Points in Time – April 2026 – ISSUE
Scott Blair, CFA
Head Portfolio Manager
An article in The Globe & Mail by Tim Shufelt entitled “Have investors forgotten how to panic?” recently caught our attention. It’s a thought-provoking piece that argues investors may have become immune to the “constant chaos” we’ve all lived through over the last several years. It’s a sentiment worth exploring. After all returns have been very strong for a long time. Over the last fifteen plus years, there have been some pockets of turbulence, but they’ve been relatively short lived with even a global pandemic unable to keep global equity markets down.
Are market participants becoming too complacent, or are they rationally trying to look through the fog? To try to answer this question, lets take a look at a couple of major events that many investors believe the markets may be improperly discounting.
Strait-up disruption
First up is the Iran war. Facts are changing daily but at the time of writing there was a ceasefire, although the U.S. and Iran seem to have a different understanding about what exactly was covered by the agreement. Peace talks seem to have failed with sticking points including Iran giving up its uranium materials and fully opening the Strait of Hormuz. This is a fast-moving situation, and the picture is changing daily.
The bottom line is that energy products such as liquefied natural gas (LNG) and oil, as well as other materials like fertilizer, are not flowing freely from the Persian Gulf to the rest of the world. Shortages will worsen the longer this conflict continues. Asia is most exposed to disruptions in the Persian Gulf with Europe also significantly impacted. Even if there was a deal tomorrow to end the conflict and reopen the Strait of Hormuz, there would still be lingering effects. At least 18 refineries have been damaged in the Middle East, with estimates of 2.5 million barrels per day of capacity impacted. That’s significant supply that needs to be brought back online. Governments have also dipped into strategic reserves to help ease the supply disruption; these reserves will need to be rebuilt. It all points to “higher for longer” prices, even if the war were to end tomorrow.
We are already seeing the impact of the conflict on U.S. inflation numbers with the Consumer Price Index (CPI) for March showing a 3.3% increase in prices over the last 12 months, with energy costs a big driver (up 10.9% year over year). Typically, inflation above 3% is viewed as concerning, with central banks looking to potentially raise interest rates to stem fears of inflation. Although it’s unlikely we’ll see rate hikes as long as energy prices are seen as temporary, it’s also unlikely we’ll see the rate cuts the market had been hoping for this year.
The next big risk
The next major risk is more North American focused. As Q2 moves on, the Canada-United States Mexico Agreement (CUSMA) will begin to get a lot more attention. Key dates include June 1, when U.S. trade representatives report to Congress on whether the U.S. intends to extend CUSMA or pursue changes, and July 1, where the three parties will formally meet for its six-year review. Many expect the U.S. to push for rolling annual reviews going forward, along with separate side deals with Canada and Mexico, rather than one overarching agreement. Such a strategy would fit well with President Trump as it would have the potential to keep Canada on its back foot and increase U.S. bargaining power. After all, access to the U.S. economy is crucial for Canada, while it is less so for the U.S.
Canada may have some leverage here, with the Iran war underscoring the fragility of global supply chains, particularly in commodities. Canada has an abundance of commodities, like fertilizer, energy, and aluminum to name a few. Also, with inflation rising in the U.S., and with the potential for it to rise higher due to increased tariffs, there is a chance any deal reached this year will prove relatively benign.
Rational or irrational markets
One might think that given the chaos in the Middle East and the upcoming trade talks, markets would be off significantly. In fact, the main Canadian benchmark (S&P/TSX Composite) returned almost 4% in Q1, while global markets (MSCI EAFE) rose 1% and the U.S. (S&P 500) was down 2% (all in CAD). Although this does seem like the chaos has had no impact, the markets have corrected from all-time highs earlier this year. For instance, the Canadian benchmark was down 5% from it’s early-March highs.
In our view, markets have acted rationally, rising earlier this year on strong earnings forecasts and then pulling back due to the Iran war. If the conflict lasts longer, spreads, or causes more damage, it’s likely that markets will fall further. But for now, investors have taken a wait-and-see approach, trimming areas of the market that are most impacted.
The story for Canada is similar. The war has caused Canadian energy stocks to post outstanding gains, which has helped our market to be one of the best performers in the world. As CUSMA negotiations heat up, we will likely see some increased volatility in the areas most impacted. A bad outcome, such as the deal falling apart entirely, could cause a recession in Canada and a large market sell-off. The market is not pricing this in, as it seems unlikely and in no one’s interest. Again, in our view this is rational.
The market has a history of assessing risk and acting accordingly. Long-lasting market downturns are typically caused by significant economic issues (like a recession) that meaningfully and persistently damage corporate earnings, not just for a quarter or two. Earnings forecasts are still strong for corporations and a recession seems unlikely.
The chart below shows market drawdowns (moves from a peak to a trough) within each year, going back to 1970 for the S&P/TSX:
S&P/TSX intra-year drawdowns (1970 – 2025)
| Years with a draw down of… | # of years | % of Years |
| 5% or worse | 53/56 | 95% |
| 10% or worse | 33/56 | 59% |
| 15% or worse | 24/56 | 43% |
| 20% or worse | 15/56 | 27% |
| 30% or worse | 7/56 | 13% |
| 40% or worse | 1/56 | 2% |
Source: National Bank CIO Office (Data via Refinitiv)
As the chart shows, it’s common to see significant drawdowns in any given year. In fact, it’s common for the market to fall 15% within a year. We’ve already seen this twice in the 2020’s (2020 and 2022). Neither downturn proved long-lasting and the S&P/TSX recovered fairly quickly, with 2022 the only negative year for this decade.
Perhaps markets are not being excessively complacent right now. Rather, markets may be taking a long-term view of current disruptions. It’s important to remember that there will be many up and downs in the future. It’s the price we pay for attractive long-term returns. In our view, investors that understand this are well equipped to stick to their plan, take emotions out of the picture, and are ultimately better off in the long run.
Source: FactSet, The Globe & Mail
Canada Equity
Scott Blair, CFA
Head Portfolio Manager
Watching
Overall, the Canadian equity market delivered a solid 4% return in the first quarter of 2026, masking significant dispersion across sectors. Not surprisingly, the energy sector is up 30% and was the top performer in the quarter, as the outbreak of the Iran war led to a virtual shut down of the Strait of Hormuz. The Strait is a major energy chokepoint that typically sees over 20% of the world’s global seaborne oil trade and liquified natural gas (LNG) exports pass through its waterways. This disruption drove a significant drawdown in global oil inventories. The conflict has also caused mounting damage to regional energy infrastructure and contributed to higher prices.
On the other side of the ledger, information technology was the primary drag on returns. The sector fell 23% as ongoing AI-related concerns weighed on Canadian software names such as Shopify (SHOP) and Constellation Software (CSU).
The materials sector was volatile in the quarter, but continued to deliver solid performance, ending up 11% at the end of Q1 of 2026. Gold, which has been firmly in focus in recent years, was up approximately 22% year-to-date by the end of February. However, despite heightened uncertainty tied to the U.S./Israel–Iran conflict, gold retraced more than half of those gains in March, ending the quarter up about 8%.
Finally, we observed a rotation away from more economically sensitive sectors, such as real estate, industrials, and financials, toward more defensive areas including consumer staples and utilities. This shift is consistent with concerns about rising inflation and slower growth stemming from the Iran war as well as an increasing market preference for businesses perceived to be more resilient to AI-driven disruption.
Thinking
The outlook for the Middle East remains highly uncertain, and the range of potential outcomes for Canadian equities, particularly energy and commodity-related sectors, is wide. While markets have already moved meaningfully, we believe it remains prudent to maintain exposure to economically sensitive Canadian sectors and themes that could benefit across a range of scenarios.
For example, WTI crude oil futures are averaging about $70/bbl. for 2027, up roughly 12% since the conflict began. A sustained peace could see supply normalize, prices stabilize or decline from current levels, and inflationary pressures ease. Conversely, a prolonged or escalating conflict could push commodity prices meaningfully higher from already elevated levels and support continued strength in the energy sector.
Within information technology, January and early February were marked by a surge of AI-related headlines focused on innovation, new tools, and the potential for disruption across a wide range of end markets. We believe, however, that the AI narrative has reached elevated levels of hype, and that many Canadian IT companies are either more resilient to these risks than commonly assumed or better positioned to benefit from new AI technology than current valuations imply.
Doing
One of the more notable changes we made in the first quarter of 2026 was increasing our exposure to materials by increasing our position in Agnico Eagle Mines and adding iShares S&P/TSX Global Gold Index ETF (XGD) to the portfolio. While the portfolio remains underweight regarding precious metals relative to the benchmark, that gap has narrowed. Given the wide range of potential macro and geopolitical outcomes, we continue to view this exposure as an effective portfolio diversifier.
In energy, we trimmed our position in Precision Drilling (PD) in early March, as the stock had approximately doubled from its 2025 lows. Beyond this trim, we made no other material changes to our energy holdings and continue to own what we believe are high-quality businesses with disciplined capital allocation and appropriate leverage to crude oil prices.
Source: FactSet
We also added to our Constellation Software (CSU) position in late-January. At current prices, many of the IT stocks we hold in the portfolio look extremely attractive. We will continue to take advantage of these sell offs and be nimble on adding to these throughout the year.
Finally, we exited our entire position in Richelieu Hardware Ltd. (RCH) in the first quarter of 2026. We continue to view RCH as a well-managed business with a defensible competitive position, a good reinvestment runway, and a clean balance sheet. However, in light of the valuation dislocations and opportunities we see elsewhere in the market, we believe capital is better deployed in areas offering more compelling risk-adjusted return potential at this time.
U.S Equity
Liliana Tzvetkova, CFA
Senior Portfolio Manager
Saket Mundra, CFA, MBA
Co-Head of U.S. Equities,
Senior Portfolio Manager
Watching
We entered 2026 with a constructive but more nuanced setup for U.S. equities. AI remained a dominant theme, but unlike prior years, there was growing evidence of market broadening as investors rotated toward cyclicals, energy, and select defensives. Inflation appeared to be moderating, the Federal Reserve was expected to resume gradual easing later in the year, and earnings expectations remained supportive.
That backdrop changed meaningfully as geopolitical risks re emerged. The escalation of the conflict in Iran became the defining macro shock of the quarter, driving a sharp repricing across commodities, inflation expectations, rates, and sector leadership. Oil prices moved decisively higher, risk premia rose, and markets shifted from pricing in stable inflation to one with more near term uncertainty.
While the overall market declined just 3% year to date (in CAD), equity performance has been increasingly divergent at the sector level. Energy was the clear top performer, followed by traditional defensive sectors such as utilities and consumer staples; an unsurprising outcome in an environment characterized by geopolitical uncertainty and rising input costs. In contrast, financials, consumer discretionary, and information technology lagged, reflecting a combination of higher rate volatility, pressure on consumer spending expectations, and continued digestion of elevated AI related capital spending.
Healthcare, which historically behaves defensively in periods of volatility, did not provide the expected stability this quarter, detracting from relative performance. Software was another notable underperformer, as investors questioned near term demand elasticity, pricing power, and the durability of margins in a world of rising costs and uneven AI monetization.
Thinking
A key part of our process is differentiating between cyclical and structural forces when assessing the impact on our holdings and portfolio. We view the recent geopolitical developments as cyclical in nature. As such, while they can have short term impacts on markets, inflation expectations, and sentiment, they typically do not fundamentally alter the long-term prospects of the businesses we own, although they may face pressure in the short term. Our focus on strong balance sheets, durable competitive advantages, and proven management teams makes us comfortable looking through near term volatility.
Structural issues, however, are different: they can permanently reshape industries, business models, and profit pools. Artificial intelligence is a good example of a force that can create structural challenges for certain companies and sectors, even as it creates significant opportunities for others. Assessing these risks is inherently difficult and requires humility. We spend considerable time evaluating where AI is likely to be incremental versus disruptive, and which companies are positioned to adapt versus those that may face long term erosion of their economics.
In this context, valuation becomes an important tool. There are times when markets over discount structural risk, pushing valuations to levels where a very pessimistic outcome is already priced in. In those cases, even businesses facing real challenges can offer attractive risk//reward if expectations are sufficiently low. One example in the portfolio is Brown & Brown. The company operates in areas such as insurance brokerage services which are perceived to be higher risk for AI disruption. The valuation has fallen to a level not seen in the last decade creating a compelling investment opportunity.
Ultimately, our goal is not to forecast every macro or technological outcome, but to continuously reassesswhether the long term return potential of a business remains attractive relative to what’s priced in the market. This framework allows us to stay invested through cyclical noise while remaining thoughtful and selective when true structural change is underway.
Source: Factset
Doing
From a portfolio standpoint, our actions this year have been consistent with the philosophy described above. We added Occidental and Cheniere to our energy holdings in February, several weeks before the conflict in Iran emerged, based on company specific fundamentals and an improving risk/reward profile. As a result, we are now modestly above benchmark weight in energy, an exposure we like and view as both a source of return and a form of portfolio insurance. The longer geopolitical tensions persist, the more time it will take to unwind elevated energy prices, normalize supply dynamics, and reverse certain second order effects, a backdrop that supports high quality energy assets.
At the same time, we have continued to trim some of our longer standing winners, including Alphabet and Fabrinet, where valuations had become fuller after strong performance. The capital has been redeployed into Pool Corp and Copart, both relatively newer positions in the portfolio. In our view, these businesses offer attractive long term fundamentals, and a very compelling risk/reward at current levels.
As always, we remain focused on the long term. Our investment process is grounded in discipline, valuation awareness, and fundamental analysis, and is designed to function well in noisy environments like today’s. While short term market leadership will continue to shift, we believe owning high quality businesses at sensible prices remains the most reliable way to compound capital over time.
International Equity
Ric Palombi, CFA
Senior Portfolio Manager
Watching
The conflict in Iran and the disruption to oil and gas shipments through the Strait of Hormuz has been the main driver of international markets since the war began. As a result, the market’s earlier focus on AI has faded into the background for now.
Equity markets have held up relatively well despite the escalation across parts of the Middle East. Since the beginning of the conflict on February 28 to the end of the quarter, the MSCI All Country World Index excluding the U.S. (MSCI ACWI ex-US) is down about 8% in USD terms.
A supply shortfall of a little over 10 million barrels per day from the Persian Gulf pushed oil prices to nearly $110 per barrel. Governments have helped ease pressure by releasing strategic reserves, while additional barrels from Russia (and potentially Iran) have also provided some near-term support. Natural gas has been more disrupted as exports of liquefied natural gas (LNG) from Qatar which represents roughly 20% of global LNG supply have been largely shut down.
Markets appear acutely sensitive to disruptions of energy flows through the Strait. The headline narrative has been simple: oil up, stocks down; oil down, stocks up. In our view, the key risk is not from inflation of higher oil prices, but that higher gasoline prices, and knock-on impacts across supply chains, can reduce consumer purchasing power leading to a potential recession.
The chart below shows how European sectors have performed since the war began. Areas that depend heavily on consumer spending or that use oil and gas as a major input (such as airlines) have been among the weakest. Software has also lagged the broader market, suggesting the AI theme remains important, even if it is not driving headlines day to day.
Bottom line: Energy supply remains the key swing factor for markets. Until flows normalize, we expect higher-than-usual volatility and meaningful differences in performance across sectors.
Source: Morgan Stanley
Thinking
In periods like this, we stay anchored to our investment process. We do not try to forecast the path or timing of the conflict. Instead, we focus on what we can assess: how well our companies are positioned in their industries, the strength of their balance sheets, the quality of their management teams and in short, their resilience.
We do not make portfolio decisions based on geopolitical events. As a result, parts of the portfolio that are more sensitive to the economic cycle have lagged in the near term, which is not unusual in an energy-driven shock. On the other hand, our energy holdings (such as Eni and Tenaris) have helped. We have also seen support from renewable energy holdings (such as Vestas) and utilities (such as RWE and Enel).
At the country level, China has been relatively more stable than many international markets so far. Large oil reserves, steady oil and pipeline-gas supply from Russia, and limited direct involvement in the conflict have helped.
Bottom line: We are staying disciplined and focusing on companies we believe can perform through a range of outcomes. We are avoiding reactive, headline-driven changes and will continue to be guided by valuation.
Doing
We used recent market volatility to add to Adyen, Lanxess, LVMH, and Worldline. We funded these purchases by trimming other positions and reallocating capital within the portfolio. Earlier in the year, during the commodity rally, we reduced our holdings in Antofagasta and Heidelberg Materials.
Bottom line: We are using volatility to strengthen the portfolio and focus on our highest-conviction ideas. We will continue to add when we see attractive long-term risk/reward and where we see the biggest divergence between price and value.
Sources: National Bureau of Statistics, Bloomberg
Fixed Income
Malcolm Jones, MBA, CFA
Senior Portfolio Manager
Watching
As discussed in many places, the conflict in Iran has resulted in the unintended, but perhaps not unexpected, consequences: disrupted transit in the Strait of Hormuz and a spike in oil prices.
In the latter part of 2025, U.S. tariff rates were largely finalized. Even with the U.S. Supreme Court declared that the tariffs were illegal as implemented, it is reasonable to assume that U.S. tariffs will remain in place, perhaps with modifications to meet the confines of U.S. law. Uncertainty about tariff levels has abated; however, uncertainty remains about the duration and magnitude of the effects of these tariffs on inflation and/or growth.
Credit spreads were narrow at the beginning of the year and narrowed further into early February. They have widened from their February lows; however they remain at the lower end of historical ranges. The market has seen some defaults in specific bonds, and there has been some concern about certain private credit funds. However, there does not appear to be a systemic issue in credit markets. We have not seen an increase in default risk or a decline in investor appetite for investment-grade bonds.
Thinking
In most of the developed world, inflation abated over 2025 allowing central banks room to possibly cut rates. U.S. inflation was more stubborn, but markets were still expecting some cuts by the end of 2026.
With oil flows disrupted by the war in Iran, inflation has become a potential issue again. At the same time, higher energy costs can reasonably lead to reduced growth. Central banks face the challenge of whether to raise rates to counter inflation or cut rates to support growth. We feel that commentary from the various central banks suggests they view inflation as the greater risk.
In Canada, we benefit from being a significant oil producer. As a result, the Canadian economy can benefit from higher oil prices, which may offset some of the drag on growth from higher energy costs. For the first three months of 2026, Canadian yields were volatile; but from January 1 to March 31, the net change was minimal. We are expecting this back-and-forth to continue for most of the year in conjunction with various geopolitical developments.
Source: Bloomberg
It will be challenging to determine the effect of tariffs on the U.S. economy since they are being implemented alongside income tax cuts, deregulation efforts, changes to immigration policies, and military activity. In this case, we rely on theory: a tariff should behave like a sales tax and, as such, should have an inflationary effect on U.S. consumers. Combined with uncertainty around these concurrent changes, U.S. debt may become marginally less attractive to non-U.S. investors. At the margin, this makes non-U.S. debt more attractive. Corporations have continued to post reasonable earnings. Outside of specific instances, debt repayment has generally been strong, and credit spreads remain very narrow compared to their history, despite widening somewhat over March. That said, we do not see a significant catalyst that would push spreads sharply higher. We reduced the duration of our credit exposure given low spreads; however, we do not feel there is a need to reduce overall credit exposure.
Doing
We remain positioned to try to capture additional income. We are currently slightly overweight duration, meaning exposure to interest rate movement. We expect this to provide additional income from holding longer-term bonds, rather than relying on capital gains from yield-curve movement. We continue to be overweight credit; however, we have reduced our duration within our credit bonds. With credit spreads low, there is less “extra income” to be earned from having longer-duration credit exposure. Overall, we expect limited opportunities to capture capital gains in fixed income this year.
The information and data supplied in the present document, including information and data supplied by third parties, are considered accurate at the time of their printing and were obtained from sources which we considered reliable. We reserve the right to modify them without notice. This information and these data are supplied for information only. No representation or guarantee, explicit or implicit, is made as to the exactness, the quality and the complete character of this information and these data. The present document aims to supply general information and must on no account be considered as offering. investment, financial, fiscal, accounting or legal advice. The present document on no account recommends the purchase or sale of any given security and it is strongly recommended that the reader consult an advisor of the financial sector and/or a professional tax consultant before engaging in any purchase or sale transaction of a security.
National Bank Financial — Wealth Management (NBFWM) is a trademark owned by National Bank of Canada (NBC) that is used under licence by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA).