Canadian economy expected to see impact from domestic issues such as a slowing housing market and household deleveraging, while still facing external headwinds from the U.S., China and Europe.
TORONTO, Dec. 12, 2012 /CNW/ - Internal threats to Canada's economic growth are expected to play a greater role next year, adding to the headwinds from Europe, the U.S. and China, Russell Investments' team of global investment strategists predicts in the firm's 2013 Annual Global Outlook.
The domestic economy, emerging from an "underwhelming" 2011, is expected to be further tested by a lethargic housing market, weary consumers and waning corporate profitability, according to Shailesh Kshatriya, senior investment analyst with the Canadian Strategy Group at Russell Investments Canada and a contributor to the annual global outlook.
"We have already seen signs of moderation in some of the country's biggest housing markets," Kshatriya notes. "A slower housing sector has an impact on private consumption, which represents more than half of Canada's GDP. Furthermore, after a decade of running up their debt loads, Canadian households are starting to tackle their balance sheet and are becoming thriftier."
Along with slowing retail sales, Kshatriya also sees a shift in corporate profitability on an expected moderation in commodity prices.
Russell's Core Expectations for 2013: Canadian Highlights
- Canada's economy will grow between 1.7%-2%, with risks skewed towards the lower number;
- The Bank of Canada leaves overnight target rate unchanged;
- Government of Canada 10-year bond yields will be modestly higher, in the 1.9%-2.2% range;
- The Canadian dollar remains within the parity range of $0.95-$1.05 (USD per CAD);
- S&P/TSX Composite Index to end 2013 at 12,600; Earnings per share growth of 5%;
- U.S. economic growth of 2.1% for 2013, increasing to 2.5%-2.75% by the second half of the year; Tepid U.S. core inflation for the medium term at 1.9%; U.S. 10-year yield at 2.15% by year-end 2013.
"While our tone is cautious for 2013, Canada is in a unique position both fiscally and monetarily," Kshatriya highlighted. "From a fiscal perspective, debt-servicing costs remain low, and as indicated by our 10-year yield forecast, we don't expect that to change. In addition, the fiscal position is sound, as net debt to GDP is not egregious. The turnover at the head of the country's central bank should not take away from the Bank's ability to stimulate the economy if downward risks materialize in a more significant manner."
Russell's global forecast for 2013 predicts a positive, albeit volatile investment environment, noting that investors can expect a modest global recovery, driven primarily by a continuation of U.S. and Chinese economic growth. Even so, volatility will likely remain elevated through most of the year, driven by the tug of war between deflationary austerity and reflationary monetary policy in the eurozone.
Russell believes six key themes will have the greatest impact on markets and asset returns in 2013:
- U.S. economic outlook for 2013: A time to address long-term issues at last?
- The Eurozone: Finding the right policy mix
- Global Equities: A rising tide may not lift all boats equally
- Emerging Markets: Due for outperformance
- Global currency outlook for 2013: More of the same, but risks aplenty
- Commodities: It's not just about monetary policy
Russell has forecast since 2009 that the U.S. economy would follow a square-root shaped recovery pattern, and events have played out consistently with these expectations. For 2013, Russell's base case scenario anticipates a continuation of this reluctant-yet-measurably-positive recovery pattern.
"The U.S. strikes us as an undervalued field, both in terms of the equity pricing and overly pessimistic economic growth expectations," said Pete Gunning, global chief investment officer, Russell Investments. "We would be surprised if the equity market does not cash in that value by the end of the year."
The Squeeze Play: Searching for Real Returns in a Yield-Starved World
On the other side of the square-root shaped recovery and real interest rates in negative territory, is the reality that investors still have the demand of a real return on their assets. In view of the dynamics of the recovery, lingering impacts of the Great Recession and intervention by the U.S. Federal Reserve, Russell forecasts that the net effect on investors will be that of "squeezing" them out of traditional safe-haven assets and forcing them further up the risk curve.
"Since only positive real returns build wealth, investors are forced to confront the question of what is to be done in a yield-starved world. This 'squeeze play' impulses people into riskier assets; we continue to advise clients to proceed purposefully and with strategic discipline," said Gunning. "For investors, this means attention to every detail of their portfolio management. We believe regional diversification will need to be firmly in place, as the economic center of gravity is expected to continue to shift. As traditional investments remain flat, alternatives likely will matter more than ever. And volatility, while it certainly brings market stress, will also bring market opportunity for multi-asset, dynamically managed portfolios."
For complete findings and details on the themes and forecasts from Russell's 2013 Annual Global Outlook, please contact Rob Baird at 416-640-2476.
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