Canada Life Investment Management CIO offers his view into an uncertain year ahead
Staring down the final month of 2024, investors may be tempted to take a breath and relax. It’s been a good year for many on the markets, with Canadian and US equities — as represented by the S&P 500 and the TSX 60 — returning over 20 per cent year to date. For all the celebrations that those returns may spark, we know that a whole new year starts when markets reopen on January 2nd. 2024’s market themes and political developments may have just set the stage for some significant uncertainty that investors will need to navigate in 2025.
Its with a view to those themes and developments that Corrado Tiralongo offered up a preview of his 2025 market outlook. The Chief Investment Officer at Canada Life Investment Management Ltd. highlighted some of the major themes in Canadian, US, and global markets as well as major economic trends that may impact performance. From the likelihood of Trump tariffs on Canadian imports, to the prospects for the AI theme, through the areas of additional value that investors may be able to find in the new year. Underpinning his whole outlook is the idea that returns and volatility can come from a myriad of sources, and that a diversified approach continues to hold merit.
“When you see the chart where value outperforms or growth underperforms, people will view that as a binary outcome when it is not, it’s not that one returned negative ten per cent and the other returned ten per cent,” Tiralongo says. “Markets are not a binary or a zero-sum game, so it’s important for risk management to look at long-term returns diversification.”
2025’s economic stories
Within that investment philosophy, Tiralongo sees many sources of uncertainty going into 2025. Some stem from politics, including the “grenades” of social-media posts and promises of 25 per cent tariffs to be imposed by the incoming Trump administration on Canadian imports. Others are rooted in market performance, with high valuations among many leading US stocks.
Tiralongo believes we are now in an era of slower economic expansion. He believes global markets will grow at around three per cent, just below their 2015-2019 average of 3.2 per cent. He expects the US will also underperform that same period, estimating a 2 per cent growth rate, compared to 2.5 per cent average between 2015 and 2019. He expects Canada to grow at only 1.5 per cent, reflecting greater structural weakness in the economy as well as shifts to stimulatory policies like immigration.
Those growth rates, Tiralongo notes, are in part due to a different global economic paradigm, one that reverses the trend of widespread globalization we saw in the 1990s, 2000s, and much of the 2010s. Now he sees a world of regional trading blocs built around geopolitical alignment to specific powers. The result is a different topline GDP growth dynamic than we saw in the heydays of globalization.
There is likely an inflationary impact to this paradigm, too. While he does not expect a return to the high inflation seen post-pandemic, Tiralongo believes that global uncertainties, conflict in the middle east, and the prospect of US tariffs could spark higher inflation rates in the United States and possibly in Canada as well. Canada’s weaker economic foundations should mean that any inflationary resurgence doesn’t materially impact the Bank of Canada’s cutting cycle — which Tiralongo believes will rest in a slightly stimulative position at its end. The US Fed, however, may have to grapple with higher sustained inflation and its resting interest rate may end up at a higher point.
Equity outlooks for the next year
Looking specifically at equity markets, Tiralongo believes that the AI theme does provide the greatest prospects for investors in the short-term. While he believes that the technology has potentially massive impacts on societies, industries, and economies, he thinks that the AI theme on equity markets has become something of a bubble. Despite the short-term opportunity caused by investors pulling forward those prospective impacts, he thinks that investors should be watching for stalls in that theme and upside opportunities in other subsectors and geographies.
If and when the AI theme pulls back, Tiralongo believes that investors will start looking at more neglected asset classes for upside. Value stocks, small-cap equities, and ex-US positions may all begin to look more attractive.
“As a multi-asset class portfolio manager, we look at allocating assets based on where, on a relative basis, we are going to get the best return for the level of risk,” Tiralongo says. “In that context, valuation comes into play, but I’ve said throughout my career that unfortunately valuations are really poor timing indicators.”
Tiralongo says that sentiment changes may prove a more instructive indicator of any rotations. GDP prints in different regions perceived as better, or simply less bad, may be enough to spark a shift in investor positions. He accepts that we’ve already seen some shifts in sentiment manifest when leading AI theme stocks have stuttered this year. In those moments investors rotated rapidly into value, small-cap, and ex-US positions.
Canada has also done very well this year, something that may surprise investors who largely watched US performance. Tiralongo expects, though, that Canada now faces more headwinds than tailwinds. Our GDP growth looks set to stay sluggish as immigration is curbed and the overhang of personal debt makes itself felt. Trump’s promised tariffs offer some risk, too, but Tiralongo says their impact will be determined by their specifics. Their intent, whether as a bargaining chip, a revenue generator, or a protectionist policy, will determine their impact. On the whole, however, he sees these tariffs as a negative for both the Canadian and US economies.
With so much uncertainty on the market, Tiralongo is on constant alert for inflection points. Clearer signs that the AI theme has become a bubble, more detail on tariffs, and new sources of geopolitical uncertainty will all be on his radar.
“We want to be conscious of all these lower probability events and make sure that we’re sizing our portfolio position to ensure that even low-probability high-impact events aren’t going to hurt us,” Tiralongo says.
