Russell Investments' Strategists' Outlook - Q3 2015 Update: Currency pivotal to Canadian economic recovery
Jun 30, 2015, 08:00 ET
- Bank of Canada likely on hold as clarity emerges on the Fed rate decision and domestic economic trends
- Canadian GDP growth downgraded to between 1.5%-1.9%
- Lower Canadian dollar critical to manufacturing sector recovery
TORONTO, June 30, 2015 /CNW/ - Currency, more than commodities, may ultimately determine if the Canadian economy gets its groove back, according to Russell Investments' Third Quarter 2015 Strategists' Outlook.
"We believe that currency will play a pivotal role in the prospects of the Canadian economy over the next decade, explained Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada, who authored the Canada Market Perspective section of the global report. "Our view is that the Canadian dollar needs to remain low for longer in order to regain competitiveness against the U.S.," said Kshatriya, "And more importantly, relative to an increasing imposing manufacturing capacity in Mexico, the loonie needs to be more attractively priced for multinational firms."
The report also notes that the strength of commodity markets in the early 2000s – the oil market in particular – was a boon that came at the cost of lost competitiveness. The negative impact of this was most acute for domestic manufacturers, who saw a strengthening Canadian dollar contributing to a 30% increase in labour costs, while they have remained roughly flat in the U.S.
According to the report, regaining lost manufacturing capacity will not happen overnight. A pre-requisite for bringing greater balance to the domestic economy and tilting reliance away from resources requires the visibility of a weaker Canadian dollar relative to the U.S. dollar for an extended period. "For this reason, we believe the Bank of Canada will be diligent with interest rate moves going forward," added Kshatriya.
Russell Investments' strategists also believe that the Bank of Canada's base case of 1.9% 2015 GDP growth is potentially as good as it can get, and have downgraded their growth prospects for the Canadian economy to 1.5%-1.9% (previously 1.8%-2.1%).
Global Outlook Overview
The global perspectives of the Russell Investments' strategists focus in large part on anticipation around two key upcoming events: timing of the initial interest rate increase by the U.S. Federal Reserve (the Fed) and negotiations around the Greek bailout. The strategists expect the first rate hike in September—a long-held view— and for Greece to stay in the Eurozone, but acknowledge that uncertainty around these events could lead to market volatility, which they see as an opportunity to add selected risk exposure to portfolios.
To analyze the anticipated Fed rate hike, the strategists compare market conditions before the two previous hikes in February 1994 and June 2004 to current conditions. The standout feature, according to the report, is that equities, bonds and the U.S. dollar (USD) are all relatively expensive now compared to the last two tightening phases, and the corporate profit cycle is far more advanced. However, since the upcoming rate hike in their view is one of the best communicated policy shifts on record, they believe the shift is already priced into the markets. After looking at these factors collectively, the team maintains their favored U.S. market scenario of moderate inflation, moderate jobs growth, and single-digit profit gains.
"It makes sense to expect volatility around the Fed policy shift, but a key question is whether any resulting market setback would represent a turning point or an inflection point," said Russell Investments' Global Head of Investment Strategy, Andrew Pease. "We believe an inflection point seems more likely, and for equity markets to remain supported over the medium term if the U.S. economy continues to post moderate growth."
Russell Investments' strategists employ the firm's three-pronged "cycle, value, sentiment" investment strategy process to update their outlook forecasts. Currently, their global market perspectives include:
|
| The cycle appears very positive for Europe and favorable for U.S. and Japan. The economic indicators in Europe, for example, are improving, married with potential growth of corporate profit margins. Regarding the U.S. market, corporate profits maintain moderate growth, supported by robust—albeit spotty—economic growth. In Japan, economic indicators are lackluster, but corporate profits are picking up, and there is a strong chance of additional stimulus from the Bank of Japan (BoJ). The cycle score for generally riskier emerging markets remains negative due to the strengthening U.S. dollar, falling commodity prices and slowdown in China. |
|
| The strategists view equities in Europe and Japan are moderately expensive, while they see emerging markets equities as moderately cheap. The U.S. currently is still the most expensive major equity market, with a Shiller PE ratio at 27 times and price-to-book value at 2.9 times (according to the U.S. large-cap Russell 1000® Index as of June 24, 2015). |
|
| Since markets have been relatively stable, the team points out that many of the overbought contrarian signals have moved to neutral territory. Except for Japan, where the market is solidly in overbought territory, momentum is a positive driver for equity markets. |
For more information, please see the "Strategists' 2015 Global Outlook – Q3 Update."
About Russell Investments
Russell Investments is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that 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.
Russell Investments has more than $344 billion CAD in assets under management (as of 3/31/2015) and works with more than 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell Investments has $2.4 trillion in assets under advisement (as of 12/31/2014). The firm has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell Investments also traded more than $1.7 trillion in 2014 through its implementation services business.
Headquartered in Seattle, Washington, Russell Investments is wholly owned by London Stock Exchange Group (LSEG) and operates globally, including through its offices in Seattle, New York, London, Paris, Amsterdam, Milan, Dubai, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Beijing, Toronto, Chicago, Milwaukee and Edinburgh. For more information about how Russell Investments helps to improve financial security for people, visit www.russell.com or follow @Russell_News.
Important Information
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
As with all mutual funds, investment in this mutual fund contains risks that may make it unsuitable for you, depending on your investment objectives and risk tolerance. If the fund does not perform as intended, you may experience a loss of part or all of your principal invested. Please read the prospectus of this fund for a detailed description of the risks involved in this investment.
Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal.
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. It is made available on an "as is" basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.
Russell Investments is the owner of the trademarks, service marks and copyrights related to the Russell Indexes.
The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity market. It is a subset of the Russell 3000® Index and includes appropriately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the U.S. market.
Indexes are unmanaged and cannot be invested in directly.
Past performance is no guarantee of future results.
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. It is made available on an "as is" basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.'
Russell Investments and the Russell Investments logo are registered trademarks of Frank Russell Company, used under license by Russell Investments Canada Limited.
Russell Investments Canada Limited is a wholly owned subsidiary of Frank Russell Company and was established in 1985. Russell Investments Canada Limited and its affiliates, including Frank Russell Company, are collectively known as Russell Investments, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group.
Copyright © Russell Investments Canada Limited 2015. All rights reserved.
SOURCE Russell Investments Canada Limited
For further information: Kate Stouffer Bauman, 206.505.2084, [email protected]; Beja Rodeck Communications, 905.885.5945, [email protected]; For real-time news updates, follow @Russell_News on Twitter.