Speaker Key:
GS Gregory Sweet
CM Craig Maddock
YG Yuko Girard
VO Voiceover
00:00:00
GS Welcome to let’s talk investing. I'm your host, Greg Sweet. Today I've invited special guests, Craig Maddock, Vice President, Senior Portfolio Manager, and Head of the Multi-Asset Management Team, as well as Yuko Girard, Vice President and Portfolio Manager on Craig's team. We're here to share with our listeners a review of the key drivers that led to Q2 capital market performance and our outlook for the balance of 2025.
It's early July and we're coming out of a turbulent quarter. Marked by persistent trade tensions in escalating geopolitical risks. However, markets have remained resilient. Our goal is to support our clients, provide valuable insights so that you can continue to make smart decisions with your long-term investments.
Craig, Yuko, thanks for joining me today.
CM Thanks for having us, Greg.
YG Thank you.
GS Craig, what's the latest coming out of the politics south of the 49th Meridian?
00:00:50
CM Well, politics are supposed to be slow moving, boring. Not that divisive or entertaining. It feels like Q2 was riddled with new attention-grabbing headlines at least daily.
So let's just say many things have been changing so rapidly. We go way back to the beginning of the quarter. We kicked it off with Liberation Day, a big tariff announcement on April 2nd that triggered significant global volatility like we've never seen before. But over the remainder of Q2, we saw a partial de-escalation of the US administration continues to reset the tariff rates that they imposed on imports to the US.
And I'd say the wheels were set in motion for renegotiation of the largest number of trade deals in history. Now, that liberation day, it resulted in a historic three-day drop of almost 11%. That's the steepest since March 2020. We watched over $6.6 trillion in US. Market value was wiped out in just two sessions, so April 4th and fifth was the largest two-day loss in history.
However, after falling over 17% in April, stock markets recovered in the quarter. The higher tariffs imposed in the quarter are weighing on global supply chains. They're contributing to higher inflation. And although the policy uncertainty may be seen as negative, it had some upfront positive impact that did influence really a flurry of spending around the world.
And this all makes it a little bit trickier to see the cause and the effect of the policy changes. Quite frankly, it's going to be months or maybe even years until the real impact is known and global trade is rebalanced. Of course one of the side effects of this aggressive US policy, uh, that quite frankly ignored the USMCA trade agreement and the rhetoric around Canada becoming the 51st state was the impact on the Canadian federal election that was held April 28th, uh, the replacement of our liberal government with a new liberal government headed by former Bank of Canada governor and now Prime Minister Mark Carney seems like it was heavily influenced by the resistance Canadians had for the due political direction of our southern neighbour.
Fast forward to the end of the quarter, and the divisive nature of the current politics was on full display. June 14th, flag Day in the United States was celebrated with a military parade in Washington while protestors opposing the administration's more authoritarian tendencies took to the streets across cities in the United States.
To cap off the quarter, the US government also decided to get involved in the Israel-Iran war, which began to escalate and resulted in the US dropping bombs on three sites in Iran, suspected of advancing Iran's nuclear capabilities. Any escalation could be damaging to the global economy. There's about 20% of global oil and gas flow through the Strait of Hormuz, which is a waterway between Iran and Oman.
If Iran retaliates by closing it off, or a war escalates, it could trigger some pretty significant global economic shock waves. Now, there have been many conflicts over the years, unfortunately, but generally they haven't had long-term impacts on markets. While we hope sanity prevails and this issue can ultimately be deescalated and resolved.
So, some big events in the quarter, and I just scratched the surface on some of the major headlines. It was eventful to say the least.
00:04:03
GS Maybe you could share some insights around that, you know, reaction by financial markets, and more importantly, what's the outlook for the remainder of the year?
00:04:10
YG Yeah. This quarter began with a sharp drop, but markets recovered after tariff delays.
Quarter end TSX rose 8.7% S&P 500 rose 5.2% and EAFE rose 6.3% in Canadian dollar, though currency gains limited returns for the year. EAFE led with 13.8%. TSX gained 10.4% and S&P 500 was just 0.8%. So, this is something we discussed last quarter as well, but this change in leadership really shows the importance of diversification.
While US equities have performed quite well over the past few years, mainly due to the AI theme, there are opportunities in other regions such as international and emerging markets. These markets are having a stellar year, and the stock in these markets are still price reasonable. US markets remain concentrated in mega cap tech names, which is still quite expensive and continue to lag other markets.
So, time and time again, we see the winners change. As long-term investors, you do need to make sure your portfolios are well diversified to benefit from the changing winners. Now, regarding our outlook for the remainder of the year, we do expect modest growth in the global economy supported by more accommodative, monetary, and fiscal policy in particular outside of the US.
Soft data like consumer and business sentiment surveys also started to improve from the last quarter, indicating a modest ongoing expansion globally. Our bear market indicator continues to improve. AI seems also remain as a tailwind. So, this is why we recently shifted our portfolios from neutral to overweight position in equities versus the fixed income as we believe equities will perform better than fixed income unless there's a global recession, which we think the risk is low.
00:06:03
GS So that's good context. I think we always say market's, not the economy. So, what's going on with the US economy?
00:06:09
CM Yeah, well, stock and bonds markets have been more volatile given the recent uncertainty. As you mentioned. Uh, in the end, the economy will drive returns, and you go hinted at this, but so far, the US economy has been quite resilient.
US GDP growth continues to slow amidst the uncertainty, but it's expected to remain positive while subdued, unemployment edging up slightly. Inflation staying well stubbornly high due to tariffs. It says volatility subsides. That means that recession risk is lower this quarter than it was last quarter.
We expect to see a one-time hit to inflation from the tariffs, and of course, consumers are moderating their purchases in the face of this recent uncertainty. But there's a new bill designed to lower taxes and eventually easing of interest rates in the United States. It's most probable that the US will actually avoid a recession this year. So, the Federal Reserve, they've only delivered two rate cuts so far in 2025, and that's because policy makers, they're trying to balance inflation while supporting growth. They've kind of been on pause as this uncertainty around inflation has ticked up a little bit. We, however, still expect another few rate cuts as the dust settles.
And while the first several months of the new administration was marked with a litany of executive orders, uh, the path forward really needs to be codified in legislation. The US administration presented the one big, beautiful bill and is going through the approval process with hopes that they will actually get this bill passed by July 4th. This is going to add much needed clarity to the business community and to the Americans supporting continued investment consumption and ultimately growth.
00:07:39
GS Important to know that we're seeing, you know, positive signs and hopeful momentum out the US. But we're a couple of Canadians chatting here. So, what's going on in Canada by way of the economy, the market? How are they doing?
00:07:52
YG Yeah, so the Canadian equity markets actually have performed quite well year to date, returning over 10%, and it's outperforming the US equities, which return only like 6% in US dollar, but only pretty much flat in Canadian dollar because US dollar, again, is kind of weakening against the Canadian dollar.
And the Canadian equity outperformance is mainly coming from a strong performance by the material sectors, which return over 30% year to date. Now financial sector is the largest sector in the TSX. It also did well returning over 10% year to date, but material sector, which is the third largest sector in the TSX had a very strong performance.
And since you know, these large sectors have performed fairly well, it did overall, uh, had a strong performance in the overall Canadian equity market and within the material sector, it's really the gold, silver, and copper. Those metals really contributed to the performance, and it also returned over 25% year to date.
So as for the economy, Canada's real GDP growth for 2025 is forecast to be modest between 1.2% and 1.8% down from the stronger momentum in late 2024 and the first quarter of 2025. The growth has derated as the year has progressed with the economy, feeling the drag from the US tariffs and the weaker business investment.
But on a positive note, inflation continued to trend downwards. Thanks to the mortgage interest costs, which recently came down for the 21st consecutive month, the annual inflation rate dropped to 1.7% in May 2025, which is below the bank of Canada's 2% target. But the unemployment has risen to 7% in May 2025, and is expected to remain elevated.
Job growth has slowed, and business hiring is cautious due to the trade uncertainty and softer demand. So, with all this, recession risk is present in Canada. However, even if we do go into recession, it will most likely be a mild one. And regarding the Canada US trade deal, negotiations are ongoing with both governments aiming for an agreement by July 21st, 2025.
The residing of Canada's digital service tax is the latest step to facilitate a possible agreement. And Canada's also making its most serious push in the decades to take down the interprovincial trade barriers with new federal and provincial laws leading the way. So overall, the Canadian markets have performed quite well year to date, but there are some weaknesses in Canadian economy.
We also need to monitor the developments in the trade negotiation with the US, as well as progress in removing interprovincial trade barriers as it could have impact on the Canadian economy.
00:10:38
GS I think that's a really good update. Obviously, a tale of kind of two stories there. We've got some constructive stories out of, you know, inflation and I know our clients would certainly be appreciative of reducing interest charges on their mortgages.
However, you know, the balancing impact of unemployment rate, we know that certainly hits Canadians, you know, really hard. Let's look beyond, you know, Canada. Let's look beyond the US. Let's turn globally. What's the story around the global economy today?
00:11:03
CM Well, that uncertainty emanating from the US that I spoke at the beginning, it's kind of upending the existing order of the global economy.
Think about the unilateral tariff policies concerned over safety, around borders, threats from abroad, fight against illegal fentanyl, energy critical minerals. You know, anyone paying attention to the news in the headlines would've caught wind of a bunch of those things over the quarter and they're all hitting the world at the same time.
Uh, so no surprise, that's a major challenge for. Everybody in the world to try to figure out, do you think for the global economy right now, everything's being driven by US policy, major tug of war between the US and China. And let's face it, China's economy is still challenged by, you know, property market issues, trade restrictions, but their advancements to technology are seen as a clear threat to the US and I'd say that's the most important deal for the US to try to renegotiate.
So, all eyes right now are on US and China. However, global trade flows are being reshaped by this new tariff policy and by the, you know, outward attack on allies. It's a little bit too early to know the ultimate impact. However, countries around the world are looking to redraw their trade relationships and enhance defence and security measures, perhaps in a lesser way in their involvement in the US than it was before. And of course, that's going to have important implications for major exporters like Canada, uh, Japan, Mexico. We've also got Europe, however, and it kind of remains at a risk of stagnation. Uh, Yuko mentioned that the returns in the, uh, European stock markets have been quite good as of late, but there still are some structural issues in Europe. There has been some fiscal stimulus and increased defence spending, especially in Germany, and that's going to provide some support. But they too in Europe, are going to be implicated in, uh, this upending of the existing world order, uh, in order to try to figure out where they fit and how they can trade with other partners.
So, I think it's safe to say that parts of the global economy will fare better than others as the dust settles on this new reality for us. Of course, we can quickly and easily go with the flow, uh, to try to invest in the possible areas once that's clear. But for now, we're just going to remain well diversified.
00:13:14
GS I think, uh, you just hit on an important point, diversified. I think we're going to hear that probably throughout, uh, our conversation here. Let's talk actually about the portfolio solutions. How are they doing?
00:13:23
YS Yeah. So, before we go into performance, I just want to kind of say that, you know, we said this last quarter, and I'll say it again, but the markets are not your portfolio, and the market performance is not the same as portfolio performance.
So, you know, our portfolios are, you know, we manage, are well diversified and actively manage. So, we make sure the portfolio could benefit from exposure to different asset classes, regions, countries, sectors. And we also make sure the portfolios are rewarded for the risks that we're taking. So, looking at the performance for the, uh, you know, portfolio solutions, year to date and quarter to date performance has been quite positive.
Its strong performance, year to date is really coming from the international emerging market equity and followed by the Canadian equity as well. But also, the niche strategies such as like the global infrastructure, global small cap or high yield, some of those that we put in the portfolio for further diversification is also adding value.
So, you know, overall, we do see a good performance, uh, year to date, and we do think that we manage, continue to manage well and diversify, and we will see, uh, a good performance going forward.
00:14:30
GS Market performance is not the same as your portfolio performance. I think those are important things for our clients to remember and I love kind of the reminder of you know, we've remained diversified in our approach and actively managed in our commitment to managing our client's capital.
We've made some exciting updates to our INNOVA and Partners programs. Can you maybe share with us some of those details? And Yuko, I know you were on BNN recently talking a little bit about alternatives, so excited to hear more.
00:14:55
YS So before we go through that, just want to kind of explain, a bit of a process, how we can, You know, all the portfolios we manage are complete portfolios and we follow this process we call total portfolio management. So, what this means is that we're making portfolio management decisions for long and short term, including what they invest in, how much of it we need for optimal success. And it's, you know, we get the, the most return for the risk we're taking.
We're constantly looking ahead to try and figure out what will work the best going forward. And as we just discussed, it is quite uncertain time at this moment in history. So while that presents a challenge, it also presents an opportunity. It is not as obvious what will be the most likely winner in this environment. So as a result, diversification is our most powerful tool at the moment. And Craig will kind of talk a little bit more about what we added and why we added different asset classes to these INNOVA partner portfolios.
00:15:54
CM Yeah. For certain portfolios we manage, uh, we have added a new enhanced diversified investment.
Uh, so combining fixed income and equities with complimentary liquid alternatives and private assets, each portfolio provides access to a broader universe of investments in a single solution. So, I think private assets, this includes investing in private companies or companies that aren't traded on an exchange would be private equity. We also can lend to businesses without a bank being involved and we can collect interest, that'd be private credit. And we can also own real estate assets or real assets that aren't traded in public markets, and that would be real estate or infrastructure. Now, these are powerful additions to portfolios for a couple of reasons. One, alternative investments give us access to companies that aren't easy to access for a typical investor. Given that private markets are 10 times bigger than public markets, we just added a huge diversifier to these portfolios, and two, they perform differently. That's because in private or in the case of liquid alternatives, they have a different source of return.
And they can often zig while their public market sag. And additionally, because the price of these private investments, well, they're private. That means they don't change every day. Based on those headlines that I was just referring to, remember that historic two-day drop in equity markets and subsequent recovery, we spoke a bit earlier in the podcast.
Well, the private equity investment prices would've remained stable throughout that period. That is diversification and action, and we are excited to be able to enhance some of our portfolios with some of these new alternatives.
00:17:23
GS You know, when I reflect back on the quarter, it reinforced a couple of really important things. Number one, the importance of staying disciplined in your investment strategy.
Yet again, we saw the disciplined patient investor being rewarded, something that we've seen time and time again in capital markets. It also was a great reminder to not try to time the markets this quarter again, proved that that is a very, very difficult and challenging feat to accomplish, certainly consistently over time.
An interesting stat I saw this quarter recently said that if you missed the best 10 days over the past 30 years, your rate of return could have been cut in half. If you had to miss the best 30 days during that same period of time, you actually would've seen your returns reduced by an astonishing 83%. So, it just speaks to the importance of those four core principles that we talk about with our clients each and every day. The power of investing, early, investing often. Being diversified in a portfolio that aligns to your investor profile. The importance of remaining discipline in the face of market volatility.
We encourage all of our clients to work with our advisors. Have a plan. Lead in on that plan when, you know, challenging times, you know, test our emotions and really remain committed to those four core fundamentals. And with that, I'd like to say thank you so much, Craig and Yuko, for your valuable insights and to our clients. Thanks so much for investing your time in our conversation today. We're here to support each one of you for every future. Be well, you keep investing.
00:16:02
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