Russell Investments sees positives in Canadian equities and bonds

The firm's outlook for 2023 calls for a mild recession and some other concerns, but also some optimistic elements

Russell Investments sees positives in Canadian equities and bonds
Steve Randall

With 2023 fast approaching, investment firms are taking their best shot at weighing up the likely challenges ahead.

Russell Investments has shared with us its outlook for the global and Canadian economies in the coming year with some good and bad likely to be in the mix.

For Canada, the outlook anticipates the Bank of Canada’s tight policy catching up with indebted households and taking the economy into a mild recession.

Canadian exports will be under pressure along with commodity prices due to the expected global slowdown.  

However, there should be better times to come.

“The good times of 2022 in terms of household spending and business investment may end in 2023, as the lagged effects of rate hikes are felt more intensely in the Canadian economy,” said Shailesh Kshatriya, director, investment strategies at Russell Investments. “However, as a mild recession gains momentum and inflationary pressures moderate, we believe the conditions should be in place toward the latter half of the year to allow the BoC to shift its policy stance towards interest rate cuts.”

Positives for investors

Among the brighter news, the Canada outlook also sees bond yields being more attractive and offering improved income, and government bonds may benefit from recession-driven risk-off sentiment.

Canadian equities are also seen as positive in the medium term due to better relative value and the potential for natural resource sectors to benefit from the energy transition.

The business cycle is less positive though.

“We are concerned about the business-cycle outlook,” Kshatriya said. “A more constructive view hinges on a policy pivot from the BoC, which may require patience.”

These concerns mean that the team at Russell Investments are neutral in an absolute sense and believe there could be a pause to Canadian equities outperformance compared to US equities.

Global outlook

For global markets, the firm is expecting recession and potential equities market struggles before an improvement towards year-end.

“The main issue for 2023 is whether inflation pressures ease sufficiently to allow central banks to step away from rate hikes and potentially begin easing,” said Andrew Pease, global head of investment strategy at Russell Investments. “We expect inflation will be on a downward trend as global demand slows. This should allow central banks to eventually change direction and may set the scene for the next economic upswing.”

The firm sees a bounceback for fixed-income, potential for emerging markets if there is stimulus from China, and UK, US, and German government bonds offering good value following the rise in yields.

The US dollar could weaken late in 2023 as central banks start to unwind rate hikes and investors begin to focus on a global recovery.