Financial Letter - First quarter 2025

The year got off to a promising start in the wake of the stock market rally at the end of 2024. Three months later, the optimism of those early days has all but evaporated.  

Even though the prospect of Donald Trump’s return to the presidency of the United States was met with both enthusiasm and concern, the context remained generally positive. His policies, perceived as business-friendly, revived enthusiasm for the U.S. economy, but his protectionist stance and unpredictability fuelled concerns, especially over global trade.  

Ultimately, the concerns have taken precedence. Investors have been confronted with a shocking return of trade tensions exacerbated by the Trump administration’s successive tariff announcements. The stated purpose of the measures is to promote U.S. manufacturing and to reduce the trade deficit. Tariffs are also used as a lever in international trade negotiations. That being said, market participants are struggling to assess their true extent and long-term consequences. Fears of higher inflation and a slowdown in global growth have intensified amid risks of retaliation from trading partners.

At the same time, the tech rally – which had taken stock indexes to new highs over the past two years –has fizzled out. A low-cost artificial intelligence (AI) chatbot launched by the Chinese start-up DeepSeek set off a wave of panic. Investors suddenly began to question the advisability of massive investments in AI and semiconductors. Many companies in the sector saw their valuations plummet. 

In this climate of nervousness, U.S. equities stumbled, while international markets and emerging markets held up better. In the background, central banks remained cautious, weighing signs of a slowdown against the threat of tariff-fuelled inflation. 

  Sources: FTSE International Limited, S&P Dow Jones Indices LLC and MSCI Inc.

Sources: Bank of Canada, Bloomberg Finance L.P.

Source: Trust National Bank.

* Effective October 25, 2024, the International Equity Fund acquired assets from the FÉRIQUE Asian Equity Fund in a reorganization and the investment objectives of the Fund were changed. The performance prior to the effective date of the reorganization represents the performance of the FÉRIQUE European Equity Fund (now the FÉRIQUE International Equity Fund) with its prior investment objectives. The reorganization and the investment objectives changes could have materially affected performance of the Fund had they been in effect throughout the entire performance measurement period.

Canadian fixed income

The FTSE Canada Universe Bond Index rose 2.0% in the first quarter along with a slight decline in the Canadian yield curve owing to concerns about economic growth. 

In March, the Bank of Canada cut its key interest rate to 2.75%, a move seen as precautionary in response to slowing growth and inflation that continued to normalize. Even so, the monetary trajectory remained uncertain, not least because of rising trade tensions with the United States. 

The outlook for fixed income is therefore mixed. Yields could still fall slightly this year, but the threat of inflation imported via U.S. tariffs could keep them at higher levels. Moreover, the federal election scheduled for the end of April has created political uncertainty.

Fears of a global economic slowdown, combined with unpredictable U.S. trade policy, are maintaining a degree of risk aversion. In this environment, Canadian bonds are still relatively attractive and continue to play a key role in portfolio diversification.

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Despite a global environment marked by rising trade tensions, Canadian equities showed some resilience in the first quarter of 2025, with the S&P/TSX Composite Index advancing 1.5%.  

Even so, the end of the quarter was especially turbulent, as the Trump administration made several tariff threats. Despite being a signatory to the Canada-United States-Mexico Agreement (CUSMA), Canada has not been spared. Tariffs on steel, aluminum and potentially auto parts have cast a shadow over the bilateral economic outlook. The scope of the measures remains to be seen, but their impact on Canadian investor sentiment has been very real.   

Despite the headwinds, some sectors managed to hold their own, particularly materials. It was the main contributor to the return on the S&P/TSX Composite Index in the quarter, thanks to the surging price of gold, which reached new highs of more than US$3,120 an ounce. Demand for gold has strengthened, driven by its safe-haven status in an environment marked by heightened geopolitical instability, significant stock market volatility and a resurgence of inflationary concerns. 

Why talk about contribution rather than absolute performance? 

When we analyze the performance of an index, such as the S&P/TSX Composite, it’s not enough to look at the sectors with the biggest gains. We must also take into account their weight within the index. A small sector with an exceptional performance will have a limited impact on the overall market, whereas a large sector can affect the index with only a modest performance. That is why sector contribution – which combines a sector’s performance with its relative weight – is a more relevant indicator for an understanding of what really drove the market up or pulled it down. 

As at March 31, 2025, the materials sector accounted for 12.5% of the index, which is why its very strong performance had an amplifying effect on the Canadian market’s overall return. 

This concept is even more significant when some stock market indexes, especially in the United States, are dominated by a few sectors, such as information technology. In such an environment, the contribution of a handful of stocks can exceed that of entire sectors.  

The storm really took a toll in the United States. The S&P 500 Index fell 4.2% in Canadian dollars, in stark contrast to the end of 2024, when it concluded its second consecutive year of gains in excess of 20%.   

The multiple tariff announcements and the prospect of an inflationary shock revived fears of stagflation – a scenario where growth slows, but prices keep rising – and even stoked fears of a recession. The Personal Consumption Expenditures Price Index, the U.S. Federal Reserve’s preferred inflation metric, showed that core inflation (excluding energy and food prices), accelerated to 2.8% in February. Meanwhile, households’ long-term inflation expectations jumped to 4.1%¹, the highest level since 1993.

This decline in U.S. equities also coincided with a sharp drop in the Conference Board’s Consumer Confidence Index, which fell to its lowest level since 2021. This index measures U.S. households’ perception of the current economic situation and their expectations on a six-month horizon. A sharp decline suggests households have become more worried about the future, which may dampen their propensity to spend — a key factor in an economy where consumption accounts for nearly 70% of GDP.  

U.S. mega caps – the much-vaunted Magnificent Seven – were hit especially hard. In addition to tariff worries, concerns about AI, as already noted, contributed to their decline. Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla alone accounted for about 32% of the S&P 500 Index in the first quarter of 2025. Thus they were the stocks that dragged the index down the most. The explanation is simple: The seven companies, or less than 2% of the 500 or so stocks in the index, accounted for nearly a third of its capitalization. Such concentration was highly advantageous in recent years thanks to the Mag Seven’s exceptional returns, but it creates fragility when the same stocks decline. Their negative impact on the index as a whole is therefore just as striking as their positive effect was previously.  

This phenomenon highlights a key issue for investors. Such concentration can lead to significant differences in performance between a diversified portfolio and a highly concentrated index. A bull market dominated by a small number of stocks can make active management more difficult, because such strategies are usually based on sound risk management and rigorous diversification. But, in a bear market, such concentration is a stark reminder of the importance of diversification and the fact that past performance is no guarantee of future returns.

In contrast to the United States, developed markets outside North America and emerging markets outperformed, although they eased at the end of the quarter as the risk that the United States would impose universal tariffs became clearer. 

The MSCI EAFE Index (Europe, Australasia and the Far East) posted a solid 7.1% gain in Canadian dollars. The return was driven mainly by the European markets, which benefited from renewed confidence. In a context of persistent geopolitical tensions, particularly U.S. pressure stemming from the Continent’s military dependence, a number of countries, including Germany, announced ambitious plans for investment in infrastructure and defence. The announcements were well received by the markets, with investors seeing them as a strong signal of a possible economic recovery in the region in the coming quarters.  

As for emerging markets, the MSCI Emerging Markets Index returned 3.1% in Canadian currency. The return was due largely to China’s surprising recovery. Domestic consumption rebounded, industrial production exceeded expectations and the stimulus measures adopted in the fall of 2024 started to bear fruit. DeepSeek’s announcement also revived enthusiasm for Chinese tech stocks.  

Even so, the outlook is still mixed. The tariff escalation initiated by the United States could disrupt global supply chains again. This risk is especially concerning for export-driven economies, such as China, Taiwan and South Korea. In fact, Taiwan, whose technology sector is strongly linked to U.S. trade, was the biggest detractor from emerging markets’ performance in the first quarter. 

Note: This commentary was written early in April 2025. The events and announcements discussed below may have evolved since then.  

The outlook for the coming months is fraught with uncertainty and highly dependent on the global political environment and the retaliatory measures taken by countries targeted by U.S. tariffs. One thing seems certain: Volatility is likely to persist.  

The second quarter began with a rude awakening: On April 2, the Trump administration unveiled a new wave of so-called universal tariffs, imposing a 10% tax on all imports into the United States. Targeted tariffs on some trading partners were also announced. The stock markets reacted swiftly, with U.S. equities recording their worst sessions since 2020. The U.S. dollar weakened, the price of oil fell and investors flocked to government bonds, fearing that the tariffs would spark a global recession. Even though the stated political intention is to rebalance trade, the real economic impact remains extremely uncertain. It’s not only the scale of the measures that is worrisome, but also their unpredictability. Announcements are constantly changing — in terms of both content and timing.  

It’s important to keep in mind that the FÉRIQUE Funds’ portfolio submanagers take a long-term view based on a rigorous security selection to create diversified portfolios. They invest in companies they consider well positioned to navigate the current economic environment owing to their sound fundamentals.

Active management gives them the flexibility to deviate from their benchmarks — whether in terms of sector or geography — and thus to adjust more effectively to ongoing changes. But this flexibility doesn’t mean they react to every announcement; rather, their role is to constantly assess the situation, act with discernment and avoid decisions driven by emotion. In an unstable environment, the ensuing panic — rather than the event itself — is often what does the most damage.  

A well-diversified portfolio that reflects your risk tolerance and liquidity needs is the best approach. It’s also essential to have a long-term vision and stay true to it so that you can achieve your goals.