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Terms and conditions for Canada

Sep 18, 2019

Financial markets face an evolving set of macroeconomic headwinds and, against this challenging backdrop, central banks are now offering support through monetary stimulus. Our base case is for continued economic growth, albeit at a slowing pace, but we recognize that the downside risks have increased. We continue to expect stocks to outperform bonds over the longer term and remain overweight equities and underweight fixed income as a result. However, we don’t feel that this is the time to be running substantial risk positions so we have trimmed exposure to stocks by half a percentage point, moving the proceeds to cash.

Economy

  • Global growth slowed in the past quarter, hindered by manufacturing weakness, elevated uncertainty from protectionism and Brexit, fading fiscal stimulus and the slowing Chinese economy.
  • Central banks are working to offset some of the negatives by cutting interest rates, and there is also the potential for additional fiscal stimulus and improved productivity growth.
  • Weighing the positives and negatives, we look for slower growth in 2019 versus 2018, and for a further deceleration in 2020 in both developed and emerging markets.
  • Our forecasts were downgraded slightly from last quarter and they are now in line with the consensus for 2019 and modestly lower for 2020.

Consensus forecast revised lower

Consensus forecast revised lower chart en

Note: As of Aug 2019. Source: Consensus Economics, IMF, RBC GAM

Fixed income

  • Central banks have now pivoted to monetary stimulus in a synchronized fashion, with some having already delivered rate cuts and others hinting at additional easing measures.
  • Global sovereign bonds extended their rally in the past quarter and our valuation models are signaling caution as yields declined to record lows.
  • We expect upward pressure on real rates over time and therefore the possibility of a bond bear market, in which returns are low or even negative as yields rise for many years, cannot be dismissed.

Global bond market composite

10-year government bond yields relative to equilibrium Global bond market composite chart en

Note: As of Aug. 30, 2019.* Source: RBC GAM

Equity markets

  • Global equities rallied in June and July, but stumbled in August as trade tensions escalated between the U.S. and China.
  • Our models suggest that stocks are relatively attractive outside of the U.S. However, we note that the S&P 500 Index is situated slightly above fair value, at a level that has historically been associated with lower returns and higher volatility.
  • In an environment of moderate corporate profit growth, low interest rates and low inflation, stocks can deliver gains in the mid-single to low-double digits. In a recessionary scenario, however, the damage to earnings and investor confidence would send stock prices meaningfully lower.
  • We continue to expect stocks to outperform bonds over the longer term and remain overweight equities and underweight fixed income as a result. However, we don’t feel that this is the time to be running substantial risk positions and have trimmed our exposure to stocks by half a percentage point, moving the proceeds to cash.

Relative performance

Price levels, indexed to 100 at start of the chart relative performance chart en

Note: As of Aug. 30, 2019. Source: MSCI, Bloomberg, RBC GAM

S&P 500 equilibrium

Normalized earnings & valuations S&P 500 equilibrium chart en

Note: As of Aug. 30, 2019. Source: RBC GAM

*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.

Disclosure

This has been 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 Global Asset Management Inc. (RBC GAM Inc.). In Canada, this report is provided by RBC GAM Inc. (including Phillips, Hager & North Investment Management). In the United States, this report is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe, this report 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, to professional, institutional investors and wholesale clients only and not to the retail public. RBC Global Asset Management (Asia) Limited is registered with the Securities and Futures Commission (SFC) in Hong Kong. Any funds/ strategies referenced in this document are not registered in, nor may be sold, issued or offered in Hong Kong, China, Singapore, Korea or Taiwan and this document does not contemplate the marketing, offer, issue or sale of any funds/strategies in these jurisdictions. RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC GAM 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. This report 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 report 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. The investment process as described in this report may change over time. The characteristics set forth in this report are intended as a general illustration of some of the criteria considered in selecting securities for client portfolios. Not all investments in a client portfolio will meet such criteria. 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 report 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. All opinions and estimates contained in this report constitute RBC GAM’s judgment as of the indicated date of the information, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates and market conditions are subject to change. Return estimates are for illustrative purposes only and are not a prediction of returns. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods. It is not possible to invest directly in an unmanaged index. A note on forward-looking statements This report may contain forward-looking statements about future performance, strategies or prospects, and possible future action. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “forecast,” “objective” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.