- Sustainability of higher oil prices is key to economic rebound
- 10-year Canadian bond yields expected to increase to 1.5-1.8% by year-end
- Equity upside remains, with modest values in Europe and Asia
TORONTO, March 30, 2016 /CNW/ - Given that the energy sector is a crucial driver of the Canadian economy, the sustainability of higher oil prices is a prerequisite for both stronger GDP growth and higher yields, according to the "Canada Market Perspective" provided in Russell Investments' 2016 Global Market Outlook – Q2 update.
The outlook offers the latest economic insights and market forecasts from Russell Investments' global team of investment strategists, which help guide the firm's multi-asset portfolios and services.
"The modest rebound in oil prices thus far in 2016 has infused some life into domestic equities, especially since mid-January, making them amongst the top-performing regional asset classes globally," said Shailesh Kshatriya, director Canadian strategies at Russell Investments Canada Limited. "While encouraging, this may partly be a reversion from oversold conditions in 2015. Regardless, we foresee the path forward will be turbulent, with oil prices holding the key."
Although the economy remains fragile, Kshatriya expects the Bank of Canada to keep policy on hold as the government provides fiscal stimulus as a means to boost growth. At the same time, the strategists believe the low levels of the 10-year Canadian yield, which continues to reflect the state of the Canadian economy, should ultimately grind higher— as long as oil prices and the U.S. Federal Reserve cooperate.
Putting these two principal factors together, Russell Investments' strategists believe two things will happen. First, the supply and demand imbalances, which have riddled the oil markets, are currently going through a rebalancing process. Although oil prices will remain volatile as these adjustments take effect, they should eventually enable crude oil prices to move into a more reasonable range of U.S. $45-60 per barrel over the coming 12-24 months.
Second, the strategists believe two Federal Reserve rate hikes during 2016 are likely and will help push the 10-year U.S. Treasury yield to the 2.3% range over the next 12 months. "And by association, we expect the 10-year yield in Canada to rise from current levels of around 1.3% as of March 11, towards the 1.5-1.8% range by year end," said Kshatriya.
Global forecast overview
The firm's strategists expect business cycle support for global equities to weaken and government bond prices to remain rich in 2016, as the difference between hawkish (U.S.) and dovish (Europe, Japan) monetary policies drives market volatility. Regarding China, the team believes the economic downturn still appears to be heading for a "soft landing," but if there is a time when skeptics will be proven correct, this is the year.
"Our investment strategy process is moving away from 'buy-the-dips' toward 'sell-the-rallies,' though we still see low single-digit returns globally for 2016," said Andrew Pease, Russell Investments' global head of investment strategy. "With downside risks for equity markets outweighing potential upside scenarios, we expect to maintain a cautious outlook until business conditions improve."
As for U.S. equities, the strategists believe low single-digit is likely as good as it gets, but the good news is that even with gross domestic product (GDP) and corporate profits weakening, the likelihood for a near-term U.S. recession remains low.
In contrast to the U.S., eurozone equities are being helped by quantitative easing (QE) and offer some reasonable valuations that are preferred by the team of strategists. However, further QE announcements are not having a big impact on either the euro or the Japanese yen. As a result, the team believes the U.S. dollar bull run is expected to run out of steam this year.
Russell Investments' global team of investment strategists determines its global outlook through a clearly defined process that is based on the building blocks of business cycle, valuation and sentiment. Their current global market perspectives are as follows:
- Valuation: The early pullback in equity markets has improved value; U.S. still expensive
- Business Cycle: Less supportive for equities; Europe and Japan the most favorable cycle; neutral for U.S. equities; negative for emerging markets and Canada
- Sentiment: Price momentum is negative in every region
For more information, please see the "2016 Global Market Outlook: Q2 update."
About Russell Investments
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Date of first publication: March 2016
Copyright © Russell Investments Canada Limited 2016. All rights reserved.
RETAIL-2016-03-25-1643 Exp. March 2017
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