Strategist downgrades economic outlook for Canada

2019 Global Market Outlook – Q2 Update:

  • Expects Gross Domestic Product (GDP) growth in the range of 1.0% to 1.5% in 2019
  • Despite neutral view on Canadian equities, still prefers them to U.S. equities
  • Sees U.S. recession risk as very low short-term, but increasing in 2020

Toronto, March 27, 2019 Russell Investments released its 2019 Global Market Outlook – Q2 Update today, offering economic insights and market forecasts from its global team of investment strategists.

The “Canada Outlook” segment of the report reveals the team is tempering its outlook for growth in Canada this year but believes a pause in the Canadian equity market rally would be a healthy development.

“The speed at which the Canadian economy decelerated over the second half of 2018 and into the first quarter of 2019 has been striking,” said Shailesh Kshatriya, director, investment strategies at Russell Investments Canada Limited. “While a severe recession is not our central scenario for Canada, the weak start to 2019 leads us to downgrade our growth outlook.”

Despite the shaky start to the year, Kshatriya believes a more dovish tone from the Bank of Canada along with the U.S. Federal Reserve’s (the Fed’s) recent change in policy to a slower tightening cycle and Chinese policy stimulus will support financial conditions in Canada over the second half of 2019.

In the markets, Canadian equities have been unfazed by the country’s economic slowdown, continuing to march higher over the first quarter. Kshatriya views the pace of equity gains as unsustainable, and he anticipates a healthy pause. 

“We have business cycle concerns as the Canadian economy is clearly vulnerable to downside shocks over the first half of 2019,” added Kshatriya. “We are neutral towards Canadian equities in an absolute sense, but continue to emphasize a preference for domestic equities over the U.S.”

Global forecast overview:

Looking globally, Russell Investments’ strategists see markets as caught between incoming data pointing to slower global growth and forward-looking factors that suggest improvement later in the year. The team believes global cycle conditions will moderately improve in 2019, but the window of opportunity for equity markets is limited. The team has an underweight preference for U.S. equities, mostly driven by expensive valuations. The Fed’s pause on interest-rate hikes has helped push markets up, but wage growth is already threatening corporate profit margins. The team believes wage growth will eventually find its way into inflation and bring the Fed back into action.

Europe has suffered from several one-off events that have depressed growth, but the team views most of these as temporary and expects to see growth in the region improve through the year. Fiscal easing is likely to provide a decent tailwind, with the European Commission expecting that could represent 0.4% of GDP this year. In addition, the European Central Bank has become more dovish, pushing out its guidance on the timing of the first funds rate rise to the end of 2019. Overall, the strategists are neutral on eurozone equity valuations, and they see core government bonds as long-term expensive.

Regarding the Asia-Pacific region, the strategists believe it is set to benefit from the increased focus on policy stimulus from the Chinese government. They think emerging Asian equities should be able to deliver around 10% earnings growth for 2019. While Japanese economic activity has been disappointing, the team thinks the big downgrade to industry consensus earnings expectations is too pessimistic.

Other views covered in the report include:

  • Equities: The team’s cycle, value and sentiment investment process points to a broadly neutral view on global equities. They have an underweight preference for U.S. equities due to expensive valuations, but they are more positive on non-U.S. developed equities. They see valuations in Japan and Europe as reasonable. They like the value offered by emerging-markets equities, as the asset class is a beneficiary of the Fed rate-hike pause, China stimulus and a potential thaw in the trade war.
  • Fixed income: The team believes U.S. Treasuries offer reasonable value, as their models give a fair-value yield of 2.7% for the 10-year bond. They see German, Japanese and UK bonds as very expensive with yields well below fair-value. The cycle is a headwind for all bond markets as inflation pressures slowly build. 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 is the team’s preferred currency as they look toward the second quarter. It’s significantly undervalued, can get cycle support as over-pessimistic growth expectations are revised higher and has contrarian sentiment support from extreme market-short positions. They believe that pessimism around the U.S. economy is overdone and expect another leg up in the U.S. Dollar Index before its bull run ends for this cycle. 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$356.7 billion in assets (as of December 31, 2018) and provides consulting services on US$2.4 trillion in assets (as of June 30, 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.

Contact:
Steve Claiborne, 206-505-1858, newsroom@russelllinvestments.com

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