CIO cites strong tailwinds for US but believes savvy institutional investors will be more tactical
With the threat of a 25 per cent tariff looming, should Canadian institutional investors reduce their exposure to the US?
Sadiq Adatia is holding his nerve and gave a pragmatic answer. The chief investment officer at BMO Global Asset Management simply says if no one bought US stocks, everyone would miss out on returns.
“We actually hit ourselves harder. In the end, no one wins off that,” said Adatia. “Imagine if you didn't invest in the US over the last 10 years? Boy, your portfolio would be down quite a bit compared to everybody else's. It’s not a fruited move by any means.”
Adatia sees the US as the key country shaping global markets in 2025, with strength in its economy, consumers, and corporate performance. While he acknowledged potential volatility ahead, his bullish outlook leans towards US equities and sectors tied to long-term growth themes.
“The US economy is good. The US consumer is in better shape than any other consumer out there,” he said. “The companies that are predominantly in the US not only have good balance sheets and good momentum, but they’re tied to the key themes that the world is actually investing in like AI, automation and robotics.”
He pointed to the US’s relative strength compared to other global economies. While he doesn’t dismiss international or emerging markets entirely, he sees them in a “position of weakness” relative to the US, noting headwinds in Europe, China’s poverty, and geopolitical uncertainty.
That’s why he believes in the power of diversification.
“You want to have exposure to the US, but you want to have exposure to other parts… What we invest in today may not be what we're investing six months from now or at the end of the year,” he said, noting he believes this year will be the year to take profits.
He asserts to institutional investors to rotate a bit more this year and to be more tactical of what you want to own because he believes Trump will be “more sporadic.”
“Because Trump goes from here to here, today's focus might be here while tomorrow's might be there. You might be fine initially, because it's not your focus of what you're owning, but then three months later, it is, and now you lose all your return,” he noted.
“When you’ve got a powerhouse country with a president that has an agenda to make others pay, and you’re coming from that position of strength, it’s a lot easier to give into things that make it worse,” he added, referencing tariffs and trade disputes under the Trump administration.
Meanwhile, Canada, he suggested, sits “in the middle.” While it benefits from its proximity to its trade ties with the US, it remains vulnerable to any spillover effects from international turbulence or supply chain disruptions.
“Our energy sector should be tied to what the US wants to do on that front,” he said, adding that Canada generally sits in the middle compared to international and emerging markets.
US small and mid-caps stand to benefit
Adatia also sees opportunities for a broader rally in US equities in 2025. While last year’s “Magnificent Seven”, known as the largest tech giants like Apple, Amazon, and Microsoft, dominated gains, Adatia expects small- and mid-cap companies to gain traction this year, particularly in financials and consumer discretionary sectors.
“I think there’ll be some segments of [the Magnificent Seven] that will still do well, but it’s time for small-cap, mid-cap financials to also play a bit more, which would be supportive. That’s where I see a lot of the strength going,” he said.
Deregulation, tax cuts, and rate reductions in the US, he argued, would provide tailwinds for smaller companies that have struggled with higher interest rates and tighter margins.
Ultimately, Adatia emphasized the utilization of a tactical approach in 2025, advising investors to rotate portfolios strategically throughout the year.
“Take some profits on some of those tech winners that have done really, really well,” he said. “Maybe the new money starts to move into financials, some of the small mid-cap names, and some consumer discretionary areas that have a chance to put a different story to the game and not tied to the high valuations.”
