Market and Investment Outlook 2024 Q4

An update by our Lead Portfolio Managers

January 30, 2025

As we enter 2025, the global economic landscape presents both opportunities and challenges. Anticipated interest rate cuts by the U.S. Federal Reserve and the Bank of Canada, alongside targeted stimulus measures in Asia, create a supportive backdrop for equities. Small-cap stocks, in particular, are well-positioned to benefit from these developments.

 

Global Economic Dynamics

The global economy remains mixed, with easing monetary policies offering relief amid ongoing political and economic uncertainties. While rate cuts are expected to support growth, inflation pressures and geopolitical risks could introduce volatility. A disciplined investment approach focused on fundamentals will be critical to navigating these market complexities.

 

Opportunities in Small-Cap Stocks

Historically, small-cap stocks have outperformed during rate-cutting cycles. As a result, we expect this trend to continue in 2025. Canadian small-cap equities are poised for strong returns, driven by favourable valuations, anticipated interest rate cuts and increased merger and acquisition activity. U.S. small caps are supported by resilient corporate fundamentals, though policy shifts under the Trump administration may contribute to short-term volatility.

 

Navigating Market Complexities in North America

In Canada, political uncertainty surrounding the upcoming federal election could lead to market volatility. However, small-cap companies with solid fundamentals are expected to perform well. In the U.S., pro-business policies such as lower taxes and deregulation may support equities, though tariffs and immigration policies could reignite inflation and disrupt the Federal Reserve’s easing plans. Careful stock selection and valuation discipline remain essential in this environment.

 

Asia’s Resilient Growth Outlook

Asia’s markets are set to maintain upward momentum in 2025, supported by government stimulus and strengthening consumer demand. China’s targeted economic measures, including consumption vouchers and market stabilization funds, are driving a recovery in domestic spending. This shift towards higher-quality consumption offers a sustainable growth path. Asian mid-cap stocks are expected to outperform, mirroring the market dynamics seen in the 2017 rally.

Quick Takeaways

  • Expected reductions by the Federal Reserve and the Bank of Canada create a favourable environment for small-cap equities.
  • Attractive valuations and increased M&A activity position Canadian small caps for strong performance.
  • Policy shifts in the U.S. may introduce market volatility, but resilient corporate fundamentals offer support.
  • Continued stimulus and consumer demand in Asia, particularly China, provide significant growth opportunities.
  • Our portfolios remain focused on high-quality companies with solid fundamentals and attractive valuations, ensuring we are well-positioned to capitalize on growth opportunities in 2025.

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