Canadian equities are due for a pause in the coming months given the ongoing lacklustre performance of the country’s economy, according to a new market update that Toronto-based Russell Investments Canada Ltd. released on Monday.
Canadian equities are unlikely to outperform in the fourth quarter (Q4) because of stretched valuations and the unlikelihood of additional monetary support, according to the Russell Investments 2016 Global Market Outlook Q4 Update.
“We argue the Bank of Canada (BoC) and market expectations are now just reflecting the current reality: that is, Canadian growth as of the end of the third quarter is, and has been, lacklustre and is likely to remain so for an extended period of time,” says Shailesh Kshatriya, director, Canadian strategies at Russell Investments Canada, in a statement.
Indeed, the BoC is likely to keep the Canadian dollar low by waiting for the U.S. Federal Reserve Board to raise interest rates, which could prove beneficial for Canada’s economy.
“Ultimately, we believe a low Canadian dollar for an extended period may be more stimulative to the economy due to its positive impact on the competitiveness of the economy than a 25 basis points cut in interest rates,” says Kshatriya. “The latter is an option the BoC may want to keep in its back pocket in case of a larger-than-anticipated downturn in the economy.”
Although Canadian equities are forecasted to be a little tepid, global equities markets can expect to see some volatility. Markets are likely to be a little rocky in the Q4 as they absorb the results of the upcoming U.S. election in November as well as Italy’s constitutional referendum and a possible tightening of U.S. federal funds rates in December.
“Equity markets are precariously priced and vulnerable to shocks, but market setbacks could provide opportunities to take on more risk in multi-asset portfolios,” says Andrew Pease, Russell’s global head of investment strategy, in a statement. “The ability to dynamically allocate between asset classes is becoming increasingly important.”
As well, Russell expects the British pound sterling to continue to experience fallout from the results of the U.K’s Brexit referendum this past June. On the other hand, the U.S. dollar is likely to reach new highs.
In the bond market, global bond yields will likely see a modest rise as inflation pressures in the U.S. are offset by deflation in other developed markets.
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