How's It Going

July 3, 2015

International trade is expected to be the key driver of Canadian economic growth in 2015, as exports continue to receive a boost from a weak Canadian dollar, an accelerating U.S. economy and, to a lesser degree, an improving European economy, according to Russell Investments’ 2015 Global Annual Outlook. While critical risks remain – primarily the direction of commodity prices, oil in particular, we believe a strengthening domestic economy coupled with stabilizing oil prices over a 12-month horizon should translate into modest returns for domestic equities in 2015,” said Shailesh Kshatriya, associate director, client investment strategies at Russell Investments Canada Limited.

The report notes the key risks to growth in 2015 in Canada will be housing and commodity prices – with the price of oil being the wildcard. “There is no way to sugarcoat the fact that household debt levels are stretched and home prices elevated. However, we believe the Bank of Canada will be sidelined for much of 2015. In the absence of rate increases, the risk of a sharp decline in home prices may well be contained yet another year; nonetheless, it’s a risk which cannot be ignored,” adds Kshatriya.

Canadian Forecast

Canadian economic growth is expected to be 2.2%-2.5%. While respectable, the downside risks emanating from an overpriced housing market and lower oil prices in particular, cannot be overlooked.
The Bank of Canada is expected to hold its target rate of 1.0% for most of 2015, with the potential for one rate hike towards the end of the year – preferring to wait for the Fed to commence increasing rates to assess how the U.S. economy responds to higher interest rates prior to initiating its own.

Mid- to longer-term bond yields are expected to head higher in 2015 with Government of Canada 10-year bond yields expected to be in the 2.50%-2.75% range by year-end.

A dovish central bank, coupled with contracting short-term yield spreads between Canada and the U.S., means the Canadian dollar has more downside than upside risks. The currency is therefore expected to hover in a range of $0.84 – $0.92 USD in 2015.

Russell’s year-end target for the S&P/TSX Composite Index is 15,000. With the caveat that oil price declines are not egregious, the combination of reasonable GDP growth and a favourable profit margin cycle should equate to modest returns from domestic equities in 2015.

For 2015, Russell remains cautiously optimistic, with expectations for stronger growth in all the developed economies, such as real GDP growth of 3.0% in the U.S. and 1% to 1.5% in the Eurozone.

CIBC WOOD GUNDY, The Wooding Group

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