Business as unusual

A quick overview

The past four years have been plagued by uncertainty and turbulence, so it’s reasonable to not want the good times to end. Going into 2025, there are a number of tailwinds that weren’t there in previous years:

• Inflation has come under control in most developed economies. 
• Economic growth, while tepid in some countries, is still positive for most.
• Interest rates continue to become more accommodative.

Politics and policy: the US effect

For markets globally, the greatest risk is likely to come from policy—in particular what the Trump presidency wants to put forward versus knowing what will actually come to fruition. With a history of making extreme demands before ultimately compromising, it’s worth examining if there’s anything practical that could be driving the demands. Trump’s recent suggestions on making Canada the 51st state, or even taking Greenland and the Panama Canal by force, are just the latest examples. It’s easy to dismiss his rhetoric, but policymakers must examine whether there’s an ulterior motive or simply an appeal to his base. 

The result of the US presidential election presents both opportunities and challenges for the next few years. Domestically, commerce is likely to benefit with a government that is more business-friendly with fewer regulations, although it will be important to see if policy favours particular segments of the economy versus being beneficial for all. On the other hand, heightened geopolitical tensions from a US-first foreign policy is likely to introduce additional risks to trade, driving up the cost of international exchange for, not only the US, but participants globally. 

While we can speculate all day about the impacts of a second Trump presidency, the fact remains that there is less leeway from a budgetary perspective for Congress to increase benefits to their favoured groups without increasing revenues or cutting outlays in other places. This may put a limit to what they are able to implement. This also highlights the increased domestic policy risk that US investors face going forward.

Politics and policy: Canada

Canada is facing a comparable risk with respect to policy, albeit with different characteristics. With an election looming right around the corner, and elements of parliament determined to topple the current government earlier, uncertainty in government policy isn’t foreign to Canadians. Immigration and the perceived cost of living (perceived, as while inflation has come down to target, life isn’t getting any cheaper and that’s what matters more from an individual perspective) remain top-of-mind going into the election year, and have already started to influence policy more directly. 

Despite efforts by the current government to address issues important to Canadians, the tepid response from the electorate raises the uncertainty in domestic policy, but more especially, in foreign policy. Quickly being able to respond to demands made by the Trump presidency without being distracted by internal politics is not a luxury the Canadian government has this time around. Coordination between the federal and provincial levels will be important, but will be even more difficult if Ottawa is distracted by infighting within and between parties. 

What can we expect, economically, in 2025?

Politics aside, the Canadian economy could benefit from some of the US-first policies if positioned well. Selling an 'onshore' (that is, at least within North America) manufacturing and production base could be attractive to the new US government and is something in which Canada could participate closely. Strengthening trade with other European and Asian counterparts would also serve Canada well, diversifying our destination for exports.

Looking towards markets, there isn’t any immediate perceived risk to equity or fixed income markets, and we do not have a preference for one more than the other. With central banks continuing their rate-cutting cycle and yields likely becoming less volatile amid a clear direction in central bank activity, there are certain segments of the market that may benefit more than others. 

While we may not see continued banner years for fixed income, a hopefully more stable rate environment will make bonds boring again, as investors can clip their coupons and realize the return earned from holding a bond. On the equity side, companies—for the most part—are still growing earnings, and remaining profitable, as consumers retain their ability to carry on amid some weakness in certain markets. Rate-sensitive sectors or companies, particularly those with floating-rate debt, should benefit from continued central bank rate cuts, as policy rates typically dictate the base level on which floating rate loans are based. A stable, or at least more predictable rate environment should allow these companies to better forecast their costs of financing, leading to fewer earnings surprises. Companies that are less sensitive to interest rates should also indirectly benefit from a calmer rate market, but likely less so than those which are directly exposed. 

Policymakers globally are in for a challenge, and business will not be 'as usual' for the next couple of years, but we, as investors, can only react to legislation once we understand the implemented effects. There are likely to be more knee jerk reactions from markets as intentions are announced, but until they are implemented it is important to stay focused on the long term and stay the course.