Investors who are watching the Canadian equity market should prepare for a few more bumpy moments in 2018, according to Russell Investments Canada Ltd.’s 2018 global market outlook.
While the firm’s strategists anticipate Canada will avoid a recession, investors will be keenly watching for the signs of one. Equities may have more room to grow in the first half of 2018, according to the report, which also suggested the Bank of Canada would raise interest rates just once in 2018 in an effort to lag behind the U.S. Federal Reserve and avoid another episode of sustained strength for the Canadian dollar. Meanwhile, more aggressive tightening by the Federal Reserve should boost Canadian bond yields as well.
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“The prospect of recession in Canada remains at bay for 2018, but Canadian investors should expect a bumpy ride and a fair bit of uncertainty with the housing market, NAFTA trade discussions and the potential for over-tightening by the [Bank of Canada] representing key downside risks,” said Shailesh Kshatriya, director of Canadian strategies at Russell Investments, in a release. “We will look to active strategies, global diversification and a multi-asset approach to help investors limit risk while still pursuing opportunities for returns in the year ahead.”
Looking further afield, the report noted the global growth seen in 2017 would likely continue, at least for the first part of the year. And both currencies and equities from regions like Europe, Japan and emerging markets will have the potential to offer investors more upside than the United States.
“The scenario for global markets in 2018 is likely to be driven by the U.S., which still dominates and is further advanced in its cycle than other economies,” said Andrew Pease, global head of investment strategy at Russell Investments. “Second-hand growth from the global economy could drive a blowout U.S. rally in 2018, but rising headwinds later in the year are likely to spoil this goldilocks scenario.”
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On the bond side, the report predicted a strong year for the Asia-Pacific region; however, a rise in inflation might see the Reserve Bank of Australia raise rates more than once.
“The question for investors is how to make the most of late-cycle returns while preparing for the inevitable downswing,” said Jeff Hussey, global chief investment officer of Russell Investments. “Investors need to squeeze every basis point out of their portfolios using smart strategies, implemented in a cost-effective manner and backed by a dynamic process that leans into opportunities and away from risks.”
In the United States, investors will want to watch for signs of a recession in 2019, according to the report, which noted the possibility of an inverted yield-curve due to further tightening by the Federal Reserve. The report also predicted 10-year U.S. treasury yields to move higher towards fair value only to falter in the second half of the year on those worries.
“With the labour market at or beyond full employment, spare capacity in the economy closed and medium-term inflation pressures gradually building, we expect the Fed will be able to raise its policy rate another 100 basis points through 2018,” said Paul Eitelman, multi-asset investment strategist for North America at Russell Investments. “If the 10-year U.S. treasury yield rises as expected by less than this, the yield curve could invert in late-2018, providing an early warning of recession.”
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