Q3 2025 Market Commentary
Introduction
As the new dedicated Portfolio Manager for the NFC Tactical Asset Allocation Pool (the Pool), I would like to formally introduce myself.
My name is Paul Girouard and I began my career in financial services in 2009. I earned the Chartered Professional Accountants (CPA) designation in 2012 and the Chartered Financial Analyst® (CFA) designation in 2016.I joined BCV Asset Management in 2022. My investing and capital markets experience includes both equities and fixed income, with specializations in inflation, interest rates and macro-economics (fixed income), and higher dividend-paying stocks (equity). I have a particular interest in the inner workings and plumbing of financial markets (i.e. how the world funds itself) – an extremely entertaining dinner conversation, I assure you! This experience directly informs my approach to the strategy for the Pool.
I assumed responsibility for the Pool in September. My immediate focus has been on ensuring a seamless transition while refining the Pool's construction to help best deliver on its targeted returns. The core investment philosophy of the Pool remains unchanged: stable, steady returns, a willingness to forgo equity market upside in favour of downside protection, and create significant cash flow generation, much of which comes from tax-efficient sources.
Financial Market Update
Returns - as at September 30th, 2025
S&P TSX Total Return
S&P Total Return
Core Canadian Universe Bond Index (XBB)
MSCI All Country World Index ex U.S. (ACWX)
Gold (in USD)
U.S.$/CND$
NFC Tactical Asset Allocation Pool
3-month
12.50%
7.79%
1.49%
6.74%
15.73%
(2.0%)
3.67%
YTD
23.95%
13.72%
2.92%
26.66%
45.98%
3.24%
4.06%
Source: FactSet
The main point to be taken away from the following Market Summary, and one that I’ve learned time and again through the various cycles during my 15-year career investing (and as a student of history), is that the real economy and financial markets are different and can deviate for long periods. Sometimes this is due to equity markets being forward-looking; others due to excess exuberance, or both.
The Pool’s Q3 quarterly returns and YTD returns, while positive, have only captured a modest portion of market returns this year. This is in large part due to a highly defensive position (beyond that of a traditionally balanced mandate) during a period of strong financial market returns, as well as a selection of individual alternative/private asset holdings that provided, on average, little return over the period.
Recent Changes
Since September, I have made the following changes which I believe will improve the Pool’s structure, and which will align it with the Pool’s long-term goals, while also positioning it based on my general market outlook.
Moving out of individual alternative/private asset holdings, and allocating the proceeds into BCV’s in-house managed, diversified multi-strategy alternatives fund (MSAF). The MSAF is managed by an individual with expertise in this asset class. The MSAF is diversified, with a 7-9% target annualized total return and a target annual distribution yield of 6%.
Exiting out of holdings that are not known or researched by myself, or by BCV’s broader investment team. Proceeds are to be allocated to holdings within the asset classes noted below in the Pool’s strategy section.
The above changes do not represent a complete overhaul of the Pool, but rather to better align to the strategy noted below (see Pool Strategy), and which will be executed keeping tax implications in mind and over this calendar year and the next. The overall tax implications will not be dramatically different than the Pool’s historical realized gains (as a percentage of the Pool) during other periods of strong market returns.
Market Outlook
My market view is simple. The real economy in North America has been in a rolling recession for the last 1-2 years, with different sectors experiencing considerable pain at different times, sometimes followed by recovery, driven by significant and widely reported factors (tariffs, geopolitics, weakening labour market, reductions in immigration, etc.) all of which has been papered over by continuing massive fiscal stimulus on both sides of the border. Queue financial market strength. Regardless of the outlook for the real economy (and there are some early indicators of recovery despite weaker economic data over the last quarter), it is difficult to see prolonged financial market weakness so long as excessive fiscal spending continues. At the same time, however, it is important to respect the long-term unsustainability of fiscal deficits and historic global issues that remain outstanding, which can sour financial market tone at any time. In simple terms, you must remain invested while the financial market party continues, but do so responsibly, with considerable “dry powder” to deploy upon market turbulence.
The Pool is being positioned to participate responsibly by having the core of its equity holdings be large, quality, Canadian dividend paying (and dividend growing) stocks with meaningful dividend yields that have historically exhibited resilience during market downturns, in addition to a more modest allocation to U.S. stocks. Meanwhile the “dry powder” will take the form of high-quality Canadian fixed income and a stable alternatives fund, both of which can provide considerable cash flow and capital stability.
Pool Strategy
My market view is simple. The real economy in North America has been in a rolling recession for the last 1-2 years, with different sectors experiencing considerable pain at different times, sometimes followed by recovery, driven by significant and widely reported factors (tariffs, geopolitics, weakening labour market, reductions in immigration, etc.) all of which has been papered over by continuing massive fiscal stimulus on both sides of the border. Queue financial market strength. Regardless of the outlook for the real economy (and there are some early indicators of recovery despite weaker economic data over the last quarter), it is difficult to see prolonged financial market weakness so long as excessive fiscal spending continues. At the same time, however, it is important to respect the long-term unsustainability of fiscal deficits and historic global issues that remain outstanding, which can sour financial market tone at any time. In simple terms, you must remain invested while the financial market party continues, but do so responsibly, with considerable “dry powder” to deploy upon market turbulence.
The Pool is being positioned to participate responsibly by having the core of its equity holdings be large, quality, Canadian dividend paying (and dividend growing) stocks with meaningful dividend yields that have historically exhibited resilience during market downturns, in addition to a more modest allocation to U.S. stocks. Meanwhile the “dry powder” will take the form of high-quality Canadian fixed income and a stable alternatives fund, both of which can provide considerable cash flow and capital stability.
Market Summary
Navigating the Great Disconnect
The third quarter of 2025 was a period that might have seemed confusing if you were following the daily headlines. On one hand, news reports pointed to a slowing Canadian economy. On the other, the Canadian stock market had a remarkable run, reaching new all-time highs. This contrast between the market’s performance and the economy’s reality was the defining story of the quarter.
Our goal with this commentary is to cut through the noise, explain this disconnect, and reaffirm the disciplined, long-term strategy we are employing for your portfolio. The returns noted below are based on data as of September 30, 2025, unless stated otherwise.
A Tale of Two Tapes: Strong Markets vs. A Cooling Economy
The third quarter delivered a powerful and broad-based rally in financial markets. In Canada, the S&P/TSX Composite Index (TSX) posted a total return of 12.5%, significantly outperforming its U.S. counterparts.
This strength, however, was not a reflection of a booming domestic economy. In fact, the Canadian economy showed clear signs of softening. Forecasts suggest Canada entered a technical recession (defined as two consecutive quarters of economic contraction). We also saw the labour market loosen, with job losses in both July and August pushing the national unemployment rate up to 7.1%.
So, if the Canadian economy was struggling, what propelled the stock market to new records? The rally was driven by three main factors that were largely independent of our domestic economic health.
1. A Global Commodity Boom: A significant surge in global commodity prices, particularly for gold, fueled a massive rally in the Canadian Materials sector. This heavyweight sector soared an incredible 37.8% in the last three months, providing a powerful lift to the entire index.
2. Resilient Banks: Canada's large financial institutions, the bedrock of the TSX, demonstrated their resilience once again, posting another quarter of strong earnings. This profitability provided a solid and stable foundation for the broader market rally.
3. A Helping Hand from the Bank of Canada: Faced with the weakening economic data, the Bank of Canada stepped in. In September, it cut its key interest rate to 2.5% to help support the economy. This move signaled to investors that the Bank would be supportive, which further boosted market sentiment.
In short, the Canadian market rallied not because our economy was thriving, but because the specific parts of our market that performed best were either insulated from domestic weakness (like Materials) or proved resilient in spite of it (like Financials).
Outlook: Preparing for a Bumpy Road Ahead
Looking to the final quarter of the year and into 2026, the key question is whether the market's strong momentum can continue if the domestic economy remains weak. This disconnect between market optimism and economic reality has created a tension that we believe cannot last forever. This is why the consensus view among investment professionals, which we share, is one of cautious optimism. We believe the path forward may be a bit bumpier than the smooth ride of the third quarter.
The single biggest factor weighing on Canada's economy is the persistent uncertainty surrounding U.S. trade policy. This policy fog has caused Canadian businesses to pause or cancel investment plans, which is the primary cause of our economic underperformance.
As we navigate the coming months, we will be closely monitoring three key themes:
The Disconnect: We’ll be watching to see if the gap between economic data and market performance begins to narrow.
Central Banks: The Bank of Canada has started cutting rates to support growth, and the U.S. Federal Reserve is expected to follow suit. The relative pace of these cuts will be a key driver for markets and the Canadian dollar.
U.S. Trade Policy: Any resolution or escalation of trade uncertainty will have a significant impact on Canadian market sentiment.
Our Strategy: Discipline and Diversification Remain the Best Defense
This complex environment highlights the importance of the disciplined, long-term approach we take in managing your portfolio. Our strategy is built on several key principles that are especially relevant today:
Staying Invested, but with a Focus on Quality: With central banks providing support, we believe it is important to maintain exposure to equities. However, our focus is squarely on high-quality companies, those with strong balance sheets, stable earnings, and the ability to navigate a slower growth environment.
The Power of Diversification: This quarter was a perfect reminder of why we diversify across different geographies and asset classes. Diversification provided from international stock markets and alternative assets provided a crucial buffer against Canada's specific domestic challenges.
Maintaining a Long-Term Perspective: It is highly likely that the coming months will bring more headlines and market swings. We will continue to guide your portfolio with a steady hand, adhering to your long-term financial goals, and avoiding emotional decisions based on short-term noise.
We thank you for your continued trust and confidence. Please do not hesitate to reach out if you have any questions.
Sincerely,
Your Portfolio Management Team