A Cloud of Uncertainty

The rhetorical tautology, “Predictions are difficult,especially about the future” may feel particularly relevant today.1 The start of 2025 has been marked by low visibility, with two events casting a cloud of uncertainty over investor sentiment: the launch of DeepSeek’s AI platform—claiming to be a significantly lower-cost model—and U.S.President Trump unleashing a trade war.

While the shift in U.S. policy direction has felt particularly unexpected—from tariffs against its
closest ally to talk of annexation—it serves as a reminder of the value of diversification. Until now, Canada’s dependence on the U.S. as its primary export market has largely been overlooked: 77 percent of exports go to the U.S.—no other nation accounts for more than 5 percent.2 Just as diversification is important in portfolio management, it is equally critical in trade.

Over recent years, the focus on diversification in investing may have also taken a back seat. Market gains have been largely driven by a handful of U.S. tech giants, whose dominance has gone mostly unchallenged. DeepSeek’s emergence highlights that disruption is inevitable in any innovation cycle, and no sector remains immune.

If the first few months of 2025 have taught anything, it is to expect the unexpected. It may also be a watershed moment—signaling a shift toward a new era of national protectionism. Indeed, it appears to be a critical juncture for Canada to focus on strengthening its economic position.

The tariff situation has also reignited the debate over its effectiveness. While Trump actively
campaigned on using tariffs to address the U.S. deficit and support tax cuts, the old economic
principle still holds: If you want more of something, subsidize it; if you want less, tax it. Many economists agree that tariffs will have negative effects on the U.S. economy at a time when it faces its own uncertainties: persistent inflation, higher interest rates and slowing economic growth.

Given this backdrop, the tariff situation may evolve. As we have seen, the policy direction of the new U.S. administration is prone to shifting at any time. Even so, the effects of policy changes aren’t always immediate or predictable. And, markets and economies don’t always react as anticipated—as we saw in the pandemic’s aftermath. One of the best ways to navigate uncertainty is by preparing for multiple possible outcomes. Diversification
is intended to position portfolios to withstand changing environments and varying conditions.

With the shifting rhetoric south of the border,the next four years will likely be a test of investor
discipline. Many other factors, such as geopolitical instability, economic declines or stock market volatility, are also beyond an investor’s control. Yet,more often than not, how an investor reacts tothese uncontrollable events can have the greatest
impact on long-term outcomes. The key will be to look beyond the headlines and keep a broader perspective. While the near-term path may not always be clear, history has shown that, as with any cycle, the seasons change, the clouds will part and
brighter days are never far behind.

For many of us, recent events feel unsettling. We continue to monitor the ongoing developments and their potential impact on portfolios making adjustments where needed, without losing focus on the longer term. While challenges undoubtedly lie ahead, brighter days will eventually prevail. Please reach out if you have concerns.

1. Attributed to Niels Bohr, Danish physicist, and Yogi Berra, baseball player, known for saying, “It ain’t over ‘til it’s over”; 2. https://www.scotiabank.com/ca/en/about/economics/economics-publications/ post.other-publications.canada-and-us-economics-.canada-and-usdecks.trade-stats–january-31–2025-.html

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