2020 Global Market Outlook – Q3 Update: Russell Investments strategists shift global outlook to neutral

Canadian strategist expects economy may take two years to reach pre-pandemic level

TORONTO, June 25, 2020— Russell Investments Canada Limited has released its 2020 Global Market Outlook – Q3 Update, offering economic insights and market forecasts from the firm’s global team of investment strategists.

Following the second-quarter market rebound, the global team no longer believes valuations are compelling for global equities or credit. While the business-cycle outlook has improved amid vast fiscal and monetary stimulus and economic re-openings, sentiment is no longer seen as supportive and the team’s composite indicator is displaying a neutral signal. This means the support from oversold conditions is waning and markets are at greater risk of pulling back on negative news.

Russell Investments’ strategists believe the pandemic has generated the following five longer-term implications for markets, which may favor domestic stocks over those exposed to global revenues and supply chains.

  • Low interest rates for longer
  • Less globalization
  • More government debt and a bigger share of government in the economy
  • Higher inflation, eventually
  • Pressure on profit margins

As a result, the team expects mid- and small-cap stocks to perform better than large-cap stocks, in a reversal of the trend of the last decade. The team also believes developed markets should benefit relative to emerging markets as there will be less technology transfer and less export-led growth. In addition, the unwinding of globalization is viewed as a headwind for emerging markets, while ongoing low interest rates favor higher yielding assets such as stocks, property and infrastructure over government bonds and cash.

Regarding the “Canada Outlook” segment of the report, recovery from the swift and deep economic downturn is expected to be sharp but also tenuous. The team sees the following two consequences to this outcome:

  • On inflation: As the output gap (which measures the difference between actual and potential rate of growth), widens, disinflation is the immediate concern. Inflationary pressures likely will be dampened by higher rate of unemployment and heavy debt burdens restricting domestic demand.
  • On monetary policy: Monetary conditions are expected to remain accommodative. While the team finds it reasonable to expect some withdrawal of monetary (and fiscal) support over time, they don’t anticipate the Bank of Canada (BoC) will be in a rush to raise its policy rate. The “effective lower bound” policy rate of 0.25% likely will stay for some time to come.

“While we expect growth to resume over the second half of 2020, there are obvious uncertainties over the projection horizon,” said Shailesh Kshatriya, director, investment strategies at Russell Investments. “Fully restoring business and household confidence will likely require either a viable treatment against the COVID-19 virus, or ideally, a vaccine. We know this will take time to develop. Therefore, while the recovery may be getting started, the macroeconomic backdrop demands that both monetary and fiscal conditions remain accommodative during this transitory period.”

In the report, Kshatriya also offers insights on the following asset classes:

  • Canadian equity: Kshatriya remains constructive on the macro outlook over the next 12 months, but he believes a reflective pause would be a healthy development considering the S&P/TSX Composite Index1 has rallied more than 40% from the March 23 low to June 8.
  • Canadian fixed income: Except for shorter-term technical reasons, Kshatriya does not expect negative sovereign bond yields. He also believes materially higher bond yields are not an immediate concern for the following three reasons: The BoC will be in no rush to tighten financial conditions until a recovery is “well under way”, the capacity utilization rate has collapsed to around 50%2, and stimulus measures which have boosted liquidity are unlikely to be inflationary.

For more details on the outlook, the team’s full report is available here.

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 is a leading global investment firm providing tailored solutions and services to institutions and individuals through financial intermediaries. Russell Investments is dedicated to improving people’s financial security, leveraging an 83-year client-centric heritage rooted in investment innovation. The firm is the fourth-largest adviser in the world with C$384.5 billion in assets under management (as of 3/31/2020) and US$2.5 trillion in assets under advisement (as of 12/31/2019) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments operates through 21 additional offices in major financial centers such as New York, London, Tokyo and Shanghai.

1The S&P/TSX Composite Index is the benchmark Canadian index, representing roughly 70% of the total market capitalization on the Toronto Stock Exchange with about 250 companies included in it.

2Source: https://www.cfib-fcei.ca/en/research-economic-analysis/business-barometer

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