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Home>Russell Investments’ Q4 2017 Global Market Update: Canadian Economy Expected to Moderate After Debt-Infused High

Russell Investments’ Q4 2017 Global Market Update: Canadian Economy Expected to Moderate After Debt-Infused High

Russell Investments’ Q4 2017 Global Market Update: Canadian Economy Expected to Moderate After Debt-Infused High

09/28/2017

Russell Investments’ Q4 2017 Global Market Update: Canadian Economy Expected to Moderate After Debt-Infused High

  • Outlook for Canadian equities remains neutral, with preference to international equities
  • Higher benchmark bond yields expected to drive household financing costs upward
  • One more Bank of Canada rate increase likely this year

The Canadian economy is all but certain to cool after a period of red-hot growth in the first half of the year, according to the “Canada Market Perspective” in Russell Investments’ Global Market Outlook – Q4 Update. The outlook offers the latest economic insights and market forecasts from the firm’s global team of multi-asset investment strategists.

“Economic growth in Canada is set to moderate over the second half of the year, but should remain healthy, trending towards 2%,” said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited. “However, the Achilles heel for the Canadian economy is also what has been its strength: housing. We expect the Bank of Canada to take a measured approach to addressing housing imbalances, which means another rate hike is likely this year.”

Russell Investments strategists maintain a neutral outlook for Canadian equities with oil fundamentals and the strengthening Canadian dollar (CAD) as key watchpoints. “There are many moving pieces which will influence the CAD going forward, but housing remains the wild card,” Kshatriya added. “At some point, tighter financial conditions, coupled with over-extended consumers, will weigh on economic growth and limit CAD strength.”

Global forecast overview

Overall, Russell Investments strategists describe a combination of economic growth, low inflation and easy monetary policy in developed economies that is currently supporting a range of asset classes, including equities, corporate credit, real assets and government bonds. This market environment is asymmetrical, however, as the downside potential outweighs the upside, especially in U.S. equities, where the cyclically adjusted price-to-earnings ratio (CAPE) of the S&P 500® Index hovers at its most expensive level except for 1929 and the late 1990s. The strategists remain underweight U.S. equities, preferring Europe, Japan and emerging markets within global equities. They also see government bonds as expensive across regions and expect global yields to trend upward over the next year.

“Global growth, inflation and monetary policy have created an economic sweet spot as we look ahead to the fourth quarter of 2017, but we believe high valuations make U.S. equities vulnerable to any news that upsets the industry consensus on moderate growth, low inflation and low interest rates,” said Andrew Pease, global head of investment strategy at Russell Investments. “With the potential for volatility to return, we believe a globally diversified multi-asset investment strategy may offer the best opportunity for both portfolio returns and downside protection.”

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