Global Outlook – Panorama 2025: Canada – RBC Wealth Management

Couple Sunny Singh and Josh Nye

Canadian stocks

In our view, the Canadian economy will likely be weaker than the U.S. economy in 2025. As the chart on the next page shows, Canada has experienced a dramatic slowdown in productivity relative to the United States, which is holding back growth. Additionally, the recently announced reduction in immigration targets, while it may help rebalance the housing market, could shave almost a full percentage point off projected GDP over the next three years, according to RBC Economics. Finally, we are aware of the difficulties for the Canadian economy that could pose the return of Donald Trump to the White House (e.g., universal tariffs, a renegotiation of trade agreements and an increase in oil production in the United States).

After the Bank of Canada began its interest rate reduction cycle in June 2024, investor concerns over consumer spending gradually eased, leading to a rebound in Canadian bank stocks. As we approach 2025, we believe it is prudent to diversify our investments across the bank group to position ourselves for a variety of outcomes. If the stock market began to favor caution, banks, which are performing well at the moment, could continue to outperform their competitors. But if the likelihood of a recession continues to decline, with the likely resulting easing of credit conditions, banks, which have struggled in 2024, could improve their relative performance.

Canada’s productivity relative to that of the United States has been declining since the 1980s

Productivity and GDP per capita of Canada compared to the United States

Commodity prices are expected to once again impact the performance of the energy sector. Oil prices will, in our view, be confined within a tight range, with geopolitical risks providing the floor and excess capacity the ceiling. The range of US$65 to US$75 per barrel generates sufficient liquidity to produce attractive returns, in our view. Additionally, energy investors should be able to reap significant profits from share buybacks and dividend payouts, as the companies are better equipped to weather challenging macroeconomic conditions thanks to their strengthened and seen balance sheets. their reasonable capital expenditure needs.

All told, in our view, the Canadian stock market in 2025 will be supported by expectations of significant earnings growth and valuations that are not very high, especially relative to the US stock market.

Canadian Fixed Income Securities

The Bank of Canada (BoC) reduced its key rate more than other G7 central banks in 2024, but the Canadian economy continues to feel the effects of restrictive monetary policy. Since mid-2022, when the BoC accelerated its tightening cycle, the Canadian economy per capita has steadily contracted. Furthermore, the U.S. economy experienced strong growth in population-adjusted GDP, even surpassing the rate observed over the previous decade. Divergences between the two economies and monetary policies caused Canadian bond yields to decline and bond prices to rise relative to U.S. bonds, resulting in moderate outperformance of Canadian fixed income securities in 2024.

Adjusted for population, the Canadian economy is contracting, while the U.S. economy has been growing at a steady pace

Average annual growth in real gross domestic product (GDP) per capita

Although the spread between U.S. and Canadian government bond yields is now wider than it has been in several decades, we see potential for further widening in 2025 as the BoC continues to reduce its key rate more quickly than the American Federal Reserve. We believe this should prevent Canadian fixed income from lagging significantly behind U.S. securities in 2025, despite U.S. yields rising as we approach the new year. The divergence could further weigh on the Canadian dollar, which recently hit its lowest level against the US dollar since 2020.

Despite challenging domestic economic conditions, Canadian corporate bond spreads, which measure the additional return investors receive for assuming credit risk, tightened in 2024 amid a generally improving appetite for the risk. This supported excess returns on corporate bonds relative to government bonds of similar maturities. We believe this trend could continue into 2025, with spreads now relatively tight and likely to widen if the Canadian economy deteriorates further or risk appetite declines.

The Canadian preferred share market performed very well in the first half of 2024 thanks to favorable factors specific to the asset class and strong demand for traditionally “riskier” assets, but this rally has lost momentum. momentum in the second half of the year. As preferred stock valuations now look much less attractive, we expect overall returns to be more moderate in 2025.

Click here to view the Global Outlook 2025 report