BMO GAM chief investment officer: Here’s how to know when to buy on the dip

The Trump administration remains laser-focused on tariffs.

Tariff uncertainty poses a significant challenge to businesses and consumers, while also threatening economic growth. On Monday, the Organization for Economic Co-operation and Development (OECD) lowered its 2025 global economic growth outlook to 3.1 per cent from 3.3 per cent, noting “higher trade barriers in several G20 economies and increased geopolitical and policy uncertainty weighing on investment and household spending.”

That uncertainty is weighing on markets and increasing volatility. To gain insights on how investors can navigate these choppy markets, the Globe and Mail reached out to Sadiq Adatia, chief investment officer at BMO Global Asset Management, on March 13, who shared his outlook on tariffs, the markets and highlighted potential investment opportunities and risks for investors to consider.

What is your outlook on the tariff timeline and trajectory, which drive your investment decisions?

Our expectation is not that it will be zero, and our expectation is not that it’s going to be 25 per cent, so somewhere in between is where we’re expecting it to play out. But to be honest with you, it’s really hard to predict when you don’t know what the end game is, and the targets keep moving as well.

But because of the uncertainty, we do expect GDP to slow down. The outlooks by corporations are going to be a bit more muted because they don’t know what they’re going to be investing in, what the input costs are going to look like and how consumers are going to react until they have some certainty on the tariff situation.

If we have the tariff situation going on for six months, for argument’s sake, our expectations for Canada, the U.S., everywhere else will also have to come down because there’ll be a six month period where people are not going be investing the way they would normally invest, they don’t know what to put in for their revenues and their expenses, so all of that is going to be very uncertain. Therefore, I do think you’d have to bring down your outlook for markets from that perspective. That being said, if it’s a lot shorter, then I think you can get a bounce back in markets.

You gave me two scenarios, which camp are you in?

I’m hopeful that within six months we get to some sort of resolution. But we could get to six months and have some sort of resolution, and then all of a sudden Trump comes up with something different that he wants to push forward and if we don’t do it, then tariffs come back on. So even when you think you have a resolution, you may not have a resolution. But I’m hoping within the six-month period, at least Canada has gone past this back and forth and got to some sort of resolution on what tariffs might look like.

For the upcoming earnings season, it might not be the actual earnings but rather the guidance and outlooks that drive stock prices and equity markets. We have already seen a pullback in the markets and valuations have come down. So, do expectations now match fundamentals, or do you think there’s still that mismatch that leaves stocks vulnerable to further downside?

I think it still leaves stocks a little bit vulnerable.

CEOs are doing their best to provide guidance, but when they don’t have full clarity, they can’t do that either. So, I think the market is still trying to figure out what is that discount that needs to be applied for the uncertainty and that’s why we’ve seen a very nervous market.

Also, people are selling their winners that have done quite well over the last few years that includes some of the best companies that you actually do want to own over time. But because they have done so well, they’re getting hit with redemptions.

How should investors navigate this heightened market volatility? Should investors be buying the dips or selling the rallies?

Pullbacks in markets occur. We’ve been fortunate that we haven’t had too many over the last few years, so we were probably due for one. And then given what’s going on, it’s understandable why markets are a little nervous at the moment.

I do think the good companies that we think are going to drive the future, that have a strong moat, that have brand awareness – they’re going to be priced at a discount here.

And as long as you have the right investment horizon, which is not three months but much longer, then you potentially should be buying on some on those dips.

But I think there’s still a little bit more of a pullback that’s required to get to a more comfortable level of buying on this dip.

How much more of a pullback might be required then?

Well, it’s hard to say. Each sector is quite different. We were just recently at 10 per cent down on the S&P 500 and about 15 per cent down on the Nasdaq. I think 20 per cent on the Nasdaq is when I think you want to look at some of those tech names that are high-quality companies. And the S&P 500 is getting pretty close to those levels now, maybe another 5 per cent down from here would be around the time you start to dip your toes back in.

When the market’s down 15 per cent that means some stocks are down 20, 25 per cent. I think you want to be owning the quality ones, especially during uncertainty. Companies that have good balance sheets and that also have brand awareness to be able to potentially pass on higher input costs to the end consumer and not impact their margins as much.

What is the downside risk for the S&P/TSX Composite Index?

The TSX has been a little bit more fortunate in two ways.

First, the TSX didn’t run up as much as the U.S. has over the last couple of years. So, it’s less overvalued than its U.S. counterparts and probably has less downside risk on that front.

Second, until this tariff discussion is completed, there’s still going to be pressure on Canada because its economy wasn’t very strong, it was doing a little bit better in the last couple of quarters, but then you ran into the political situation and then of course the tariff situation so that’s going to cause some stalling in economic activity. The unemployment rate has been going up as well.

So, I do think there’s still more room on the downside, but I think it’s sector driven. Areas like precious metals are doing fine. We had some good numbers coming out of the Canadian banks, they’ve been beaten down a little bit, but I think there’s room for upside there because of their strong dividend yields as well and some do have U.S. exposure, and the U.S. economy is still the strongest economy despite what’s going on at the moment. I think there’s still may be another 3 to 5 per cent in Canada.

When we last spoke in October, you predicted that 2025 would be a challenging year for Canadian equity investors. So far that’s been correct. You also said your expectation was that the S&P/TSX Composite Index would deliver muted returns, 0 to 3 per cent. Are you sticking with that forecast?

Maybe we could get to 0 to 5 per cent but I do think that we’re going to be in the low single digits for sure in Canada this year. I think the headwinds are going to be there because we’ll get some tariffs, and that’s going to put some pressure on it. We’re underweight Canada in our portfolios because we want to see this tariff situation play out.

What sectors in the S&P/TSX Composite Index do you believe will be the leaders and laggards in 2025. Or perhaps you see it as a tale of two halves because you’re talking about seeing some resolution surrounding tariffs hopefully in the next six months?

I think it will be a tale of two halves. What does well during the tariff uncertainty and then what does well after the tariff resolution. When I say resolution, it doesn’t mean zero tariffs, it means just some certainty there.

I think in this environment people are going to be looking for something that has dividends. Yield, I think, is going to be important for people because it gives you a little bit of a floor because you know you’re going to get a three, four, five per cent yield, which cushions you on the downside. I think insurance companies, financials, things that have a decent yield will do well. We don’t have a really good healthcare sector here, like the U.S., so we don’t have that defensive play. I think even on the staples side, consumers are going to still be buying the goods, necessities they need to buy. It’s more on the discretionary side that I’d be more cautious and nervous about. And I think even within our tech segment, valuation pressures are going to be there as people look to readjust their portfolios to bring down some of the risk associated with higher valuations in many cases.

Given your yield preference in mind, do you also favour REITs and utilities?

REITs are going to be important because if you think about real estate, lower interest rates are good but it’s good only if the economy is good and you’re cutting rates. If the economy is bad and that’s why you’re cutting rates, then that’s not a good thing. I think that the real estate opportunity will be okay in this environment, but the key is going to be where rates go from here.

And utilities, I think the yield is good there. There’s not a lot of growth in some of these utility companies that we’ve been seeing so you’re really just looking at just getting a steady return that’s tied to the dividend yield. But there’s probably less downside pressure.

Diversification benefits have certainly been evidenced this year with many major international stock markets outperforming Canadian and U.S. indices. Are there specific international markets where you have overweight recommendations?

We’re neutral on international markets and that’s an upgrade from being underweight previously.

European markets are turning the corner, they’re not necessarily in a high growth mode yet, but they’re stabilizing from the downturn. So, all the negativity was priced in. Now, some of that needs to come out and that means valuations can potentially go up.

Germany is a good example of one where nothing was going right for the last two years, but pre-COVID, it was one of the best economies out there and it really drove international markets. We still need to see more proof in some of the areas before we get overly bullish on it.

But you can see why you want to be diversified. One of the key themes that we had at the beginning of the year was rotation – to start to rotate into some of the areas that have been beaten up that may have some upside potential surprises and Europe is giving us that right now. The periphery in the Eurozone, for instance, has actually done better than the core, so that’s something that’s a little different. Normally, it’s the core that does better.

And then they really haven’t gone into the tariff discussions yet and if they do, that’s where Germany could get exposed, if you think about what might happen in the automotive sector, for instance.

There are still some potential headwinds ahead, but I do think a lot of the negativity was priced in and so valuations look a little bit better in Europe. Some yields look pretty good there as well. And if they don’t get the brunt of tariffs, then there is some potential positivity that could occur there and you’re seeing that so far in the markets this year.

You’re neutral on U.S. equity markets. Is that because of valuations or why is that?

So, pre-Trump winning, we were bullish on U.S. equity markets, and we benefited really strongly off that. We got into January, and we went to a little less bullish but still on the overweight side. Then, as we got into February, we then took that down to neutral. So, we’ve be taking profits along the way knowing that if there was uncertainty, the U.S. would be the area that we would see some momentum loss occurring and that’s exactly how it’s played out. As we’ve been taking money off the U.S., we’ve been adding it to international to bring it to neutral, and we’ve added to emerging markets, particularly China, because we thought that it had the best upside potential surprise.

China had the best upside potential surprise?

Yes, because everything negative possible was priced in. The 60-per-cent tariffs, the property sector being dismal, consumers not spending, and uncertainty on stimulus. To me, that wasn’t going to last, and we’ve seen China exceptionally strong because Trump isn’t even talking about 60 per cent tariffs, he started off at 10 per cent and now at 20 per cent – that’s a big difference. The property sector is stabilizing a little bit. They came out to talk about stimulus and I think more is still to come there. And then you had this massive discount between Chinese tech companies and U.S. tech companies.

Should investors increase their cash positions? I believe you have a slightly bearish call on cash.

We think that you should generally never be too overly exposed to cash. You can win in the very short term at times, but you’d have to time it really well. And the hard part about it is the timing to get back in. If the market drops 10 per cent and you decide after 5 per cent you want to go to cash, you might protect the next 5 per cent down. But then when things bounce back, you might miss the first 7 or 8 per cent on the upside so you’re actually worse off from that standpoint. Generally, I would not encourage people to go to cash. I think bonds have done a better job than cash since 2022. And equities have definitely done better. And in the long term, we know that that cash is always generally a drag.

Do you prefer investment grade corporate bonds over government bonds?

I think you need a combination of both. What we say is you want a combination of those versus high yield.

BMO is a leading ETF provider. What ETFs have the greatest inflows and outflows year-to-date?

I don’t have the exact numbers for you, but I can tell you that we do see momentum in low volatility. We’ve seen money in short term bond funds coming through as well. We have still seen money going to the U.S., and a lot of our bank ETFs have been getting money as well.

We get flows back and forth, but we do see on down days, for instance, money flowing into some of these areas. We’re quite happy that we have a very diverse lineup.

What do you think investors should be paying close attention to?

I think they should be paying attention to geopolitical risk. I don’t think that’s fully priced in.

And I think they should try to understand that it’s very uncertain as to what could happen next because I don’t think Trump has himself an end game that he actually wants to get to. I think it’s changing on the fly and that does make it harder to navigate.

But also remember, when you invest in equity markets, for instance, you’re investing in volatility. We’ve been fortunate, we haven’t had much of that in the last few years, but volatility is part of investing. It’s why you get paid good returns on the stock market because you take on some risk and so you have to ride the bumps along the way and we’re definitely getting some bigger bumps at the moment. If you can, I would be buying on dips, but again, be understanding that you may not get the reward for that in three months from now either.

What worries you the most?

What worries me is that you cannot predict what Trump is going to be doing.

So, I think what worries me is that we get into a trade war and just because of temperaments, we don’t do what’s rational and that does worry me a little bit on that front – and nervousness does cause overreactions.

So, we’ve seen markets pullback, but if you get to a point where people get too caught up in it, then markets can get overblown.

Anything else that we didn’t discuss that you think it’s important to mention?

I think people should just remember that we’ve had hiccups in the market of more than 10 per cent many times – you get through them. Generally, you kick yourself for not buying on some of those dips.

So, just remember to be patient along the way. If you’re feeling too nervous, you can reduce your allocations to risk. There are many ways to do that. It doesn’t mean just going cash. Gold is good one, for example, having hedges in your portfolio, so there’s many ways that you can actually play it without just going to cash.

This Q&A has been edited for clarity and brevity.