Canadian markets face a bumpy ride in 2018 as economy shifts into lower gear and volatility increases
- Low recession risks should allow for modest returns for Canadian equities
- Monetary and inflation cycles support higher bond yields
- One interest rate hike expected from Bank of Canada in 2018
TORONTO December 6, 2017 — Late-cycle tailwinds should support modest positive returns for Canadian equities in 2018, though volatility is expected to increase as markets consider the timing of the next recession, according to the “Canada Market Perspective” in Russell Investments’ 2018 Global Market Outlook. The outlook offers the latest economic insights and market forecasts from the firm’s global team of multi-asset investment strategists.
Russell Investments strategists expect moderate economic growth for Canada as several growth factors from 2017 moderate. The Bank of Canada (BoC) will likely raise its target rate once in 2018, intentionally lagging the U.S. Federal Reserve to prevent another episode of sustained Canadian dollar (CAD) strength. Despite the BoC’s constrained position, Canadian bond yields should trend higher in sympathy with the more aggressive tightening action expected from the U.S. Federal Reserve.
“The prospect of recession in Canada remains at bay for 2018, but Canadian investors should expect a bumpy ride and a fair bit of uncertainty with the housing market, NAFTA trade discussions and the potential for over-tightening by the BoC representing key downside risks,” said Toronto-based Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited. “We will look to active strategies, global diversification and a multi-asset approach to help investors limit risk while still pursuing opportunities for returns in the year ahead.”
Global forecast overview
Russell Investments strategists believe global growth momentum is likely to persist into 2018, pushing up equity markets over the first part of the year. Japan, Europe and emerging markets are likely to outperform the U.S. Similarly, the euro, Japanese yen, British pound and emerging market currencies may offer investors more potential upside in 2018 than the U.S. dollar.
“The scenario for global markets in 2018 is likely to be driven by the U.S., which still dominates and is further advanced in its cycle than other economies,” said London-based Andrew Pease, global head of investment strategy at Russell Investments. “Second-hand growth from the global economy could drive a blow-out U.S. rally in 2018, but rising headwinds later in the year are likely to spoil this goldilocks scenario. With Europe, Japan and emerging markets performing well, we believe a globally diversified multi-asset investment strategy offers the best opportunity to find a path between euphoria and danger.”
The timing of the next U.S. recession will be a critical issue for the global economy in 2018. Further out, the strategists see the risk of a recession in 2019 if additional policy tightening by the Fed causes the yield curve to become inverted. The strategists believe the 10-year U.S. Treasury yield could rise towards its fair value before declining in the latter half of 2018 as recession fears grow.
“With the labor market at or beyond full employment, spare capacity in the economy closed, and medium-term inflation pressures gradually building, we expect the Fed will be able to raise its policy rate another 100 basis points through 2018,” said Seattle-based Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. “If the 10-year U.S. Treasury yield rises as expected by less than this, the yield curve could invert in late-2018, providing an early warning of recession.”
In contrast to the U.S., the eurozone is amid a mid-cycle renaissance and at the early stage of its exit from a very loose monetary policy, which the strategists believe may keep core eurozone bond rates rangebound through 2018. The strategists also expect another strong year for the Asia-Pacific region, buoyed by an accommodative policy at the Bank of Japan, although re-emergent wage and price inflation may cause the Reserve Bank of Australia to raise rates twice in 2018.
“The question for investors is how to make the most of late-cycle returns while preparing for the inevitable downswing," said Jeff Hussey, Russell Investments’ global chief investment officer. "Investors need to squeeze every basis point out of their portfolios using smart strategies, implemented in a cost-effective manner, and backed by a dynamic process that leans into opportunities and away from risks.”
For more details on this report, please see the 2018 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, 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 CAD $339 billion in assets under management (as of 9/30/2017).
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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