Fall 2017 Economic Outlook
U.S. economy expanded at a 3% (annualized) pace during the second quarter of 2017, Canadian GDP grew by 4.7% (annualized) in the same time period. The global economy is experiencing a synchronized global acceleration, with many developed economies in mature expansion and emerging markets in earlier recovery.
Our base case forecast is for the global economy to continue moving forward with a modest uptick in growth through the coming months and gradual progression on inflation.
Source: Fidelity investments (AART) as of 3/31/2017
Stock Valuation Check
Although several markets have given ground through the summer months, most global equity markets are hovering not far beneath their all-time highs. A sizeable portion of the stock market’s gains through the current bull market have been delivered through expanding valuations on the back of low interest rates. Our models suggest that further increases in rates from current level could begin to act as a headwind to multiples. As the gains from P/Es have likely been exhausted, earnings growth will pace the market going forward.
They cyclical economic and earnings growth differentials are closing between the U.S. and the rest of the world. With less good news priced into the valuation of non-U.S. equities and currencies, the fundamentals for international equities look relatively attractive.
Strong Canadian Q2 GDP growth and BoC rate hike
Q2 GDP growth increased by 4.5% (annualized). Household consumption was the leading contributor to GDP growth, while non-residential investment added 0.6 percentage point after a 1.2 percentage point contribution in Q1, giving credence to the growth rotation story from the Bank of Canada. The lack of Government investment suggest infrastructure spending is continuing to roll-out slowly.
Source: RBC Capital Markets, Statistics Canada, RBC Economic Research
BoC hikes again to 1.00%, leaves door open
The rationale for the move was tied to stronger-than-expected data and the fact that “the level of GDP is now higher than the Bank had expected”, the probability of another 25bp rate hike prior to the end of year has been raised. The upgraded forecasts now adding one additional 25bp hike to each of 2017 and 2018, with the overnight rate now forecasted at 2.00% at the end of 2018 versus 1.5% previously.
Rita Li, CFA, MBA, CFP
Rita is a seasoned investment professional with experience working with different asset classes at top investment firms in Canada and abroad. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP®. She works with a multi-disciplined team to provide comprehensive wealth management services to High Net Worth families.