- Canadian economy continues upside surprise, though forward concerns are more structural than cyclical
- Consumer spending still the most consistent contributor; awaiting business investment to take the lead
- Investor expectations have run ahead of market fundamentals in global equity markets
TORONTO, March 29, 2017 /CNW/ - The Canadian economy continues to surprise naysayers as economic improvements and employment trends have contributed to the steady rise in domestic equities from 2016 lows, according to the "Canada Market Perspective" in Russell Investments' Global Market Outlook – Q2 Update. The outlook offers the latest economic insights and market forecasts from the firm's global team of multi-asset investment strategists.
"Not to spoil the party, but we believe that although recession probabilities are low, vulnerabilities exist which should not be ignored," said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited. "Specifically, the consumer has been the most consistent contributor to growth over the last several years, despite rising household indebtedness. Consumer indulgence may go on a bit longer as housing continues to defy rationality. However, at some point debt-to-disposable income levels, which are now approaching 170%, will become self-limiting."
According to the report, business investment has detracted from growth for eight consecutive quarters since the downturn in oil prices, which started in 2014. "We would prefer to see consumers pass the baton to businesses, which need to start spending," Kshatriya added. "Although business surveys point toward improvement on this front, we await data that is more measurable."
Global forecast overview
Overall, Russell Investments' strategists warn that investor expectations have run ahead of market fundamentals in the global equity markets. They maintain a call for caution as inflated expectations for global growth and U.S. fiscal policy drive markets higher, despite looming global economic headwinds, including additional Federal Reserve (Fed) tightening and a slowing Chinese economy. On the positive side, opportunities remain for agile multi-asset investors, as the strategists see little risk of a recession in the U.S., attractive growth in Europe and resilience in emerging markets. The strongest tailwinds for global equities in the team's view are in Europe, followed by Japan.
"While market bulls see reflation and investor confidence, we see very expensive U.S. equities, high profit margins and an economy unlikely to sustain the current surge," said Andrew Pease, global head of investment strategy at Russell Investments. "A pull-back seems likely and should create a buying opportunity, which means we are maintaining our 'buy the dips, sell the rallies' investment strategy."
U.S. growth expectations remain mediocre, leading the team to maintain its forecast for a total of two interest rate hikes in 2017, despite the Fed's more confident stance to start 2017. Although a more hawkish Fed creates headwinds for U.S. Treasuries, the team believes the market is already pricing-in three hikes for the year. According to the strategists, this means most of the damage to U.S. Treasuries is in the rear-view mirror and they are less negative on bonds than in prior quarters.
"Knowing when market exuberance will meet reality is more art than science, but our investment strategy building blocks of business cycle, valuation and sentiment clearly indicate downside risks for U.S. equities," said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. "Expensive valuations and overbought sentiment signals drive our caution. Globally diversified, multi-asset portfolios may look to the positive cyclical outlook in European equities and the value in emerging markets. In addition, 10-year U.S. Treasury yields are close to our estimate of fair value at 2.5%."
For more information on the annual report, which also includes the strategists' latest views on Europe, Asia-Pacific and currencies, please see the 2017 Global Market Outlook – Q2 Update.
About Russell Investments Canada Limited
Russell Investments Canada Limited is a wholly owned subsidiary of Russell Investments Group, Ltd. Established in 1985, Russell Investments Canada Limited has its head office in Toronto.
About Russell Investments
Russell Investments, a global asset manager, offers multi-asset portfolios and services which include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors-using the firm's core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures-to help each achieve their desired investment outcomes. The firm has more than USD$258 billion in assets under management with USD$123.7 billion in multi-asset solutions (as of 12/31/2016).
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