A heated housing market has emerged as the greatest long-term risk to Canada’s economy now that oil prices are rising, according to Toronto-based Russell Investments Canada Ltd.’s quarterly global outlook.
The report, released Wednesday, analyzes the Canadian and global markets as the third quarter of the year begins.
The study suggests that more attention must be placed on the real estate market frenzy in Canadian cities outside of Vancouver and Toronto.
“While the Vancouver home price index has by far outpaced all major metropolitan centres, it’s interesting to note that Toronto actually lags Winnipeg and is only modestly ahead of Quebec City in terms of home price appreciation,” says Shailesh Kshatriya, director of Canadian strategies at Russell Investments, in a statement.
High household indebtedness and its impact on consumption is also a concern. Strong retail sales from the first quarter of this year may not be sustainable given that wage growth on a year-over-year basis is trending below 1%, the report says.
Further, concerns are growing over the effect a strengthening Canadian dollar may have on non-resource exports over the second half of 2016.
On a global scale, investors should expect to see lacklustre economic and equity market growth, states the research report: “[Russell Investments’] team expects [that] upward pressure from inflation on U.S. bond yields will be muted by deflation in other major developed markets, meaning low yields are likely to rise, but only modestly.”
Global market volatility is also likely to continue as a result of the U.K.’s vote to exit the European Union, known as “Brexit,” although that volatility has not been substantial enough for the firm to go on an equity-buying spree.
“We still want to buy equity dips and sell rallies, but even post-Brexit volatility has not been significant enough yet to trigger a contrarian ‘buy’ signal in our investment process,” says Andrew Pease, global head of investment strategy at Russell Investments, in a statement. “U.S. equities still look expensive, business cycle fundamentals in developed markets are weakening and government bonds score poorly on value.”
In its analysis of the U.S. economic market, the report states that a decelerating labour market and negative corporate earnings growth may cause some concern, but Russell Investments’ strategists see little risk of a recession in the near future.
“We expect Brexit will have only a limited impact on the U.S., and the headwind from a stronger U.S. dollar will be offset by more cautious [Federal Reserve Board] policy,” says Paul Eitelman, investment strategist for North America at Russell Investments, in a statement. “We expect the [U.S.’ central bank’s meeting in December] will be the earliest timing of a rate change, and we continue to expect 2% real [gross domestic product] growth in 2016, although we cannot rule out a slower growth scenario entirely.”
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