Portfolio Update

Global equity markets experienced a marked increase in volatility over the past month as investors reacted to escalating trade policy uncertainty. As of time of writing, President Trump has announced a 90-day suspension on reciprocal tariffs for most nations, while maintaining a baseline 10% tariff on all imports to the U.S.—with the exception of China, where tariffs have been raised to 145%. This policy shift follows the April 2^nd announcement—referred to as “Liberation Day”—where the administration introduced a sweeping set of new tariff measures.

In response, China has raised its reciprocal tariffs on U.S. goods to 125 %. While no new tariffs have been introduced for Canada or Mexico, both countries have been subjected to a 25% tariff on imports not compliant with USMCA, including a 25% tariff on foreign autos imported to the U.S. The Canadian government has since indicated it will match these auto tariffs. With further retaliatory actions likely from other nations, global trade relations remain under strain. The full impact on the economy and capital markets remains difficult to predict at this juncture and will depend largely on the duration and scope of these tariffs.

The uncertainty surrounding trade policy has contributed to headwinds for U.S. equities, with the S&P 500 declining by 8.1% year-to-date as of April 9^th (total return in Canadian dollars). This follows two years of strong double-digit returns, during which market concentration increased and valuations in certain segments became stretched. Canadian equities have also edged lower, with the S&P/TSX Composite Index posting a decline of 3.3% over the same period. Similarly, international equity markets have also seen declines, with MSCI EAFE down 4.7% and MSCI Emerging Markets down 8.2%.

Looking ahead, while tariffs and ongoing trade policy uncertainty have raised concerns over a potential global downturn, we believe it is premature to conclude that these developments will lead to a broad-based recession. As outlined in our Q2 2025 Economic and Capital Markets Outlook, global growth is expected to remain subdued, with global real GDP projected to expand by approximately 3.0% in the year ahead.

The Case for Diversification in Volatile Markets

The recent turbulence in equity markets underscores the importance of well-diversified portfolios and prudent risk management. The U.S. now accounts for nearly 50% of global stock market capitalization, despite representing only 26% of the global economy (Chart 1). This level of market concentration is the highest level on record and raises questions about the sustainability of recent market leadership.

In light of this, a well-diversified portfolio should be balanced across geographies, industries and companies to mitigate the risks inherent in any single market. Market leadership shifts over time—historically, periods of extended U.S. outperformance have been followed by stronger returns in international markets. For example, in the late 1980s, Japan accounted for nearly 50% of global stock market capitalization while contributing just over 15% to the global economy. Today, Japan represents approximately 5% of global equities and less than 4% of the global economy, a reminder that market concentration can be cyclical. Maintaining diversification helps ensure more stable returns amid market turbulence and as leadership evolves over time.

The Role of Risk Management in Long-Term Value Creation

As equity markets continue to experience volatility, the importance of risk management remains paramount. Risk may take many forms and varies by investor definition. While some investors assess risk based on how a portfolio’s returns fluctuate relative to the market, at LetkoBrosseau, we define risk as the permanent loss of capital. Our approach mirrors that of business owners evaluating long-term value creation: we analyze market position, product quality, cost structures, profit margins, debt levels, growth potential, management quality, regulatory environment, industry dynamics, and the price paid relative to intrinsic value. This disciplined framework enables us to assess risk based on fundamental merit rather than relying on market consensus or index composition.

Market volatility, while unsettling in the short-term, also presents opportunities for disciplined, long-term investors. By focusing on the intrinsic value of companies and maintaining a consistent investment philosophy, we aim to weather the turbulence and remain focused on long-term growth. In an environment characterized by trade policy uncertainty, elevated evaluations and concentrated market leadership, we remain cautious, selectively taking profits and raising cash as companies approach their intrinsic value.

On balance, portfolio activity has been measured, with exits from select positions, including several in the IT sector—specifically Celestica, Oracle and SAP—where valuations had become increasingly stretched. These exits have been partially offset by redeploying capital into existing positions that are trading at more attractive valuations. The initiation of new positions has been minimal, reflecting our prudence in the current market environment. As a result, our portfolios hold a moderate level of cash, affording the flexibility to deploy capital opportunistically as we continue to monitor market conditions.

Our global portfolios have remained resilient, supported by strong business fundamentals, such as earnings growth and dividend income, rather than relying on price multiple expansion—where stock prices rise without a corresponding increase in earnings. Unlike broader U.S.-centric equity indices, where a significant portion of returns appears driven by multiple expansion, we believe that true value is created through sustainable earnings growth and a focus on risk-adjusted returns (Charts 2 and 3). We remain committed to delivering long-term value, while avoiding the pitfalls of short-term market fluctuations driven by speculation or investor sentiment.

Concluding Thoughts

Periods of heightened volatility reinforce the importance of a disciplined risk management framework and a steadfast commitment to long-term objectives. In response to shifting market conditions, we have adopted a cautious approach—reducing exposure in areas where valuations appear stretched and reinforcing positions in companies with solid fundamentals and attractive long-term prospects. Unlike certain broad equity market indices, which have become increasingly concentrated in a handful of high-valuation stocks, our portfolio remains diversified across sectors and geographies, emphasizing businesses with sustainable earnings and resilient cash flows.

With a moderate cash position, we maintain the flexibility to act decisively as market dislocations create opportunities, while positioning our portfolios to navigate a potentially more turbulent period for equities.