business-man-crystal-ball

Internal threats to Canada's economic growth are expected to play a greater role next year, adding to the headwinds from Europe, the U.S. and China, say experts at Russell Investments in the firm's 2013 Annual Global Outlook.

"We have already seen signs of moderation in some of the country's biggest housing markets," says Shailesh Kshatriya, senior investment analyst with the Canadian Strategy Group at Russell Investments Canada. "A slower housing sector has an impact on private consumption, which represents more than half of Canada's GDP. Furthermore, after a decade of running up their debt loads, Canadian households are starting to tackle their balance sheet and are becoming thriftier."

Read: U.S. housing surge will help Canada

Along with slowing retail sales, there will be a shift in corporate profitability on an expected moderation in commodity prices, he adds.

The forecast predicts a positive, albeit volatile investment environment, noting that investors can expect a modest global recovery, driven primarily by a continuation of U.S. and Chinese economic growth.  Even so, volatility will likely remain elevated through most of the year, driven by the tug of war between deflationary austerity and reflationary monetary policy in the eurozone.

"The U.S. strikes us as an undervalued field, both in terms of the equity pricing and overly pessimistic economic growth expectations," says Pete Gunning, global chief investment officer, Russell Investments.  "We would be surprised if the equity market does not cash in that value by the end of the year."

In light of the dynamics of the recovery, lingering impacts of the Great Recession and intervention by the U.S. Federal Reserve, Russell forecasts that the net effect on investors will be that of "squeezing" them out of traditional safe-haven assets and forcing them further up the risk curve.

Read: CFA releases global sentiment survey

"We continue to advise clients to proceed purposefully and with strategic discipline," says Gunning. "For investors, this means attention to every detail of their portfolio management. We believe regional diversification will need to be firmly in place, as the economic center of gravity is expected to continue to shift.

As traditional investments remain flat, alternatives likely will matter more than ever, he adds.

Russell's core expectations for 2013: Canadian highlights

  • Canada's economy will grow between 1.7%-2%, with risks skewed towards the lower number
  • The Bank of Canada leaves overnight target rate unchanged
  • Government of Canada 10-year bond yields will be modestly higher, in the 1.9%-2.2% range
  • The Canadian dollar remains within the parity range of $0.95-$1.05 (USD per CAD)
  • S&P/TSX Composite Index to end 2013 at 12,600; Earnings per share growth of 5%
  • U.S. economic growth of 2.1% for 2013, increasing to 2.5%-2.75% by the second half of the year; Tepid U.S. core inflation for the medium term at 1.9%; U.S. 10-year yield at 2.15% by year-end 2013.

Key themes that will have the greatest impact on markets in 2013:

  • U.S. economic outlook for 2013: A time to address long-term issues at last?
  • The Eurozone: Finding the right policy mix
  • Global Equities: A rising tide may not lift all boats equally
  • Emerging Markets: Due for outperformance
  • Global currency outlook for 2013: More of the same, but risks aplenty
  • Commodities: It's not just about monetary policy

Read: Emerging markets to lead global growth

Originally published on Advisor.ca