Diversifying During Uncertain Times

The recent imposition of U.S. tariffs on Canada has fuelled a surge in Canadian nationalism. In recent weeks, investors have increasingly asked, "How much of my portfolio is in U.S. equities?"

Historically, this question reflected concerns about whether their exposure was sufficient to capture the superior performance of U.S. markets. Today, however, the question is rooted in an emotional reaction to the U.S. administration’s policies and the growing wave of Canadian nationalism. While these concerns are valid, investment decisions require a clear, objective approach. Unlike choosing to buy Canadian produce from a grocery store, the answer for investment portfolios is: diversification remains essential. 

The case for global diversification 

Although Canadian investors’ temptation to reduce or eliminate U.S. equity exposure in response to political and trade tensions is understandable, it might not be strategically prudent. While we have confidence in the strength and resilience of Canadian equities, the reality is that the U.S. market provides diversification benefits that can’t be replicated within Canada’s equity landscape. 

The Canadian equity market is heavily concentrated in a few sectors – financials, energy, industrials and materials – accounting for approximately 75%1 of the S&P/TSX Composite Index. In contrast, the U.S. market offers a much broader exposure, particularly in technology and healthcare, two of the most dynamic and fastest-growing sectors globally. The U.S. is home to industry leaders such as Microsoft, Apple, Nvidia and Amazon in technology, as well as Johnson & Johnson, UnitedHealth and Pfizer in healthcare. These sectors provide structural growth opportunities that Canadian investors can’t access through domestic markets alone. 

Technology, a sector in which Canada has had little exposure, has been a key driver of U.S. stock market outperformance. The same applies to healthcare, which benefits from aging demographics, innovation in biotechnology and advancements in pharmaceuticals. Without exposure to these sectors, Canadian portfolios risk being overly dependent on commodity price fluctuations and financial sector performance, both of which can be cyclical and vulnerable to external shocks. 



"... diversification into U.S. equities acts as a hedge against currency risk. The U.S. dollar is the world’s reserve currency and often appreciates during periods of economic uncertainty."

Additionally, diversification into U.S. equities acts as a hedge against currency risk. The U.S. dollar is the world’s reserve currency and often appreciates during periods of economic uncertainty. For Canadian investors, maintaining exposure to U.S. assets provides not only sectoral diversification but also acts as a potential stabilizer in times of market volatility. 

Canadian investors have an inherent home bias, with an estimated 82% of their total assets – including real estate, pensions, investment funds – tied to Canada. Real estate alone represents approximately 40.9%2 of total household assets, while financial assets (including pensions, investment accounts and private businesses) make up another 41%.3 The vast majority of these assets are invested domestically. Given this already high domestic exposure, reducing U.S. equity allocations would further increase concentration risk and reduce access to global growth opportunities. 



While concerns over trade policy and geopolitical uncertainty are understandable, history shows that markets tend to look beyond short-term disruptions. Investors who attempt to time geopolitical risks often make sub-optimal decisions, reducing exposure at precisely the wrong moment. Instead, maintaining a long-term, globally diversified approach ensures access to the best-performing sectors and companies, regardless of political and economic uncertainties. 

Investment strategy amid trade tensions 

Recent developments, including the shift in the U.S. administration’s economic policy towards Canada, has added another layer of complexity to Canada-U.S. economic relations. The Bank of Canada has already acknowledged that trade uncertainty is weighing on business confidence and investment intentions.4 While some sectors, such as steel and aluminum may face direct impacts from tariffs, we believe that broader economic growth will likely remain resilient. 

At the same time, when comparing economic growth and productivity trends, the U.S. stands out as the most resilient and best-positioned economy for long-term investors. We believe that the country is expected to maintain a gross domestic product (GDP) growth rate of approximately 2.5% annually, outpacing both Canada and the Eurozone, which we forecast to grow at more modest rates of 1.7% and 1.2%, respectively. 

Additionally, the U.S. has a clear advantage in productivity growth, driven by its leadership in technology, artificial intelligence (AI) and automation. We project that U.S. productivity growth will remain at an annualized rate of 1.8%, compared to just 1.0% in Canada and 0.8% in Europe. This productivity edge is further reinforced by substantial investment in research and development, an entrepreneurial culture and a regulatory environment that encourages innovation. 

The AI-driven productivity boom is expected to bolster economic growth in developed markets, particularly in the U.S., which remains in the strongest position to capitalize on these advancements. The strong fundamentals of the U.S. economy, combined with its leadership in key industries, make it a critical allocation bucket for Canadian investors, despite political noise and trade uncertainties. 

The long-term outlook 

While political uncertainty and trade tensions may create near-term volatility, global economic megatrends are expected to continue to shape markets over the next decade. AI-driven productivity gains, shifting trade alliances and demographic changes will influence long-term investment returns. Canada’s economy will remain closely linked to the U.S., but diversifying beyond national borders remains the most prudent approach for Canadian investors. 

Conclusion 

Canadian nationalism is understandable in the current climate. When it comes to investment decisions, however, diversification remains a sound strategy. History has shown that concentrated bets on any single country – no matter how dominant it is at a given time – can lead to extended periods of underperformance. By maintaining a globally-diversified portfolio, investors can mitigate risks, capture opportunities across different markets and help ensure long-term financial stability. Any shift in bilateral trade policies may cause short-term turbulence, but they’re unlikely to derail the broader economic megatrends shaping the future. The U.S. will likely remain at the forefront of AI-driven innovation, while Canada’s economic resilience will continue to be supported by its strong trade relationships. In an unpredictable world, maintaining a balanced, diversified investment approach might be the best way to safeguard and grow wealth over time. 

Sincerely,

Vice President, Asset Allocation & Chief Investment Officer

Canada Life Investment Management

All investment related content, views and insights are those of Canada Life Investment Management and it’s sub-advisors.

The content of this material (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.  

This material may contain forward-looking information that reflects our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of March 7, 2025. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.  

Canada Life and design and Canada Life Investment Management and design are trademarks of The Canada Life Assurance Company.