Don’t be fooled by strong growth expectations

Despite strong economic indicators for the Canadian economy, vulnerabilities shouldn’t be overlooked, says a global market outlook report from Russell Investments.

“Specifically, the consumer has been the most consistent contributor to growth over the last several years, despite rising household indebtedness,” says Shailesh Kshatriya, director of Canadian strategies at Russell Investments Canada, in a release. “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.”

Further, 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 says. “Although business surveys point toward improvement on this front, we await data that is more measurable.”

Read: Future of private investment depends on direction of monetary policy

Likewise, in the U.S., a concerning indicator is zero growth in commercial and industrial loans over the last four months, which, along with additional Fed tightening and policy concerns, supports an outlook for mediocre growth.

Slower U.S. growth the new normal

In a special report on U.S. growth, James Marple, senior economist and director at TD Bank, argues that slower U.S. growth averaging less than 2% annually is the new normal, considering the challenges to the workforce, such as the imminent retirement of baby boomers. However, poor growth in labour hours could potentially be offset by increased labour productivity due to technological advances, for example.

Still, opportunities remain for agile multi-asset investors, says Russell Investments, because there’s little risk of a recession in the U.S., growth in Europe is attractive and emerging markets show resilience.

Investment strategy

While others may be bullish because of reflation, “we see very expensive U.S. equities, high profit margins and an economy unlikely to sustain the current surge,” says Andrew Pease, global head of investment strategy at Russell Investments, in a release. “A pullback seems likely and should create a buying opportunity, which means we are maintaining our ‘buy the dips, sell the rallies’ investment strategy.”

Read: Why U.S. equity valuations continue to climb

In the same release, Paul Eitelman, multi-asset investment strategist for North America at Russell Investments, adds: “Globally diversified, multi-asset portfolios may look to the positive cyclical outlook in European equities and the value in emerging markets.”

In addition, the market is already pricing in three Fed hikes for the year, meaning most of the damage to U.S. Treasuries is in the rearview mirror, with the 10-year Treasury yielding “close to our estimate of fair value at 2.5%,” says Eitelman.

For more details on the global economy, read the full report from Russell Investments here.

For more details on the U.S. economy and the U.S. labour force, see the TD report here.

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