Expect weaker Canadian growth in Q3: Russell

Expect a weaker Canadian economy amid continuing improvements in the U.S., Europe and Japan, says Russell Investments’ 3rd Quarter Strategists’ Outlook and Barometer.

The report’s forecast for Canada is based on the softer housing market and the continued high level of consumer debt.

Read: Equity funds off to solid start in Q3

Even after the strong rally in global equity markets, Russell’s strategists favor equities over bonds and cash, although equities are expected to outperform bonds by a smaller margin than in the first half of 2013. Within global equities, Russell strategists prefer Europe and Japan due to slight improvements in the Eurozone, the success of ‘Abe-nomics’ in Japan, and the overall attractiveness of Japanese and European equity valuations relative to U.S. valuations.

“We expect in the months ahead to see economic growth in the U.S. to remain modest but robust, Europe to emerge from recession and Japan to accelerate,” said Andrew Pease, global head of Investment Strategy for Russell Investments. “The gains in global equity markets and rises in bond yields mean that we head into the second half of the year with equity markets offering reasonable, but not outstanding value and with bond markets less dangerously overvalued.”

Read: U.S. economy expands 1.7% in Q2

Canadian equities, meanwhile, are expected to struggle to remain in the black for the rest of the year, as the economic weakness is expected to create a formidable headwind for corporate earnings. Russell has revised the year-end forecast for the S&P/TSX Composite Index down to 12,400 from 12,600 previously.

Read: Active managers beat benchmark in tough Q2

“The gold sector is grappling with high costs and lacklustre growth prospects,” says Shailesh Kshatriya, associate director, Client Investment Strategies at Russell Investments Canada. “Meanwhile, the banking sector will probably be weighed down by the expected slowdown in consumer spending. Additionally, with crude oil prices volatile, the outlook for the energy sector is uncertain. As these are the three dominant sectors in the index, we are cautious on the prospects for the TSX.”

Russell’s updated forecasts for Canada include:

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