Russell Investments’ Q4 2017 Global Market Update: Canadian economy expected to moderate after debt-infused high
- Outlook for Canadian equities remains neutral, with a preference to international equities
- Higher benchmark bond yields expected to drive household financing costs upward
- One more Bank of Canada rate increase likely this year
TORONTO September 27, 2017 — The Canadian economy is all but certain to cool after a period of red-hot growth in the first half of the year, according to the “Canada Market Perspective” in Russell Investments’ Global Market Outlook – Q4 Update. The outlook offers the latest economic insights and market forecasts from the firm’s global team of multi-asset investment strategists.
“Economic growth in Canada is set to moderate over the second half of the year, but should remain healthy, trending towards 2%,” said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited. “However, the Achilles heel for the Canadian economy is also what has been its strength: housing. We expect the Bank of Canada to take a measured approach to addressing housing imbalances, which means another rate hike is likely this year.”
Russell Investments strategists maintain a neutral outlook for Canadian equities with oil fundamentals and the strengthening Canadian dollar (CAD) as key watchpoints. “There are many moving pieces which will influence the CAD going forward, but housing remains the wild card,” Kshatriya added. “At some point, tighter financial conditions, coupled with over-extended consumers, will weigh on economic growth and limit CAD strength.”
Global forecast overview
Overall, Russell Investments strategists describe a combination of economic growth, low inflation and easy monetary policy in developed economies that is currently supporting a range of asset classes, including equities, corporate credit, real assets and government bonds. This market environment is asymmetrical, however, as the downside potential outweighs the upside, especially in U.S. equities, where the cyclically adjusted price-to-earnings ratio (CAPE) of the S&P 500® Index hovers at its most expensive level except for 1929 and the late 1990s. The strategists remain underweight U.S. equities, preferring Europe, Japan and emerging markets within global equities. They also see government bonds as expensive across regions and expect global yields to trend upward over the next year.
“Global growth, inflation and monetary policy have created an economic sweet spot as we look ahead to the fourth quarter of 2017, but we believe high valuations make U.S. equities vulnerable to any news that upsets the industry consensus on moderate growth, low inflation and low interest rates,” said Andrew Pease, global head of investment strategy at Russell Investments. “With the potential for volatility to return, we believe a globally diversified multi-asset investment strategy may offer the best opportunity for both portfolio returns and downside protection.”
The strategists caution that U.S. fixed income markets appear to be underestimating the potential for upward pressure on interest rates in 2018, and that U.S. economic fundamentals still look mediocre. A fundamental factor they see as likely helping U.S. earnings is “secondhand growth” from other economies, which supports tilting equity allocations toward the international markets that have been the engine of growth, and trade at more attractive valuations.
“The biggest risks to U.S. markets – a recession scare or an inflation scare – do not seem likely in the near-term,” said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. “Fixed income markets appear to have currently priced in only two more hikes through the end of 2018, though we think a faster pace is warranted by fundamentals.”
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 – Q4 Update.
About Russell Investments
Russell Investments, a global asset manager, offers 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. The firm has more than CAD $360 billion in assets under management (as of 6/30/2017).
Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as London, Paris, Amsterdam, Sydney, Tokyo, Shanghai, Toronto and New York. For more information about how Russell Investments helps to improve financial security for people, visit russellinvestments.com or follow @Russell_Invest.
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