excessive indebtedness, weak consumer confidence, home-price deflation and rising unemployment. 

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It’s worth noting that our constructive view on U.S. equities is cautiously constructive, as we do consider the downside risk on high valuations and market concentration. 

On traditional valuation metrics, U.S. equities look expensive. And, also, markets are at peak concentration levels, with U.S. equities representing just under 75% of the MSCI World Index, while the Magnificent Eight — which includes Broadcom now — accounts for around 35% of the U.S. market. 

That said, we’re also careful not to discount the upside potential or the potential for new technologies, such as artificial intelligence, to shift the productivity curve upwards and drive sustained economic and corporate outperformance of the United States. 

We’re also alert to the uncertainty around future winners in the artificial intelligence space. So, broadly, within equities, constructive but also quite cautious. 

It’s worth also noting that, while proposed policies under the new Trump administration are expected to create tailwinds for the U.S. economy and the U.S. stock market, several policies are expected to put upwards pressure on inflation. So, in the United States and many other parts of the world, the fight against inflation is not yet over. And how inflation unfolds from here really remains key to how fixed income will perform over the short term. 

In the last quarter of 2024, we saw bond markets reflect reset expectations that priced in higher-for-longer interest rates than would have otherwise been the case. Yield curves steepened, in part reflecting higher inflation expectations as well. So we expect continued volatility until markets regain comfort in, not only inflation, but in economic stability. 

We know that markets tend to dislike uncertainty, and there’s still quite a bit of that right now with Trump’s presidency. What’s important, though, is that over the long term, bond returns tend to reflect the yield-at entry. And bond yields today are significantly higher than their 15-year long-term average. 

Although bonds carry the risk of selling off when interest rates rise, we’re entering an environment of declining rates. And that should provide a price lift, as interest rates do come down. 

And, with continued yield curve steepening, we’re seeing a restoration of a term premium. In other words, the reward to investors for lending money for a longer period of time. 

And then, finally, the higher yield level today, compared to say 5-10 years ago, means that there’s more of a buffer on returns through the coupons investors receive, which should provide a lift in times of economic and market weakness. And that’s a really important and diversifying characteristic of bonds today, relative to bonds in 2022, and one of the reasons why we’re quite constructive on both equities and fixed income. 

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In times like these, our recommendation for portfolio positioning really is to prepare portfolios. And that’s to accept that we can’t prevent a storm if it comes, but we can be positioned for it. Right now, the potential paths around the known unknowns should be managed through broad exposure to assets. 

We prepare our portfolios for adverse outcomes by maintaining a diversified mix across asset classes, geographies, and styles in our strategic asset allocation. When all of the political dust settles, you know, we expect asset prices to return to being driven by fundamental factors that impact financial productivity, such as economic growth, inflation, interest rates and corporate profitability. 

And, although the new Trump administration might influence some of these factors, the long-term impact of those remain pretty uncertain. So, ultimately, a diversified portfolio of stocks and bonds is the best way to prioritize investment goals and ensure exposure to a broad range of financially productive assets. 

Although well-constructed portfolios do some of the heavy lifting, even the most robust investment ideas and the most prudent diversification strategies, are still subject to the whims of short-term market sentiment and volatility. 

So, during those inevitable periods of turbulence, it’s useful to remember that volatility flair ups are a natural feature of markets, and that they are not flaws but rather they create opportunities. 

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One of the risks I think many of us will be keeping an eye on throughout 2025 is inflation. Trump’s policies, including trade tariffs, are expected to put upwards pressure on inflation, and likely keep interest rates higher for longer.  

However, U.S. dollar strength might provide some relief. 

That said, a stronger U.S. dollar suggests a weaker Canadian dollar, which could make inflation stickier for us here too, through potential higher costs of some imported goods. But how this all eventually plays out is very complicated and we believe the risk of inflation getting too out of control is pretty low. 

The risk with the greatest impact to our relatively constructive but cautious outlook remain political risk. And that includes the risk of an all-out trade war. 

China continues to be the main target of U.S. tariff rhetoric. It is seen by the U.S. as a long-term military threat, an instigator of large-scale unfair commercial practices, and is the main cause of U.S. trade deficits. 

And then with respect to the Canadian economy and market, proposed tariffs on Canadian goods by the U.S. president certainly have very negative consequences for us. One third of Canada’s GDP is made-up of exports and roughly 80% of those exports go to the U.S. market. 

However, the range of possible outcomes for tariffs broadly are complex because of potential retaliation, substitution effects, and currency impacts.  

So, there’s really a high degree of uncertainty, which makes a prudent investor stick to their long-term investment objectives, as history does demonstrate that a portfolio with a broad mix of stocks and bonds tends to outperform cash, and also outperform portfolios that try to time markets throughout the cycle.

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