All prices, returns and portfolio weights are as of market close on March 31, 2025, unless otherwise indicated.
Caution Over Exuberance
As we update our quarterly portfolio strategy, we’re reminded of an important lesson that often must be re-learned. Namely, that markets are terrible at forecasting non-linear events.
To wit, we are preparing this edition just ahead of the “America First Trade Policy” memorandum is scheduled to be released. That release is expected to recommend additional country-specific tariffs to be implemented based on the principle of reciprocity and other non-tariff barriers. Additionally, tariff exemptions on USMCA-compliant imports from Canada and Mexico are set to expire on April 2nd while the threat of sector-specific damage on autos, semiconductors and pharmaceuticals still looms large.
It’s difficult to extract just how much of the impact from tariffs is “in the price.” That’s not least as there is always the chance that the White House could change its mind on the scale of these measures along with which countries are targeted. At the very least, we can credibly argue that the unpredictability of trade policy means that we probably haven’t reached peak uncertainty. In a more practical sense, that implies that sticking with a defensive posture is still prudent. The flip side to that is, we’ve yet to see U.S. economic fundamentals deteriorate in a meaningful manner to justify an extension to the correction we’ve seen in Q1. That points to maintaining a bit of flexibility and/or nimbleness when it comes to risk allocation in your portfolios.
Nevertheless, our inclination for the coming quarter is to proceed with a healthy degree of caution on broad risk while also prioritizing regional diversification. Additionally, we are far more constructive on infrastructure over the long-term.
For U.S. equities, while we understand some of the optimism expressed by our colleagues who tend to follow a “bottom-up” approach, we must pay tribute to the fact that the U.S. economy is still operating with a restrictive monetary policy backdrop. True, the passthrough from that backdrop to markets can take some time, but we’re now getting to a point where the expansion phase of the economic cycle is starting to feel mature. At the same time, U.S. equity valuations remain elevated relative to other regions. As such, we are shifting our approach within the equity sleeve of our portfolio and prioritizing regional diversification. In particular, we’ll be allocating more to the Eurozone and China.
Zooming in on the Eurozone, the threat of a trade conflict with the U.S. alongside a geopolitical realignment that doesn’t favour Europe has led to two important outcomes: First, it has accentuated long-term concerns with U.S. valuations – especially compared to the relatively lower valuations in the Eurozone; Second, it has forced European governments to reconsider long-standing aversion to increased deficit spending to boost the domestic economy.
The former has been a reason why European investment has migrated back to domestic markets. But the latter is integral for why European markets should continue to outperform. As European governments spend more on infrastructure, the multiplier effect on the real economy should lead to a higher rate of return over time. The implication here is that we should see a greater proportion of European savings remain invested in the Eurozone and not in the U.S.
As geopolitical realignments move forward, we expect developed countries to reassess their economic models. As part of that, we anticipate that countries that have fiscal space will likely spend more on defense and upgrading or expanding infrastructure. That means more opportunities for project financing as well as P3-style private-public investments. Even countries that lack the fiscal space are now more likely to entertain the idea of spinning off extant infrastructure holdings to private sector firms that can operate far more efficiently.
The upshot of that additional spending is that it is likely to be funded by additional issuance. That is particularly true in a place like Canada, where we expect to see healthy dose of fiscal stimulus in the coming quarters to deal with the fallout of the trade war. At the same time, it’s not as clear that the Bank of Canada will be quick to ease interest rates – not least as inflationary pressures remain sticky in the near-term. To us, that suggests that the Canadian dollar (CAD) yield curve should bear steepen1 – an environment that isn’t as conducive for strategic plays for CAD duration.2 We can make a similar case for the U.S., as well.
To conclude, investors should remember that the best way to enter a dark cave is not by rushing in. Instead, it’s by slowly feeling your way through and letting your eyes adjust. In this backdrop of policy uncertainty, cautiousness is rewarded – not exuberance.
Asset Allocation:
- Relative to our stance in Q1, we’re allocating a bit more to the equity sleeve in our portfolio. That should be interpreted as a nod towards the fact that we see a more constructive backdrop developing outside of North America – where the mix of monetary and fiscal policy easing should be more beneficial for broad risk.
- Nevertheless, we’re still underweight equities relative to our benchmark (which tends to be in the 50-60% range). That reflects our cautiousness with the backdrop in North America, as tariffs are likely to quicken the transition from expansion to slowdown in the U.S. economy and tip the Canadian economy towards a recession.
- For the fixed income sleeve, we’ve slightly curbed some of our exposure. The reason for this is that we see more two-way risk for U.S. and Canadian sovereign yields from here. At the same time, we’re a bit leery about the risk backdrop and what that portends for credit spreads, as well.3
- We continue to see value in maintaining a healthy degree of exposure to alternative assets. Given the current backdrop, the lack of correlation to other traditional assets is a virtue – on top of our constructive view for gold and infrastructure over the medium-term.
- Finally, the nature of the uncertain backdrop in the U.S. means that we continue to prioritize income and liquidity there. That means keeping some cash (in the form of ZUCM) on hand to deploy once the smoke clears a bit more with respect to tariffs.
Fund Performance (%):
| Ticker | Year-to-Date | 1-Month | 3-Months | 6-Month | 1-Year | 3-Year | 5-Year | 10-Year | Since Inception |
| ZDB | 2.01 | -0.26 | 2.01 | 1.87 | 7.56 | 2.42 | 0.83 | 1.65 | 2.41 |
| ZBI | 1.14 | -0.20 | 1.14 | 3.12 | 9.05 | 4.80 | – | – | 3.79 |
| ZTIP.F | 2.69 | 0.78 | 2.69 | 2.17 | 5.68 | 2.42 | – | – | 2.77 |
| ZUQ | 3.66 | -1.14 | 3.02 | 10.75 | 22.91 | 19.92 | 18.97 | 15.89 | 17.11 |
| ZLB | 5.69 | 1.14 | 5.69 | 3.80 | 17.23 | 8.77 | 14.63 | 9.03 | 12.12 |
| ZDI | 9.76 | 0.69 | 9.76 | 5.74 | 13.42 | 13.79 | 14.60 | 6.64 | 7.26 |
| ZXLV | Returns are not available as there is less than one year’s performance data | ||||||||
| ZWEN | 8.48 | 2.97 | 8.48 | 13.20 | 6.93 | – | – | – | 9.60 |
| ZCH | 21.39 | 1.63 | 21.39 | 20.01 | 56.45 | 7.95 | -2.71 | 0.83 | 2.87 |
| ZLSU | 0.11 | -4.58 | 0.11 | 10.37 | 20.04 | – | – | – | 25.18 |
| ZGLD | 19.46 | 9.29 | 19.46 | 25.90 | 49.07 | – | – | – | 52.17 |
| ZGI | 6.85 | 3.31 | 6.85 | 12.35 | 30.65 | 9.56 | 12.95 | 7.93 | 11.98 |
| ZUCM | 1.14 | -0.20 | 1.14 | 8.74 | 11.44 | – | – | – | 9.59 |
Bloomberg, as of March 31, 2025. Inception date for ZDB = 2/14/2014, ZBI = 2/10/2022, ZTIP/F = 1/26/2021, ZUQ = 11/12/2014, ZLB = 10/27/2011, ZDI = 11/12/2014, ZXLV = 2/6/2025, ZWEN = 1/26/2023, ZCH = 1/21/2010, ZLSU = 9/26/2023, ZGLD = 2/15/2024, ZGI = 1/21/2010, ZUCM = 9/26/2023.
For more information, listen to the latest Views from the Desk Podcast episode “Guided Portfolio Strategy Q2 2025”
Yield curve: A line that plots the interest rates of bonds having equal credit quality but differing maturity dates. A normal or steep yield curve indicates that long-term interest rates are higher than short-term interest rates. A flat yield curve indicates that short-term rates are in line with long-term rates, whereas an inverted yield curve indicates that short-term rates are higher than long-term rates.
Duration is a measure of a bond’s sensitivity to changes in interest rates. It is expressed in years and helps investors understand how much the price of a bond is likely to change when interest rates move. Essentially, duration estimates the percentage change in a bond’s price for a 1% change in interest rates.
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