2025 Will Bring Threats and Opportunities. Just Like Every Year

In 1848, Lord Palmerston was the Foreign Secretary of Great Britain. He was an outspoken imperialist and was not shy about intervening in the affairs of countries around the world. He stated his policy to the House of Commons as follows:

“Therefore, I say that it is a narrow policy to suppose that this country or that is to be marked out as the eternal ally or the perpetual enemy of England. We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.”

As we enter 2025, it is Canada’s misfortune that it will be confronted by an American President who would be entirely comfortable echoing these sentiments. Appeals to our historical friendship and special relationship will fall on deaf ears. In the last few days he has raised the idea of annexing each of Greenland, Panama and Canada. It is impossible to tell how serious he is about any of this.

Making matters worse, Donald Trump is quite certain that the interests of the United States are identical to his own. In surrounding himself with billionaires and in stuffing his cabinet with under-qualified sycophants, he is mimicking the behaviour of dictators with imperial pretensions such as Putin and Orban, each of whom he admires.

It is Canada’s further misfortune that this is happening at a time when the federal government is weak and about to fail. Whatever your feelings may be about Justin Trudeau and the Liberal party, there is no question that both have lost the support of the great majority of Canadians, and apparently, of Parliament if Jagmeet Singh is to be believed. At the moment, there is no one in power in Ottawa with the stature and credibility to address the obvious and ominous threats emanating from the colossus to our south.

As investors it is our job to accept the world as it is, and not as we might like it to be. We must try to discern what new risks will present themselves, what new opportunities are likely to arise, and how we should respond. Naturally we proceed with full understanding that the future is unknowable. All we can do is take actions which seem more probable to succeed than not. With that in mind, here is what our investment team is thinking about as the new year dawns.

  • Canada is currently near to being in recession. Growth in per-capita GDP is negative, unemployment is rising, and the weak Canadian dollar will make it impossible to control food-cost driven inflation this winter. The Bank of Canada was too slow off the mark in lowering interest rates. It will have no choice but to lower them further in 2025. The Canadian bond market will not be a very rewarding venue, although there may be some capital appreciation in longer dated issues.
  • In contrast, the U.S. economy remains quite vibrant despite high interest rates. At its last meeting, the Federal Reserve Chair stated that interest rates in the U.S. will not fall much in 2025. The spread of U.S. bond yields over Canadian bond yields raises an attractive investment opportunity, when coupled with the next point.
  • There is every reason to believe that the Canadian Dollar will continue to slip against its American counterpart. Already below US$.70 at the time of writing, we can certainly imagine the loonie at US$.65. Factors exacerbating this trend include the interest rate spread noted above, low commodity prices, a rising Canadian budget deficit, and of course, the threat of massive American tariffs. For this reason, we will continue to emphasize investment in U.S. stocks over Canadian ones, and we will also open new positions in US$ denominated bonds. We expect that the Trump administration will be very business friendly, and we believe that many of the anti-trust and consumer complaint driven lawsuits that have plagued large American companies in the past few years will quickly disappear.
  • There continue to be some excellent companies in Canada, and they are much less highly priced than many American ones. We will continue to invest in companies that we view as being “best in class”, while keeping a weather eye on the developing cross-border trade situation. At the moment, our portfolios do not include any Canadian manufacturers that would be devastated by tariffs but do include companies that will benefit from a weakened Canadian dollar.

Our clients have enjoyed excellent returns over the past two years, driven by robust stock markets on both sides of the border. Canadians are now confronting a level of U.S. hostility which may be unprecedented, at least in the post-World War Two era. Extra vigilance will be required.

Finally, it is important to note that new technologies, particularly in the areas of sustainable energy, energy storage and artificial intelligence are changing the dynamics of world industry. Much as smart phones, the internet and personal computers spawned a host of new companies and new products that had not previously been imagined, we cannot know how innovations in sectors such as A.I., large scale batteries and autonomous vehicles will affect us in the coming years, but we can be sure they will. The most valuable companies in the world barely existed twenty-five years ago. Who knows what new Microsofts, Apples and Googles are already out in the world, awaiting discovery by today’s investors? As always, we will be alert for opportunities to profit from the new wave of innovators.

We wish all our clients a healthy, happy and profitable 2025.

 

Podcast 

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