- 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 conservative investors."
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 2014.
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 sequestration.
- 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 recession.
"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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