Domestic housing and crude oil pricing concerns likely to impact
Canada's economic growth prospects but investment spending expected to
provide some offset.
TORONTO, May 9, 2013 /CNW/ - Canada's economy is expected to grow
between 1.7%-2.0% this year, with risks skewed to the downside amid
concerns regarding the housing market and domestic crude oil-price
fundamentals, according to Russell Investments latest Strategists'
Outlook and Barometer which updates the firm's Annual Outlook for 2013.
The report features in-depth analysis of key trends and indicators by
Russell's global team of investment strategists, whose capital markets
insights are one of the tools used to help guide Russell's multi-asset
portfolios and services.
"A slowing housing market creates a reverse 'wealth effect' that could
restrain household spending," said Shailesh Kshatriya, associate
director, client investment strategies at Russell Investments Canada,
who authored the Canada Market Perspective section of the global
report. "As well, market volatility related to issues such as the
recent banking crisis in Cyprus will continue to cause anxiety for
Kshatriya believes the weak domestic economy means the Bank of Canada is
unlikely to raise interest rates for the rest of the year. Kshatriya
expects the central bank's target interest rate to remain at 1% until
On the other hand, Kshatriya believes the low rates and a slightly
weaker Canadian dollar may encourage investment spending and could
boost the domestic manufacturing sector. As well, he believes the
ongoing U.S. economic recovery could be beneficial for Canada.
According to the Strategists' Outlook and Barometer, the outlook for the
U.S. is positive despite continued market risks.
U.S. economic indicators expected to influence markets throughout 2013
Russell's updated economic forecast includes:
Fiscal tightening is expected to equal about 2% of GDP, with the three
main contributions coming from tax increases on incomes about $400,000,
expiration of the temporary 2% payroll-tax holiday and spending
The debt-to-GDP ratio above 90% could impair growth, and the U.S.
economy may not see nominal GDP growth of at least 4.5% on a rolling
four-quarter basis until 2014.
Employment gains are expected to average 170,000 jobs per month.
10-year U.S. Treasury yield likely will be at 2.25% at the end of 2013,
assuming the economy neither overheats nor undershoots toward
"Even with modest growth expectations for corporate earnings, current
stock-price multiples are quite high compared to historical measures,"
said Mike Dueker, chief economist for Russell Investments. "We do not
expect U.S. growth to set any records, but we do believe the market
could advance if four major fears are addressed:
interest rates and the continued action of the Federal Reserve in
maintaining liquidity; avoidance of major negative events (such as in
Europe and the fiscal cliff); outstanding recession fears; and concerns
about excess government debt."
While Russell's team of global strategists forecast the overall 12-month
view of the U.S. equities market as positive, with projections of
between 2-2.5% Gross Domestic Product (GDP) growth, gains are expected
to be tempered by an ongoing risk fluctuating environment.
The strategists believe current optimism in U.S. and global
markets—driven by the U.S. housing recovery, a cyclical rebound in
China and Japan's favorable policy initiatives—will continue to be
offset by ongoing volatility in the Euro zone, U.S. fiscal tightening
and moderate economic growth.
In terms of global emerging markets, Russell's strategists believe that
despite underperforming developed markets during the recent rally,
emerging markets are undervalued and demonstrate potential for double
digit earnings per share growth in 2013.
"Great rotation" back into equity mutual funds?
Despite continuing inflows into equity funds coupled with declining
fixed income fund returns, Russell's strategists do not expect the
second quarter to herald the "great rotation," where investors allocate
out of cash and bonds into equities. Rather, investors are moving cash
into both bonds and stocks, a sign of confidence that could be quickly
undermined by disappointing economic news in the U.S. market or another
fiscal crisis in Europe.
In addition to offering an update to their Annual Outlook in their
quarterly update, Russell's strategists offer a look at 16 key asset
class pairings to determine which asset class in each pair currently
signals better return prospects.
"The biggest change we saw in our asset-class pairings was between U.S.
Large Cap and Asia ex-Japan Equities. Despite a large swing in our
momentum modeling for this pair favoring U.S. Large Cap, the signal
oscillates around neutral, and this is a case where a big change might
not lead to a big move in positioning," said Douglas Gordon, senior
investment strategist, North America. "Perhaps the most notable
surprise though involved the comparison of U.S. Large Cap and
Continental European Equities, which showed a modest - not overwhelming
- valuation advantage to U.S. equities. When we incorporate structural
forward growth concerns, as well as political and policy risk, however,
we would hold a neutral position in this pair, preferring other
non-U.S. developed markets from a relative basis."
For the complete report, please click the following link: "Strategists' Outlook and Barometer".
For a French-language version of the Canadian report, please click: "Perspectives du marché canadien"
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