Canadian institutional investors taking a measured approach amid ongoing geopolitical, economic volatility

Read: Canadian asset owners increasingly re-thinking U.S. allocations due to currency risk, Trump policies: report

That approach has yielded opportunities such as the HOOPP’s recent investment in a Richmond Hill, Ont. data centre alongside the ongoing artificial intelligence boom — another trend shaping the world of 2026 and beyond.

Tariffs and trade talks

Just like the first week of 2025, early 2026 got off to a raucous start.

Within weeks, global stock markets took a bumpy ride amid U.S. President Donald Trump’s on-again, off-again tariffs on its trading partners. While tariffs have caused short-term disruption, the worst-case scenarios that economists were predicting haven’t yet come to pass, says Yusuke Khan, investments leader at Mercer Canada.

However, he expects the upcoming review of the Canada-U.S.-Mexico Agreement will shape economic trends for months and years to come. In January, Trump called the trade pact — which was initiated during his first presidential term — “irrelevant,” setting up a potentially rocky review ahead.

This uncertainty could impact Canadian public equities if businesses hold off on capital investments, says Dimi Ntantoulis, Canadian equity growth portfolio manager at MFS Investment Management.

“I don’t think anyone is going to walk away [from] this, because it’s so important to all three nations but, until that’s resolved, there may be some hesitation by businesses in making those decisions.”

Read: What could a second Trump presidency mean for Canadian institutional investors?

While a renegotiation or cancellation of the CUSMA could cause further volatility, uncertainty over the future of the agreement could also result in near-term economic growth, says Soami Kohly, MFS’ Canadian fixed income portfolio manager. “The flip side is, in the first two quarters, it actually may boost economic growth, to the extent that companies are worried about cancellation [and they may] front run a lot of economic activity.”

Populism on the rise

A possible U.S. pivot on the CUSMA is just one example of a growing shift towards populism in many countries around the world.

However, despite the noise of daily headlines, opportunities exist in public equities yielded by a greater focus on governments using economic policy — in particular, fiscal policy — as a way to support economic growth in countries that have taken a populist approach, says David Ross, senior executive managing director and global head of liquid assets at the OPSEU Pension Trust.

“That’s generally a good environment for corporate earnings and a good environment for equities in general. We’re also seeing signs of a broader cyclical recovery taking place, not only in the U.S., but elsewhere as well. And in periods when the global economic cycle is doing well, equities do well and equities outside of the U.S. tend to outperform U.S. equities.”

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Turning to the fixed income portion of the portfolio, he notes this economic environment will keep bond yields elevated. In 2021, when bond yields dropped to historically low levels, the OPTrust significantly reduced its bond portfolio, but as yields recovered over the last five years, the investment organization has slowly restored its bond allocations.

Buy Canadian

In response to U.S. tariffs and threats of annexation by Trump last year, Canadian consumers and businesses were quick to take up rallying cries of ‘Buy Canadian’ and ‘Elbows Up!’ as they passed over U.S. products in favour of homegrown alternatives.

A similar fervour has shaped the federal government’s push for investments in domestic infrastructure projects over the last year, beginning with the removal of the cap that restricted Canadian pension funds from owning more than 30 per cent of the voting shares of a Canadian entity.

Chris Boyle, senior vice-president and head of global institutional partnerships at Mackenzie Investments, recalls a similar outreach by the U.K. government a decade ago that could serve as a model for how Canada could entice institutional investors to allocate to domestic infrastructure.

Read: Ottawa to remove 30% investment cap for Canadian pension funds

“They wanted to meet with investors that were involved in infrastructure investing. . . . The government was weighing different regulatory responses and rules they were going to put in place and they wanted to consult with investors to understand what their needs would be to foster direct investment in projects in the U.K.

“That just struck me as an extraordinary thing — to see government reaching out to business and engaging in that kind of dialogue — and I hope that’s what we see happen in Canada. . . . It creates more certainty and an environment that’s more attractive for businesses to allocate capital in Canada.”

More than a third of the OPTrust’s portfolio is already invested in Canadian assets, notes Ross, adding the government’s growth-focused approach is benficial for all Canadian industries and will have a positive impact on public equities.

“We increased our public equity exposure in Canada because we felt there were a number of good things happening in Canada. . . . We think [the current government’s approach] is going to be beneficial for the economy and for Canadian companies.”

Active versus passive management

In the midst of ongoing concentration in the U.S. equity market, institutional investors continue to contend with underperformance by active equity strategies, says August Cruikshanks, a principal in Eckler Ltd.’s investment consulting practice.

Read: Institutional investors leaning on active management strategies for equities amid economic volatility: expert

This concentration is largely related to technology companies’ stocks surging from the AI boom of recent years, he adds. “We’ve had these extraordinary absolute returns in most equity markets and most active managers haven’t been able to keep up. . . . A lot of it comes back to the AI concentration issue and how the market is evolving and how active managers are able to add or not add value relative to passive indices.”

Active managers in Canadian equities also underperformed significantly in 2025, says Khan, noting passive strategies will likely see more consideration moving forward. “I would consider active management as something [institutional investors] should pay more attention to, especially if it’s the case that equity returns over the next 10 years are less likely to be as good as they’ve been over the past 10.”

Kin Chin, head of retirement and relationship management at Franklin Templeton, notes his institutional clients have expressed increased interest in systematic management when it comes to public equities, describing the approach as the midpoint between active and passive strategies. “Systematic managers tend to be much more closely aligned to a benchmark rate when it comes to some of the ‘Magnificent Seven’ companies . . . and they have tended to come in at a much lower fee then an active manager.”

Diversifying portfolios

While U.S. public equities, particularly large-cap stocks in technology companies, have yielded high returns over the last five years, an uncertain global economy requires a degree of risk management through portfolio diversification.

Read: Concentration risks from AI trend putting pressure on long-term equities outlook: expert

“I think now is the time not to react in a kneejerk way to the emotions of the day, but to be measured and just taking in that information and understanding that the range of outcomes is now broader,” says Khan. “A year ago, I think many could have made a very thoughtful argument on why the Canadian stock market wouldn’t do well in 2025 because of Canada-U.S. relations. It ended up being one of the best stock markets in the world.”

Alternatives, including private equity, continue to provide diversification, particularly for smaller institutional investors, he notes.

“There are opportunities that have been made available to a broader range of institutional investors. You don’t have to be a $20-billion plan to access some of these opportunities anymore.”

A global approach

In addition to alternatives, investments in emerging and global markets provide a similar benefit to institutional investors.

These markets continue to yield new opportunities in sectors such as financial technology, renewable energy and health care at a lower price compared to their U.S peers, says Chin, noting large economies such as Brazil, China and India will continue to lead the emerging markets space in 2026. “Everyone wants to have a healthy exposure to U.S. equities but, on the other hand, they’re also concerned about high valuation [and] emerging markets trade at lower costs than some of the U.S. companies.”

Read: Adapting to an economy with globalization shifts at the CSSB

In addition, the reordering of global affairs may provide opportunities in emerging markets, says Boyle. “You’re starting to see that play out from a macro perspective — if you have a situation where the U.S. dollar weakens, that could be an additional tailwind for em erging markets.”

AI boom or bust?

The current AI boom is providing institutional investors with a range of opportunities that go beyond the technology through to its influence on all aspects of society.

The HOOPP’s recent data centre investment represents just one layer of opportunity in a sector that requires huge amounts of capital to finance its infrastructure, says Shum. “When we pick a deal in infrastructure, we want to make sure our down-side is well protected. We’ve invested in a high-quality tenant and operator in Canada, so we feel very strongly about the protection of our investment.”

Beyond infrastructure, there are also opportunities in the model layer of AI — in which systems are trained and optimized — as well as the application layer, representing the technology’s user-facing aspect and its integration into consumer software.

Read: Expert panel: Investment strategy, AI among key issues for DB pension plan sponsors in 2026

The OPTrust’s portfolio has some exposure to AI via public equities, says Ross. While the technology is yet to make a major impact on the broader economy, he notes there are signs of AI supporting improved productivity, which could yield further investment opportunities.

“Some companies appear to be well positioned to improve their profitability [via AI]. Banks and other financial institutions seem to be in that category, but there’s likely going to be other companies that don’t do a good job of adapting to this new technology and they end up getting disrupted and fading away. There are both opportunities and risks here, but I think 2026 is when we’re going to start seeing [AI’s impact] show up in the broader economy and markets.”

Despite murmurs of an AI bubble, Boyle believes there’s more room for growth, drawing parallels to the early days of the dot-com boom of the mid-1990s. “I don’t know who’s going to win the AI race, but I believe that all manner of companies are going to see a huge productivity windfall as a result of AI, which is ultimately going to drive earnings and that’s going to be good for markets. . . . I think we’re closer to 1996 than 1999 and [AI still has] some legs to it.”

Blake Wolfe is the managing editor of Benefits Canada and the Canadian Investment Review.