Russell Investments released its 2018 Global Market Outlook “ Q4 Update today, offering economic insights and market forecasts from its global team of multi-asset investment strategists.
While the Canadian economy has benefited in 2018 from strong U.S. economic growth, and those conditions remain firm as the fourth quarter begins, the report suggests reasons to be cautious. In the Canada Outlook segment of the report, Shailesh Kshatriya, director, investment strategies at Russell Investments Canada Limited, explains that trade negotiations with the U.S., high household indebtedness and the generally wide and volatile discount of Canadian crude oil prices are three factors clouding the outlook for Canadian growth.
While U.S. economic conditions remain firm, the beneficial impact of U.S. federal tax reform and fiscal stimulus may fade over 2019, potentially leading to softening U.S. demand, Kshatriya said. This would have direct implications for Canadian exports going south. Moreover, both the U.S. Federal Reserve (the Fed) and the Bank of Canada are projecting gradual normalization of their policy rate. Therefore, over the next 12 months we anticipate these headwinds continuing to manifest as interest rates tick higher.
For the balance of this year, however, Kshatriya expects U.S. strength to remain a pillar of support as Canadian households are tested with higher rates.
Considering the teams investment decision-making building blocks of cycle, valuation and sentiment, Kshatriya assesses the current state of Canadian equities as follows:
- Cycle: Modestly positive. Economic growth is expected to settle into a 1.5% to 2% level for the balance of the year, while headline inflation at 3% is not alarming as Kshatriya believes certain transitory effects will fade, and he expects inflation will moderate to 2% early next year.
- Valuation: Neutral to modestly positive. Regarding sectors, the team finds relative attractiveness in energy and pockets of cheapness in materials, notably gold.
- Sentiment: Neutral. Momentum has moderated as Canadian equities have generally downshifted since mid-year, however contrarian signals are not oversold at this point.
Global forecast overview
Looking globally, Russell Investments strategists expect trade wars, the Fed, China stimulus and the direction of the U.S. dollar all to dominate the near-term outlook. As the fourth quarter begins, the team sees U.S. recession risks as low, European growth set to improve over the next couple of quarters, and emerging markets as oversold.
For the near term, we like the defensive qualities of U.S. government bonds and Japanese yen exposure, said Andrew Pease, global head of investment strategy at Russell Investments. Ten-year U.S. Treasury yields near 3% offer reasonable value amid the current uncertainty. Over the medium term, however, the cycle forces of inflation pressures and central bank tightening will put global government bond markets under pressure.
He added that the team is neutral on global equities for now, with a small preference for non-U.S. markets. They strategists believe pessimism on eurozone equities looks overdone, and they would wait for more clarity on trades wars, the Fed and China stimulus before leaning into oversold emerging markets.
Other views covered in the report include:
- U.S. market: Strong economic growth and strong corporate earnings, the team believes, are coming at the price of a more assertive Fed. Theyd expect the clock will start ticking on recession risk once the yield curve becomes inverted.
- Eurozone: The team believes the economy is likely to beat low expectations as the political risks that have dominated the past quarter continue to fade, while earnings forecasts have potential for upside revision.
- Asia-Pacific: Trade-war uncertainty adds a note of caution to the strategists Asia-Pacific outlook, but they think that most of the bad news is now known. The team expects China stimulus to largely offset tariffs and sees inflation pressures slowly starting to build in Japan.
- Currencies: The team sees the U.S. dollar rally running out of steam. They believe rising Fed rates are dollar supportive, but that the greenback is expensive and speculative investors are very bullish, which usually is a good contrarian sign.
To read more, please see the 2018 Global Market Outlook “ Q4 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
With more than 80 years of experience, Russell Investments is a global investment manager, dedicated to helping investors reach their long-term goals. Russell Investments offers investment solutions in 31 countries, manages C$381.4 billion in assets (as of June 30, 2018) and provides consulting services on US$2.3 trillion in assets (as of Dec. 31, 2017). Russell Investments specializes in multi-asset solutions, scouring the globe to deliver the best investment strategies, managers and asset classes to its clients around the world.
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