Canada to see a ‘year of resilience and opportunity’: Vanguard

“Despite everything that’s going on in Davos,” Khang said, “we shouldn’t really lose sight of AI as the most important driver for the economic and market outlook for this year and then beyond.”

He told reporters that the global economy is in the midst of a “regime change” that will reset economic productivity expectations in the U.S. and elsewhere.

Khang made a point similar to the one shared by Michael Greenberg, head of Americas portfolio management at Franklin Templeton, in November — that investors can expect companies outside the technology sector to invest heavily in AI.

So, while high fliers like Nvidia Corp. could disappoint in the near term, investors are in a position to benefit from a wave of AI-related capital expenditures from outside the technology sector.

“We think that it’s actually going to pan out quite a bit in a palpable way this year,” Khang said. If it does, GDP growth in the U.S. could approach 3% in 2026 — Vanguard puts a 60% probability on that top-end number.

“A lot of that will be dependent on what happens on the data centre investment front,” he said. “A lot rides on that physical investment component to prop up the economic growth.”

Optimism about Canada

Vanguard’s view on Canada is based on more than just AI. Dewan laid out three themes: we’re better off than other developed countries on the U.S. tariff front; domestic fiscal policy will be stimulative; and inflation is expected to slow.

“We have the lowest effective tariff rate amongst the major trading partners,” Dewan said. Vanguard calculates it at 6%.

“We obviously have a lot of what we’ve classified as nation-building projects,” he said. “You have spending on defence, infrastructure and housing. … That is going to also lift the economy.” Ottawa’s decisions to remove the carbon tax and implement a middle-class tax cut have provided further stimulus.

Unlike some forecasters, Vanguard doesn’t expect a Bank of Canada rate cut this year.

In his Canada forecast issued earlier this month, Dewan wrote that “these dynamics suggest Canada will outperform consensus expectations. … While risks persist, particularly around [Canada-U.S.-Mexico Agreement on trade] developments and oil price volatility, Canada’s structural strengths and pragmatic policy approach point to continued resilience as global conditions stabilize and investment momentum builds.”

A ‘constructive’ view

Khang recognizes that equity valuations are high, particularly in the U.S. “We are constructive, especially on the U.S. short-term equity market,” he said. “It actually calls for a lot of nuance. … Stock market returns, at the end of the day, are a function of your starting valuations and what’s priced in.”

In other words, pick your bets carefully. “We continue to be more constructive on the stock market that is more representative of the old economy,” Khang said.

“The U.S. stock market is pretty expensive,” he said. “Broadly speaking, ex-U.S. is reasonably valued. Bonds are actually very normally valued.”