Canadian growth likely to remain lackluster for extended period
- Economic growth may be enough to keep Bank of Canada policy on hold
- Canadian equities due for a pause; U.S. earnings growth to be tepid
- U.S. federal funds rate hike expected in December; two hikes in 2017
TORONTO, Oct. 3, 2016 /CNW/ - The drop in oil prices has toned down expectations for the Canadian economy, according to the "Canada Market Perspective" provided in Russell Investments 2016 Global Market Outlook Q4 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 argue the Bank of Canada (BoC) and market expectations are now just reflecting the current reality: that is, Canadian growth as of the end of the third quarter is, and has been, lackluster and is likely to remain so for an extended period of time," said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited.
According to the firm's latest quarterly outlook, with valuations stretched and no additional support anticipated from monetary policy, the expectation is that Canadian equity, a top performer among developed markets globally this year, is due for a pause.
"We believe that economic growth at around 1-1.5%, while uninspiring, may be enough to keep the BoC on hold. They are likely to wait instead for the Fed to raise rates and in turn keep the Canadian dollar in check," according to Kshatriya. "Ultimately we believe a low Canadian dollar for an extended period may be more stimulative to the economy due to its positive impact on the competitiveness of the economy than a 25 basis points cut in rates. The latter is an option the BoC may want to keep in their back pocket in case of a larger-than-anticipated downturn in the economy."
Global forecast overview
Russell Investments' strategists anticipate volatile markets in the final quarter of 2016, as markets absorb the U.S. election results, the Italian referendum and likely U.S. federal funds rate tightening. The strategists' outlook for lackluster global economic growth remains intact from the previous quarter. The team expects global bond yields to rise modestly as inflation pressures in the U.S. are offset by deflation in other developed markets. In currency markets, the U.S. dollar looks set to test previous highs, while the British pound remains at risk as investors focus on the full implications of the mid-year Brexit referendum in the United Kingdom to leave the European Union.
"Equity markets are precariously priced and vulnerable to shocks, but market setbacks could provide opportunities to take on more risk in multi-asset portfolios," said Andrew Pease, Russell Investments' global head of investment strategy. "The ability to dynamically allocate between asset classes is becoming increasingly important."
In the U.S., the team continues to expect an interest rate hike from the Federal Reserve (Fed) in December, as well as two hikes in 2017, supported by modest economic growth and a gradual firming in inflation. The U.S. labor market remains healthy, and the strategists do not see signs of imbalances in business investment. However, the team does see warning signs stemming from the corporate sector, including a troubling rise in corporate leverage.
"U.S. corporate earnings appear to have bottomed, but earnings growth is going to be tepid," said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. "While we still have an underweight U.S. equities view, our modeling shows only a modest risk of recession, and we continue with our 'buy-the-dips and sell-the-rallies' investment strategy."
For more information on the global report, which also focuses on the strategists' latest views on Europe, Asia-Pacific and currencies, please see the 2016 Global Market Outlook: Q4 Update.
About Russell Investments Canada Limited
Russell Investments Canada Limited is a wholly owned subsidiary of Emerald Acquisition Limited and was established in 1985. Russell Investments Canada Limited has its head office in Toronto.
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