During Uncertain Times: The Value of Diversification

Volatility made a comeback to start 2025, fueled by the introduction of DeepSeek’s AI platform and U.S. President Trump’s imposition of tariffs, serving as a reminder of the value of diversification.

At the end of January, China’s DeepSeek claimed to have developed top-tier AI for just US$6 million—a fraction of other players’ costs without relying on Nvidia’s expensive chips. While this figure has since been disputed, it has shaken market assumptions about the dominance of certain U.S. AI players. In March, the U.S. launched a trade war by imposing tariffs on Canada. Both events serve as strong reminders of why diversification remains one of the investors’ best allies:

Sector Dominance & Rotation — The AI boom has fuelled market optimism in recent years. The capitalization-weighted return of the top five U.S. technology companies relative to the S&P 500 in 2024 alone (chart below) highlights how a handful of names have come to represent a disproportionate share of the benchmark. DeepSeek’s announcement may have unsettled markets, but consider that innovation inherently requires disruption—a concept often described in Schumpeter’s Creative Destruction theory.¹ Indeed, the progress of humankind is a result of incessant product and process innovation.

This may encourage constructive sector rotation into non-tech areas, some of which have been overlooked amid the intense focus on technology, with a greater focus on earnings growth and strong fundamentals as the driver of stock prices. It may also be a reminder that companies, sectors, geographies and even asset classes can fall in and out of favour over time.

A Changing Geopolitical Landscape — Trump’s tariff stance has underscored Canada’s vulnerability to trade disruptions. Canada remains heavily reliant on the U.S. as its primary export market, with 77 percent of the C$965 billion in exports going to the U.S. (2023). No other country accounts for more than 5 percent of export values (chart below). Just as diversification is essential in portfolio management, it is equally critical in trade. Overreliance on a single partner carries significant risk should conditions change.

With the imposition of tariffs in March, we would be wise to remember that their magnitude and duration—as well as their potential economic impact—can evolve over time.

The Continuing Importance of Diversification

A core principle in our approach as advisors has been the importance of diversification. This may be even more important in today’s environment, which is heavily tilted toward uncertainty. While we can never predict the future with certainty, a well- diversified portfolio can help to dampen volatility and, perhaps most importantly, prepare us for multiple possible outcomes.

At the time of writing, the unfolding trade war continues to evolve. As advisors, we are closely monitoring developments and assessing their potential impact on portfolios through careful analysis. Please call if you have concerns.

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^{1. https://www.nytimes.com/2000/06/10/your-money/IHT-half-a-century-later-economists-creative-destruction-theory-is.html; 2. Capitalization-weighted return of top tech stocks versus the S&P 500 adapted from BMO Portfolio Advisory Team; 3. https://www.scotiabank.com/ca/en/about/economics/economics-publications/post.other-publications.canada-and-us-economics-canada-and-us-decks.trade-stats--january-31--2025-.html}

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