- Lower Canadian dollar likely to boost exports, while lower employment trends and business investment remain a cause for concern
- Canadian housing market in for period of stagnation rather than devastation
TORONTO, April 17, 2014 /CNW/ - The Canadian economy, like its housing market, continues to surprise doubters, and is expected to grow between 2 - 2.3% this year, according to Russell Investments latest Strategists' 2014 Global Outlook - Second Quarter Update, which reflects the most recent guidance from Russell's global team of investment strategists.
"While the Canadian economy is currently trending below our forecast level, growth should accelerate as the year progresses as a result of our lower Canadian dollar boosting exports and an improving U.S. economy," said Shailesh Kshatriya, associate director, client investment strategies at Russell Investments Canada, who authored the Canada Market Perspective section of the global report. "However, we remain concerned about employment trends."
Kshatriya believes that declining job growth rates, coupled with high household debt, may adversely impact consumption and weigh on growth this year, despite the offset of the expected growth of exports and a lower Canadian dollar.
At the same time, Kshatriya is keeping an eye on business investment. "A lower Canadian dollar relative to the U.S. may be positive for exports, but it makes new purchases to improve efficiencies more costly if those purchases are to be sourced externally. Meaningful business investment has largely been absent over the last several years when our dollar was hovering at parity with the U.S. The question is: will business feel confident enough in domestic and global growth trends to spend now that our dollar has declined by roughly 10%?"
In terms of the direction of the loonie, Kshatriya believes the Canadian dollar's descent has run its course for the time being, and predicts a band of roughly $0.89-$0.94 for the balance of this year.
Despite alarm bells over the affordability of housing for the average Canadian, the housing market has not experienced the meltdown some have been expecting. Kshatriya believes the market is in for a period of stagnation rather than outright devastation -- until the Bank of Canada introduces rate increases -- which are not expected for at least 12 months.
With regards to global markets, the Russell strategist team notes that a variety of market crosscurrents have led to a lackluster start to 2014 and equity markets are still waiting to validate their run last year. These crosscurrents included the chilling winter impact on U.S. economic data, concerns around China's debt and Japan's consumption tax hike as well as tensions in Crimea and the stand-off in the East China Sea. But, as the U.S. economy finally heats up, with jobs gains expected to average 215,000 over the next nine months and the U.S. Federal Reserve's (the FED) interest rate hikes held off until mid-2015, Russell's strategists maintain a modest preference for equities over fixed income globally.
"Markets always find new ways to challenge us, and currently this challenge comes from the combination of late-cycle valuations for asset classes like credit and U.S. equities, and mid-cycle dynamics in developed economies," said Russell's Global Head of Investment Strategy, Andrew Pease. "We believe that the economic cycle will win out, and investors should maintain equity market exposure. However, the temperature is rising. It could be a warm northern hemisphere summer, not just for vacationers, but for investors as well."
Based on Russell's three-pronged "value, cycle, sentiment" investment strategy process, which combines qualitative views and quantitative inputs, the current global market perspectives are as follows:
Value: U.S. and Eurozone equity valuations still expensive
- Equity valuations in developed markets appear stretched relative to the end of 2013. With a price-to-book (PB) floating near 2.7x and a cyclically adjusted price-to-earnings (P/E) ratio over 20x, the U.S. equity market, as measured by the Russell 1000® Index, is valued at levels not seen since late 2007, which the team finds to be expensive.
- Eurozone equities are also slightly expensive, the strategists note, while Japan's P/E ratio of 13x and P/B of 1.3x, as measured by the Russell Japan Index, indicate valuations which are close to what they consider fair.
- The strategists find that emerging markets are currently relatively favorably valued, with about a 30% to 40% undervaluation relative to developed markets, as measured by the Russell Emerging Markets Index and Russell Developed Index.
Cycle: Eurozone growth expectations improving, but with increasing downside risk; U.S. regains its footing
- The team sees moderate economic recovery in the Eurozone continuing, primarily driven by producer and consumer confidence. However, the strategists suspect that recent inaction by the European Central Bank has allowed deflationary forces to take hold, leading to heightened downside economic risk.
- In the U.S., the strategists expect the economy to continue recovering from the February freeze and return to the anticipated track of moderate, low-inflation growth. "The price multiple mapped onto U.S. equities through 2013 was based on an assumed strengthening economy in 2014," said Doug Gordon, Russell's Senior Investment Strategist, North America. "While the macroeconomic data at the start of the quarter was disappointing, our forecasts indicate that when the weather effect thaws, there will be organic sources of improvement beneath the snow."
- Japan, on the other hand, is seen by the strategists to have a positive business cycle outlook, as earnings-per-share are being revised higher and additional fiscal stimulus is underway. Still, the team suspects that Japan will have lower growth this year than in 2013 as a result of the April (2014) consumption tax rise.
- As for emerging markets, the business cycle there continues to face challenges as a result of China's tighter credit conditions and slowing commodity demand, and more generally from rising inflation and the after effects of currency devaluations.
Sentiment: Positive momentum continues for developed equity markets
- Overall, the strategists find that their records of fund flows, investor confidence, risk appetite and technical data, which encompass their sentiment views, appear neutral globally. Accordingly, sentiment readings are mainly pushed by momentum, which currently offers a positive driver for developed equity markets.
- The U.S. market leads other developed markets globally in terms of sentiment as strong forecasts for economic data in 2014 balance out the Fed's plans to continue a moderately paced tapering of its asset purchasing program. Japan comes next, having recently reached new highs in a wide range of economic indicators, including base money growth, CPI inflation, employment growth, and corporate profit margins. Eurozone sentiment also has improved due to capital inflows and outperforming risk assets.
- On the other side of the spectrum, the team finds that emerging markets generally have a negative sentiment with negative momentum and no indicators signaling a shift in momentum.
For more detailed information, please see the "Strategists' 2014 Global Outlook – Second Quarter Update" as well as the Global Outlook Infographic.
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