•Year-end target for S&P/TSX Composite updated to 15,300 – a reflection of improved profit margin potential
•Fair-value range for the CAD/USD exchange rate tightened to
•Russell global investment strategist team cautions there could be market shocks given investor complacency, unsustainably low volatility and stretched equity market valuations
"Our upgrade is not necessarily a reflection of being more or less bullish; rather, it's a reflection of improving profit margins," said
In addition, Kshatriya believes increased economic activity as the U.S. rebounds over the course of the year should also reinforce domestic trends. "As such, we no longer expect multiples to contract for the balance of the year, but remain stable. And pertaining to economic growth, we expect it rebounds from weak Q1 levels, finishing the year between 2-2.3%." At the same time, Kshatriya believes the market is susceptible to a mild correction before it moves forward, and remains cautious in the interim.
In terms of the direction of the loonie, Kshatriya believes the Canadian dollar is in a losing battle and has tightened the fair-value range for the CAD/USD exchange rate to
For the global equity markets overall, Russell's global team of investment strategists maintain their point of view stated in the 2014 Annual Global Outlook - a modest preference for equities over fixed income globally - though with a slightly diminished spread for the U.S. market. However, the combination of volatility near all-time lows (as measured by the VIX Index), investor complacency and stretched equity market valuations, is leading them to caution that the markets are especially vulnerable to shocks.
"We're calling current market conditions the 'great re-moderation' as they appear similar to the low-volatility, high-return markets we saw prior to the 2008 global financial crisis," said Russell's Global Head of Investment Strategy,
In the report, the team highlights the impact on their outlook of three surprises that were seen in the first half of 2014: the -2.9% contraction in first-quarter U.S. Gross Domestic Product (GDP), the large rise in U.S. core inflation, and the decline in volatility across all asset classes to levels believed to be unsustainable in the long run. In addition, they cite a list of geopolitical risks, such as the events escalating in
Despite these changing considerations, the team's investment strategy views remain largely unchanged, in part due to strong economic growth in the first half of 2014 and positive economic forecasts going forward. The team predicts monthly gains in U.S. non-farm jobs to average 230,000 over the next 12 months and the U.S. Federal Reserve's (the Fed) interest-rate hikes to be held off until mid-2015.
"Mid-year data points support our outlook that U.S. 10-year Treasury yields are likely to rise, default rates will stay low and support credit spreads, and equities can continue to outperform fixed income," Pease summarized. "The CPI rise appears to be more noise than signal. Our models suggest core inflation will stay close to 2% through 2015."
Russell's strategists continuously update their market forecasts amid a changing market environment by implementing a three-pronged "value, cycle, sentiment" investment strategy process, which combines qualitative views and quantitative inputs. Based on this process, Russell's current global market perspectives are as follows:
•Value: U.S. appears more expensive,
Russell's strategists agree that little has changed on market valuations in the past three quarters. They believe the U.S. has become marginally more expensive as the market reaches record highs, with the cyclically adjusted price/earnings ratio for the U.S. large-cap Russell 1000® Index at more than 20 times, and the price-to-book value is around 2.8 times.
They also see European equities as modestly expensive and score
•Cycle: Eurozone growth expectations improving, U.S. regains its footing
The team of strategists sees business cycle indicators as positive for the developed economies, and they believe growth should strengthen across
Supporting this view is the fact that Institutional Broker Estimate Service (IBES) consensus earnings-per-share growth forecasts for the Russell 1000 companies have stabilized near 8% as of early
•Sentiment: Positive momentum continues for developed equity markets
This signal, which reflects price momentum, is based on a range of indicators on positioning, fund flows, investor confidence, risk appetite and technicals to judge market sentiment. The strategists still see momentum as a strong positive driver – particularly in
In summary: "High equity market valuations tell us that the longer term return outlook is subdued, but for now our value, cycle, sentiment process and models tell us to favor equities over fixed income and maintain some credit exposure," Pease said.
For more detailed information, please see the "Strategists' 2014 Global Outlook – Third Quarter Update"
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell 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, portfolio construction, portfolio implementation and indexes to help each achieve their desired investment outcomes.
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