What does the investment behemoth see as the best strategies?
Canada’s retail investors should be prepared for continued uncertainty regarding the economy amid US trade policy risks and how the new Canadian government responds, according to a new outlook from BlackRock Canada.
The asset manager’s Spring 2025 Investment Directions report expects volatility to remain a key factor in the coming months with the Fed unlikely to have much room for rate cuts due to a tight labour market and tariff-induced inflation. There may be the possibility of action in the second half of 2025 but with its dual mandate, the central bank may only be able to cut rates if there is a sharp slowdown in the US economy.
Although the firm suggests low volatility strategies and defensive equities for now, it also sees potential long-term opportunity such as the continued growth of AI and the likelihood of South America gaining from global supply chain shifts.
“Higher volatility alongside unreliable stock/bond correlation demands that investors think critically about diversification,” said Gargi Pal Chaudhuri, Chief Investment and Portfolio Strategist.
As for the trajectory for the US economy, BlackRock highlights the resilience shown in some metrics including durable goods, retail sales, factory orders, non-farm payrolls, and corporate earnings; but also, the softer consumer sentiment reflected in several surveys and indexes which leaves open the potential for recession.
For Canada, there has also been a weakening of consumer and business sentiment while inflation has eased. But the new government may increase stimulus measures such as boosting infrastructure spending that should ease growth risks.
Canadian equites will continue to be impacted by headlines in the near term while US equities remain exposed to tariff risks, although are expected to see a broadening out of returns rather than being focused only on the top of the index. International equities have outperformed North American options recently and the report suggests that they will continue to deliver for investors seeking lower valuations and increased diversification.
Meanwhile, in fixed income, an active, flexible approach may work best for investors amid an uncertain trajectory for interest rates as the BoC navigates the impacts of tariffs.
Duration should not be the only diversification focus for investors, with inflation-linked bonds, infrastructure, gold, and short-dated bonds all having a role to play in boost resiliency and reduce correlation risk.
Today, the need couldn't be greater Diversify portfolios for a better diversifier than traditional fixed income, as stagflation and global uncertainty pose an unprecedented challenge to the role of the dollar and US Treasuries as portfolio diversifiers,” said Jeffery Rosenberg, CFA Managing Director in Systematic Fixed Income.
