New global market update highlights the positive signs for the Canadian economy
With the rally in equities set to run further, one of Canada’s leading global investing firms is favouring domestic options over the US.
Russell Investments has released a fourth quarter update to its 2020 Global Market Outlook and its team of investment strategists highlight several positives for the Canadian economy and markets.
Consumer spending, the housing market, and the savings rate are all cause for optimism. But as tough economic conditions remain, there are still reasons to be wary, especially with a second wave of the pandemic growing.
“Key economic numbers point toward recovery, but many challenges lay ahead and, as a consequence, both fiscal and monetary policies are expected to remain stimulative for some time to come,” said Shailesh Kshatriya, director, investment strategies at Russell Investments.
He added that economic growth should benefit from generous income transfers and low interest rates as businesses open and travel restrictions ease.
Potential gap
For Canadian equities, there is a significant gap between current growth and potential growth.
Kshatriya expects monetary and fiscal policies to remain supportive of the business cycle while this gap exists, noting that the gap implies there are resources that are on the sidelines but could be deployed.
He believes that Canadian equity valuation is largely neutral.
“Traditional valuation measures such as the price-to-earnings ratio are rich, but those measures are offset at this point with a healthy dividend yield and scope for corporate profit margins to expand,” he said.
Global outlook
The Russell Investments team has a moderately positive outlook for global markets in the medium term, despite COVID-19 and the US election.
The team scores global equities are slightly expensive, sentiment as neutral, and the cycle as supportive.
“Overheated technology stocks and U.S. election uncertainty are near-term headwinds, but positive Covid-19 vaccine developments, dovish central banks and an ongoing economic recovery should allow equity markets to push higher,” said Andrew Pease, global head of investment strategy at Russell Investments. “We believe that the global recovery from the recession will lead to a long period of low-inflationary growth, supported by monetary and fiscal stimulus.”
Outlook highlights
The team:
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Prefers non-U.S. equities to U.S. equities.
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Sees value in emerging markets equities. “China’s early exit from their Covid-19 lockdown and stimulus measures should benefit emerging markets more broadly,” Pease said.
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Holds a neutral view on high yield and investment grade credit. “Credit spreads, that is the difference in returns due to different credit qualities, have since narrowed and at this point only adequately compensate for the likely rise in default rates following the Covid-19 recession,” Pease said.
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Views government bonds as expensive. “Low inflation and dovish central banks should limit the rise in bond yields during the recovery from lockdowns. U.S. inflation-linked bonds offer good value with break-even inflation rates well below the U.S. Federal Reserve’s targeted rate of inflation.”
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Believes real assets offer a pandemic recovery trade. “Sentiment appears overly bearish after real estate investment trusts sold off heavily in March, with investors concerned about the implications of social distancing and online shopping for shopping malls and office buildings. At this point value is positive,” Pease said.
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Expects the U.S. dollar will weaken into the global economic recovery, given its counter-cyclical behavior. “The U.S. dollar typically gains during global downturns and declines in the recovery phase,” Pease said. “The main beneficiaries should be the economically sensitive ‘commodity’ currencies, such as the Australian and Canadian dollar. Also, the euro and British sterling at this point are undervalued.”
