Russell Investments’ 2017 Global Market Outlook
Economic growth likely weak, but not a wreck
- Canadian GDP growth expected in a range of 1.6% to 2.0%; U.S. GDP growth to top 2%
- BoC target rate likely steady at 0.50%; two additional U.S. rate hikes forecast for 2017
- Canada 10-yr bond yield expected to trade within a range of 1.5% to 1.9%
- Canadian equities likely modestly positive, with S&P/TSX year-end target at 15,300
TORONTO, December 6, 2016 — The strength (or lack thereof) of oil prices, domestic housing and the U.S. economy will guide the direction of Canada’s economy and financial markets, according to the “Canada Market Perspective” provided in Russell Investments’ 2017 Global Market Outlook. The outlook offers the latest economic insights and market forecasts from the firm’s global team of investment strategists for the upcoming year.
“Our base case sees modest growth as moderate improvement in the price of oil and reasonable growth of the U.S. economy are weighed down by debt-debt laden households,” said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited. “For that reason, we expect domestic equities to be positive, but without the exuberance of 2016. However, domestic bonds likely will be challenged as lacklustre fundamentals may be partially offset by rising yields in the U.S. lifting Canadian yields. On balance, we see 2017 economic growth in the range of 1.6% to 2.0%.”
According to the firm’s Global Market Outlook, while not downplaying the Bank of Canada’s (BoC) admission of entertaining a rate cut in their October 2016 meeting, Russell Investments’ strategists question how effective a 25 basis-point cut could be, considering current market conditions. “We believe it is critical the BoC maintain traditional levers to deal with the next downturn,” said Kshatriya. “Cutting rates in the near term, while recession probabilities are low, is a view that is difficult to reconcile. As such, we expect the central bank will keep their target rate steady at 0.50% in 2017.”
Kshatriya also believes Canadian 10-year bond yields are headed higher, albeit moderately, and expects them to trade within a range 1.5% - 1.9% by year-end 2017. “With our anticipation that the U.S. Federal Reserve will raise the federal funds rate, potentially as many as three times by the end of 2017, we believe the upward bias in the U.S. yields could help pull domestic yields higher.”
Global forecast overview
Russell Investments’ strategists anticipate a challenging market environment in 2017. Near-term, the team believes global economic growth is likely to improve, spurred by fiscal stimulus as political leaders worldwide move away from austerity. Longer term, however, they think the prospect of trade protectionism raised by Brexit and the U.S. presidential election could lead to slower growth and higher inflation.
“Buckle up for what could be a roller-coaster investing ride in 2017,” said Andrew Pease, global head of investment strategy at Russell Investments. “We will watch closely for evidence that markets have moved too far into fear or euphoria and look for downside protection when it is cheap.”
In the U.S., the strategists see equity market valuations as already expensive, and they caution that euphoric anticipation of Trump stimulus could lead to an extended overbought period. Corporate profit growth is likely to be in the mid-single digits at best, while currently high margins may feel pressure from rising labor costs and a stronger dollar.
“Trumponomics is directionally pro-growth, pro-inflation, and our central scenario is a net addition of half a percentage point to real GDP growth,” said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. “We continue to favor Europe and Japan equities over the U.S. in global portfolios, and expect expensive U.S. valuations to limit future market performance.”
Inflation and a more hawkish U.S. Federal Reserve appear in the strategists’ outlook as headwinds for bonds, but uncertainty is the primary reason the team has upgraded the 10-year U.S. Treasury yield forecast. Trumponomics is untested and they believe too much stimulus could overheat the U.S. economy, resulting in more Fed tightening and an economic downturn in 2018.
For more information on the annual report, which also includes the strategists’ latest views on Europe, Asia-Pacific and currencies, please see the 2017 Global Market Outlook.
About Russell Investments Canada Limited
Russell Investments Canada Limited is a wholly owned subsidiary of Russell Investments Group, Ltd. Established in 1985, Russell Investments Canada Limited has its head office in Toronto.
About Russell Investments
Russell Investments, a global asset manager, is one of only a few firms that offers actively managed multi-asset portfolios and services which include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors—using the firm’s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures—to help each achieve their desired investment outcomes.
Russell Investments has more than CAD$339 billion in assets under management (as of 9/30/2016) and works with more than 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell Investments has USD$2.4 trillion in assets under advisement (as of 6/30/2016). The firm has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell Investments also traded more than USD$2 trillion in 2015 through its implementation services business.
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