Global shifts, inflation pressures and portfolio strategy: Insights from David Wolf - May 21, 2026

A more fragmented world and inflation risk

The global economy is becoming more fragmented, with trade patterns and supply chains shifting after decades of globalization. This trend began before the pandemic and has continued as countries reassess resilience and security. Shorter, more localized supply chains may improve reliability, but they can also increase costs. At the same time, geopolitical developments, including the conflict involving Iran, have added pressure to energy markets and global supply. Together, these forces suggest an environment where inflation may be more prone to periodic shocks.

Rising government debt adds another dimension. As debt levels increase, there may be greater incentives for policymakers to allow inflation to reduce the real burden of that debt over time. This combination of structural and policy dynamics points to a backdrop where inflation could behave differently than it did in previous decades.

Energy security brings Canada into focus

In this environment, access to reliable energy is becoming increasingly important. While near-term movements in oil prices remain uncertain, concerns around energy security are unlikely to diminish. Canada has significant energy resources and is viewed as a reliable supplier. However, current capacity limits how quickly production can expand. As a result, there is growing attention on unlocking investment in the energy sector, supported by both public and private initiatives aimed at strengthening long-term growth.

This shift is unfolding alongside changes in the broader economy. Growth has historically been supported by housing and consumer borrowing, but that dynamic appears to be weakening. With housing activity softer in many regions, the need for new sources of growth has become more apparent. Investment in infrastructure and productive assets is viewed as one approach to support more durable economic expansion over time.

Debt, deficits and long-term capacity

Rising government deficits often raise concerns, particularly for bond investors. However, David notes that the impact of debt depends on how it is used. Spending that supports long-term growth and expands the productive capacity of the economy may strengthen a country’s ability to service its debt over time. By contrast, spending focused on short-term support may not deliver the same effect.

Canada’s government debt levels remain relatively moderate compared to many other developed economies. This provides some flexibility, particularly if borrowing is directed toward investments that support future growth.

Central banks balancing competing pressures

Monetary policy is navigating a more complex backdrop. Higher energy prices can contribute to inflation, particularly in a resource-heavy economy like Canada. At the same time, domestic economic conditions remain uneven. Against this backdrop, the Bank of Canada may remain cautious in the near term, balancing inflation risks with underlying economic softness. In the United States, the policy outlook is more nuanced. David noted that U.S. policy is becoming less supportive of creditors, which has implications for fixed income investors. Differing views within the Federal Reserve also add uncertainty around how inflation will be addressed.

Rethinking fixed income and diversification

These dynamics are influencing how portfolios are positioned. Exposure to U.S. government bonds has been reduced, reflecting concerns around inflation and creditor outcomes. Capital has been reallocated toward markets offering more attractive real interest rates and more sustainable fiscal positions, including Europe, emerging markets and Japan. Canadian bonds have also played a larger role. At the same time, traditional diversification approaches are being reassessed. In an environment where inflation is a key risk, bonds may not provide the same level of protection during periods of market stress as they have in the past.

Commodities as part of the toolkit

Commodities can play a role in managing this risk. Assets such as gold have long been used as diversifiers, and broader commodity exposure may help offset the impact of inflation shocks. Incorporating a wider range of commodities into portfolios may enhance their ability to adapt to changing conditions. This reflects the idea that assets linked to inflation drivers may provide an additional layer of diversification.

AI and the equity landscape

In equities, artificial intelligence remains a key theme, though its long-term impact is uncertain. Rather than making broad predictions, the focus remains on company-level fundamentals. David highlighted the importance of relying on bottom-up insights from portfolio managers and analysts. Current signals suggest that earnings growth in AI-related companies has been stronger than many expected. If the trend continues, it could potentially influence equity markets.

Emerging markets and the AI supply chain

While much of the attention on AI is focused on the United States, emerging markets play an important role in the broader ecosystem. Many companies in Asia are key suppliers of the components that enable AI development. This dynamic has coincided with strong performance in emerging markets, alongside relatively attractive valuations. Earnings growth in many of these companies has remained robust, even as some investors have questioned how long that strength can persist.

Conclusion: Navigating uncertainty with discipline