Senior Investment Strategist outlines his firm’s view, highlights where investors may want to look now
Each month at WP we offer a slate of articles and content pieces that go deep on a particular topic. This January, we’re exploring the use of index funds.
Canada is going into the new year on stronger footing than many had previously expected. Bufetted by US tariffs, sabre rattling, and a mood of economic malaise, Canada has come out of the tumult of 2025 with better prospects than much of the developed world. That is, at least, the view taken by Vanguard which predicts an annual GDP growth rate of 1.6 per cent, core inflation of 2.3 per cent, and an unemployment rate of 6.2 per cent in its 2026 economic forecasts.
Ashish Dewan, Senior Investment Strategist at Vanguard Investments Canada, explained how Canada has managed to build and maintain some structural advantages that could help drive growth as global trade normalizes. Dewan outlined some of the key unknowns and risks to his firm’s outlook, while highlighting what advisors may want to consider allocating to as they prepare their clients for a 2026 where Canada may be given an opportunity to outcompete.
“Trade negotiations seem to be going well. We're cautiously optimistic. And then when we look at kind of the effective tariff rate that Canada has had, it has been the best amongst the US' major trading partners. And that is really because of CUSMA. We've had an effective tariff rate somewhere between five and six per cent, whereas the effective tariff rate globally has been about 23 per cent,” Dewan says. “We are also expecting higher growth in the US, which is another tailwinds for Canada.”
Dewan explains that US growth sits on a ‘three-legged stool’ of AI capacity buildouts, deregulation, and tax cuts. Despite the stagflationary impact of tariffs, Dewan sees those three forces driving US growth which, given the need for Canadian resource imports, should benefit Canada’s overall GDP.
CUSMA negotiations in 2026 will be a significant factor in this outlook, but Dewan notes that despite the likelihood that the United States calls for some concessions around procurement and investments made in the US, as well as concessions on dairy and financials, the overall view remains optimistic.
There are domestic drivers for this growth outlook, too. Dewan notes that while many of the initiatives and major projects outlined in the latest federal budget are long-term in nature, areas like increased defense spending ought to drive some economic growth. Middle-class tax cuts, too, will help stimulate growth. In the longer-term, Dewan sees sector-specific impacts of the major projects and investments, largely in the industrials, financials, and energy sectors.
While the outlook is broadly optimistic, Dewan notes a few key risks. The first is if the US growth story is derailed, notably by a shift in AI. If the AI hyperscalers prove to have overbuilt and overleveraged without the cash flow to show for it, that could have a cascading impact on the US economy akin to the crash of the 1990s telecom buildout. That would materially impact the Canadian economy, too.
Another key risk lies in trade. Should the US follow through on its more bellicose threats around CUSMA or broaden the scope of its tariffs on Canadian goods, then the structural advantages that Dewan sees for Canada could evaporate. From an equity investor standpoint, however, that risk may not have as much bearing on Canadian allocations.
“If you look at the top 10 stocks in the Canadian index, for example, a lot of them really don't generate a lot of revenues in the form of exports to the U.S. And so they weren't really impacted by the tariffs that much,” Dewan says. “There is obviously that argument, and it's a very credible argument, that what happens in the economy doesn't necessarily translate into the equity markets. I think the equity markets will be driven by a lot of different factors.”
Canadian equity growth in 2025 benefitted from the need to hedge geopolitical risk through gold allocations, raising gold and other commodity prices which benefitted resource extraction equities listed in Canada. Going into 2026, however, Canada’s comparatively lower interest rates should benefit Canadian financials. Gold may still be a driver, too.
Dewan also notes that as 2026 tests the hypothesis that AI will drive productivity growth, we should start to see the realization of value from companies that use the AI tools being built by hyperscalers. That broadening of AI value realization should, in Dewan’s view, benefit more value names and sectors beyond tech. Given the relative abundance of value names on Canadian indexes, he sees upside for those that can use AI to drive productivity growth.
For advisors checking in with clients at the start of the year, Dewan says that depending on time-horizons, a shift away from the growth leading indexes in the United States and towards some more value-heavy indexes like Canada can be beneficial. He argues for a slight rebalance towards fixed income, too, especially Canadian corporate bonds. All of this under what he argues is a first principle of investing: managing costs.
“Our message has always been that investors can’t control market movements, but they can control costs,” Dewan says. “And then really that discipline of making regular contributions again and again to your portfolio, and also really not panicking when the markets go down, because that's when you can really harness some of that equity risk premium.”
