Russell Investments' 2016 Annual Global Market Outlook: Severe vulnerabilities persist and will test resiliency of Canadian economy

• Strategists more cautious than Bank of Canada in outlook, with policy rate expected to remain at 0.50% for 2016 and GDP growth expected to be in the 1.2% to 1.6% range
• Overextended household finances pose greatest risk – beyond low oil prices
• The pace of Fed hikes seen as key global market driver in 2016

TORONTO, Jan. 6, 2016 /CNW/ - Stable or higher oil prices will be critical for an improved outlook for the Canadian economy — and entirely necessary for any positive performance in domestic equities, according to Russell Investments' 2016 Annual Global Market Outlook.

That said, the greatest downside risk over the next 12 months for the Canadian economy remains overextended household finances, according to the report, which details key investment insights, economic forecasts and market expectations from the firm's global team of investment strategists.

"Severe vulnerabilities persist in Canada and, as in 2015, we believe the resiliency of the economy will be tested over the first half of 2016," said Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada Limited. "We believe GDP growth will be in the 1.2% to 1.6% range and expect that the economic drivers will be exports primarily, but also government spending and household consumption." The Bank of Canada (BoC) is expected to maintain its policy rate at 0.50% for 2016. "However, if GDP growth is at risk of coming in below our already conservative forecast, an additional rate cut would not surprise us," said Kshatriya.

"Contributions to Canada's economic growth needs to be more diversified — beyond just the resource sector," asserts Kshatriya. For this to occur, the Canadian dollar — which was $0.71 vs. the USD as of Jan. 4, 2016 — needs to be low for longer. "We believe this is a prerequisite for the manufacturing sector to regain lost competitiveness, and that appears likely as our 2016 forecast shows the U.S. dollar per Canadian dollar in the range of $0.70 to $0.77."

Looking past the oil price shock, the report also indicates that the BoC's job will be complicated by housing-related risks, as total debt-service costs remain at multi-decade highs. Coupled with a debt-to-disposable income ratio close to 167% and a debt-to-GDP ratio of around 96%, the picture becomes more concerning. "We believe overextended household finances pose the greatest risk to the economy beyond low oil prices — and they are potentially more disruptive," said Kshatriya.

The wildcard may well be if oil prices rise unexpectedly beyond the "base case" and improve economic sentiment. "Unfortunately, the transmission mechanism for improved oil price fundamentals translating into hard economic data is not likely to be a swift one. So unless oil prices accelerate over the immediate near-term, only moderate growth is to be expected from the domestic economy in 2016," added Kshatriya.

Global Forecast Overview

By contrast, Russell Investments' strategists describe a reasonably robust outlook for major developed economies, which have few imbalances and possess spare capacity. They expect GDP increases of 1.5% to 2.0% in the eurozone and 2.0% to 2.5% in the U.S. In contrast, they believe emerging markets are not yet at the bottom of their cycle and could remain under pressure from continued low commodity prices, a strong U.S. dollar and weak exports.

"The economic and market cycles are aging, but the good news is that we don't see a recession on the horizon," said Andrew Pease, Russell Investments' global head of investment strategy. "The less positive news is that the upside for investment returns looks fairly limited in 2016. We believe the winners in 2016 will be those investors that 'hope for the best, but prepare for the worst' and have the governance structure to be tactically astute."

The strategists' favored scenario for investors in 2016 is mid-to-low single-digit returns for global equities, led by Europe and Japan, which they expect will modestly outperform cash and fixed income. This scenario includes a gradual rise in long-term interest rates as the U.S. federal funds rate increases to 1.25% or 1.5% by the end of 2016.

For the strategists to be more positive on emerging markets, they need to see signs that China's economy is bottoming, global export demand is picking up, and emerging market currencies and interest rates have adjusted to Fed tightening expectations.

"2016 is likely to be a year of moderation: moderate growth, a moderate Fed and moderate asset-class returns," said Paul Eitelman, Investment Strategist, North America. "The main risks to this scenario are that U.S. growth weakens or a slowdown in emerging markets flows into developed economies. On the other hand, if growth is too strong, there is a risk of inflation pressures and more aggressive Fed action. Key indicators for investors to watch will be whether U.S. non-farm payrolls and S&P 500® Index earnings per share grow in line with expectations, and if emerging market exports move from contraction to expansion."

Russell Investments' global team of investment strategists determines the outlook for 2016 through a clearly defined process that is based on the building blocks of business cycle, value and sentiment. Their current global market perspectives include the following points, which are elaborated on in the 2016 Annual Outlook report:

• Business Cycle: Broadly positive outlook in developed markets and Asia's middle path
• Valuation: U.S. equities are expensive; Europe cheaper, but neutral; and Japan preferred
• Sentiment: Slightly positive in the U.S. and Eurozone, but muted Asia

"The low-return environment is set to tighten its grip in 2016," said Jeff Hussey, Russell Investments' Global Chief Investment Officer. "There is a chance that markets will post surprisingly strong returns but this would be a temporary reprieve at this late stage of the cycle. We see two keys to success in such an investing environment: access to a wide source of investment opportunities and a robust investment process that guides active asset allocations."

For more information, please see the "2016 Annual Global Market Outlook." 

About Russell Investments

Russell Investments, a global asset manager, is one of only a few firms that offers actively managed multi-asset portfolios and services which include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors—using the firm's core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures to help each achieve their desired investment outcomes.

Russell Investments has more than CAD$318.2 billion in assets under management (as of 9/30/2015) and works with more than 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell Investments has US$2.4 trillion in assets under advisement (as of 12/31/2014). The firm has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell Investments also traded more than US$1.7 trillion in 2014 through its implementation services business.

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