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Terms and conditions for Canada

Mar 10, 2020

Global Economy

New sources of uncertainty have disrupted financial markets and undermined economic growth prospects. There is no question that many different pathways now exist for the global economy, and some of these could lead to recession. However, a coordinated response by central banks and politicians, the fact that past health scares have proven temporary, and the massive repricing of assets that has occurred over the last few weeks encourages us to maintain a moderately constructive outlook.

The recent decline in risk assets followed several quarters of financial market gains amid stable economic growth, supported by improved financial conditions and centralbank stimulus. An assortment of geopolitical risks remain, but the sudden spread of the Covid-19 virus, closely followed by the collapse in oil prices are the main culprits disrupting economic growth and investor confidence. We must recognize the growing presence of these risks and their potential adverse impact on near-term growth. We anticipate subdued global growth in 2020, but expect a recovery in 2021 as fears of Covid-19 diminish.

Fixed Income

The emergence in China of the new coronavirus has become a real threat to global trade and investor confidence. Accordingly, global bond yields recently declined to the lowest levels ever recorded. In the short term, the success or failure of efforts to combat the spread of the virus will be among the most important drivers of bond yields.

Our expectation is that the outbreak will be brought under control before it threatens severe economic damage given the enormous public resources being marshalled to fight the spread of the virus. Until investors are able to get a better handle on the progression of the disease, we expect volatility and demand for safe assets such as government bonds to remain high.

Faced with a continuation of extremely high fixed-income valuations in long-maturity bonds, it is useful to revisit some of our longer-term fair-value models. Based on an analysis of short-term interest rates, inflation and the term premium, our estimate of the fair-value range for the U.S. 10-year yield lies somewhere between 1.00% and 3.50%.


The S&P/TSX Composite Index recorded all-time highs toward the end of last year amid signs of global economic improvement, rising oil prices and a moderation in U.S.-China trade tensions. Since then, the spread of the new coronavirus makes all that a distant memory, as the outbreak raised considerable uncertainty about the outlook for the economy and corporate profits. In the three months ended February 29, 2020, the Canadian stock benchmark was down 3.8% on a total-return basis.

In January, the Bank of Canada lowered its GDP growth forecasts, noting weakness in domestic business investment, hiring and consumer spending. In early March, it cut its key interest rate by 50 basis points to 1.25%.

We forecast S&P/TSX earnings growth in 2020 of 5%, up from 4% last year. However, estimates could be revised lower to account for the economic impact of the coronavirus and continued commodity-price weakness. The overall S&P/TSX valuation is 15.8 times trailing earnings, under the long-term average of 16.7 and well below the S&P 500 Index’s 18.3 multiple.

United States

At the end of February, the S&P 500 was down 13% from the peak as the coronavirus dashed hopes that the global economy might quickly emerge from a period of soft economic growth. Sectors with more dependable earnings performed best, led by Consumer Staples, Real Estate, Utilities and Health Care. Industrials, Materials, Information Technology, Financials and Energy lagged.

We expect that monetary and fiscal authorities globally will support economies, and the increased stimulus should bolster financial markets. We expect the corporate response to be equally aggressive. The biggest wildcard is the response of U.S. consumers if the outbreak becomes serious enough that officials quarantine populous areas and close schools.

History of prior viral outbreaks, natural disasters and acts of terrorism suggests that economic activity and financial markets rebound quickly once there is clarity about the event. Investors usually model the hit to corporate earnings as a delay rather than a fundamental change to earnings power. The volatility and uncertainty in the markets could provide investors with opportunities to add equity exposure to their portfolios.


Europe’s macroeconomic dynamics appear to be broadly positive. Leading indicators such as Purchasing Manager Indexes (PMIs) and earnings estimates appear to be bottoming. Prospects for the economy as measured by Europe’s Economic Surprise Index sit at a two-year high, both in absolute terms and relative to other regions.

While the course of the coronavirus outbreak injects a degree of uncertainty into our macroeconomic outlook, we remain focused on the relationship among PMIs, GDP and the pace of earnings growth in the region. Current earnings growth projections for Europe in 2020 are about 9% and should hold up better than past history suggests, given the macroeconomic improvements.

European equity P/E ratios are moderately high at 14.9 compared with a long-run average of 13.2. Still, equities continue to offer the highest dividend yields ever versus fixed income. The yield advantage of European stocks relative to 10-year government bonds rests at a 100-year high of 3.5 percentage points.

Asia Pacific

Asian equities started the period strongly after a preliminary U.S.-China trade deal in mid-January. In addition, signs of stabilization of Chinese retail sales and industrial output fueled hopes for economic growth this year. This optimism was short-lived as the coronavirus outbreak led to declines in late January and again toward the end of February. While China has made progress in stopping the spread of the disease, the virus is taking hold in other parts of the world.

In India, the government is again raising the percentage of domestic companies that foreigners can own to promote investment. The increased openness has helped Indian stocks trade near record highs, but slowing growth and consumption are at hand.

Equity markets in Australia, China, Taiwan and India outperformed the Asian benchmark while Thailand, Singapore and the Philippines lagged. Japanese stocks underperformed the rest of Asia.

Regionally, the Information Technology, Communication Services, Consumer Discretionary and Health Care sectors outperformed. Energy, Real estate, Industrials and Utilities underperformed.

Emerging markets

Emerging market equities have fallen so far in 2020 due to virus concerns and its impact on what was a nascent, yet fragile, economic recovery. It is still the base case that the virus will behave in a similar way to the SARS virus and recede when the weather improves. We expect this impact will be transitory, and that central banks and governments will act in a synchronized manner to reduce the damage.

Looking beyond the coronavirus, we believe there are four key factors that will play an important role in determining the performance of emerging market equities: the U.S. dollar, the economic growth differential between emerging markets and developed markets, earnings growth, and valuations. In our view, there is a high likelihood that in the coming years some of these factors will move from headwinds to tailwinds, and such changes would ultimately support a sustained improvement in relative emerging market performance.


This document is provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC GAM or its affiliated entities listed herein. This document does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction. This document is not available for distribution to people in jurisdictions where such distribution would be prohibited.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

In Canada, this document is provided by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this document is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe this document is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

This document has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the above-listed entities in their respective jurisdictions. Additional information about RBC GAM may be found at www.rbcgam.com.

This document is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.

Any investment and economic outlook information contained in this document has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions.

Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this document may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.

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© RBC Global Asset Management Inc., 2020