2025 Annual Outlook | Here are the Tailored Strategies for Canadian Investors

In 2025, the global economy is anticipated to moderately slow, with emerging markets facing challenges while the U.S. economy maintains its leadership position. The fundamental economic outlook for the U.S. continues to suggest a soft landing. Still, the pace and direction of policies from the Trump administration will be critical variables influencing the economy. Potential tariffs may create dual pressures of rising inflation and decelerating growth.

The year 2025 is expected to be characterized by macroeconomic variability, with the China-U.S. policy landscape still lacking a clear trajectory. For investors, 2025 offers a landscape of both transformation and opportunity. Our meticulously crafted investor strategy guide aims to equip you with valuable insights and inspiration for your investment decisions.

(1) Anticipated Rate Cuts: Both the US and Canada still have significant room for rate cuts in 2025. Canada has already cut rates by a cumulative 175bp to 3.25% in 2024, with potential for further cuts to below 2.75% in 2025. The US is expected to cut rates to 3.75%/4.00% next year. The continued downward trend in North American interest rates will further reduce debt burdens for households and businesses, benefiting various asset classes including stocks, Bitcoin, and real estate.

(2) Volatile Canadian Dollar: Trump's America First policy introduces uncertainty to the USD/CAD exchange rate. Currently, the interest rate difference between Canada and the US has reached 150bp, putting pressure on the Canadian dollar. However, if the US accelerates its rate cuts next year due to continued inflation decline, this interest rate gap may narrow. Nevertheless, maintaining a balanced allocation between US and Canadian assets remains the preferred strategy for investors.

Analysts maintain a broadly optimistic outlook regarding the potential for gains in the U.S. stock market; however, much of this optimism has already been factored into current market prices.

In contrast, market attention is increasingly shifting toward small and mid-cap stocks, which are benefiting from valuation discounts, interest rate cuts, and favorable policies from the Trump administration. This segment of the market may present more attractive investment opportunities compared to larger-cap stocks.

Tariff policies will serve as a key variable in 2025, influencing not only markets outside the U.S. but also posing risks to the revenues of American companies engaged in global operations. Investors should remain vigilant regarding the potential for revenue declines among U.S. firms stemming from changes in tariffs and evolving trade dynamics.

The Mag7 still exhibit robust growth potential driven by advancements in AI, although growth rates are expected to decelerate. Additionally, elevated valuations may constrain further upside, leading to greater differentiation in stock performance. Investors should concentrate on each company's return on AI investments and overall market competitiveness, particularly for high-growth potential firms like Nvidia, Meta, and Amazon.

As we approach 2025, the AI wave is anticipated to usher in a new phase characterized by heightened software investment, robust revenue growth, and margin expansion. Market attention is expected to shift toward "application and monetization," with key focus areas including AI software, AI agents, large models, public cloud infrastructure, core hardware, and cybersecurity. The application scale of AI agents is projected to be up to ten times that of traditional SaaS applications, with tech giants spearheading advancements in large models and public cloud services. Demand for hardware infrastructure is also set to rise, along with an expected increase in cybersecurity spending.

Looking ahead to 2025, the Trump administration has made strides in reducing regulatory uncertainty surrounding cryptocurrencies in the U.S., fostering a more optimistic outlook among investors regarding Bitcoin's future. Trump has pledged to establish the U.S. as the "global cryptocurrency capital." This commitment, combined with the ongoing rate cut cycle and the anticipated Bitcoin halving event, is expected to drive increased demand for Bitcoin. Furthermore, the current frenzy surrounding Bitcoin ETFs is further integrating Bitcoin into traditional financial investment portfolios, enhancing its legitimacy and accessibility.

In 2025, gold is expected to face several headwinds that could limit its price appreciation. For instance, an anticipated easing of geopolitical tensions may diminish gold's appeal as a safe-haven asset. Additionally, the new Trump administration aims to promote fiscal efficiency, which could result in reduced government spending and lower deficit levels, thereby exerting downward pressure on gold prices. Furthermore, the rise of digital assets like Bitcoin is attracting investor interest away from gold, a trend that may be intensified by supportive policies from the Trump administration.

(1) Potential Safe-Haven Demand: New trade tensions under Trump could reignite safe-haven demand, boosting gold prices even if other conflicts ease. Should the situation in Syria escalate, it may reignite safe-haven demand among investors.

(2) Fiscal Policy Uncertainties: Trump's fiscal policies, particularly if the fiscal deficit remains high, could degrade the U.S. dollar's creditworthiness and push gold prices up, especially as over 70% of U.S. spending is mandatory.

(3) Central Banks Keeping Gold Purchases: The People's Bank of China has resumed gold purchases, and increased buying by central banks in emerging markets could further stimulate gold prices.

(1) Canada's economy may face potential challenges in 2025. The reduction in immigration targets, though potentially stabilizing the housing market, is projected to decrease the GDP by nearly one percentage point over the next three years. Additionally, potential economic challenges could arise from Donald Trump's return to the White House, including the imposition of blanket tariffs, renegotiation of trade deals, and increased U.S. oil production.

However, quicker rate cuts by the Bank of Canada will lead to a lower interest rate burden for Canadians compared to the US. Following the Bank of Canada's initiation of interest rate cuts in June 2024, a gradual easing of investor concerns about consumer spending has led to a rebound in Canadian stocks.

(2) As 2025 approaches, diversifying across the banking sector seems wise to prepare for various scenarios. A shift towards a more conservative equity market could favor banks that are currently performing well to continue their strong performance. Conversely, if recession risks diminish further, relieving pressure on credit, banks that faced difficulties in 2024 might see a turnaround in performance.

(3) Commodity prices are set to impact the mining sector once again. Oil prices are expected to remain within the US$65–US$75 per barrel range, with geopolitical risks setting a minimum price level and excess capacity establishing a maximum price cap. This price range should allow for sufficient cash flow, supporting attractive returns on energy stocks.