Points in Time, Q1 2025

In this commentary:

Controlling the chaos | Canada | U.S. | International | Fixed Income

Controlling the chaos

Scott Blair, CFA
Chief Investment Officer

If there’s one thing a Trump presidency is not, is boring. While the first term was eventful, it was just a taste of what was to come. Every facet of U.S. life seems to be in flux as the new president seeks to remodel U.S. society. Heightened political uncertainty and shifting U.S. policies have contributed to market volatility, creating both challenges and opportunities for investors. 

Unchained

A long-held tenet of Trump, and his first-term advisors, has been to control the narrative by “flooding the zone” with information. More headlines, allegations or controversies in the media mean less scrutiny an information-saturated public can have on any one issue. The scandal over a journalist being invited into a group chat on Signal with high-ranking government officials is a good example. Although it was big news for over a week, it faded into the background as the administration’s big tariff announcement on April 2 neared.  

Amidst plentiful policy shifts, the Trump administration is in full force, aiming to deliver on his key promises. The first time around this included big tax cuts, an attempt to repeal Obamacare, and renegotiating NAFTA. This time, it’s cutting bureaucracy, increasing tariffs and revamping immigration policy to name a few. Despite his campaign promises, most are still surprised by the President’s commitment to deliver his agenda. Perhaps because many of his policies are so bold this time.

In any event, the Trump administration’s policy direction appears less constrained, with significant implications for both the global economy and U.S. markets. The first quarter of 2025 has given us some insight into how this could play out for investors.

Broader markets

For years, global stock market returns have been led by large cap U.S. tech stocks. Recently, the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla), have driven U.S. markets to new highs on ever-expanding profits and growth prospects. Investors who didn’t own these stocks felt pressure to buy, driven by strong past returns and market momentum. 

Concerns over slowing economic growth and escalating trade tensions have now contributed to a pullback in the Mag 7 stocks, while market returns have broadened. In 2024, only 30% of U.S. stocks outperformed the S&P 500 Index benchmark. In the first quarter of 2025, that number was 65% with only one of the Mag 7 outperforming the benchmark (Meta). A broader market means it should be a better environment for stock pickers over indices, at least if the trend continues.

Some good news

For investors who have continued to diversify across markets and asset classes, the first quarter was a good one. Although the U.S. market was down, Canadian stock and bond benchmarks rose while International markets were strong (see figure 1).  

Figure 1:  Total returns of major indices – Q1 2025 (CAD)



Sources: FactSet, Canadian Bonds = FTSE Canada Bond Universe, Canadian Stocks = S&P/TSX Composite, U.S. Stocks = S&P 500, International Stocks = MSCI EAFE

European markets rose sharply, driven by low valuations and hopes of stronger growth. Based on the numbers in figure 1, an investor with a traditional 60/40 portfolio of stocks and bonds (with the stock portion split evenly among Canada, U.S. and International and the bond portion in Canadian bonds) would have generated a return of 1.8% in the first quarter. 

If current trends persist over the next three quarters, the same 60/40 portfolio described above could see an annualized return of over 7% in 2025. However, keep in mind that market conditions remain fluid.

Given the volume of market and economic uncertainty, the resilience of diversified portfolios may be surprising. While political and economic disruptions can create challenges, they also open doors for investors. A broader market means greater opportunities beyond a handful of dominant stocks, and diversification is proving its worth. 

Sources: FactSet

Canada

Gil Lamothe, CFA
Head of Canadian Equities, Senior Portfolio Manager

Watching

The S&P TSX Composite Index is up 1.5% over the first quarter of 2025. The last days of the quarter saw a sharp move down, then a mild recovery as equities were sold amidst fears of U.S. tariffs. One asset that’s benefiting in the current environment is gold. The price of gold is now over $3,100 USD per ounce and precious metals companies, up over 30% this year, now account for over 9% of the S&P/TSX Composite Index by market weight. So why all the interest in gold?

To begin, geopolitical uncertainty surrounding the Russia/Ukraine and Israel/Palestine wars have resulted in many central banks purchasing gold reserves. This has been a tailwind for the metal since early 2024. More recently, the repercussions of imminent tariffs have shone a light on several factors that also make gold appealing. 

Inflation in the U.S. is now expected to remain well above 2.0% through 2026. With expected further rate cuts from the Fed, this would keep real interest rates below 2.0%, which makes gold attractive as an inflation hedge relative to short-term money market investments. Furthermore, high debt levels in the U.S. and Europe undermine their currencies, particularly in the face of possible tariff-induced recessions. This leads to gold being seen as a safer alternative than U.S. dollars or euros, increasing investor demand. These factors have been positive for gold’s price (see figure 2).

Figure 2: Gold price rises with increased investor demand


Source: FactSet

The Canadian utilities sector has also been attracting investor attention and is up 4.9% this year. These companies are largely unaffected by tariffs, and have fairly secure or regular revenues, making them attractive now.

The Canadian energy sector was volatile at the start of the year, but it managed to generate a 2.7% return in the first quarter. Energy stocks fell significantly in late-February/early-March given the increasing uncertainty around tariffs and OPEC’s decision to start gradually raising oil production in April. 

Thinking

Although rising global oil production and 10% tariffs on Canadian energy will negatively impact the sector, a weakening CAD/USD has offset some of this. With clean balance sheets, focus on cost efficiencies, and solid asset utilizations, Canadian oil and gas producers are well-positioned to handle a wide range of scenarios and will continue to generate meaningful free cash flow in the current commodity price environment. Integrated energy companies, such as Suncor, are further insulated from commodity price volatility and tariffs due to their exposure to refined products.  Furthermore, energy infrastructure businesses, like pipelines, are similar to utilities in that they have stable, contracted, and recurring cash flows.  

Doing

The tariff-related volatility in our market led us to execute several trades. When good companies’ stock prices go lower for non-company specific reasons, an opportunity is presented. So, on stock price weakness we added to our positions in TFI International, OpenText, Descartes Systems and Shopify within our core Canadian portfolios. Within our dividend portfolios, we added to Brookfield Renewables. We also moved capital from Bank of Nova Scotia to CIBC to take advantage of the latter bank’s more consistent dividend growth, which is stronger than Scotia’s.  

We understand the uncertainties facing North America and the world. Despite the discomfort of staying invested in these times, we believe it’s the right choice for long-term investors. 

Source: Bloomberg

Q1 2025 Dividend Performance Summary

* Estimate from Statistics Canada February 28, 2025
** The dividend yield is based on the Leon Frazer Canadian Dividend Fund using the target weight for cash. Dividend performance numbers are year to date and express growth statistics only. These are not rates of return (as with the other portfolios). 

Source: CWB Wealth

U.S.

Liliana Tzvetkova, CFA
Co-Head of U.S. Equities, Senior Portfolio Manager

Saket Mundra, CFA, MBA
Co-Head of U.S. Equities, Senior Portfolio Manager

Watching

It’s been a volatile start to the year. Market participants jumped from initial hope after Trump’s re-election to the current state of tariff wars and geopolitical chaos. As a result, the S&P 500 Index ended the first quarter with -4.2% returns. Defensive sectors such as healthcare, staples and utilities were some of the top sectors and ended the quarter with positive returns, while cyclical sectors such as consumer discretionary, technology and communication services were major laggards (see figure 3).

The market seems to be on skittish ground with expected reciprocal tariffs and their impact on companies, supply chains, and overall economic uncertainty. As a result, economic growth is slowing while inflation expectations have ratcheted up. Simultaneously, innovation has led investors to question the sustainability of investments in AI-related supply chain. This is important, as the unprecedented level of AI investments has been the primary driver of returns for the markets over the last two years.

Despite the sluggish performance of the S&P 500 Index, commodities and other global markets seem to be doing well (see figure 3). It remains to be seen whether the decoupling of supply chains, an uptick in investments in other parts of the world, and decade-old underperformance of equities outside the U.S. will lead to a sustained catchup phase for rest of the world.

Figure 3: S&P 500 Index sector performance – Q1 2025

Source: FactSet
Total returns in CAD

Thinking

Markets are a forward discounting mechanism, meaning that some level of the ongoing uncertainty is already priced in. The key question is whether reality is better or worse than the market’s current expectations. Trying to predict an investment based on top-down variables like economic growth, inflation and interest rates is extremely difficult and prone to error given the many dependencies and uncertainties. Investing in select businesses that have an historical record of successfully navigating uncertainty offers better visibility.

Different aspects of an investment can become more or less important given the prevailing environment. We believe management quality, balance sheet strength, and earnings revisions paired with valuation are extremely important in times like these. Management quality and balance sheet strength allow a business to take advantage of any dislocations in their markets and come out stronger. For context, our core holding, Berkshire, carries over $300 billion USD in excess cash on its balance sheet – an amount big enough to buy any company outside the top 25 companies in the S&P 500 Index.

Doing

During the quarter, we initiated new positions in Brown & Brown, Copart, and Deere. We believe these companies all exhibit the aforementioned traits. The management at these companies run their businesses with a long-term view and have balance sheet strength to take advantage of any opportunities that may appear. In order to source capital for these opportunities, we exited our positions in J.P. Morgan, Nike, and Dollar General. We still believe in the pedigree of J.P. Morgan as a business but sold it to accommodate opportunities with better risk/reward.  

Our view of structural resilience of Dollar General’s business changed given the competitive pressures they’ve been facing, and their management’s responses to these issues. In a nutshell, we overestimated both the quality of the business and its management, and we’ve learned from this experience. For Nike, while we believe the turnaround is progressing, other opportunities offered better risk/reward. 

Our disciplined process has historically generated long-term returns for investors and will help us navigate current and future uncertainties. We learn from our mistakes and maintain a long-term perspective to find the best investment opportunities for our clients.

Sources: FactSet, CWB Wealth

International

Ric Palombi, CFA
Senior Portfolio Manager, International Equities & Alternative Income

Watching

Rotation from U.S. to International markets was a key highlight for the first quarter of 2025. Several catalysts drove the move:

• Revelation of DeepSeek and its implications for China Tech’s role in the AI value chain.
• A change in the U.S. exceptionalism market narrative driven by Trump government rhetoric and actions.
• Germany’s announcement of a massive fiscal and defence package which could total 1 trillion euros.

As a result, the MSCI All Country World Index ex U.S. returned 5.4% (total returns in CAD). Both European and Chinese markets contributed to the returns. 

Thinking

Our International portfolio is in a good position to benefit from the trends above given its allocation to Europe as well as China—more specifically, Germany and China Tech. Germany’s fiscal plan could result in adding over 1% to its Industrial Production growth over the next decade which is quite material. This could result in double digit earnings growth for our holdings with exposure to the German economy. On top of that, we should see European (and German) multiples continuing to rise which we believe could help generate healthy total returns for investors going forward. 

Sectors where we have exposure and are expected to benefit from the policy include, construction materials, chemicals, industrials, utilities and financials. Speaking of European banks, the Stoxx 600 Banks Index has surged 25% this year, its best three months since 2020, driven by strong earnings and capital allocation (buybacks, M&A). 

Banks are benefiting from a different and healthy operating environment including the shape of the yield curve, reduced regulatory burdens, and loan growth (which would further benefit from Germany’s spending plan). The sector now trades at 9x forward earnings but is still the cheapest in Europe after autos. 

Post-DeepSeek, the change in market tone toward China has been astounding. The Chinese tech sector has rallied considerably as the world realizes that Chinese AI research may be at par, or possibly even further ahead, than Western companies. As a result, companies like Alibaba and Tencent have now nearly doubled in price over the course of the past year. 

Doing

We managed our weights and our risk/reward by selling down positions that generated returns because of material multiple expansion including, SAP, Heidelberg, Alibaba, Intesa Sanpaolo and Richemont. We reallocated capital to areas where risk/reward is more favourable, including Banco Bradesco (Brazil) and Samsung Electronics (South Korea). We held Samsung in the portfolio previously and recently reinitiated it as shares were trading at record low valuations of 0.9x Price-to-Book and around 10x Price-to-Earnings. 

While Samsung is a leader in the memory sector, they’ve struggled to deliver a specific type of memory used in AI computing. Combined with overall weakness in the non-AI spending for computing (both for businesses and consumers), the shares have been trading at quite depressed valuations. Given their excellent track record, we believe Samsung should have the technical and managerial capabilities to find a way out of their current conundrum. 

If our thesis plays out, we believe the shares could move significantly higher. And if our thesis is delayed, our purchase price is low enough to mitigate much further downside risk. Samsung has a healthy net cash balance and positive free cash flow, which their management is using to buy back shares at this low valuation. Given these factors, we believe Samsung shares at this price/valuation level are a great asymmetric risk/reward opportunity. 

Source: Morgan Stanley

Fixed Income

Malcolm Jones, CFA, MBA
Head of Fixed Income, Senior Portfolio Manager

Ric Palombi, CFA
Senior Portfolio Manager, International Equities & Alternative Income

Watching

Over the first three months of 2025, the spread between 10-year and 3-month sovereign yields has been positively sloped (10-year yields higher than 3-month yields) which is normal. This is only meaningful when noting the extended period of time that this spread was negatively sloped (or inverted) through 2024 and 2023.

Central bankers have waged a large and effective fight against inflationary forces that emerged after COVID-19. The Bank of Canada claims that it’s close to the end of its cutting cycle. It feels closer to a neutral rate that’s neither stimulative nor restrictive. Markets are expecting another 50 bps of cuts in 2025, after which the cycle will be complete.  

In the U.S., the Fed remains cautious due to persistent inflation and fiscal policy uncertainty, which means the Fed is likely to take longer to reach neutral. Markets expect the U.S. cutting cycle to extend until the end of 2026 (see figure 4).

Figure 4: Anticipated bank rate movements


* This chart reflects market expectations at the time of writing. Markets have been very volatile, and the chart may not represent the most recent figures.
Source:  Bloomberg

Both the Bank of Canada and Federal Reserve are more focused on controlling inflation than on economic slowdowns. They remain especially aware of the 1970s, when inflation surged back after some initial bank rate cuts. Central bankers aim to avoid repeating that mistake. 

Credit spreads have widened slightly this first quarter but remain within an historical range. This increase is more a correction from tight levels in December than a sign of economic concern.

The election of a new government in Germany led to promises of increased defense spending and more laxed deficit controls. Increased European government spending should lead to higher debt issuance and yields in Europe.

Thinking

With continued cuts from the Bank of Canada, we feel there’s room for slight declines in short-dated yields. Longer-dated yields may rise slightly due to economic uncertainty. The upcoming Canadian election shows no significant austerity measures from leading parties, unlike the recent U.S. election. 

Overall, we expect limited movement in the Canadian yield curve over the coming year. With this in mind, we extended the portfolio duration in our core bond portfolio in February. This is less a bet on rates decreasing and more a bet on capturing higher returns in longer dated bonds. We anticipate being slightly longer duration for the coming year.

With the increased issuance of European sovereign debt, some investment money may switch to Europe. We don’t anticipate this will be a large effect, and will certainly be felt more by U.S. Treasuries than by Canadian government debt.

We anticipate a year of higher geopolitical uncertainty. This should reflect in a higher volatility in credit spreads. That said, we don’t anticipate events that will aggressively increase the risk of default. We feel that corporate spreads will provide an adequate extra return for the extra risk taken on. We continue to hold an overweight position in credit.

Doing

We increased duration slightly in February. This is meant to capture some extra return in longer dated bonds. We continue to hold an overweight exposure to credit expecting to be adequately compensated for taking on extra risk.

Source: Bloomberg

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