2018 Global Market Outlook

Q2 Update: Trade Tantrums and Canadian Crude May Counter Strong Fundamentals

Near 2% GDP growth expected, but Canadian equities may continue to lag relative to global counterparts

Housing trends, NAFTA and the CAD remain concerns that may limit the Bank of Canada (BoC) to one rate hike in 2018
Discounted domestic oil prices and trade uncertainties may temper equity returns

March 28, 2018 — TORONTO–(BUSINESS WIRE)–Russell Investments released its 2018 Global Market Outlook – Q2 Update today, offering economic insights and market forecasts from its global team of multi-asset investment strategists. The team believes the Canadian economy could grow nearly 2% this year, but persisting uncertainties could temper growth, particularly inflation, rising mortgage costs, domestic oil prices and the outcome of the North American Free Trade Agreement (NAFTA).

In the “Canada Market Perspective” segment of the report, Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited, writes there appears to be no love for Canadian equities as they continue to lag their U.S. and global counterparts.

“Trade uncertainties are weighing on investor sentiment and the discount applied to Canadian crude is a serious blow to the economy,” he said. “Restrained optimism in the markets combined with low unemployment, firming wage growth and double-digit corporate earnings growth could result in the BoC being more dovish relative to the industry consensus. We remain neutral toward domestic equities and believe the 10-year Canadian bond yield may have a modest upside from current levels.”

Global forecast overview

Looking globally, the team believes investors face complicated global market conditions after a volatile start to the year. U.S. tax cuts, synchronized global growth and strong corporate profits are battling monetary tightening and inflation pressures for control of global economies. The tailwinds are prevailing for now, but the strategists believe headwinds could overcome markets later in the year as interest rates rise, inflation picks up and profit margins come under pressure from rising labor costs. Protectionist trade policy has also emerged as a risk, but the team views a full-blown trade war as unlikely.

“We continue to see Europe, Japan and emerging markets outperforming the U.S. in what could be a relatively flat year for global equities,” said Andrew Pease, global head of investment strategy at Russell Investments. “We are still looking to add risk into market pull-backs, but we recognize that ‘buying the dips’ may become more challenging as markets grow more sensitive to recession risks later in the year.”

The U.S. is experiencing a highly unusual tug of war between fiscal and monetary policy with Congress passing tax cuts and a large increase in discretionary government spending, while the U.S. Federal Reserve will have to limit this stimulus to prevent the economy from overheating. In anticipation of rising inflation and faster rate hikes, 10-year U.S. Treasury yields have risen and are now in-line with the strategists’ fair value estimate. However, U.S. equities, in the team’s view, remain very expensive.

Given our underweight preference for U.S. equities in multi-asset portfolios, we see global diversification and active management as important tactics for investors seeking to capture returns while managing downside risk

“The outlook for the U.S. economy and corporate profits in 2018 is strong, but the challenge for markets is that this optimism is already priced in,” said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. “Given our underweight preference for U.S. equities in multi-asset portfolios, we see global diversification and active management as important tactics for investors seeking to capture returns while managing downside risk.”

Outside the U.S., the eurozone continues its mid-cycle renaissance, according to the report, despite the strong euro. The team’s outlook for Asia-Pacific remains solid as global growth underpins demand and monetary policy remains relatively accommodative. The Japanese yen has overtaken the euro as the most attractive developed market currency, and the strategists see potential for its positive run to continue.

For more details on this report, please see the 2018 Global Market Outlook – Q2 Update.




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