Russell Investments’ 2017 Global Market Outlook – Q3 Update:
Canadian mid-year market outlook hinges on housing concerns
- Strategists upgrade 2017 Canadian gross domestic product (GDP) growth forecast
- While the Bank of Canada (BoC) prepares the markets for an eventual rate increase, strategists believe they will take on a measured tone regarding forward guidance
- Team expects the Canadian/U.S. dollar to trade in a range of 0.72 to 0.78
TORONTO, June 29, 2017 — The Canadian economy continues to exhibit reasonable growth trends, though possible negative effects from a potential housing correction loom large, according to the “Canada Market Perspective” in Russell Investments’ Global Market Outlook – Q3 Update. The outlook offers the latest economic insights and market forecasts from the firm’s global team of multi-asset investment strategists.
Based on the resiliency of the housing market and a strong first-quarter annualized GDP growth rate of 3.7%, the team has upgraded its 2017 Canadian GDP growth forecast to a range of 2.2%-2.6% from a range of 1.6%-2.0%.
However, according to the report, the central watch point remains housing fundamentals, which in the bubbly markets of Toronto and Vancouver have softened as listings of homes for sale increase, suggesting price gains should moderate in the months ahead.
“Collating these countervailing forces, we believe the BoC is preparing markets for an eventual rate hike,” said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited. “Inflation remains stubbornly low and wage growth is tepid at best. That said, while housing concerns are paramount, what cannot be ignored are encouraging growth trends as the oil price shock moves further into the rearview mirror.”
Kshatriya lists three key ingredients that have been missing for the BoC to raise rates in recent months: inflationary pressures, non-energy export growth and business investment. “The lack of inflationary pressures, more diversified export growth and subdued investment has provided reasonable cover, justifiably, to stay sidelined despite accelerating growth,” he said. “Despite recent signals from the BoC, we would not jump to the assumption that a rate increase is imminent, though likely sooner than previously expected.”
Global forecast overview
Overall, Russell Investments strategists advise caution in the mid-2017 late-cycle, momentum-driven market. The team believes investors in the U.S. market have embraced a type of cognitive dissonance: equity valuations are sky-high, but U.S. Treasuries are overbought and low yields warn of lackluster growth. Their analysis of market conditions has them leaning out of the U.S. rally and buying the next dip or potentially better opportunities outside the U.S. market. They see the strongest tailwinds for equity returns in Europe, followed by emerging markets and Japan. The team also views government bonds as expensive across markets, especially in Germany and the U.K., indicating yields will trend upward in the medium term after remaining in a range for the next few months.
“U.S. bond investors currently seem to be from Mars while equity investors are from Venus,” said Andrew Pease, global head of investment strategy at Russell Investments. “In this late-cycle market with contradictory views on the U.S. economy, we’d lean toward Europe in a globally diversified, multi-asset portfolio for better opportunities to find returns and manage risk.”
The cautious outlook for U.S. growth combined with the recent slowdown in core inflation will likely prevent the U.S. Federal Reserve (the Fed) to hike its funds rate for the remainder of 2017. However, the Fed is expected to begin winding down its balance sheet later this year. The strategists continue to look for 10-year U.S. Treasury yields to slowly shift up to 2.5% over the next 12 months.
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 – Q3 Update.
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 more than CAD $355.2 billion in assets under management (as of 3/31/2017).
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/ca or follow @Russell_Invest.