By Joel Kranc

This year marks a dramatic change in world and geopolitical events. With the new Trump administration taking shape and a likely Conservative government getting ready to take power in Canada, things are moving to the right. Trade wars, provincial pension funds wanting to break away from national plans, scooped up surpluses, and surprising soft economic landings may shape the way pension funds invest this year.

Overall, investors are looking at lower inflation than in the past couple of years, and although interest rates have come down in Canada, they may still be relatively higher in the United States. A Vanguard report, Beyond the Landing, says that disinflation has been uneven across countries. But unlike some economies facing a downturn due to monetary policy, the U.S. has (and may still) experience an accelerating economy.

“Supply-side forces have the potential to create the most disruption to the Federal Reserve’s soft-landing scenario,” says Joe Davis, Vanguard’s global chief economist and global head of the Investment Strategy Group. “Landing scenarios aside, the higher-for-longer interest rate environment is here to stay and has profound implications for long-term investors.”

The Vanguard report also notes that, “Despite higher interest rates, many large corporations insulated themselves from tighter monetary policy by locking in low financing costs ahead of time. And more importantly, the market has been increasingly concentrated toward growth-oriented sectors, such as technology, that support higher valuations.” Going forward, Davis notes that bonds remain attractive and that long-term investors will benefit from a diversified portfolio of fixed income and global equities.

A Natixis Investment Managers Survey shows that U.S. investors believe a recession is unlikely in 2025, with 73% saying they do not anticipate one. One year ago, 62% of US institutional investors believed a recession was inevitable in 2024. The significant shift in recession beliefs is due mainly to the Federal Reserve’s progress in navigating a soft landing – 71% of US investors believe the U.S. economy will reach a soft landing in 2025, while 73% think we’re already in a soft-landing scenario. Most U.S. investors (73%) anticipate between one and three rate cuts in 2025, with 55% saying inflation targets will be achieved in 2025.

Despite recession expectations being lower than last year, risks from China, trade wars, regional wars and inflation could still affect markets and investments.

“Subsiding recession fears in 2024 have given way to enthusiasm for strong returns on the horizon, but investors are still looking over their shoulder at the geopolitical and economic risks,” says Dave Goodsell, executive director of the Natixis Center for Investor Insight. “While the US election gives some clarity to institutional investors of the direction that economic and foreign policy could go, there is still a lot of ‘wait and see’ as investors calibrate their portfolios to account for the opportunities the market has to offer versus the risks it could see in 2025.”

Beyond Economics

Pension funds in Canada have–or will have–interesting battles that could affect behaviors and pension norms for larger plans. For example, last November, Treasury Board President Anita Anand tabled two actuarial reports, which showed the Public Service Pension Plan exceeds its legislated threshold by C$1.9 billion.

In response, the Liberals announced plans to take up that money and stick it into the Consolidated Revenue Fund – a central government bank account. In an opinion piece for the Globe and Mail, Public Service Alliance of Canada, president, Sharon DeSousa called it a “betrayal.” The Income Tax Act limits the surplus a pension fund can have and so Ms. Anand redirected the funds.

If a new government surfaces, there could be major overhauls to this and other tax legislation.

Another area of pension pain for the Federal government could be the departure of Alberta from the Canada Pension Plan. The Alberta government, under Premier Danielle Smith, is considering exiting the CPP and creating a provincially managed one. In that discussion, the Premier said the province is entitled to more than half of the assets of the CPP. Of course the Chief Actuary of Canada disagrees. Other than Quebec, every province is part of the CPP, and provisions do exist allowing a province to withdraw their share of the funds if they want to set up their own system. However, interpreting the legislation over how the assets would be divided is the challenge.

The challenge, according to many analysts and investors is to block out the noise while staying diversified. In most cases economics trumps (pun intended) politics.