Ask The Experts - July/August 2025
All answers are provided by 5i Research.ca
Q: How serious do you feel the aggregate global debt situation is? I have read that the total is now well over $300 trillion USD. Government and consumer spending seems somewhat out of control in much of the world. Let's put it this way - if the Earth was part of an interplanetary federation, would the aliens' financial authorities think we are heading towards bankruptcy?
A: The aliens likely would not want to buy Earth's bonds. Certainly governments worldwide have been 'kicking the can down the road' for 50 years or more. Both Canada and the US are spending too much money and running up bigger deficits. The problem for investors, though, is none of this is new. One could have shorted the market in 1985 on the same thesis, and of course one would be broke now if that is what was done. There is a level of debt that can be managed by high growth. Growth overall has been decent, and thus there have not been many crises. Typically, high debt will result in lower values for currencies, and this is likely why gold has done so well for 30 years (as a store of value). Crypto currencies might offer a store of value, but so far their record has been sketchy and the volatility is not great for investors looking for places to hide. This year, with the flight away from the US dollar, and US assets, may be the start of a trend, or (which would be our guess) simply a reaction to the current trade war and 'tweet' politics where everything can change on a single social media post. If there is a trade war resolution or a new administration, the currency flight could easily reverse. Good companies will still be good investments. In fact, bond-wise, companies with strong cash flow are likely safer than many government bonds. Sure, government bonds are guaranteed, but if they are just printing dollars to satisfy the obligation then that is not much of a guarantee, really. So, it is hard to predict what's going to happen. The US could default or carry on as is for another 50 years. Some gold exposure we think makes sense for all investors, as insurance.
Q: My question is on portfolio management ñ trimming, rather than selling. I'm that some sectors and companies, or even countries like the U.S. market, are a bit expensive and might well be trimmed.
Even if you don't agree with the premise, what areas would you trim on that basis? I have already trimmed gold.
Also, can you suggest some areas that do not fit that premise and are under-valued?
Thanks, as always, for your wisdom.
A: Despite recent weakness, the U.S. market is still more expensive than international markets, so that is one possible area to trim. We are not that worried about the U.S., but the capital flows out of the country could certainly continue for a while. The tariff yo-yo is not good for business or confidence. Gold has had a good run but we think remains attractive. We think now that tech has corrected somewhat it is starting to look better, especially as Q1 earnings were fine for the most part and spending comments have been positive. Utilities are mixed, as we do not really know where interest rates are going to end up. Some caution is advised on consumer discretionary, as we are not out of the woods yet in terms of a possible global recession.
Q: Where do you see U.S. Treasuries going over the next 6-12 months, given recent weakness due to massive American debt. Is it a reason to exit U.S. assets, including stocks, or do you see the problem resolved somehow? Is it a simple case of the U.S. Treasury Market simply being too big to fail? Welcome your insights.
A: Investors have fretted about the U.S. debt for more than three decades. The current worry we think is more of an anti-U.S. sentiment than true, additional, new concerns. There are still not a lot of global reserve currencies that investors are comfortable with. At the end of the day, it will come down to economics and interest rates. Right now, investors are worried about both. But if tariffs are not as bad as expected, the economy and inflation will look better. While there are always risks, we think they are being priced in. U.S. 10-year rates have been above 5% before (last year also) and the world did not end. We think Europe and other areas look decent, and are priced better than the U.S., but in a global asset allocation we would still want more U.S. exposure than any other country.
Q: The TD chief economist is predicting a recession for Canada, and is also concerned about stagflation. What are the best investments for our protection?
A: In the event of a stagflationary environment, high-quality dividend stocks in defensive sectors can help protect against erosion of purchasing power. Hard assets like gold and precious metals, agricultural stocks, and even energy stocks, can help against inflation shocks. Low volatility ETFs can help to provide upside potential, while helping to minimize downside risks.
Q: I continue to have about 70% of my savings in cash with plans to input through dollar cost averaging. A couple of weeks ago you suggested a spread over 6 months. Is this still your view? It seems that the rebound has taken place and I am worried about missing the increases. But I know we are still in an uncertain market. Thank you.
A: The market dynamics have been in flux, and while we cannot personalize responses, we generally like to keep cash balances minimal for a couple of reasons:
1) There is always a bull market or opportunity somewhere, even when the broader markets are declining, one sector, industry, is likely increasing, and 2) over a long period of time, cash acts as a drag on portfolio performance.
The market has rebounded nicely, essentially following a 'V-recovery' shape that we have seen in 2019, 2020, and other instances in prior decades. The markets are still below all-time highs, and while investors may be intimidated by the relentlessness of this rebound, we feel that dips provide good buying opportunities. Many investors reduced their equity and leverage exposures significantly in the drawdown, and we think these will be built back up in the coming months. We would be quite comfortable deploying cash today for a long-term hold, given that we think investors who sold near the bottom will be chasing the market higher into new highs, fueling a bull market run.