Canadian economic growth is expected to improve in 2014 relative to the lacklustre pace of 2013, finds Russell Investments. However, the outlook is less optimistic about the impact a strengthening U.S. economy may have on domestic fundamentals.
While a forecasted U.S. growth rate of 2.9% would lead to a more positive outlook for the Canadian economy, trends such as U.S. onshoring of higher-end manufacturing and greater energy independence will weigh on momentum in Canada, notes Shailesh Kshatriya, associate director with the Canadian strategy group at Russell Investments Canada.
“The declining contribution from housing and households in 2014 will also be a headwind,” says Kshatriya. “While the domestic housing market has been remarkably resilient, consumer debt-to-income levels in excess of 160% give us pause.
“Private consumption accounts for roughly 50% to 60% of the Canadian economy, so even some moderation of household consumption will affect growth. On the positive side, business investment is primed to accelerate, particularly in the energy field.”
Additional findings:
- Canadian economic growth is expected to be 2% to 2.3%, below forecasted growth for the U.S. economy of 2.9%.
- The Bank of Canada is expected to hold its target rate of 1%.
- Government of Canada 10-year bond yields are expected to be modestly higher reaching 3% to 3.25% by year-end 2014.
- The Canadian dollar is no longer tilted toward parity and is expected to stay within the lower range of $0.90 to $0.98 (USD per CAD).
- The S&P/TSX Composite Index is expected to end 2014 at 13,800; earnings per share growth is expected in the 4% to 6% range.
Read: Investment professionals optimistic about 2014
Global overview
The Global Annual Outlook expects that the G3 economies are headed toward synchronized, albeit moderate growth in 2014. With equity markets trading at close to full valuations and global bond yields with room to rise, we anticipate returns will be tame in the coming year, particularly for global equities relative to 2013.
“The prospect of lower returns does not make us pessimistic,” said Jeff Hussey, Russell’s global chief investment officer. “What we do see though is a challenge for investors when it comes to achieving a rate of return at a level of risk they can survive. There are still opportunities for good returns, but we believe realizing them will require the full arsenal of a multi-asset investing strategy including a sharpened focus on managing downside risk and an actively managed and globally diversified multi-asset portfolio.”
In terms of asset classes, the team expects global equities to outperform cash and fixed income throughout 2014, but amid the spectre of two risk scenarios. On the part of global equity markets, there is the risk of speculative overdrive if confidence in the economic outlook takes hold and markets overshoot, as has happened in the past. Alternatively, with what the strategists believe are equity markets currently “priced for perfection” after the big gains of 2013, a large portion of these gains could dissipate if growth disappoints and investors worry that monetary policy has reached its limits.
“We may be headed toward a low-return world, but this is not a ‘set it and forget it’ year. In this climate, we feel top-down active management becomes more important because market over—and undershoots could provide opportunities for astute investors,” says Russell’s global head of investment strategy Andrew Pease.
Read: U.K. equities, global bonds look attractive: Report
Global equities
On the heels of a year with significant returns and material misevaluation opportunities between global equities, 2014 is expected to deliver more modest returns and higher correlation between developed equity markets with regional business cycles as well as a level of synchronization in growth forecasts unseen since the global financial crisis.
Modest earnings growth in the range of 4% to 5% coupled with a likely equity dividend yield near 1.7% likely will place a premium on timing risk-on/risk-off choices. The strategists believe the best outcomes can be expected from a portfolio that utilizes prudent downside risk protection married with informed active allocation both between regional equities and perhaps more importantly in 2014, within those regional markets, as well as allocations with respect to cap tier, style, and equity risk factors.
This article originally appeared on our sister site, Advisor.ca.