SEI’s Domestic View

The Canadian economy was already walking a bit of a knife’s edge before the outbreak of military hostilities in the Persian Gulf, the closure of the Strait of Hormuz, and supply and price shocks in global energy commodities and derivatives.

Real economic activity contracted in the fourth quarter of 2025, and economic growth was looking extremely sluggish at the start of 2026. It is important to note that shrinking business inventories were a key driver of fourth-quarter weakness and that domestic demand actually looked healthy. However, a lack of inventory rebuilding may have reflected an absence of business confidence, while labour markets have been showing signs of weakness. Overall, Canadian economic data has consistently surprised to the downside despite a strengthening global picture.

As things stood before the end of February, the Bank of Canada (BOC) had the luxury of holding its overnight interest rate target steady in the hope that growth would start to pick up after its latest easing cycle, a view that was reflected in market pricing of expected BOC interest rate policy. The U.S. Supreme Court’s ruling against the Trump Administration’s “Liberation Day” tariffs under The International Emergency Economic Powers Act (IEEPA) also offered a glimmer of hope, although the administration was busy finding other legal rationales for its tariffs and mid-year renegotiation of the Canada-U.S.-Mexico Agreement is still looming.

As a major energy producer and net exporter, Canada (like much of the western hemisphere) is far better insulated against the Strait of Hormuz shock than countries in Asia, Africa, and Europe. The same is true for the human and infrastructure damages arising from the conflict. However, given that crude oil and several related commodities tend to be subject to the Law of One Price, Canadian businesses and consumers are already being forced to deal with higher gasoline and other prices (natural gas price are a welcome exception for now). These higher prices will certainly start to feed into headline inflation in the months ahead and, if supply shortages persist, those pressures could reverse some of the progress made in core inflation measures (which exclude more-volatile energy and food prices). The risk of stagflation—higher inflation against a backdrop of weak or stalling growth—puts the BOC and many other central banks in a very difficult position.

At the BOC’s most recent post-policy-meeting press conference on March 18, Governor Tiff Macklem was quite explicit about the greater level of uncertainty now facing the BOC’s Governing Council. He noted that, although higher energy prices would mean higher export income, consumers were already being squeezed by higher energy prices, financial conditions had tightened, and “transportation bottlenecks caused by the effective closure of the Strait of Hormuz could also impact supplies of other commodities, such as fertilizer…Uncertainty is acute. Trade and geopolitical uncertainties remain, and the conflict in the Middle East has broadened the range of possible outcomes.” The BOC has already penciled in higher inflation and slower growth, and we will be watching its next Monetary Policy Report update in late April to see how its forecasts evolve. For now, markets are betting that the BOC, like a number of its peers, will be forced to tighten monetary policy in 2026.

Are there any silver linings for Canadian investors to grasp onto? We see a few but they come with some important qualifications. As previously mentioned, while gross domestic product (GDP) contracted in the fourth quarter, domestic demand looked solid enough. However, recent consumer and service-sector sentiment surveys have been notably lacklustre. Fortunately, sentiment surveys are rarely an accurate guide to future activity.

Turning to the labour market, higher unemployment has been driven almost entirely by workers in the 15-to-24-year-old cohort, and the spread between youth and ages-25-and-older unemployment sat at the 98th percentile of its historic distribution in February. While high youth unemployment isn’t good, it isn’t necessarily a sign of an impending recession either; although it’s hard to make a well-grounded recession-probability call in normal times, much less amidst the fog of war and global supply chain stress. The bottom line is that it’s encouraging to see unemployment among adult workers remaining below its long-term average.

Finally, the Canadian dollar has held up reasonably well since the onset of Persian Gulf hostilities. Currency movements against the U.S. dollar have largely reflected the vulnerabilities of net energy importers, and Canada is relatively insulated in this regard.

Canadian equities have held up even better than the loonie. The S&P/TSX Composite and TSX Small Cap indexes have outperformed U.S. large caps (as measured by the S&P 500 Index) since the “Liberation Day” shock roughly one year ago. The prevalence of metals, mining, and energy within Canadian markets has been a clear positive for investors’ portfolios.
As challenging as the economic, inflation, and interest rate outlooks may seem, it’s not all bad news. Unfortunately, Canadian investors and policymakers will, like their counterparts around the world, have to take a wait-and-see approach to the current upheavals caused by the Iran-Israel-U.S. conflict. It has certainly raised the risk of higher inflation and slower growth in the near term. However, there are still a wide range of vastly differing outcomes in sight, and it’s impossible to place a probability on any of them with a high degree of confidence.

While it is understandable that emotional reactions to geopolitical events can be difficult to control, holding a diversified portfolio that is well-suited to one’s objectives and circumstances is still well within every investor’s control. For now, the best advice we can offer is to buckle up—2026 could be another interesting year in a very interesting decade.

SEI’s Global View

The onset of hostilities in the Middle East is the latest test for investors and the broader market as fears of a protracted conflict raise the specters of stagflation, recessions, and bear markets. The probabilities of all these outcomes have clearly increased as the supply disruptions in oil, fertilizers, helium, and other critical commodities extend the reach of this conflict well beyond energy and into other, crucial parts of the global economy, including agriculture and semiconductor production.

While this war began as a conflict between the U.S., Israel, and Iran, the Iranian regime’s decision to target its Gulf region neighbors in retaliatory strikes and the reality of the vital nature of the Strait of Hormuz to global supply chains, particularly in Asia, emphasizes that a resolution sooner rather than later is in a majority of the world’s best interests. The longer the strait is closed, the higher the probability of a poor outcome for both markets and the economy as the totality of the supply disruptions are significantly higher than any previous conflict in the region. Additionally, targeted strikes on infrastructure across the Middle East is another wildcard which may extend the consequences of this war well beyond any formal end to the hostilities as bringing supply back online will simply take time.

Despite all the challenges, a near-term resolution remains our base case, which suggests that this resilient global economy will avoid recession. Notably, the world is substantially less reliant on energy today than it was during prior conflicts. This relatively narrow strait is responsible for the flow of 20% of global oil supplies and has been subject to the whims of the Iranian regime for the last 47 years. The fragility of that situation is, quite frankly, untenable and a resolution to this conflict, which includes the global economy no longer being held hostage to potential supply shocks by a hostile actor, is an enormously positive outcome.

We remain constructive in our outlook for equities given our current views, including a near-term resolution to the conflict and the continued resilience of the economy and corporate earnings. Our strongest preference remains active management due to the fluid situation in the Middle East and higher levels of stock-level dispersion. A value-oriented approach is a particular emphasis, and we expect continued outperformance for the remainder of the year. In addition, we still find emerging markets particularly attractive based on valuations and overall leverage to what we see as a still-growing global economy. Meanwhile, the current tensions raise the most concerns in Europe given the potential for an outsized economic impact from rising energy costs.

Fixed-income markets were particularly volatile in March as front-end yields sold off dramatically on inflation concerns from rising energy prices and expectations for tighter monetary policy. U.S. market expectations at the start of the year were for two full interest-rate cuts in 2026, which have now been fully priced out. Elsewhere, investors now expect multiple rate hikes, including from the Bank of England and European Central Bank. We view the severity of this move in yields to be a bit overdone as it will not be lost on monetary policymakers that higher overnight rates cannot open the Strait of Hormuz. Nonetheless, with inflation above most targets and rising, we do expect most central banks to adopt a more hawkish stance in the near term. Two-year yields look attractive at these levels, particularly in the U.S.

Credit markets continued to digest private credit concerns as software companies became the latest “cockroaches” to emerge. Spreads in this sector widened as the future of software in an artificial intelligence (AI)-enabled world was called into question. The gating of a few high-profile, retail private credit funds also grabbed headlines during the quarter as investors rushed for the exits. While we believe that private credit is due for correction, we are confident that this will be relatively isolated. We simply do not see systemic contagion in this situation and no reflection of the leverage and breadth witnessed in the global financial crisis of the late 2000s. Therefore, while we retain our defensive posture in credit markets, we are eager to take advantage of opportunities presented by this broader spread-widening.

Commodity exposure was a bright spot for investors over the quarter as broad commodity indexes finished the quarter up nearly 25%. While energy was the key driver of the rally, agriculture including wheat and soybeans, and metals including aluminum, all finished substantially higher for the quarter. Precious metals are in positive territory for the year to date, but suffered in March as momentum in both gold and silver reversed dramatically. Commodities have been a key strategic and tactical position, and we remain positive on broad exposure. While we see a near-term end to the conflict as a likely outcome, the closure of the strait and the damage to infrastructure cannot be reversed immediately; therefore, we expect post-war energy prices to remain elevated for 2026. In addition, we believe that the selloff in gold seems overdone as we expect a resumption in demand from both investors and central banks.

Economic Data (unless otherwise noted, data sourced to Bloomberg)

• According to Statistics Canada, consumer prices (as measured by the change in the Consumer Price Index (CPI)) rose 0.5% and 1.8%, respectively, for the month and the year ending in February. The cooling of annual inflation is largely attributable to the rolling off of the GST/HST tax break that ended on February 15, 2025. Producer prices were up 0.4% and 0.6% in February for the Industrial Product Price Index (IPPI) and the Raw Materials Price Index (RMPI), respectively. Year-over-year price increases were robust, rising 5.4% and 8.6%, respectively, for the IPPI and RMPI. Increased costs for crude energy products drove short-term prices, while metal prices remained significantly higher than a year ago. The Labour Force Survey revealed that the employment picture was little changed in March. The economy added just 14,000 jobs for the month, and the unemployment rate held steady at 6.7%
   
• The Department of Labor reported that the consumer-price index (CPI) rose 0.3% in February. Prices for fuel oil and utility gas service surged 11.0% and 3.1%, respectively, during the month, while prices for electricity dipped 0.7%. The CPI advanced 2.4% year-over-year in February—matching the increase in January and in line with expectations. Costs for utility gas service and fuel oil climbed 10.9% and 6.2%, respectively, over the previous 12-month period. Conversely, gasoline prices declined 5.6%. Core inflation, as measured by the CPI for all items less food and energy, was up 2.5% year-over-year in February, unchanged from the increase in January and meeting expectations. Costs for medical care services and housing rose 4.1% and 3.0%, respectively, over the previous 12-month period, while prices for used cars and trucks decreased 3.2%. According to the second estimate from the Department of Commerce, U.S. gross domestic product (GDP) rose at an annual rate of 0.7% for the fourth quarter of 2025—down sharply from both the 4.4% gain in the third quarter and the government’s initial estimate of a 1.4% increase. The economy expanded 2.1% for the 2025 calendar year, a decrease from the 2.8% growth rate in 2024. The increase in GDP for the fourth quarter was attributable primarily to upturns in consumer spending and nonresidential fixed investment (purchases of equipment and software, and nonresidential structures). Conversely, federal government spending and exports fell during the quarter. The decelerating GDP growth rate in the fourth quarter compared to the previous quarter was due mainly to decreases in exports and federal government spending, as well as a slowdown in consumer spending.
   
• According to the Office for National Statistics (ONS), inflation in the U.K., as measured by the CPI, rose 0.4% in February, a significant upturn from the 0.5% decline in January. Prices for furniture and household goods, and restaurants and hotels posted the largest increases during the month. Meanwhile, costs for alcohol and tobacco, recreation and culture, and communication were virtually flat. The CPI advanced at an annual rate of 3.0% in February, matching the year-over-year rise in January. Education, housing and household services, and communication costs were up 5.1%, 4.6%, and 4.3%, respectively, over the previous 12-month period. Conversely, prices for furniture and household goods edged up just 0.1% year-over-year. Core inflation, as represented by the CPI excluding energy, food, alcohol, and tobacco, rose 3.4% over the previous 12 months, up from the 3.1% annual increase in January. The ONS also announced that U.K. GDP ticked up 0.1% for the fourth quarter of 2025, matching the growth rate for the third quarter. Output in the production sector increased 1.2% for the quarter, while the construction sector output decreased 2.0%, and the services sector was flat.
   
• Eurostat pegged inflation for the eurozone at 2.5% for the 12-month period ending in March, notably higher than the 1.9% annual increase in February. Costs in the services sector rose 3.2% year-over-year in March, unchanged from the 12-month annual increase in February. Energy prices climbed 4.9% compared to the same period in 2025, up sharply from the 3.1% annual downturn in February, and prices for unprocessed food rose 4.1% year-over-year in March. According to Eurostat’s second estimate, eurozone GDP edged up 0.2% in the fourth quarter of 2025—down marginally from the 0.3% growth rate for the third quarter of this year—and increased 1.4% for the 2025 calendar year. The economies of Malta, Lithuania, Cyprus, and Croatia were the strongest performers for the fourth quarter, expanding 2.1%, 1.7%, 1.4%, and 1.4%, respectively. In contrast, GDP for Ireland and Romania contracted by corresponding margins of 3.8% and 1.9% during the quarter.

Index Data (Q1 2026, in CAD)

• The S&P/TSX Composite Index gained 3.94%.
• The FTSE Canada Universe Bond Index edged up 0.23%.
• The S&P 500 Index, which measures U.S. equities, dipped 2.60%.
• The MSCI ACWI (Net) Index, used to gauge global equity performance, declined 1.45%.
• The ICE BofA U.S. High Yield Constrained Index, representing U.S. high-yield bond markets, returned -0.97% (currency hedged) and 1.25% (unhedged).
• The Chicago Board Options Exchange Volatility Index (VIX), also known as the “fear index,” a measure of implied volatility in the S&P 500 Index, was significantly higher as it spiked from 14.95 to above 31 in late March—the highest level since the so called “Liberation Day” tariffs were announced in early April 2025—before settling at 25.25 to end the quarter.
• WTI Cushing crude-oil prices, a key indicator of movements in the oil market, jumped nearly 77%, from US$57.42 to $101.38 a barrel to end the quarter, as prices have been notably higher and suffering from considerable volatility stemming from the Middle East war.
• The Canadian dollar weakened to C$1.40 per U.S. dollar. The U.S. dollar was stronger versus the world’s other major currencies, ending March at US$1.15 versus the euro, US$1.32 against sterling, and at 159.90 yen.

Glossary and index definitions

For financial term and index definitions, please see: https://www.seic.com/ent/imu-communications-financial-glossary

Important information

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