- 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
"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
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
For more information, please see the "2014 Global Annual Outlook".
About Russell Investments
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consultant to some of the largest pools of capital in the world,
Russell has US$2.4 trillion in assets under advisement (as of
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Russell is headquartered in Seattle, Washington, USA, and has offices
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