Diversification, defensive sectors offer refuge in turbulent times

While recession fears have grown in Canada, the underlying economic fundamentals remain resilient, says Corrado Tiralongo, chief investment officer with Canada Life Investment Management.

Speaking on the Soundbites podcast, Tiralongo said market volatility remains elevated due to trade uncertainty, inflation risks, and monetary policy decisions.

“Investors should focus on being broadly diversified in defensive sectors such as healthcare, consumer staples and utilities, which have historically outperformed during stagflationary periods,” he said.

He also encouraged close monitoring of the Trump administration’s shifting stance on tariffs.

“Historically, uncertainty around trade policy has delayed business investment and weakened consumer confidence,” he said. “The recent implementation of 25% tariffs on steel and aluminum from Canada and the anticipated tariff adjustments have significantly contributed to market volatility.”

Tiralongo, whose Q1 report Navigating Uncertainty Amid Trade Policy and Market Volatility is available online, believes economic momentum could stabilize if net trade headwinds reverse in Q2. He pointed out that the ongoing trade imbalance between the U.S. and China stems from vastly different approaches to monetary policy.

“The U.S. spends too much and saves too little, while China saves too much and spends too little,” he said. “In an ideal world, both countries would adjust their policies to fix this misalignment.”

A balance could be struck if the U.S. cut government spending and reduced its debt, while China focused on increasing consumer spending instead of relying on exports and government-driven investments.

“If done correctly, this would reduce trade imbalances without hurting overall economic growth,” he said. “Both countries would have to change their policies, but neither wants to be seen as backing down.”

The result of the trade uncertainty has been evident in recent equity performance. But he said the correction does not yet suggest a prolonged downturn.

“The latest data suggest that while market volatility will persist, particularly in technology and cyclical sectors, the broader economy remains stronger than initial forecasts suggested,” he said.

Investors should keep their eye on a number of key risks on the horizon:

• A new round of tariffs that could escalate trade tensions, leading to further global retaliatory measures.
• Inflation trajectory: If it breaches 3%, the Fed may delay rate cuts, tightening financial conditions.
• Consumer spending trends: While February retail sales rebounded, continued strength is needed to offset business investment weakness.
• Earnings seasons impact: Corporate profit expectations remain modestly positive, but downward revisions due to higher costs and trade disruptions could weigh on sentiment.
• Geopolitical developments: Beyond U.S.-China trade relations, potential supply chain disruptions and policy uncertainty in Europe and Canada could further impact market sentiment.

In the current moment, Tiralongo suggested investors prioritize quality over growth when picking equities, shifting exposure toward quality stocks with strong balance sheets.

“Maintain a long-term perspective on your investment and be disciplined throughout this market volatility,” he said. “Avoid reactionary moves based on short-term volatility. Market corrections tied to trade uncertainty have historically rebounded once policy clarity improves.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.