Russell Investments' 2018 Global Market Outlook – Q3 Update: Strategists on Watch as Markets Walk Trade-War Tightrope

  • Canadian equities showing surprisingly “defensive” behavior
  • Heightened trade tensions & gridlock with NAFTA renegotiations are risk concerns
  • U.S. growth leadership & the U.S. dollar bounce may have run their course

TORONTO--()--Russell Investments released its 2018 Global Market Outlook – Q3 Update today, offering economic insights and market forecasts from its global team of multi-asset investment strategists.

While the Canadian economy has decelerated into a stable growth path, the team sees complications ahead. In the “Canada Outlook” segment of the report, Shailesh Kshatriya, director, investment strategies at Russell Investments Canada Limited, explains that the timing of the gridlocked NAFTA negotiations is especially troubling since the later stages of the business cycle are normally associated with businesses boosting spending as capacity constraints build. Canada risks being overlooked by multinational corporations as an investment destination.

However, economic undertones may be at odds with equity market performance, Kshatriya said. “Even though the macro picture is complicated, there may be a case for late-cycle tailwinds for Canadian equities.”

“Canadian equities as a defensive alternate to U.S. equities may sound bizarre, but Canadian equities outperformed their U.S. counterparts roughly 90% of the time when returns were negative between February 1 and May 31,” Kshatriya added. “This may be a short-lived pattern, but Canadian valuations have also improved, the unemployment rate has held at its near-historic low, and corporate earnings growth along with wages remains firm. We see support for commodities and are modestly positive toward equities while we watch for two key warning signs: souring business sentiment due to the trade impasse; and a severe deterioration in housing trends.”

Global forecast overview

Looking globally, the team believes the two key global market trends of early 2018—U.S. growth leadership and the U.S. dollar bounce—have run their course. Looking ahead, the strategists are watching for any escalation in the trade war issue and keeping an eye on the yield curve for a U.S. recession warning. However, the team believes the latter seems unlikely before late 2019.

“Our cycle, value and sentiment decision-making process at mid-year holds us at a broadly neutral weighting on global equities,” said Andrew Pease, global head of investment strategy at Russell Investments. “We have a small preference for Europe, Japan and emerging markets over the U.S., and expect that the U.S. 10-year Treasury yield has limited upside. We see the U.S. dollar bounce as having run its course.”

Assessing the U.S. economy, the team at mid-year expects it can continue with above-trend growth through mid-2019. However, the team believes U.S. Federal Reserve (Fed) policies appear on track to invert the yield curve by the end of this year. Given the usual lags, they believe this means an elevated risk of recession by the end of 2019 and through 2020.

“There’s a rhythm to the United States economy that makes a ‘more of the same’ outlook a very reasonable assessment for the next 12 months,” said Paul Eitelman, senior investment strategist. “The challenge for investors is that we believe this rhythm is already accounted for in the price of U.S. equities.”

Regarding Europe, Russell Investments’ strategists note economic growth has cooled, but believe it is still above trend and that corporate earnings are growing at a healthy pace. They rate the threats to global trade and Brexit as bigger dangers for Europe than other threats, such as Italian politics.

The team also remains positive on the Asia-Pacific outlook. Fears of a significant China slowdown in the strategists’ view are overdone, and they believe the rest of developing Asia has shown good resilience to the rising U.S. dollar. Japan is more mixed, with weak consumer data offsetting strong corporate indicators. However, they expect rising real wages should see the household sector recover.

Looking at currencies, the team sees the bounce in the U.S. dollar since mid-April as mostly technical and not the start of a structural dollar bull market. They also see signs that the dollar rally is running out of steam.

Considering their quantitative modeling tools, the U.S. business cycle index model estimated at mid-year points to relatively low recession risk over the next 12 months, while their model for U.S. equities versus fixed income has bounced back (relative to the end of Q1 2018) to a small pro-equities bias at mid-year 2018.

To read more, please see the 2018 Global Market Outlook – Q3 Update.

About Russell Investments Canada Limited

Russell Investments Canada Limited is a wholly owned subsidiary of Russell Investments Group, Ltd. Established in 1985, Russell Investments Canada Limited has its head office in Toronto.

About Russell Investments

With more than 80 years of experience, Russell Investments is a global investment manager, dedicated to helping investors reach their long-term goals. Russell Investments offers investment solutions in 31 countries, manages C$385.1 billion in assets (as of March 31, 2018) and provides consulting services on US$2.3 trillion in assets (as of Dec. 31, 2017). Russell Investments specializes in multi-asset solutions, scouring the globe to deliver the best investment strategies, managers and asset classes to its clients around the world.

Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as New York, London, Tokyo and Shanghai. For more information about how Russell Investments helps to improve financial security for people, visit russellinvestments.com/ca.

Important Information

Nothing in this publication is intended to constitute legal, tax securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This is a publication of Russell Investments Canada Limited and has been prepared solely for information purposes. It is made available on an “as is” basis. Russell Investments Canada Limited does not make any warranty or representation regarding the information.

Russell Investments is the operating name of a group of companies under common management, including Russell Investments Canada Limited.

Forecasting is inherently uncertain and may be incorrect. It is not representative of a projection of the stock market, or of any specific investment.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

Copyright © Russell Investments Canada Limited 2018. All rights reserved.

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Contacts

Russell Investments Canada Limited
Steve Claiborne, 206-505-1858
newsroom@russelllinvestments.com
russellinvestments.com/ca

Contacts

Russell Investments Canada Limited
Steve Claiborne, 206-505-1858
newsroom@russelllinvestments.com
russellinvestments.com/ca