Strategists signal caution in mid-year outlook report

2019 Global Market Outlook – Q3 update

  • Team sees positive economic data for Canada at risk due to deteriorating global conditions
  • Still expects Canada gross domestic product (GDP) growth from 1% to 1.5% for 2019
  • Views the probability of a U.S. recession in 12 months as above the ‘warning’ threshold

Toronto, June 26, 2019 — Russell Investments has released its 2019 Global Market Outlook – Q3 Update, offering economic insights and market forecasts from its global team of investment strategists. 

The “Canada Outlook” segment of the report explains why the team remains neutral on the outlook for domestic equities, even as the Canadian economy continues its gradual recovery. While the strategists don't see valuations as compelling yet, their contrarian sentiment indicators remain far from oversold.

“While our baseline outlook does not include a recession in 2019, trade tensions and household indebtedness are testing the longevity of the current economic expansion,” said Shailesh Kshatriya, director, investment strategies at Russell Investments Canada Limited.

He added that the Bank of Canada (BoC) continues to hold a very balanced outlook, which sets it apart from other central banks, which have become outright dovish.

We expect the recent divergence between Canada and other developed countries, both from the perspective of macroeconomic data as well as central bank rhetoric, cannot be sustained indefinitely,” Kshatriya said. “The balance of risks as we look toward the second half of 2019 is clearly tilted towards a rate cut as the BoC’s next move.”

Regarding economic growth, Kshatriya sees encouraging economic data, which continues to reflect an economy growing at 1.0% to 1.5%. He observes, however, that the output gap, which measures actual growth relative to potential, has once again turned negative over the past two quarters.

“Economic slack has emerged as a watchpoint in our mid-year outlook,” he said.

To assess the outlook for Canadian equities, the team relies on the investment decision-making building blocks of business cycle, valuation, and sentiment. “We continue to cite business-cycle vulnerabilities, particularly home prices and household indebtedness, as reasons to remain cautious on Canada’s market outlook,” Kshatriya said. “With global concerns escalating, valuations not yet compelling, nor sentiment indicators suggesting conditions are oversold, we remain neutral on our outlook for domestic equities.”

Global forecast overview:

Looking globally, Russell Investments’ strategists believe China stimulus, global central bank easing and a China-U.S. trade-war ceasefire could set the scene for a rebound in the global economy later in the year. However, the inversion of the U.S. Treasury yield curve and the downtrend in business confidence indicators keep them cautious at mid-year.

With falling long-term government bond yields, the inverted U.S. yield curve, a slowdown in global trade and weak global manufacturing surveys, the team believes it appears increasingly likely that the U.S. Federal Reserve (the Fed) will cut interest rates in both July and September. They believe a combination of Fed easing, China stimulus and trade compromise could make the recent yield-curve inversion a false signal. At mid-year, though, the inversion is seen as a worrying indicator that biases the strategists toward caution.

In Europe growth indicators remain lackluster, and persistent low inflation has the European Central Bank pushing rate hikes further into the future. Meanwhile, bond market expectations for inflation in five years’ time have fallen to a record low of 1.2% as of mid-June. The strategists are not bearish on Europe, but the one-off factors that depressed growth are taking longer to turn around than anticipated. Overall, they see no signs that eurozone equities are either overbought or oversold, while core government bonds look long-term expensive.  

Regarding the Asia-Pacific region, the escalation of the China-U.S. trade war has put pressure on growth, which suggests to the team that there will be further Chinese government stimulus measures that should benefit the region. At mid-year 2019, the team sees slightly attractive valuations in Japan and Emerging Asia.

Other views covered in the report include:

  • Equities: The team’s cycle, value and sentiment investment process points to a broadly neutral to slightly underweight view on global equities. The strategists have an underweight preference for U.S. equities, driven by expensive valuation and cycle concerns around the trade-war escalation, fading fiscal stimulus and yield-curve inversion. They are broadly neutral on non-U.S. developed equities, viewing valuation as slightly positive in Japan and neutral in Europe. Both should benefit from stimulus in China, which will help bolster export demand.
  • Fixed income: The team sees government bonds as universally expensive with U.S. Treasuries as closer to fair value than German bunds, Japanese government bonds and UK gilts. High-yield credit is expensive and losing cycle support, which is typical late in the cycle, when profit growth slows and there are concerns about defaults.
  • Currencies: The Japanese yen remains the team’s preferred currency at mid-year 2019 because it’s seen as undervalued with safe-haven appeal if the trade war escalates. The U.S. dollar could weaken once the Fed eases. The main beneficiaries of this would be emerging market currencies. Meanwhile, the euro and British sterling appear undervalued.

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

With more than 80 years of experience, Russell Investments is a global investment solutions provider, dedicated to helping investors reach their long-term goals. Russell Investments offers investment solutions in 31 countries, manages C$388.5 billion in assets (as of March 31, 2019) and provides consulting services on US$2.3 trillion in assets (as of December 31, 2018). Russell Investments specializes in multi-asset solutions and investment and implementation services with a goal of delivering the best investment strategies, managers and asset classes to its clients around the world. Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as New York, London, Tokyo and Shanghai.

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