Beyond the Outlook: What We’re Watching Now

Market cycles have always brought change, but the current environment presents a unique combination of challenges: geopolitical instability, rising tariffs, potential tax reform in the U.S., and questions around where inflation and interest rates go from here. These developments are prompting a new wave of questions and conversations about how to preserve and grow wealth in today’s world. 

At Nicola Wealth’s Strategic Insights with John Nicola event in Vancouver on May 29, Chairman, CEO, and CIO John Nicola offered a candid look at how the firm is navigating a complex and fast-moving global landscape. From post-election shifts, policy changes and inflation to interest rates and rising global uncertainty, he outlined what these forces could mean for investors, and how Nicola Wealth is responding.  

He also highlighted how Nicola Wealth is positioning portfolios with a focus on resilience and long-term growth, aiming to deliver what matters most to clients: peace of mind, greater clarity, and the confidence that comes from disciplined planning. 

While John Nicola remains cautiously optimistic in the long-term outlook, he acknowledged that the road ahead is complex. Quoting one of his go-to expressions, “May you always live in interesting times,” he reminded the crowd that "interesting" today often means challenging, yet with the right team and strategy, these challenges can be navigated.  

These are the major forces he’s watching closely:

The growing divide

Nicola pointed to a long-term trend in the U.S. where income growth for the bottom 40% has been flat (after inflation) for nearly 60 years, while the top 5% have experienced income growth of 160%. In that context, tariffs function as a regressive tax. "Tariffs aren’t paid by the exporting countries,” Nicola explains. “They’re paid by U.S. consumers, and they hit low-income earners the hardest." 

Uncertainty as a market force

Beyond their economic cost, tariffs and policy volatility create persistent uncertainty. This unpredictability becomes a market force in itself, distorting pricing, slowing decision-making, and complicating planning. 

Canada's strategic opportunity

Nicola sees potential for Canada to reshape its economic position by reducing U.S. trade dependency. "My view of what 'good' looks like," he shares, "includes reducing U.S. trade dependency to below 50%, expanding agreements with Europe, growing our transpacific trade relationships and eliminating 90% of interprovincial trade barriers." Paired with refined immigration policies to attract top global talent, Canada is well-positioned to compete. 

Understanding the Mar-a-Lago Accord

The Mar-a-Lago Accord is a proposed U.S. economic strategy aimed at reducing the trade deficit by weakening the U.S. dollar to make exports more competitive. It involves imposing tariffs, encouraging foreign currency appreciation, linking trade access to national security cooperation and restructuring U.S. debt into long-term, low interest "century bonds." 

As Nicola points out, this strategy carries material risks, including higher borrowing costs, inflationary pressures and the potential erosion of the U.S. dollar’s reserve currency status, all of which could reshape global markets. 

A ballooning debt picture 

The U.S. federal debt-to-GDP ratio stands at 124%, with interest payments consuming 20% of annual revenue, around $1 trillion. Foreign countries hold $9 trillion of this debt, which can give them influence over U.S. policy. China, once the largest holder, has been gradually selling U.S. bonds for a decade. Japan, now the largest holder at $1.1 trillion, has hinted it may follow. "The U.S. not only needs these countries to retain their bonds,” Nicola says, “but to keep buying the $50 billion in new debt issued weekly to fund the deficit." 

Section 899: A tax shift to watch 

Passed by the U.S. House in May 2025, the "One Big Beautiful Bill Act" includes Section 899, which imposes retaliatory tax measures on foreign entities from countries deemed to have unfairly taxed American firms. This includes digital services taxes and undertaxed profits rules. "The big risk for Canadians," notes Nicola, "is that these U.S. taxes may no longer be deductible against Canadian taxes, as they are under the current tax treaty."

Beware the Dead Cat Bounce 

In financial markets, a "dead cat bounce" refers to a temporary recovery during a long-term decline. Nicola draws on history to provide context. After the 1929 crash, markets rebounded in 1930, only to plunge further after the Smoot-Hawley tariffs were introduced. It took nearly 25 years for the market to recover to its 1929 level. As of May 2025, markets have nearly retraced their losses since April's "Liberation Day," with the TSX reaching a record high. But Nicola warns against complacency: "Now is the time for measured perspective, not euphoric risk-taking." 

Read more about Nicola’s perspective on the Dead Cat Bounce here. 

How Nicola Wealth Addresses These Challenges 

At the core of Nicola Wealth's strategy is thoughtful asset allocation. While public equities account for just 23% of global wealth, many wealth management firms build portfolios with 60-75% stocks, primarily because they’re easy to implement. "But the most successful institutional investors, like Canada’s top pension plans, invest as little as 25% in public equities," says Nicola. The rest is allocated to real estate, infrastructure, private equity and private debt. 

The Nicola Core Portfolio Fund takes a similar approach. "If we were measured against the Maple Eight pension funds, our 10-year return performance would rank third," Nicola says. "That’s something we’re proud to deliver for our clients." 

Over the past decade, private equity has delivered relatively stronger risk-adjusted returns. Real estate, according to a 145-year study by the National Bureau of Economic Research, delivers similar total returns to equities, but with half the volatility. "That’s why we favour real estate.  It’s a more stable path to the same destination," says Nicola. 

Today, Nicola Wealth is leaning into defensive positioning. Fixed income allocations have increased in the Nicola Core Portfolio Fund to take advantage of attractive yields, and the firm is focused on generating reliable cash flow, particularly through strategies designed to minimize exposure to newly proposed U.S. withholding tax rules and especially in registered accounts. “Our goal is a 4% cash yield across the portfolio, through rents, interest and dividends,” says Nicola. Reliable income sources like Canadian bank dividends remains a cornerstone in the Nicola Canadian Equity Income Fund (NCEIF). 

Within equities, the emphasis is also on yield. While U.S. equity yields remain low, the Dividend Yield on the NCEIF is at 4.5% (as of April 2025), helping drive overall portfolio cash flow. Exposure to U.S. dividend-paying stocks has been reduced in favour of growth-oriented names that are more tax-efficient under the evolving U.S. policy landscape. 

This is crisis management in action. Through four major downturns—the Dot- Com bust, the 2008 financial crisis, the COVID pandemic, and post-COVID inflation 2022—Nicola Wealth has maintained a focus on portfolio resilience. "We build portfolios to withstand pressure," notes Nicola. 

How the Nicola Wealth Team Is Responding to the Tariff Environment 

Following his keynote address, John Nicola brought up leaders from Nicola Wealth’s Asset Management teams to comment on their response to the tariff environment. Alex Messina, Managing Director, Nicola Real Estate; Ben Jang, Portfolio Manager and Investment Strategist; Robert Olsen, Head of Private Capital; and William John, Co-Head of Public Assets, shared their plans and insights. The following reflects the views and insights shared by Nicola Wealth’s Asset Management leaders during the discussion. 

Fixed Income: Yields seem attractive again, but tariffs bring complexity. On the credit side, the team is cautious, lending primarily to businesses resilient to trade pressures. On the interest rate side, tariffs could push inflation up – raising rates – but they could also dampen growth, pulling rates down. "It’s a time for defensive positioning and careful selection," says John. 

Public Assets: A detailed review shows that only 3.7% of revenue from European equity holdings within Nicola Wealth managed funds is at risk from U.S. tariffs, due to their service-heavy and domestic U.S. operations. The firm has positioned accordingly. 

Private Capital: Deal flow may slow due to uncertainty, but Nicola Wealth’s portfolio is positioned with a defensive approach. Private debt is senior-ranked, well-diversified and structured to help manage risk in rising-rate environments. Despite the challenges, the team completed 85 deals in 2024, reviewing over 1,000 opportunities to find the right fits. 

Real Estate: Tariffs may increase construction costs by 2 – 7%, but the team is proactively managing this risk through pre-ordering materials and contract management. Industrial leasing in Ontario is slowing as businesses delay decisions, but demand and occupancy remain relatively healthy. The diversified portfolio includes industrial, multi-family, self-storage and other asset classes that have historically demonstrated resilience. 

From Outlook to Opportunity 

“When you have a country, like the U.S., that is literally 15 times the size of your economy and higher levels of productivity, you can't really ignore it as an alternative place to put capital,” says Nicola.  

Even if there isn’t always alignment with the policy direction.  

“We can’t ignore the opportunities. We just have to manage the downside risks." 

With potential policy changes and global reactions still unfolding, Nicola Wealth is staying focused on the fundamentals: disciplined asset allocation, dependable income generation, and active oversight. 

Preparing for the uncertainties that come with Trump’s presidency – and the global reactions it will continue to provoke – is a key consideration shaping Nicola Wealth’s current strategy. “We have to manage the political variables,” Nicola concludes. “This is how we preserve the returns our clients are counting on.” 

Uncertainty may persist, but it doesn’t need to derail a thoughtful plan. With a disciplined approach, diversified portfolios, and a clear investment philosophy, Nicola Wealth continues to support clients in navigating complexity with clarity. 

Let’s Talk About What Comes Next 

The current environment presents complexity, but also opportunity. Our advisors are here to help you evaluate your portfolio, revisit your goals, and take action where it matters most. Meet with us to explore how Nicola Wealth can support your plan. 

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