- Eventual unraveling of the housing market poses greatest long-term threat
- Concerns persist around elevated levels of household indebtedness
- Improving profit margins encouraging, though valuations not as compelling for domestic equity
TORONTO, July 6, 2016 /CNW/ - Rising oil prices have taken attention away from the resource sector's negative impact on the economy, redirecting it towards the still-heated housing market, according to the "Canada Market Perspective" provided in Russell Investments' 2016 Global Market Outlook - Q3 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.
"We continue to believe the eventual unraveling of the housing market poses the greatest longer-term risk to Canada's economy," said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited. "Most real estate market observers focus on Vancouver and Toronto, where home prices are most extreme. However, what should not be lost in the conversation is the level of house price appreciation in areas outside of those two big cities. While the Vancouver home price index has by far outpaced all major metropolitan centres, it's interesting to note that Toronto actually lags Winnipeg and is only modestly ahead of Quebec City in terms of home price appreciation."
According to the latest outlook, the greater concern is high household indebtedness and its impact on consumption going forward. As the report highlights, strength in retail sales over the first three months of the year may not be sustainable given wage growth on a year-over-year basis trending below 1%. "And while higher oil prices should lead to higher values for Canadian energy exports, it is less clear how the strengthening Canadian dollar (CAD) will impact non-resource exports over the second half of 2016," according to Kshatriya. "Suffice it to say, vulnerabilities persist—both short- and longer term—which argues for the growth trend to be modest at best going forward."
Global forecast overview
At mid-year 2016, Russell Investments' strategists see lackluster economic and equity market growth globally. The team expects upwards pressure from inflation on U.S. bond yields will be muted by deflation in other major developed markets, meaning low yields are likely to rise, but only modestly. The team also expects global market volatility to continue as the implications of Britain's vote to exit the European Union play out over the coming months. Looking to China, the strategists maintain their case for the country's economic slowdown to make a "soft landing."
"We still want to buy equity dips and sell rallies, but even post-Brexit volatility has not been significant enough yet to trigger a contrarian buy signal in our investment process," said Andrew Pease, Russell Investments' global head of investment strategy. "U.S. equities still look expensive, business cycle fundamentals in developed markets are weakening and government bonds score poorly on value."
In the U.S., both the May employment report and concerns over Brexit have contributed to the Federal Reserve's caution, according to Russell Investments' strategists. However, even with the decelerating labor market and negative corporate earnings growth, the strategists find little risk of near-term recession in the U.S.
"We expect Brexit will have only a limited impact on the U.S., and the headwind from a stronger U.S. dollar will be offset by more cautious Fed policy," said Paul Eitelman, investment strategist, North America. "We expect the December Fed meeting will be the earliest timing of a rate change, and we continue to expect 2% real GDP growth in 2016, although we cannot rule out a slower growth scenario entirely."
The report includes a segment focusing specifically on U.S. earnings, outlining the strategists' expectations for earnings growth to move from negative to zero over the next few quarters as transitory headwinds fade. Longer-term, the team forecasts low single-digit earnings growth and the continuation of expensive valuations.
For more information, please see the "2016 Global Market Outlook: Q3 Update."
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