There's No Place Like Home

After decades of chasing returns abroad, Canadian investors may soon find reasons to come home.

In recent years, domestic exposure has been steadily reduced in favour of international diversification – and largely for good reason. The U.S. has outperformed on nearly every metric: economic growth, corporate profitability, equity returns, and financial innovation. That "U.S. exceptionalism" trade has dominated asset allocation decisions across pensions, institutions, and households alike. While the U.S. remains the world’s largest economy, home to deep and highly investable capital markets, confidence in its uninterrupted outperformance is beginning to soften. What may lie ahead is not a dramatic shift, but a gradual rebalancing – a recognition that the sizable U.S. overweights in many global portfolios may now warrant a more balanced approach.

Exhibit 1:

The Turning Tide of U.S. Dominance

As we outlined in Greenback Fire Sale, the U.S. dollar's slide in 2025 has been both sharp and telling. The US Dollar Index (DXY) is down roughly 8% YTD, largely reflecting a re-evaluation of the U.S.’s role in the global order (see Exhibit 1). Indeed, while interest rate differentials – typically a key fundamental driver of currency valuations - continue to clearly favour the U.S. dollar (see Exhibit 2), these drivers are currently sidelined as markets remain focused on the broader global repositioning away from U.S. assets.

Exhibit 2:

U.S. equities have also underperformed relative to other asset classes YTD with the S&P 500 up about 1% YTD compared to Canadian equities that are up 7% YTD, with EM and Eurozone equities also providing strong returns (see Exhibit 3).

Exhibit 3:

Two forces are at play here:

1. Positioning Unwind: Non-U.S. investors had grown overweight U.S. assets. Foreign holdings of U.S. equities, as an example, have grown to nearly 20% of the U.S. equity market (see Exhibit 4). The rebalancing here is likely to be disorderly if international investors sell, or even if they begin to turn off the overallocation of flows.

   Exhibit 4:

   

2. Confidence Erosion: While trade tensions have de-escalated over the past month, uncertainty remains elevated relative to pre-2025 levels (see Exhibit 5). Ongoing unpredictability around trade policy, taxation, fiscal discipline, and even the Fed’s independence is prompting a reassessment of the U.S.’s role as a global anchor.

   Exhibit 5:

   

Canadian Portfolios Are Now International Portfolios

In 2024, Canadians held $6.3 trillion in U.S. assets – with $3 trillion of that in portfolio investments (see Exhibit 6).

Exhibit 6:

Of that, nearly 80% is in equities with the remainder in fixed income assets (see Exhibit 7).

Exhibit 7:

Pensions, in particular, have leaned hard into the U.S. This shift has been decades in the making. Over the past 25 years, the share of domestic assets held by major Canadian public pension funds has declined sharply, while exposure to foreign and unlisted assets – such as real estate, infrastructure, and private equity – has steadily increased (see Exhibit 8). What’s changed is the risk-reward profile of that bias.

Exhibit 8:

Why Canada May Be Viewed as the Safer Bet

Global portfolios are likely to begin reflecting a renewed home bias – a natural consequence of rising geopolitical risk, fractured trade relationships, and declining confidence in long-standing economic alliances. For Canadians, that preference, which has a variety of justifying factors, may prove especially valuable for the following reasons:

1. Hedging U.S. Exposure Now Has Return Potential: Historically, holding U.S. dollars served as a natural hedge against global risk-off events. That inverse correlation is breaking down. The Loonie has appreciated nearly 5% YTD, not on the back of domestic strength, but due to broad U.S. dollar weakness.

2. Relative Stability in Canadian Policy: While far from perfect, Canada’s policy environment has avoided the abrupt swings of its southern neighbour.

   Regulatory stability, a consistent rule of law, and credible central banking may look increasingly attractive to both domestic and foreign capital. Moreover, with the federal election now behind us, policy uncertainty has eased. The new Liberal government’s agenda also marks a step forward from its predecessor, with a renewed focus on building a more resilient domestic economy – offering a clear reason for optimism. Dynamic changes in policy can be good in certain cases, but investment craves a stable backdrop in aggregate (55 tariff changes in 115 days does not strike us as a bastion of stability).

3. Low Domestic Weight = High Sensitivity to Flows: The sheer scale of Canadian underinvestment in domestic assets means it wouldn't take much of a shift to drive significant price impacts. Even a modest reallocation from U.S. to Canadian assets – whether by pensions, institutions, or household could have a pronounced effect on Canadian assets. The case is further supported by the relative valuation of Canadian assets, which remain attractive compared to their U.S. counterparts (see Exhibit 9).

   Exhibit 9:

   

What Would It Take to Trigger a Rotation?

We see three plausible catalysts that could spur renewed demand for Canadian assets:

1. Political Instability in the U.S.: Ongoing policy volatility – driven by trade tensions, shifting international alliances, and questions around monetary independence – could increase investor caution toward U.S. assets.

2. Tax Policy Shifts: Proposals in the U.S. for higher withholding taxes on foreign investors could further disincentivize Canadian ownership of U.S. assets. A key concern is Section 899 in the U.S. reconciliation bill, which has made its way through the House but not yet the Senate. If enacted in its current form, it would target countries with so-called “discriminatory” tax policies – Canada’s digital services tax being a prime example. This has the potential to accelerate the shift away from U.S. market if it remains in the final version of the reconciliation bill.

3. Market Repricing: As global markets continue pricing in a diminished role for the U.S. dollar and reduced foreign appetite for U.S. assets, relative value opportunities may emerge in under owned Canadian sectors.

Bottom Line: Time to Reconsider Canada

The case for revisiting Canadian assets is grounded in practical opportunity rather than sentiment. For much of the past decade, Canada has been viewed as a source of capital, not a destination for it. But with global capital flows shifting, a thoughtful re-engagement with Canadian assets is gaining momentum.

To be clear, the U.S. remains the world’s largest economy, home to the deepest and most investable capital markets. This is not about abandoning U.S. exposure, but about gradually reducing what have become substantial overweight positions in many global portfolios. Even a partial reversal of the decades-long orientation of Canadian portfolios could have outsized implications for domestic equity and credit markets.

The opportunity isn't just about what's happening abroad – it's also about what could happen at home. Renewed investment in Canada could help reverse lagging business investment, boosting productivity through modernization of equipment, increased innovation, and enhanced capacity. This could drive stronger economic growth and improve Canada’s competitiveness over the long term.

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Glossary

Correlation: A statistical measure of how two securities move in relation to one another. Positive correlation indicates similar movements, up or down, while negative correlation indicates opposite movements (when one rises, the other falls).