Russell Investments' 2014 Global Annual Outlook: Canadian Economic Growth to Experience a Restrained Resurgence
- Growth expected to accelerate, but impact of strengthening U.S. economy will have broad implications on the Canadian dollar, bond yields and domestic equities
- Modest global growth expected, with improved outlook for U.S. and continued economic healing in Europe and Japan
TORONTO, Dec. 19, 2013 /CNW/ - Canadian economic growth is expected to improve in 2014 relative to the lackluster pace of 2013 according to Russell Investments' 2014 Global Annual Outlook. However, the outlook is less optimistic about the impact a strengthening U.S. economy may have on domestic fundamentals in the coming year.
While a forecasted U.S. growth rate of 2.9% would naturally lead to a more positive outlook for the Canadian economy, trends such as U.S. onshoring of higher-end manufacturing and greater energy independence, will weigh on momentum on this side of the border, according to Shailesh Kshatriya, Associate Director with the Canadian Strategy Group at Russell Investments Canada, and a contributor to the annual global outlook.
"The declining contribution from housing and households in 2014 will also be a headwind," noted Kshatriya. "While the domestic housing market has been remarkably resilient, consumer debt-to-income levels in excess of 160% give us pause. Private consumption accounts for roughly 50-60% of the Canadian economy, so even some moderation of household consumption will affect growth. On the positive side, business investment is primed to accelerate, particularly in the energy field."
Canadian Forecast Summary
- Canadian economic growth is expected to be 2.0-2.3%, below forecasted growth for the U.S. economy of 2.9%.
- The Bank of Canada (BoC) is expected to hold its target rate of 1%.
- Government of Canada 10-year bond yields are expected to be modestly higher reaching 3%-3.25% by year-end 2014.
- The Canadian dollar is no longer tilted towards parity and is expected to stay within the lower range of $0.90-$0.98 (USD per CAD).
- S&P/TSX Composite Index is expected to end 2014 at 13,800; earnings per share growth in the 4%-6% range.
Global Forecast Overview
The Global Annual Outlook expects that the G-3 economies are headed toward synchronized, albeit moderate growth in 2014. With equity markets trading at close to full valuations and global bond yields with room to rise, we anticipate returns will be tame in the coming year, particularly for global equities relative to 2013.
"The prospect of lower returns does not make us pessimistic," said Jeff Hussey, Russell's global chief investment officer. "What we do see though is a challenge for investors when it comes to achieving a rate of return at a level of risk they can survive. There are still opportunities for good returns but we believe realizing them will require the full arsenal of a multi-asset investing strategy including a sharpened focus on managing downside risk and an actively managed and globally diversified multi-asset portfolio."
In terms of asset classes, the team expects global equities to outperform cash and fixed income throughout 2014, but amid the specter of two risk scenarios. On the part of global equity markets, there is the risk of speculative overdrive if confidence in the economic outlook takes hold and markets overshoot, as has happened in the past. Alternatively, with what the strategists believe are equity markets currently 'priced for perfection' after the big gains of 2013, a large portion of these gains could dissipate if growth disappoints and investors worry that monetary policy has reached its limits.
"We may be headed towards a low-return world, but this is not a 'set it and forget it' year. In this climate, we feel top-down active management becomes more important because market over- and undershoots could provide opportunities for astute investors," said Russell's Global Head of Investment Strategy Andrew Pease.
U.S.: Emphasis on validation over appreciation
Russell's investment strategists believe much of the current high value in equities stems from anticipation of better economic growth next year. In 2013, stock performance reflected the anticipation of positive growth for the following year, so continued gains are contingent on those expectations being validated.
Russell's Chief Economist Mike Dueker projects U.S. economic growth of 2.9% over 2014, monthly job gains that average 230,000 per month and modest inflation of 1.9%. In addition, the team anticipates a modestly positive price appreciation for U.S. equities of around 5% during 2014, depending on actual corporate performance.
Eurozone: Skating on thin ice
Deflationary forces are building and the greatest concerns for 2014, according to Russell's strategists, are the weak condition of banks and their toxic connection to sovereigns as well as the negative impact on growth driven by lack of credit. That said, they believe reflationary polices will have the upper hand, with the European Central Bank (ECB) playing an important role in this respect and likely introducing another rate cut and new long-term refinancing operation (LTRO).
Eurozone growth of between 0.5% and 1.0% is expected, alongside a gradual and modest recovery in demand, combined with less austerity and continued strength in trade across the region. Notably, while valuations are still attractive relative to other regions, the Eurozone is not considered by the team as safe enough to simply "buy and hold." In light of a confluence of conditions including weak banks, divergence related socio-political risk, high debt levels as well as lagging structural reforms; investors should keep a close eye on developments and adjust allocations accordingly.
Asia-Pacific: Strong internal growth dynamics in China and Japan
The economic prospects for the Asia-Pacific economies appear solid to the strategists, and they believe the region is well-positioned to leverage a global recovery, particularly, any uplift in global trade. The strategists see China and Japan as both pursuing credible economic reform processes that, while not without risks, are running as they expected. The team does not see material risk to their 2014 GDP growth expectations of 7% to 8% in China and in the case of Japan, expectations for growth of 1.6% look undemanding in light of the strong momentum in the Japanese economy.
Russell's strategists prefer equity markets over both Asian-region bonds and developed market equities. While overall, they consider the risks to the Asian growth story in 2014 as "low" - in contrast to Europe's "moderate" risk rating. Key watch points include Japan's bond market and potential challenges to the Chinese credit markets from rising rates and questions over loan quality.
Global equities: A rising tide that may lift most boats
On the heels of a year with significant returns and material misevaluation opportunities between global equities, 2014 is expected to deliver more modest returns and higher correlation between developed equity markets with regional business cycles as well as a level of synchronization in growth forecasts unseen since the global financial crisis.
Modest earnings growth in the range of 4% to 5% coupled with a likely equity dividend near 1.7% likely will place a premium on timing risk on/risk off choices. The strategists believe the best outcomes can be expected from a portfolio that utilizes prudent downside risk protection married with informed active allocation both between regional equities and perhaps more importantly in 2014, within those regional markets, as well as allocations with respect to cap tier, style, and equity risk factors.
"In last year's outlook, we stated that investors would be forced higher up the risk curve," said Senior Investment Strategist Doug Gordon at Russell. "While we got that direction right, the magnitude outpaced our expectations with the Russell Global Index on track for gains of around 20% and global fixed income likely to deliver a small negative return. In 2014, the forces behind this squeeze play - ultra expansionary monetary policy, low risk free returns, low inflation - are still in play with the added dynamics of less attractive valuations, QE unwinding."
For more information, please see the "2014 Global Annual Outlook".
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offer actively managed multi-asset portfolios and services that include advice, investments and implementation. Working with institutional investors, financial advisors and individuals, Russell's core capabilities extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes.
Russell has more than C$253.7 billion* in assets under management (as of 9/30/2013) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has US$2.4 trillion in assets under advisement (as of 6/30/2013). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than US$1.4 trillion in 2012 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, which includes more than 80 countries and more than 10,000 securities. Approximately US$4.1 trillion in assets are benchmarked to the Russell Indexes.
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