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Dec 22, 2022

Global growth faces a variety of challenges including rising interest rates, high inflation and a struggling Chinese economy. Uncertainty is elevated and financial markets have been extremely volatile, but the significant adjustment in asset prices this year has diminished valuation risk and boosted return potential for investors as we enter 2023.

Economy

  • Headwinds have intensified as a result of tighter monetary policy and reduced fiscal stimulus. We continue to look for a deceleration in growth in 2023, with economies likely slipping into recession in the developed world.
  • We have below-consensus inflation forecasts for 2023, expecting inflation to continue softening as the four main drivers that pushed inflation to multi-decade highs reverse course.
  • Economic indicators have shown more resilience in the past few months, suggesting that the probability and expected depth of recession might be lower than initially feared.
  • We anticipate that global GDP will expand by 2.1% in 2023, which is less than a third of the figure in 2021, and about half the expected 2022 rate.

Global economic growth has been deteriorating

Global economic growth has been deteriorating
Note: As of December 2, 2022. Shaded area represents U.S. recession. Source: Citigroup, Bloomberg, RBC GAM

Fixed Income

  • As investors warm to the idea that inflation may have peaked and that the pace of tightening is slowing, yields on 10-year government bonds have fallen 50 to 130 basis points from their September/October highs.
  • This rally in bonds started from a point where technical indicators indicated that the bond market had been oversold, and our own valuation models suggested that yields had reached relatively appealing levels.
  • Structural forces such as aging populations and an increased preference for saving versus spending should ultimately limit how high real interest rates can go.
  • Over the near term, inflation will likely be the factor dominating the trajectory for bond yields.

Major equity market indices

Cumulative price returns indices in USD
Major equity market indices
Note: As of November 30, 2022. Price returns computed in USD. Source: Bloomberg, RBC GAM

Equity Markets

  • Equity markets stabilized in the past quarter but, even with the recent bounce, are still sitting at significant losses since the start of the year.
  • While valuation risk has diminished and return potential has increased, stock prices could fall in the event that we enter a recession and earnings decline.
  • We think corporate profit estimates are vulnerable to further downside given that earnings are still above their long-term trend and companies are facing headwinds from rising costs and slowing economic activity.
  • Stock gains could be limited in the near term absent evidence that the economy is headed for a soft landing.

Global stock market composite

Equity-market indexes relative to equilibrium
RBC GAM GDP forecast for developed markets
Note: As of November 30, 2022. GDP-weighted average of RBC GAM fair value models for a variety of countries. Fair value estimates are for illustrative purposes only. Corrections are always a possibility and valuations will not limit the risk of damage from systemic shocks. It is not possible to invest directly in an unmanaged index. Source: RBC GAM

Discover more insights from this quarter's Global Investment Outlook.

Disclosure

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; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. 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.



Additional information about RBC GAM may be found at www.rbcgam.com.



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.



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.



Opinions contained herein reflect the judgment and thought leadership of RBC GAM and are subject to change at any time. Such opinions are for informational purposes only and are not intended to be investment or financial advice and should not be relied or acted upon for providing such advice. RBC GAM does not undertake any obligation or responsibility to update such opinions.



RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.



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. 2022

Publication date: December 22, 2022