Russell Investments’ global market outlook: Strategists see 2022 outlook as dented, not derailed by Russian war

Team still sees Canadian economy on track for moderately above-trend growth this year

TORONTO, March 29, 2022— Russell Investments Canada Limited has released its Q2 2022 Global Market Outlook, offering economic insights and market forecasts from the firm’s global team of investment strategists. Regarding the “Canada Outlook” segment of the report, the team believes Canada will benefit from higher energy and agricultural prices as a net exporter of commodities, and this should also support equities. However, the team cautions that Canadian households have historically high levels of debt, raising economic vulnerabilities and forcing the Bank of Canada to move more slowly than markets have priced.

“Canadian equities have been a relative bright spot amid global market volatility aggravated by Russia’s invasion of Ukraine, “said Shailesh Kshatriya, director, investment strategies at Russell Investments. “Commodity-related inflation remains problematic for the markets and economy; however, Canada’s equity benchmark has benefited from its higher allocation to the energy and materials sectors.”

The team’s Q2 2022 outlook for Canadian equities remains favorable, based on an assessment of their investment decision-making building blocks of cycle, valuation, and sentiment:

  • Cycle: “The Canadian economy is expected to grow above trend in 2022,” Kshatriya writes in the Q2 report. “Although high inflation and the Russia-Ukraine war introduces uncertainty, if the conflict de-escalates within a reasonable timeframe, we believe the Canadian economy will do well, and therefore the cycle remains positive.”

  • Value: The Canadian team notes that earnings growth expectations for 2022 rose from under 10% at the start of the year to over 14% as of March 15, 2022, based on Refinitiv DataStream. “Market valuation has improved; however, profit margins are stretched well above long-term averages. Maintaining high profit margins with rising input costs will be a challenge, and therefore, we rate value as slightly negative overall,” Kshatriya added.

  • Sentiment: The Canadian team rates sentiment as neutral at the beginning of Q2. “While the Russia-Ukraine conflict further jolted an already anxious equity market and has slowed equity momentum, our contrarian technical indicators are more neutral,” Kshatriya added.

Overall, at the beginning of Q2 2022, Kshatriya expects the Canadian business cycle to remain positive with a preference to remain overweight Canadian equities relative to the U.S.

Global market outlook

Globally, Russell Investments’ strategists still expect markets to generate moderately above-trend growth for 2022, despite an array of short-term risks and longer-term issues erupting from Russia’s war in Ukraine. The team believes growth will support equities over bonds and cash amid continued market volatility due to the significant uncertainty created by the conflict. 

“Markets had plenty to worry about before the invasion, including the onset of U.S. Federal Reserve (Fed) tightening, the impact of COVID-19 lockdowns on supply chains and inflation, and the outlook for China,” said Andrew Pease, global head of investment strategy at Russell Investments. “We expected global growth to moderate from the post-lockdown surge in 2021 but remain above trend in 2022. The consequences of the invasion are lower global growth, with Europe taking the largest hit, coupled with higher inflation.”

At the beginning of Q2 2022, the team’s asset-class preferences are summarized as follows:

  • Small preference for non-U.S. developed equities to U.S. equities. “Provided hostilities subside, above-trend global growth should favor relatively cheaper non-U.S. markets,” Pease said.

  • Neutral stance for emerging markets (EM) equities, which face headwinds from the China slowdown, high energy and food prices as well as central bank tightening across other economies to contain inflation pressures. “EM equities could recover if there is significant China stimulus, the Fed slows its pace of tightening, energy prices subside, and the U.S. dollar weakens,” Pease said.

  • Neutral outlook on credit markets. The high yield spread is still low by historical standards and investment grade credit spreads, which widened following the Russian invasion of Ukraine, are back to their longer-term averages. “High yield spreads will be at risk if the Russia/Ukraine conflict escalates but could perform well if hostilities subside and the cycle outlook improves,” Pease said.

  • Government bond valuations are mixed after the recent sell-off, with the U.S. now fairly valued and Japanese, German and UK bonds still expensive. “Yields will face upward pressure from continuing inflation increases and central bank hawkishness,” Pease said. “A positive for government bonds is that markets have fully priced potential tightening by most central banks, and this should limit the extent of any further sell-off.”

  • Regarding real assets, the team expects both global listed infrastructure (GLI) and real-estate investment trusts (REITS) to benefit if Russia/Ukraine hostilities subside, the pandemic recovery resumes and inflation concerns continue. Regarding Commodities, which has been the best-performing asset class with energy and agricultural prices surging on the Russia/Ukraine conflict, the team expects some of these gains will be reversed if hostilities subside, but strong global demand and supply bottlenecks should support prices. “On balance, the case for commodities exposure is still positive,” Pease said.

  • The U.S. dollar, which has made gains this year on Fed hawkishness and safe-haven appeal during the Russia/Ukraine conflict, is expected to weaken if hostilities subside and lower inflation outcomes later in the year lead to less Fed tightening than markets currently expect. The team sees the main beneficiaries to be the euro, which has become more undervalued, and the Japanese yen, which has weakened on commodity price inflation and China growth concerns.

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 solutions firm providing a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Building on an 86-year legacy of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve the financial security of its clients. The firm is the world’s seventh-largest investment adviser, with $2.9 trillion in assets under advisement (as of 6/30/2021) and $340.8 billion in assets under management (as of 12/31/2021) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including in New York, London, Toronto, Tokyo, and Shanghai.


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