CC&L Financial Group Ltd.

2026 portfolio strategy and positioning
Secular themes shaping the outlook
Cyclical outlook over the year
Conclusion

This year’s Forecast begins with a synopsis of 2025 before delving into the secular themes shaping our outlook, and then examines the shorter-term cyclical factors affecting the economy, inflation and monetary policy. We assess market valuations and, considering these elements, establish our portfolio strategy.

**Throughout the next year, updates to our forecasts will be highlighted in our quarterly newsletter Outlook.**

Introduction

2025 was a year of shocks followed by resilience. Despite extreme policy uncertainty, equity markets delivered a third consecutive year of strong gains as investors looked through geopolitics and focused on earnings durability and AI-driven investment. Canadian equities outperformed, benefiting from relative policy stability, resilient growth and a surge in gold prices amid geopolitical and institutional uncertainty.

Entering 2026, markets face fewer immediate stresses than in prior years, but outcomes remain highly sensitive to policy, inflation and confidence. In the coming pages, we present our portfolio strategy and positioning, and discuss the long-term and cyclical shorter-term influences on markets.

Chart 1: Strong equity market gains in 2025 led by Canada
Total returns in local currency rebased at 01/01/2025 = 100

Source: TMX, S&P Global, MSCI, Macrobond

Chart 2: Gold surged in 2025

Source: CME group, Macrobond

2026 portfolio strategy and positioning

Equity markets begin 2026 with a favourable backdrop. Supportive monetary and fiscal policy as well as solid nominal growth underpin a positive environment for equities. Company earnings remain resilient, supported by healthy nominal growth and easing cost pressures. AI-driven investment continues to shape capital allocation across technology, industrials, energy infrastructure and utilities, while related productivity expectations remain a meaningful contributor to valuations. At the same time, high valuations in the United States temper upside potential, but represent better value in Canada and other non-US markets.

Bond markets reflect a balance between the moderating labour markets and longer-term inflation and fiscal concerns. Long-end yields remain bounded in a “higher-for-longer” range by persistent fiscal expansion, reconfiguration of global power structures and sustained investment needs. Policy easing is expected to continue early in the year, amid ongoing concerns around the central banks’ credibility in the face of stubborn underlying inflation.

Chart 3: Earnings growth to remain solid
Trailing earnings growth

Source: I/B/E/S, Bloomberg, Macrobond

Asset allocation

The macroeconomic environment favours a balanced approach that recognizes both the progress made on disinflation and the persistence of structural forces keeping long-term rates elevated. While policy easing supports risk assets, we hold a neutral allocation across equities and a modest underweight in fixed income. We prefer Canadian and emerging market equities relative to global equities.

Fundamental equity positioning

Our fundamental equity portfolios have added high-quality cyclical companies that will benefit from broadening economic growth, such as financials and autos. We increased infrastructure exposure to benefit from AI-related capex as well as deglobalization and protectionist policies. We also added to mid-cap gold producers given spot prices will support strong free cash flow generation over the year. We have reduced lower-growth and interest rate-sensitive companies given expectations of interest rate volatility.

Chart 4: Limited scope for further expansion

Source: I/B/E/S, Bloomberg, Macrobond

Fixed income positioning

In fixed income portfolios, we are managing duration exposure tactically within the recent range in bond yields, as interest rates fluctuate alongside downside economic surprises and upside pressures on long-end yields. Long-term rates are expected to see upside pressure, a global trend. We maintain a yield curve steepening bias. Meanwhile, short-term rates in Canada, currently pricing in central bank rate hikes, should see limited upside from here.

The backdrop of easing inflation and stable demand supports credit fundamentals, and the strong profits, income and policy backdrop are likely to persist. However, the tightest spreads in over a decade, combined with asymmetric risk-reward dynamics, lead to a neutral overall exposure. Within credit, we prefer corporate bonds over provincials.

Secular themes shaping the outlook

Inflation: A higher, more volatile floor

Disinflation over the past two years reflects the unwinding of acute shocks, not a return to pre-2020 levels. Global trade networks are adapting to shorten supply chains, prioritize resilience and elevate geopolitical considerations over cost efficiency. Aging populations and reduced immigration imply a shrinking of working-age populations and tighter labour markets. Large-scale infrastructure renewal, defence modernization and expansion, coupled with energy transition investment, all reinforce upward pressure on costs. Persistent momentum in nominal GDP will anchor growth rates higher for wages, rents, earnings and government outlays. In this environment, maintaining confidence in central bank independence remains critical, as any erosion of the US Federal Reserve’s (the Fed) credibility would raise the long-term risk that inflation expectations become less firmly anchored. Inflation is likely to trend lower, but with a higher floor, greater volatility and an increased risk of resurgence if demand firms or policy eases prematurely.

AI and the productivity wildcard

AI is reshaping capital allocation, labour demand and corporate strategy, but its macro impact remains uneven. Near-term effects are capital intensive as adoption has accelerated, boosting investment in data centres, semiconductors and power infrastructure. To fund this buildout, companies are increasingly turning to credit issuance, both public and private. This reflects the scale of ambition but also introduces financial stability risks, should funding conditions tighten or expected returns fail to materialize. While early adopters remain confident in the displacement of routine cognitive roles, AI has not yet delivered on the promised broad productivity gains. Longer-term benefits depend on diffusion into enterprise processes, organizational redesign and workforce adaptation, which historically take time. A deeper question concerns the long-term social consequences, notably how the distributional and employment impacts will be managed. AI represents both a powerful growth opportunity and a source of uncertainty around labour displacement, inequality and financial stability.

Bigger government and fiscal dominance

Fiscal policy has shifted from cyclical support to a persistent structural force. Even as central banks have cut interest rates, politically entrenched deficits, industrial policies, defence spending and climate-related investments are creating a potent blend of policy support . This encourages growth and employment, reducing the likelihood of a downturn. However, it constrains monetary policy from deploying restrictive policy as debt service costs surge. This dynamic implies asymmetric responses to inflation, leaving the risk of inflation settling above target. Elevated bond issuance and debt-servicing sensitivity imply higher term premiums, wider yield ranges and greater volatility in long-term rates.

Geopolitics and a fragmented world

Globalization is giving way to regionalization and strategic alignment. Trade, capital flows and supply chains are increasingly shaped by security concerns rather than efficiency. Countries at the intersection of the realignments, such as Mexico, parts of Southeast Asia and Canada are positioned to benefit. However, this global reordering raises costs, complicates coordination and sustains higher risk premiums . As a result, global allocators are reassessing concentrated exposure to US dollar denominated assets. While the US dollar remains dominant, diversification across currencies, jurisdictions and real assets is gradually increasing.

Hyper-financialization and fragility

Financial markets now exert outsized influence on real economic outcomes. Consumption, hiring and investment are increasingly sensitive to asset prices, particularly equities. The concentration of wealth effects at the top of the income distribution has so far supported spending growth. However, this also introduces overall consumer vulnerability to a reversal in market confidence. This is particularly true in light of higher interest rates (punitive for borrowers and more rewarding for savers) as well as high inflation that is borne disproportionately by lower income earners . Financial market risks are compounded in private markets where leverage is higher, transparency is lower and liquidity is thinner. This can lead to valuation mismatches as refinancing pressures, particularly to fund the AI buildout, rise.

Cyclical outlook over the year

The United States: A mid-cycle expansion continues, with inflation risks

The United States enters 2026 in a mid-cycle expansion supported by fiscal stimulus, easing financial conditions and sustained AI-related capex. High-income consumers remain resilient, and credit availability is improving. However, labour markets are gradually softening, services inflation remains sticky and tariffs are beginning to pass through to prices. Inflation risks are asymmetric: renewed demand or overly accommodative policy could reaccelerate inflation and force a less dovish Fed than markets expect.

Europe: Gradual stabilization amid structural headwinds

Europe shows signs of gradual stabilization as fiscal flexibility increases and rate cuts ease financial conditions. Defence and infrastructure spending support activity, notably in Germany. However, political fragmentation with coalition governments and populism imply rising fiscal strains as there is no appetite for fiscal austerity. Trade pressures and energy transition costs will constrain growth across the region. Inflation is moderating, but wage dynamics from challenging demographics, combined with rising food and energy costs, all remain upside risks.

China: Managed moderation

China continues a path of controlled slowdown, with growth driven by manufacturing, exports and state-directed investment rather than consumption. The property-sector correction remains a key drag on household confidence. Inflation is persistently below target with pressure on the downside from weak pricing power and industrial capacity. Policy support is targeted, as authorities prioritize financial stability and do not want to reflate housing aggressively. External risks persist, especially with trade, but incremental easing and stabilization efforts should help reduce deflation risks into this year.

Canada: Renewed potential output growth

Canada weathered 2025 better than expected despite significant trade shocks and housing weakness. Household leverage, mortgage resets, slower population growth and subdued business sentiment remain constraints. Looking ahead, risks are easing. Fiscal spending on infrastructure, housing and defence provides a positive thrust, while contained inflation gives the Bank of Canada room to remain accommodative. Trade frictions may resume in light of the USMCA renegotiations, but Canada enters 2026 with improving labour dynamics and renewed potential output growth.

Conclusion

After three consecutive years of strong equity returns, the investment environment entering 2026 is shifting. Equity performance is increasingly expected to be driven by earnings growth rather than valuation expansion, against a macro backdrop that remains broadly supportive. Canada’s combination of commodity exposure, improving earnings momentum and relatively attractive valuations stands in contrast to the highly valued US market, while bond yields appear range bound as inflation and interest-rate pressures offset one another.

Beyond the near-term cycle, markets are being shaped by powerful secular forces. Geopolitical fragmentation, sustained large fiscal deficits and rapid AI-driven investment are reshaping growth, inflation and policy constraints. Inflation is easing, but is likely to remain more volatile than in the pre-pandemic era.

We’re pleased to reflect on another year of meaningful growth and strategic advancement across our portfolio.

Transformative acquisitions

Oakcreek

In May 2025, Oakcreek Golf & Turf completed the acquisition of Pattlen Enterprises including L.L. Johnson in Denver, Colorado and Midwest Turf in Omaha, Nebraska.

This acquisition reinforces Oakcreek’s position as one of the largest, full-service distributors of Toro commercial turf equipment in North America.

Purity Life

In September 2025, Purity Life completed the acquisition of Horizon Distributors, PSC Natural Foods and Ontario Natural Food Company.

This acquisition further solidifies Purity Life’s leadership in the Canadian natural health, grocery and wellness distribution market, creating one of the country’s largest, full-service platforms with an unwavering commitment to excellent customer and vendor service.

Learn more about our portfolio.

New to Banyan and recent promotions

We’re excited to share the following promotions and additions to our firm as the depth and breadth of our team continues to grow:

Marat Altinbaev promoted to Director	Alex Gelmych promoted to Senior Analyst	James Nash has joined as Analyst

Our success at Banyan is built on the talent, dedication, and leadership of our people.

Learn more about our team.

New investments

Our focus heading into 2026 remains the same. We are looking to make long-term equity investments alongside world-class management teams in businesses across North America with EBITDA of at least $5 million.

Do you have an opportunity in mind? Learn more about our investment criteria or connect with us today.

Chinese economic growth held up in H2 2025 but a fall in six-month real narrow money momentum in November-December suggests weakening prospects – see chart 1.

Chart 1

December money numbers are also available for Brazil, India and Japan, showing declines in momentum for the former two, with Japan remaining negative.

US and European data will be released next week. Assuming unchanged growth rates, the above information implies a significant fall in global (i.e. G7 plus E7) six-month real narrow money momentum, retracing much of the July-November recovery – chart 2.

Chart 2

Global real money momentum may be about to cross beneath six-month industrial output growth, which rose into November.

Chart 3 shows a long-term comparison of G7-only real narrow money and industrial output momentum, using 12- rather than six-month rates of change. The series converged in November, supporting the suggestion of a change in “excess” money conditions.

Chart 3

Signs of a narrow money slowdown, albeit tentative, are consistent with the negative cyclical view here, based on an expectation that the global stockbuilding cycle will enter a downswing this year into a possible H1 2027 low.

A measure of US broad money M3 derived from data in the Fed’s quarterly financial accounts grew at a 5.5% annualised rate in the two quarters to end-September. This exactly equals the average over the non-inflationary five years to end-2019 – see chart 1.

Chart 1

The growth rate is also close to a 5.4% six-month annualised increase in the monthly M2+ measure calculated here. M2+ adds large time deposits and institutional money funds to official M2. M3 additionally includes repos.

M2+ growth rose to 6.7% in November, with available information suggesting a further increase in December. This could signal a future rise in inflation, though probably not before H2 2027. However, a similar pick-up a year ago reversed in H1 2025.

An advantage of the financial accounts measure is that a sectoral breakdown is available. M3 holdings of the household and non-financial business sectors rose at similar rates in the two quarters to September (5.2% and 5.0% annualised respectively), with stronger growth (12.7%) in financial sector money (i.e. held by insurance companies, pension funds and GSEs) – chart 2.

Chart 2

While household broad money continues to grow respectably, it has lagged far behind financial wealth. Money accounted for 14.0% of total financial assets at end-September, the lowest share since Q2 2019 – chart 3.

Chart 3

The equity share of financial wealth, meanwhile, reached another post-WW2 record of 47.1%.

The fall in the broad money share since 2022 has been driven by time and savings deposits, with the combined weighting of currency, checkable deposits and money funds stable – chart 4.

Chart 4

A chart recently doing the rounds shows only the latter measure (i.e. excluding time and savings deposits) to support a claim that household cash levels are high. Such selective use of data is regrettable.

(Note that the share of time and savings deposits has also been reduced by the reclassification of some savings deposits as demand – i.e. checkable – deposits.)

The rise in the equity share mostly reflects price appreciation but households have also been buying into strength.

The rally from the October 2022 low was initially driven by corporate demand but this fell off after H1 2024, with household and foreign purchases taking up the slack – chart 5.

Chart 5

The broad money share reached a similar level before the GFC bear market and corrections in 2015 and 2018, as well as the 2020 covid sell-off.

The share fell below the current level in the late 1990s but equity exposure was then significantly lower, peaking at 38.7%. Put differently, the higher beta of the balance sheet now makes a similar cash undershoot less likely.

The past year was yet another eventful one for sustainability investors and the broader Environmental, Social and Governance (ESG) landscape. 2025 was marked by a succession of extreme weather events, a near-record global temperature average and significant international policy developments, including the EU’s Omnibus simplification package and further amendments to greenwashing claims under Canada’s Competition Act. Importantly, the average global temperature for the three-year period from 2023 to 2025 likely exceeded the 1.5°C threshold above pre-industrial levels for the first time – a milestone that underscores the growing urgency for governments, companies and investors to reassess how climate risks are managed and priced.

In this commentary, we highlight five ESG trends set to shape the year ahead, revealing both challenges and opportunities for investors and businesses alike.

1. From climate mitigation to climate survival

With the 1.5°C threshold now effectively behind us, the focus is shifting from climate mitigation alone to climate adaptation and resilience. Markets are increasingly pricing physical climate risks – from flooding and heat stress to water scarcity – into valuations, insurance costs and credit risk. At the policy level, governments are directing more capital toward adaptation priorities such as resilient infrastructure, water systems, food security and disaster preparedness, with several countries announcing a major increase in adaptation finance, aiming to triple it to $120 billion annually by 2035. For investors, exposure to climate resilience is becoming critical. We believe that companies enabling societies to withstand and adapt to physical climate impacts are likely to play an increasingly important role in long-term portfolios.

2. ESG returns to its financial roots

After surging in prominence during the pandemic years, ESG has faced political pushbacks and skepticism in parts of the market. This recalibration is now forcing a clearer definition of what ESG truly represents: financially material business issues. Labour practices, supply-chain resilience, governance failures and environmental liabilities matter because they can directly affect cash flows, valuations and license to operate – and indirectly shape the long-term sustainability of economic growth. In 2026, we believe ESG will be re-anchored to its original purpose: identifying risks and opportunities that are financially relevant to investors.

3. ESG integration is also becoming mainstream

ESG is no longer a niche strategy or a product label. Sustainability considerations are increasingly embedded across investment processes, from equity and credit analysis to portfolio construction and risk management. In Canada alone, ESG integration is used by 96% of investors, representing 87% of AUM. Whether or not a fund is explicitly marketed as “ESG,” these factors are becoming part of standard due diligence, and therefore increasingly a core component of the investment infrastructure. We believe this trend will continue in the new year and accentuate in many markets around the world as countries like Japan, China and India are increasingly adopting ESG initiatives.

4. The redefinition of “responsible” capital

Energy security, defence, critical infrastructure and industrial resilience are being re-examined through an ESG lens. Investors are increasingly debating when exclusion gives way to responsibility, and whether financing defence capabilities, transition metals or strategic industries is incompatible with – or essential to – long-term sustainability. This shift reflects a more pragmatic approach to ESG, recognizing that social stability, security and resilient supply chains are foundational to sustainable development. We believe that 2026 will be marked by further discussions and guidance around how to invest responsibly in previously deemed harmful sectors, with workgroups such as the Principles for Responsible Defence Investment (PRDI) initiative.

5. AI and data-driven ESG analysis

Artificial intelligence (AI) and advanced data analytics are transforming how most sectors operate. ESG is no different. From climate modelling and supply-chain monitoring to controversy detection and impact measurement, AI is enabling more timely, granular and forward-looking ESG analysis. The competitive edge is moving away from simply having ESG data toward better understanding of the data, as well as interpreting signals faster and more effectively than the market. As AI capabilities continue to advance, we believe ESG will increasingly become more dynamic, data-driven and integral to enhance risk management, uncover emerging opportunities and improve long-term investment decision-making.

Final thoughts

At Global Alpha, it’s never been about chasing ESG trends, but remaining disciplined and consistent in our investment processes. ESG has always been about financial risk mitigation and long-term value creation – doing what is right for our clients by identifying material risks and opportunities in a rapidly changing world. From climate resilience and supply-chain stability to governance quality and data-driven analysis, ESG considerations have long been embedded in how we assess risk and opportunity across portfolios.

As the ESG landscape continues to evolve, our philosophy remains unchanged: identifying and managing material risks, while allocating capital to businesses positioned to create durable value in a rapidly changing world.

Venezuela and the arrival of the “Donroe Doctrine”

Trump gunboat diplomacy in the Caribbean has culminated in the seizure of Venezuelan leader Nicolás Maduro on January 3, 2026. The move has been widely touted as part of a revived Monroe-style foreign policy doctrine in the United States which aims to assert regional hegemony by shaping political trajectories through the region.

More muscular regional foreign policy from the United States under President Trump reinforces a rightward political shift across the region. Economic instability, corruption and crime have been the fuel for voters to favour conservative and far right candidates in elections across Argentina, Bolivia, Chile, El Salvador and Honduras. The United States has signalled in recent months that it is prepared to strengthen the hand of conservative political actors aligned with its strategic aims (e.g., the US Treasury’s $20 billion currency swap line with Argentina’s central bank).

Maduro’s capture sends a clear message – particularly to Latin America’s left-wing politicians – with respect to the lengths to which Washington will go to protect its economic, geopolitical, security and ideological interests in the region.

The rise of economic conservatism with a backstop from the United States has already stoked optimism in regional equity markets on hopes for pro-business reforms, deregulation and fiscal discipline. While LatAm’s equities markets were buoyant in 2025, we think there is potential for positive momentum to pick up as the continent embraces fiscal conservatism.

As we have written previously, Brazil remains the largest market that can move the dial for EM equities should voters go with an economic moderate over incumbent President Lula in this year’s presidential elections. Below, our LatAm portfolio manager Luis Alves de Lima provides an update on prospects for the market.

Will Brazil be the next domino to fall in LatAm’s shift to the political right?

With the FIFA World Cup and presidential elections looming, 2026 shapes up as a big year for Brazil. While my Brazilian compatriots and I remain as passionate as ever about football, I think that politics is poised to steal the spotlight from the pitch.

In my view, the “Hexa” (Brazil’s longed-for sixth World Cup win) remains a distant national dream reflected in rather long odds among the bookmakers. The better bet is for a market-friendly political shift and subsequent bull market in Brazilian stocks.

However, it would be foolhardy to call time on a political operator as wily as Lula da Silva. We have written in previous commentaries about the potential for a conservative moderate such as Sao Paolo governor Tarcísio de Freitas to win the presidency. He remains the markets’ preferred candidate, being a technical, pro-market leader capable of bridging the gap between the Bolsonarista base and the moderate right. However, recent data from the December 2025 Quaest polls suggests a more complex reality.

Senator Flávio Bolsonaro, the son of the former president Jair Bolsonaro (now in prison for a botched coup attempt), has reached parity with Tarcísio in presidential vote runoff simulations, both trailing President Lula in a 46% to 36% split. This shift has emboldened the Bolsonaro family to prioritize their own political legacy, seeing an opportunity for Flavio to inherit the mantle of right-wing standard-bearer rather than coalesce around a moderate more likely to garner wider public support.

Critically, and much to the consternation of investors, Governor Tarcísio has said he will not run for president if Flávio Bolsonaro maintains his candidacy. Driven by a deeply held sense of loyalty and a desire to avoid fracturing the conservative base, Tarcísio has essentially signalled that he will remain in São Paulo if the “heir apparent” proceeds.

This is the worst-case scenario and would leave voters with a choice between two populists who feed on political polarisation. President Lula would welcome the prospect of Flávio’s candidacy, where he can home his narrative for the candidacy in on the threat to institutions of a Bolsonaro presidency.

Political sands will continue to shift as 2026 unfolds

These recent developments are no doubt a knock to the short-term bull case to Brazilian equities. However, getting overly fixated on this “nightmare scenario” would be a mistake. The field is deeper than current headlines suggest.

Even if Flávio remains the standard-bearer for now, there is potential for alternative candidates to grow in the polls should the electorate favour administrative results over populist chaos.

Figures like Governor Ratinho Júnior (Paraná) and Governor Romeu Zema (Minas Gerais) have built formidable reputations for fiscal discipline and efficiency.

The emergence of Renan Santos and the MBL’s “Missão” party represent a youth-driven movement prioritising fiscal conservatism, anti-corruption and law and order, which could disrupt the duopoly between Lula’s PT party and the Bolsonarismo right as we approach the March 2026 deadline for candidate clarity.

Market implications

There are two primary reasons for constructive optimism in thinking about the outlook for Brazilian stocks:

First, Brazil is not an island; it is part of a decisive continental swing to the right. In December, we saw José Antonio Kast’s victory in Chile, this on the back of President Javier Milei’s strong showing in Argentinian legislative elections, and recent conservative momentum in Ecuador.

This regional “blue tide” creates a powerful tailwind for market-friendly policies, and we argue that this will place some moderating pressure on Brazil’s political elite.

As its neighbours demonstrate the success of radical deregulation, the appetite for a “rational right” candidate in Brazil will only strengthen.

Second, valuations remain exceptionally attractive. Despite the noise, the Brazilian equity market continues to trade at a forward P/E of roughly 10x – well below historical averages and global peers.

EM market valuations vs past 10 years – Brazil the cheapest of the major markets

Source: FTSE Russell, Factset, HSBC

Momentum in earnings revisions ratios is broadly turning higher

Source: FTSE Russell, Factset, HSBC

The “election premium” is already being priced into assets, meaning that any pivot back toward a Tarcísio-led ticket or a credible centrist surge would trigger a massive re-rating.

Historically, when Brazil shifts toward a pro-market administration, the subsequent rallies can exceed 200% in dollar terms.

In summary, while we expect continued volatility through the first half of 2026, the fundamental investment case for Brazil remains intact. We are navigating a period where political pessimism provides a rare window to build positions in high-quality companies at distressed prices.

We remain vigilant but confident that the broader regional trend and the sheer attractiveness of local valuations will ultimately win out over the electoral circus.

Stagevision, a Banyan Capital Partners portfolio company, announced that Jason Grouette has been appointed Chief Executive Officer. Former CEO Scott Tomlinson has transitioned to the role of Vice Chairman and continues to provide strategic guidance to the company. This leadership transition is effective January 7, 2026.

Jason has been an Operating Partner with Banyan since 2022 and has over 20 years of leadership experience from his tenure as an executive at 3M, including navigating 3M’s N95 response during the COVID-19 pandemic.

In 2025, US equities were powered not just by technology companies and AI giants, but by a wider array of stocks, signaling a shift beyond the famed Magnificent Seven. Yet it was Canadian equities that stole the spotlight, propelled by a remarkable gold rally that soared over 60% this year. For investors, this marks the third straight year of robust total portfolio growth, achieved despite persistent geopolitical uncertainties and trade challenges.

Equities – Canadian equity led the charge

2025 was a banner year for Canadian equities, which charged ahead of other major markets. The S&P/TSX Capped Composite Index returned 31.7%, and Canadian small cap stocks soared more than 50%. This impressive rally was powered by the explosive growth of gold and precious metal companies, as well as the continued global momentum of AI-driven firms. Emerging and international equities also delivered stellar performances, climbing 27.3% and 25.1% respectively.

In contrast, US equities lagged, rising 12.4% for the year, a result dampened for Canadian investors by a weaker US dollar. In contrast, the S&P 500 Index gained 17.9% in US dollar terms. While a wider array of stocks drove the S&P 500 Index return in 2025, the collective influence of the Magnificent Seven – Alphabet (Google), Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla – saw their representation grow slightly, with Nvidia being a key contributor to that growth.

Figure 1 – 2025 calendar year equity returns (%)

Source: Bloomberg, S&P & MSCI (all returns in CAD)

While equity market indices delivered impressive gains, active managers faced a tough landscape, especially if they missed out on the surging gold and technology sectors. An exception to this experience has been quantitative (systematic) investment managers, who harness technology to analyze a vast array of global companies and maintain diversified portfolios. Quantitative-style managers have generally been able to navigate the challenging and concentrated equity markets and outperform the index over the last several years.

Fixed income – duration headwinds

2025 proved to be another challenging year for traditional fixed income markets. Emerging markets debt and US high yield stood out as top performers, driving public market fixed income returns. The Bank of Canada continued to cut rates, bringing the overnight rate down to 2.25% by year end. Once again, longer-duration bonds faced headwinds, with universe bonds invested across all maturities posting a modest 2.6% gain, while long bonds declined by 0.8%.

Figure 2 – 2025 calendar year fixed income returns (%)

* 30% Merrill Lynch US High Yield Cash Pay BB Index (CAD$) & 30% Merrill Lynch US High Yield Cash Pay BB Index (USD$) & 30% FTSE Canada Corporate BBB Bond Index & 10% Merrill Lynch Canada BB-B High Yield Index (CAD).
** 50% P Morgan Emerging Market Bond Index, 50% JP Morgan Corp Emerging Market Bond Index (CAD).
Source: Bloomberg, Merrill Lynch, S&P & FTSE (all returns in CAD)

Private markets

Private markets in 2025 once again revealed a landscape shaped by strategy and timing. Unlike public markets – where returns are immediate and transparent – private investments require patience due to valuation and reporting lags. This year witnessed encouraging results with private credit and infrastructure strategies delivering solid returns and commercial real estate showing steady improvement.

Private equity returns, while mixed, sparked renewed optimism, especially with deal activity surging past USD300 billion in the third quarter of 2025 alone. Hedge funds demonstrated their versatility, with many strategies achieving returns that more closely rivaled global equities, a notable shift from the previous year.

Ultimately, private markets continue to play a vital role in portfolio diversification, complementing public equities and fixed income to create a more resilient asset mix.

Stronger loonie

The Canadian dollar clawed back much of the decline it experienced in 2024 relative to the US dollar. For Canadian investors holding unhedged US equities, this rebound reduced returns due to the currency effect. Figure 3 traces the history of exchange rates from 1970, capturing the modern-day experience with respect to the Canadian dollar versus the US dollar relationship. Since around 2016, the Canadian dollar has settled into a relatively narrow range, even during the recent surge in inflation. By the close of 2025, the Canadian dollar stood at around 73 US cents, marking a gain of almost 5% from the previous year’s finish.

Figure 3 – History of USD / CAD exchange rates

Source: Bloomberg

Opportunity knocks

Opportunity is knocking for investors in 2026. After several years of remarkable gains in equity markets, now is the perfect moment to revisit how diversified your portfolio truly is. While alternative investments may have recently lagged soaring global equities, they remain a vital tool for building resilience. By weaving alternatives into your asset mix, you can better prepare your portfolio to weather the inevitable twists and turns of the financial landscape.

Canadian investors have long leaned toward homegrown stocks, giving Canadian equities a bigger slice of their portfolios than global equity benchmarks suggest. Notwithstanding the strong performance of the Canadian equity market in 2025, the recent surge in US markets – fuelled by the rise of the “Magnificent Seven” technology giants – has some investors rethinking this approach. Canadian investors have a similar home-country bias as some of their global peers. While some investors may go all-in on global equities, there are several advantages for having a Canadian-equity bias.

Home-country bias

Home-country bias refers to building an investment portfolio instinctively favouring stocks from your own country, which is a tendency shared by investors worldwide. Although Canadian stocks represent just 3% to 4% of world equity markets, the comfort of the familiar leads to a much larger role in equity portfolios. It is common for Canadian investors to allocate 20% to 40% of their total equity exposure to domestic equities.

Many investors globally allocate far more in local equities than their country’s actual slice of the global market. According to the WTW Thinking Ahead Institute’s Global Pension Assets Study 2025, this bias has been especially strong for Australian, Japanese and UK pension investors that allocate 20% to 45% of their total equity exposure to homegrown companies. While US pension investors typically have the largest domestic percentage allocation, it generally reflects the US market’s large representation of the global market.

The case for a home-country bias versus a more global market capitalization approach often wrestles with similar challenges, like the impact of certain sector concentration. However, each approach offers a unique lens on how to manage risk and opportunity.

Features of the different approaches

The table highlights the features of the different approaches to managing total equity assets.

	Canadian-equity bias	Global equity only
Currency	Investing in assets denominated in Canadian dollars allows institutional investors, such as pension plans, endowments and foundations, to sidestep currency risk. This ensures that asset values move in step with liabilities, eliminating valuation fluctuations caused by currency mismatches.	Investing globally is not just about geography; it is about currency too. Global equities provide exposure to multiple currencies, offering a natural hedge if the Canadian dollar takes a hit during global downturns or commodity slumps.
Index features	Canada’s equity market stands out globally with its concentration in resources and financials, which gives it a unique risk-return profile. During commodity booms, for example, Canadian equities can offer diversification benefits relative to global markets.	From a sector perspective, the global market is more heavily weighted to growth sector opportunities, such as information technology and health-care sectors compared to Canada.
Diversification	While Canada’s market is smaller and more concentrated, leading to higher return volatility, it can strengthen total equity returns when paired with global equities by adding a layer of diversification.	Diversifying globally helps avoid putting all your eggs in one equity basket. Depending on the global index adopted, it provides access to many developed and emerging market countries.
Alpha potential	Added value potential from active management has been more consistent for Canadian equities compared to global equities, providing an important additional source of return.	Active management within global equity portfolios has delivered added value, notwithstanding the recent headwinds due to the robust performance of technology-related companies.

Why have a Canadian-equity bias?

Portfolios with a Canadian-equity bias provide the opportunity to unlock better risk-adjusted total equity returns compared to global only, they have the benefit of more consistent added value potential from active management, as well as a supportive economic backdrop in Canada that amplifies its growth potential.

Return perspective

Analyzing relative historical performance of Canadian equities (S&P/TSX Index) versus the major global equity indices (MSCI ACWI Index and MSCI World Index), highlights the resilience and benefits that a Canadian equity bias can bring. While global indices often steal the spotlight, there is no clear, consistent winner. Except for the most recent decade, Canadian equities have outpaced their global counterparts over extended periods, when measured in rolling four-year returns and in Canadian-dollar terms for the global indices (figure 1). While the headlines focus on the “Magnificent Seven” powering US and global equity gains, Canadian equities have quietly matched global equity performance over the more recent rolling four-year periods.

Figure 1 – Global equity versus Canadian equity index returns

Source: MSCI, FTSE and Bloomberg

When analyzing the volatility of Canadian and global equity indices, the story is a little clearer, with Canadian equities generally being more volatile than unhedged global equities (figure 2). This experience is consistent with the more concentrated Canadian market compared to the global equity market.

Figure 2 – Global equity versus Canadian equity volatility of index returns

Source: MSCI, FTSE and Bloomberg

But here is the twist: portfolios that have a tilt toward Canadian stocks, more than their market capitalization weighting would suggest, have generally experienced lower overall volatility than a purely global portfolio, as illustrated for a portfolio invested 70% in global equities (MSCI ACWI Index) and 30% in Canadian equities (figure 3). When also considering the rolling four-year return experience (figure 4), it implies stronger risk-adjusted returns for a home-country bias.

Figure 3 – Global equity versus home-country bias global equity volatility of index returns

Source: MSCI, FTSE and Bloomberg

Figure 4 – Global equity versus home-country bias global equity index returns

Source: MSCI, FTSE and Bloomberg

Alpha potential

Active management offers the potential of an additional source of return. While the influence of technology-related stocks has recently implied headwinds for active managers in general, Canadian equity managers have on average provided more consistent added value over time compared to global equity managers (figure 5).

Figure 5 – Canadian versus global equity median added value

Note: Based on manager universe with MSCI ACWI Index benchmark for global equities.
Source: eVestment, Connor, Clark & Lunn Financial Group.

Current economic backdrop

Canada is positioned to deliver both value and growth for investors. The country is stepping confidently into a new era of economic growth, powered by a pro-business agenda. Under Prime Minister Mark Carney, the country is embracing reforms that break down interprovincial trade barriers, streamline regulations and fast-track resource and infrastructure development. Policy moves, like easing the carbon tax, signal a broader commitment to making Canada a more attractive place to do business. At the same time, the Bank of Canada’s aggressive interest rate cuts and a government focused on fiscal stimulus are working in tandem to ignite domestic growth.

Canada’s rich reserves of future-critical commodities, such as copper, uranium, gold, rare earths and natural gas, are set to play a pivotal role in the global energy transition. For example, the introduction of new liquified natural gas export terminals on the West Coast is opening the doors to Asian markets. The country’s banking sector, renowned for its stability and strong regulations, adds another layer of resilience in an unpredictable world.

Benefiting from local strengths and global opportunities

While global equities provide broad investment opportunities, a Canadian bias in total equity allocations offers strategic advantages, especially for investors seeking currency alignment, unique market exposure, greater active management contribution, as well as more efficient risk management. An optimal approach to total equity portfolio structure is a thoughtful blend of both Canadian equity and global equity that incorporates an element of home-country bias.

The analytical approach used here is giving mixed messages for 2026 prospects. Global monetary trends appear modestly supportive of economic growth and markets, but the stockbuilding cycle remains on course to enter a downswing this year, with the housing cycle also in a time window for weakness.

Further considerations are likely suppression of labour demand from AI deployment and the unusual magnitude of gains in risk asset prices during the upswing phase of the current stockbuilding cycle.

The judgement here is to give greater weight to cyclical influences and plan for a negative shift in the investment environment during 2026, with caution to be reinforced in the event of deterioration in monetary indicators and / or data confirmation that a stockbuilding downswing is under way.

Global six-month real narrow money momentum – the key monetary leading indicator employed here – fell between March and July 2025 but recovered into November. The decline and rebound were driven by nominal money trends, with global CPI momentum stable at around its pre-pandemic pace (vindicating the monetarist forecast of full retracement of the 2021-22 inflation spike) – see chart 1.

Chart 1

The earlier fall in real money momentum has been reflected in a decline in global manufacturing PMI new orders – a timely indicator of economic momentum – from an October peak. Based on recent lead times, however, the monetary rebound suggests that the PMI will bottom out in early 2026, with a recovery into mid-year – chart 2.

Chart 2

While global growth may hold up in H1, it may not be strong enough to prevent a further rise in unemployment rates, partly reflecting AI job displacement – chart 3.

Chart 3

Meanwhile, the stockbuilding cycle – averaging 3.5 years in length historically – remains on course to enter a downswing in 2026, with a possible low in H1 2027. The focus here is on the survey-based indicator shown in chart 4, which has been moving sideways at a level consistent with a cycle peak – a decline into negative territory would confirm a phase shift.

Chart 4

Global inflation is expected to be little changed in 2026, with downside risk judged greater than upside. A key consideration is that G7 annual broad money growth, while recovering further over the past year, remains below its pre-pandemic average – chart 5.

Chart 5

A downside surprise could arise from AI job displacement depressing wage growth. One upside risk is a near-term burst of commodity price strength before the stockbuilding cycle moves into a downswing. Industrial commodity prices rose by less than usual earlier in the upswing and a catch-up could be in progress – chart 6.

Chart 6

The expected transition in the stockbuilding cycle coincides with the housing cycle – averaging 18 years, with a previous trough in 2009 – being in a time window for weakness. G7 housing investment moved sideways between 2023 and H1 2025 but fell to a new low in Q3 – chart 7.

Chart 7

Cyclical hopes rest on further strength in business investment, which follows an average 9-year cycle, with a previous low in 2020. While tech capex is booming, however, it accounts for only one-third of US business investment (and less than 5% of GDP), with other segments weak – chart 8.

Chart 8

The dispersion of real narrow money momentum across countries has narrowed – chart 9. Adjusted for a recent apparent data distortion, US momentum remains slightly below the Eurozone level. Japan is still a negative outlier but the UK has returned to mid-range. Strength in Australia / Canada suggests upside economic and rates risk, with an opposite message from a Swedish move into contraction.

Chart 9

Global real narrow money momentum remains below its long-run average but is nevertheless above weak industrial output momentum, suggesting “excess” money support for markets – chart 10.

Chart 10

Against this, risk assets have usually corrected – or worse – in the 18 months leading up to stockbuilding cycle troughs, with another such window now open on the analysis here. Table 1 compares moves in selected asset prices in the current cycle with averages across the previous nine cycles, with the mean maximum rise from the beginning of the cycle in column 1 and the subsequent fall into the cycle trough in column 2.

Table 1

Global / US equities, tech and other cyclical sectors, and precious metals have significantly outperformed their average gains in the current cycle, suggesting larger-than-normal reversals into the cycle trough. By contrast, European equities, EM, small caps and industrial commodity prices are lagging their respective averages, so may have more upside potential while a positive environment persists and / or prove more resilient in a subsequent risk-off phase.

A fall in the US dollar boosted risk appetite in 2025. The timing of the decline echoes the last three housing cycles, in which the dollar trended lower from an overvalued level in the years preceding and beyond the cycle trough – chart 11.

Chart 11

US currency weakness could become market-negative if a decline becomes disorderly, resulting in upward pressure on longer-term rates, for example in the event of further fiscal profligacy or unwarranted additional rate cuts by a politically controlled Fed. Alternatively, a negative market shift could be triggered by a temporary dollar rebound, if US economic news surprises positively and the Fed remains orthodox. Dollar sentiment and positioning were contrarian-bearish at the start of 2025 but current signals are neutral / positive.