What is Russell Investments’ Canadian outlook for 2017?

The investment manager foresees weaker growth, but not a total loss

The newly released 2017 Global Market Outlook from investment manager Russell Investments foresees modest growth for the Canadian economy, noting that while oil prices and reasonable expansion in the US economy can act as buoyant forces, they will likely be counteracted somewhat by debt-laden households.

Monetary policy is expected to be neutral, with the manager expecting a steady rate target of 0.50% from the Bank of Canada as the sensible response in 2017, given low probabilities of recession that would necessitate a dovish rate cut in the near term. However, 10-year bond yields are expected to go up moderately to within 1.5%-1.9% by the end of 2017, with a lift from higher US Treasury yields and anticipated Fed rate hikes being countered by the ballast of residuals from the oil shock.

Currency-wise, they anticipate that the loonie has to remain low for longer. The currency is undervalued by around 10% relatively to the greenback. However, it must stay range-bound between 0.72 and 0.78 “[f]or the Canadian economy to regain lost competitiveness and boost manufacturing output,” according to the report.

While growth is anticipated for Canadian equities next year, the asset class is not expected to stage a repeat of its 2016 performance. The economy is likely to recover from the housing crisis and the oil shock and go further into positive territory due to planned infrastructure spending. However, “[t]he trailing price/earnings (P/E) ratio for the S&P/TSX Composite Index is nearly 20x — a level not seen since 2011,” which makes negative revisions likely. The fact that the S&P/TSX Composite Index has been broadly range-bound also suggests that momentum from 2016’s has moderated.

“Overall, we rate equities as modestly positive on a 12-month horizon, with a 2017 year-end target on the S&P/TSX Composite Index of 15,300,” the authors wrote.

The broader global outlook is expected to hold better economic growth near-term, driven particularly in the US by President-elect Donald Trump’s anticipated fiscal policy measures. Longer-term, however, the report sees a possible pullback from protectionist policies and the risk of overheating from the Trump stimulus, which would necessitate Fed tightening and could result in a downturn in 2018.


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