2025 Outlook – Economics & Portfolio Strategy

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. Welcome to a special year end discussion on economic and market trends brought to you by our CIBC experts. It’s been an exciting and newsworthy year, and the prospects for more market moving news remain strong heading into 2025. I’m pleased to lead today’s economic outlook discussion alongside Avery Shenfeld, CIBC’s Chief Economist, and Ian de Verteuil, Head of Portfolio Strategy at CIBC. 2024 featured a relatively robust economies in North America. The Canadian economy did reasonably well, but the US economy did even better. The backdrop there being the US election and, The backdrop there being the US election and, you know, significant changes with the results of the US election. So Avery, why don’t we start there? You know, in terms of the US elections, obviously the path forward is a new regime. New president, new economic advisors, a whole new play New president, new economic advisors, a whole new scorecard rather, looking ahead to that, you know, how do you perceive what the changes in the economy may pan out to be if, all the campaign rhetoric comes to fruition and it is, manifested in policies.

Avery Shenfeld: Well, to cut to the chase, the outlook would be worse. And to some extent, that’s why we have hope that not all of this will go forward, that someone will point these things out. But, putting on massive tariffs and significant tariffs on all US imports, which is part of that campaign, would raise prices to consumers. Consumer spending would therefore falter in volume terms, it wouldn’t be the income to support that pace of consumption. And consumer spending has been the big driver for US growth. So put a dent into that. You put a material dent into US economic activity. On the export side, the US would be hit by retaliatory tariffs, so US exporters would find it more challenging to export their products to the rest of the world, and that pop in inflation might push bond yields up a little bit. It certainly wouldn’t be a positive overall. So you’ve got a slower growth, higher inflationary environment. That’s stagflation. And it’s one reason we hope that some of these policies will be moderated to some degree. As the Trump administration actually sits down to think about which of these things that we said during the campaign, do we really want to end up doing?

Roman Dubczak: Yeah. So I guess a month from now, when, you know, the inauguration is occurred and we start seeing these policies, we’ll have a clearer view on it. But up until now, it’s, reason to be concerned. And, you know, on that theme as Canadians, what could the impacts be from a dollars and cents perspective, for Canadians in terms of interest rates, FX? You know, the variables in our economy?

Avery Shenfeld: Well, you can tell that the leadership in Canada is worried about this. The business community is worried with good reason. You know, we still are very dependent in particularly our manufacturing sector, our resource sector on the US market. A major tariff, like a 20% tariff or the threatened 25% tariff on Canada and Mexico would be a big dent in that export momentum. And even the threat of that tariff may stall capital spending on this side of the border. As businesses start to try to take a more of a wait and see stance, to see whether or not their access to the US market is impeded. Ultimately, if we did get hit by that sort of shock, we’re going to have to respond by getting more out of the domestic side of the economy. So we would likely have to end up taking interest rates even lower than we expect. That would stimulate some domestic demand. It would also weaken the Canadian dollar, which would be part of the recipe for cushioning some of those exporters in terms of maintaining some share of the US market. But for the average Canadian, that’s not necessarily that happy a story. You get the benefit maybe of lower mortgage rates, but you’re going to pay more for imports. Export industries are going to shed jobs. So there’s certainly some casualties here that we’re worried about. And again, we’re hopeful that like in Trump 1.0, we’re able to negotiate our way out of that. Because remember, in Trump’s first term, for a while we had a tariff on steel and aluminum that came and went after a year. We had the threat that NAFTA would be written up, and instead we had a renegotiation of a treaty that, from the Canadian perspective, really wasn’t all that different than the then the prior NAFTA agreement. So we were able to convince the right people in the Trump administration and our allies, among governors, among business representatives in the US, to not disrupt what’s working pretty well, which is the Canada / US trade relationship.

 Roman Dubczak: Thanks, Avery. And you know, on that point, Ian, you just put out a terrific piece yesterday on the impact of the new reality, so to speak. On equity markets in Canada. Maybe just a couple of highlights there on, you know, what the macro and then micro implications of that would be.

Ian de Verteuil: Sure. Boy. Equities. Not as concerned as Avery as these days.

Roman Dubczak: Exactly. Trees are going to the sky.

Ian de Verteuil: Trees are going to the sky. I think what largely we’re seeing reflected in the equity market is You know, this statement of animal spirits.

Roman Dubczak: Yeah.

Ian de Verteuil: There is certainly the, the concern on tariffs. But I would say, broadly speaking, equity investors and most investors so far believing, let’s say saner minds will prevail. And at the end of the day, the, the thrust of, of the Trump administration is Make America Great Again. How do you bring activity back into the United States? So certainly I think for trade partners, if it is not, it’s not the best of news, but certainly it is one of those things that’s quite helpful to the, to the, to the US economy, assuming, as Avery says, it doesn’t get to the point where it’s hyperinflationary or inflationary. And, as we move forward. So what we’re really seeing out of the US is, is an environment where I think businesses, believe we’re going to see some deregulation, agencies such as the Environmental Protection Agency, the Securities and Exchange Commission, and Federal Trade Commission, there’s going to be removal of some of the shackles of stop businesses from really growing the way they would they would like. Against that, that backdrop, if that is the environment that actually occurs and we’ve got an economy that’s in reasonable shape, as long as too many of these, too much of the rhetoric doesn’t come to reality, I think we can continue to do relatively well in Canada, a little bit less favorable as a rightly. If you’re making America great again and you’re sucking activity back into the United States, a trade partner like Canada does lose. But I would say it’s hard to believe some of our major exports, fossil fuels, auto parts, which are so intertwined in North America and in the automotive business in the United States. It’s hard to believe that those things face tariffs over the over an extended period of time that are particularly harmful. So I would say Canada will do okay as long as the US continues to perform. We are when all is said and done, derivative of of the of the US economy.

Roman Dubczak: Yeah. Another theme that you’ve written on and you know, apropos Avery’s earlier comments about lower interest rates, weaker Canadian dollar are, you know, the thesis on dividend paying equities may be going to that a little bit because that’s probably the you know big takeaway.

Ian de Verteuil: Yeah I think certainly on the on the Canadian side we have quite an unusual situation. There really isn’t with for Canadian investors a tax efficient high yield alternative that that meets the income needs of retiring or older Canadians. What really has happened over the course of the last couple of years is we saw the spike in short term interest rates. We’ve seen a flood of money on the bank balance sheets into the guaranteed investment certificates, into the GIC books, the term books as we know on them. So there is, roughly speaking, a quarter of $1 trillion of excess. I’m not saying quarter of $1 trillion. I’m thinking a quarter of $1 trillion of excess over what you’d expect as rates start to come down, which we certainly think will start to happen in Canada. And I’m talking here at the short end of the curve, we will see that money become mobile and start to look for alternatives. We’ve started to see elements of it in the Canadian market. We’ve seen the financials do quite well. Many of the many of the stocks, banks and insurers are carrying four, three, four, five percent yield. That’s certainly one element of it. We’ve seen some of the pipeline stocks do quite well as well. I think we’re going to start to see that broaden out. And utilities, REITs I think as we as we move forward. So to me, the reason I’m so confident that we’re going to have this yield trade rotation is really, but we have a lot of confidence in the Bank of Canada having to cut rates at the short end, and that GIC book generally, most of it, is less than one year in duration. So we’re going to start repricing that book pretty quickly in 2025. So I think that’s really the trade within the Canadian markets for next year.

Roman Dubczak: Got it. Thanks. Well look and speaking of within one year of duration and excitement on the political scene, Avery, we’re probably going to see. Well, we are going to see a Canadian election within the next 12 months. Perhaps offer up a couple insights on where you think the direction of some of our economic policies and, and or economic variables may go in the next year.

Avery Shenfeld: Well, if the polls are right, conservatives will win a majority and we don’t know everything in their campaign platform. But we do know a few things about their campaign platform. So one of them is clearly indicating a lighter touch on Canada’s energy sector. So one of them is clearly indicating a lighter touch on Canada’s energy sector. So certainly a positive for that sector. And, and I would agree that it’s one of those sectors that probably won’t face US tariffs. Doesn’t really make sense to put a tariff on imported oil if part of the Trump campaign was he wants cheap gasoline prices. So that’s certainly a plus for that sector. Generally speaking, you get a notion of smaller government and some idea that someone’s going to get some tax relief, in exchange for that savings on the size of the government. But we don’t know the full campaign platform. We’ll have to wait and see when we get there. But those are those are certainly some of the hints we have at this point. And I’d say that depending on where your political stance sides, you might view some of those things as positive. Certainly I think for our sector, for investors in the energy, the resource sector, speeding up approvals, processes for new projects and so on, all that will be a plus and it will be in sympathy with the political trend that’s likely in the US. That is one of the things that the Trump administration also promises to bring is a lighter regulatory hand, and particularly on the US energy sector. But I think mining as well will benefit from the same sort of thing.

Roman Dubczak: Yeah. No thanks. Look, thanks, Avery. And great insights. You know, I think consistent with a generally positive theme, you know, for investors going forward, consistent and also with the view of the street, you know, taking the markets higher. And I think the political overlay makes things just extra exciting. You know, for us as a, as observers and investors going forward. And I want to thank everyone for joining us here today. I hope you found this an insightful conversation. Wishing you all the best for the holiday season. I hope you join us again soon. Thanks.