Lacklustre Canadian growth expected

The drop in oil prices has toned down expectations for the Canadian economy, says a Russell Investments global market outlook update.

With valuations stretched and no additional support anticipated from monetary policy, the expectation is that Canadian equity, a top performer among developed markets globally this year, is due for a pause.

“We believe that economic growth at around 1% to 1.5%, while uninspiring, may be enough to keep the [Bank of Canada] on hold. [It is] likely to wait instead for the Fed to raise rates and, in turn, keep the Canadian dollar in check,” writes Shailesh Kshatriya, director of Canadian strategies at Russell Investments Canada. “Ultimately, we believe a low Canadian dollar for an extended period may be more stimulative to the economy due to its positive impact on the competitiveness of the economy than a 25 basis points cut in rates. The latter is an option the BoC may want to keep in [its] back pocket in case of a larger-than-anticipated downturn in the economy.”

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Global forecast overview

The strategists anticipate volatile markets in the final quarter of 2016 as markets absorb the U.S. election, the Italian referendum and likely U.S. federal funds rate tightening. Global bond yields should rise modestly as inflation pressures in the U.S. are offset by deflation in other developed markets. In currency markets, the U.S. dollar looks set to test previous highs, while the British pound remains at risk as investors focus on the full implications of Brexit.

“Equity markets are precariously priced and vulnerable to shocks, but market setbacks could provide opportunities to take on more risk in multi-asset portfolios,” wrote Andrew Pease, Russell Investments’ global head of investment strategy. “The ability to dynamically allocate between asset classes is becoming increasingly important.”

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In the U.S., the team continues to expect an interest rate hike from Fed in December, as well as two hikes in 2017, supported by modest economic growth and a gradual firming in inflation. The U.S. labour market remains healthy, and the strategists don’t see signs of imbalances in business investment. However, the team does see warning signs stemming from the corporate sector, including a troubling rise in corporate leverage.

“U.S. corporate earnings appear to have bottomed, but earnings growth is going to be tepid,” said Paul Eitelman, multi-asset investment strategist at Russell Investments. “While we still have an underweight U.S. equities view, our modeling shows only a modest risk of recession, and we continue with our ‘buy-the-dips and sell-the-rallies’ investment strategy.”

The full report, which also focuses on Europe, Asia-Pacific and currencies, can be found here.

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