Expected economic headwinds in Canada won’t prevent strong results from equities and fixed income in 2025, according to a new report by the Royal Bank of Canada.
Canadian equities will be supported by strong earnings growth expectations and a valuation that isn’t “terribly extended,” compared to the U.S. equity market, said the report. For its part, the performance of fixed income will be relative to the ongoing interest rate cuts by the Bank of Canada in the new year.
“Economic and central bank divergence caused Canadian bond yields to decline and bond prices to rise relative to the U.S., resulting in moderate outperformance in Canadian fixed income in 2024.”
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The spread between U.S. and Canadian government bond yields is expected to continue growing wider in 2025 as the Bank of Canada is expected to cut its policy rate faster than the U.S. Federal Reserve.
Canadian corporate bond spreads tightened in 2024 amid a general improvement in risk appetite. However, there’s less scope for a similar result in 2025 with spreads now relatively tight and susceptible to widening if the Canadian economy deteriorates further or if risk sentiment softens.
The report also noted the Canadian economy is expected to lag the U.S. next year with potential headwinds stemming from Donald Trump’s return to the White House, such as blanket tariffs, renegotiation of trade agreements and increased U.S. oil production.
Stricter rules around immigration in Canada may help to ease the housing market pressures but these restrictions will subtract nearly one per cent in from gross domestic product forecasts over the next three years, the report said.
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