Navigating Policy Crossroads: BMO's Strategic Shifts for Canada in Q2 2025

The Canadian economy stands at a crossroads, buffeted by trade policy uncertainty, restrictive monetary conditions, and shifting global fiscal priorities. BMO’s Q2 2025 investment strategy underscores a cautious yet opportunistic approach, emphasizing liquidity, diversification, and long-term infrastructure plays. Here’s how investors can navigate these complexities.

Trade Policy Storm Clouds Over Canadian Exports

=text2img>A stormy horizon with cargo ships anchored mid-ocean, symbolizing trade uncertainty. A map highlights disrupted supply chains between North America and Asia.=text2img>
The expiration of U.S. tariff exemptions for Canadian autos and semiconductors on April 2, 2025, has cast a shadow over Canadian exporters. BMO warns that the "America First Trade Policy" could introduce new barriers, exacerbating a slowdown already evident in manufacturing sectors. The report projects Canada’s economy to enter recession, with GDP growth forecast to dip to 0.8% in 2025—a sharp decline from 2024’s 1.4% expansion.

To mitigate this risk, BMO recommends reducing North American equity exposure (down to 47% of the Balanced Portfolio) and favoring defensive sectors like healthcare (BMO SPDR Health Care ETF, ZXLV) and energy (BMO Covered Call Energy ETF, ZWEN), which have shown resilience. Energy’s 8.48% year-to-date return reflects supply-demand dynamics, while healthcare’s secular growth offers a hedge against economic volatility.

Diversify East and West: Europe and China’s Turn to Shine

=text2img>A world map with arrows flowing from Canada to Europe and China, highlighting investment shifts. Key cities like Frankfurt and Shanghai are lit up in gold.=text2img>
BMO’s strategy pivots toward Eurozone equities (via BMO International Dividend ETF, ZDI, 10% allocation) and China (via BMO MSCI China ETF, ZCH, 5% allocation), regions offering lower valuations and fiscal stimulus tailwinds. The Eurozone’s focus on deficit-spending-led infrastructure projects is expected to create a "multiplier effect," retaining capital domestically rather than flowing into U.S. markets.

China’s inclusion reflects its role as a geopolitical counterweight to U.S. trade pressures. ZCH’s 21.39% YTD return (as of March 2025) signals investor optimism about its long-term growth trajectory, despite near-term volatility.

Infrastructure: The New Safe Haven

=text2img>A futuristic cityscape with solar farms, high-speed rail, and smart bridges, symbolizing global infrastructure investment.=text2img>
Amid policy uncertainty, BMO positions infrastructure as a "non-correlated growth asset," allocating 7% to BMO Global Infrastructure ETF (ZGI). Governments globally are pouring $12 trillion into infrastructure through 2030, with Canada expected to issue more debt to fund projects amid trade-driven fiscal stimulus.

The strategy is bolstered by ZGI’s focus on toll roads, utilities, and renewable energy—sectors insulated from trade cycles. Its 5.2% YTD return aligns with this thesis, outperforming broader equity indices.

Fixed Income: Short Duration, Strong Credit

=text2img>A bar chart comparing Canadian and U.S. bond yields, with a magnifying glass on short-term instruments.=text2img>
With Canadian rates likely to remain elevated longer than markets expect (Bank of Canada delays easing amid trade-driven inflation risks), BMO prioritizes short-duration, high-quality fixed income. The BMO Short-Term US TIPS ETF (ZTIP.F) (5%) and Canadian Bank Income ETF (ZBI) (15%) provide yield stability, while the USD Cash Management ETF (ZUCM) (5%) preserves liquidity for market dislocations.

Risks and the Road Ahead

While BMO’s strategy balances caution and opportunity, risks persist. Credit spreads could widen if trade tensions escalate, and Canada’s fiscal stimulus may steepen its yield curve, disadvantaging long-duration bonds. Gold (BMO Gold ETF, ZGLD) retains an 8% allocation to hedge against volatility, its 19.46% YTD return underscoring its role as a "crisis anchor."

Conclusion: Prudence Over Exuberance

BMO’s Q2 strategy is a blueprint for navigating an era of "policy-driven darkness." By reducing North American equity exposure, diversifying into Europe and China, and anchoring portfolios in infrastructure and short-duration fixed income, investors can mitigate downside risks while positioning for long-term growth. Key allocations like ZCH, ZGI, and ZTIP.F reflect this balance, supported by data-driven choices:

• ZCH’s 21.39% YTD return vs. Canada’s tepid equity performance (S&P/TSX down 2.3%).
• ZGLD’s 19.46% YTD gain as a volatility hedge.
• ZBI’s 3.60% yield offering stability in a low-growth world.

As trade policies reshape global flows and fiscal spending picks up pace, BMO’s focus on liquidity, diversification, and non-correlated assets offers a roadmap for resilient growth—even in uncertain times.