Russell Investments’ global market outlook: Strategists expect a shift from darkness to dawn in 2023 outlook

Team sees the Canadian economy slipping into a mild recession, contracting -0.5% for the year

Toronto, December 6, 2022 — Russell Investments Canada Limited has released its 2023 Global Market Outlook, offering economic insights and market forecasts from the firm’s global team of investment strategists. Regarding the “Canada Outlook,” the team believes the Bank of Canada’s (BoC) very tight monetary policy will soon catch up to highly indebted households and potentially take the Canadian economy into a shallow recession. Meanwhile, a slowing global economy will drag on commodity prices and challenge Canadian exports.

“The good times of 2022 in terms of household spending and business investment may end in 2023, as the lagged effects of rate hikes are felt more intensely in the Canadian economy,” said Shailesh Kshatriya, director, investment strategies at Russell Investments. “However, as a mild recession gains momentum and inflationary pressures moderate, we believe the conditions should be in place toward the latter half of the year to allow the BoC to shift its policy stance towards interest rate cuts.”

The team also points out a couple of bright spots for investors amid talk of a recession: bond yields are more attractive, offering improved income, and government bonds may benefit from recession-driven risk-off sentiment.

In addition, the team remains positive on Canadian equities over the medium term due to better relative value and the potential for natural resource sectors to benefit from the energy transition.

Regarding the Canadian dollar, the team believes it will likely hover around 70-80 cents to the U.S. dollar as it searches for direction in an uncertain environment for commodities and the global economy.

The team assesses their investment decision-making building blocks of cycle, valuation, and sentiment as follows:

2 2022 outlook for Canadian equities remains favorable, based on an assessment of their investment decision-making building blocks of cycle, valuation, and sentiment:

  • Cycle: “With recession as the team’s baseline assessment for the Canadian and U.S. economies, the business cycle outlook is negative. However, the team expects the cycle outlook will improve as BoC policy shifts from a restrictive hold to gradual easing, although in their view that may only occur in late 2023.”

  • Value: Traditional valuation measures such as price-to-earnings indicate decent value; however, the team is concerned about profit margins eroding as the economy slows. Therefore, the team rates value as neutral.

  • Sentiment: Canadian equities have avoided a technical bear market in 2022, defined as a peak-to-trough pullback of at least 20%, and with domestic shares rebounding from the October lows, the team’s contrarian indicators are only modestly oversold. Overall, the team assesses sentiment as slightly positive.

“We are concerned about the business-cycle outlook,” Kshatriya said. “A more constructive view hinges on a policy pivot from the BoC, which may require patience. Therefore, while valuations are reasonable and the equity sentiment is not alarming, our cycle concerns are an overriding factor that keeps us neutral in an absolute sense and a possible pause to Canadian equities outperformance. Relative value, however, favors Canadian over U.S. equities over the medium term.”

Global market outlook

Globally, Russell Investments’ strategists believe a recession seems likely in 2023 and equity markets may struggle, but an economic recovery should be on the horizon by year-end.

“The main issue for 2023 is whether inflation pressures ease sufficiently to allow central banks to step away from rate hikes and potentially begin easing,” said Andrew Pease, global head of investment strategy at Russell Investments. “We expect inflation will be on a downward trend as global demand slows. This should allow central banks to eventually change direction and may set the scene for the next economic upswing.”

Russell Investments’ global asset-class views for 2023 include:

  • Fixed income will make a comeback after experiencing the worst year of returns in 2022.

  • Long-term bond yields should decline moderately as recession risk looms. The team’s target is 3.3% for the U.S. 10-year Treasury yield by the end of 2023.

  • Equities have limited upside with recession risk on the horizon.

  • The U.S. dollar could weaken late in 2023 as central banks start to unwind rate hikes and investors begin to focus on a global recovery.

  • A weakening U.S. dollar could be the trigger for non-U.S. developed market equities to finally outperform U.S. stocks, given their more cyclical nature and relative valuation advantage over U.S. stocks. A weaker U.S. dollar could also be the trigger for emerging markets to outperform.

Looking toward 2023, the team offers the following asset-class preferences:

  • Although non-U.S. developed equities are cheaper than U.S. equities, the team has a neutral preference until the Fed become less hawkish and the U.S. dollar weakens.

  • Emerging market equities could recover if there is significant China stimulus, the Fed slows the pace of tightening, energy prices subside, and the U.S. dollar weakens. For now, the team believes a neutral stance is warranted.
  • High yield and investment grade credit spreads are near their long-term averages, although the overall yield on U.S. high yield at near 8.5% is attractive. Spreads will come under upward pressure if U.S. recession probabilities increase and there are fears of rising defaults. The team has a neutral outlook on credit markets.

  • Government bond valuations have improved after the rise in yields, and the team sees U.S., U.K., and German bonds as offering good value and Japanese government bonds offering fair value. “The risk of a further significant sell-off seems limited given inflation is close to peaking and markets have priced hawkish outlooks for most central banks,” Pease said.

  • Real assets: Real-estate investment trusts (REITs) look attractively valued relative to global equities and listed infrastructure, and the team believes they should benefit from declining bond yields. The team sees the outlook for commodities as mixed, given the expected slowdown in the global economy.

  • The U.S. dollar (USD) has made gains this year on Fed hawkishness and safe-haven appeal during the Russia/Ukraine conflict. The team believes USD could weaken if inflation begins to decline and the Fed pivots to a less hawkish stance in early 2023. The team believes the euro and Japanese yen would be the main beneficiaries.

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 has CA$376.9 billion in assets under management (as of 9/30/2022) 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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