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Mar 15, 2021

The pandemic is entering a new phase with vaccines at hand, case counts in decline and businesses gradually resuming normal operations. Bond yields have surged, stocks have climbed to records and a variety of market signals suggest that economies are on the cusp of a strong recovery.

Economy

  • Containing COVID-19 has been critical to the economic recovery, which is now underway and has much more room to grow supported by significant monetary and fiscal stimulus.
  • There is concern that inflation could run too hot as economies reopen. Our view is that inflation will move higher but remain at low levels relative to history.
  • Risks to the growth outlook include the distribution of vaccines and their efficacy against new variants and the possibility of another virus wave.
  • Our base case scenario is quite constructive as economic forecasts were mostly upgraded from last quarter and remain above consensus.

RBC GAM GDP forecast for developed markets

RBC GAM GDP forecast for developed markets

Source: RBC GAM

Fixed Income

  • Longer-term bond yields have surged as investors’ expectations of faster inflation and better economic growth are offsetting the impact of central-bank efforts to hold rates down.
  • Part of the increase was due to real, or after-inflation, interest rates rising from unsustainably low levels. Real rates could rise even higher but increases are limited by structural changes in the economy.
  • The recent surge in global yields has dampened the acute valuation risk that existed in the bond market and we think that bond prices could find near-term support at current levels.

10-year government bond yields

10-year government bond yields

Note: as of February 28, 2021. Source: RBC GAM

Equity Markets

  • Global equities rose to new highs as the pace of COVID-19 vaccinations progressed, virus counts declined and earnings exceeded expectations.
  • We recognize there is froth in some areas of the market and that valuations are elevated, but our modelling suggests the possibility that price-to-earnings ratios could rise even further as fears of the crisis fade and interest rates return to normal levels.
  • The economic recovery has stoked a rotation out of traditional U.S. large-cap leadership into other more economically sensitive areas of the market, driving rallies in small and mid-cap stocks, financials and industrials, and value stocks overall.
  • Although the advantage of stocks over bonds has diminished somewhat as a result of rising yields, equities continue to offer an attractive risk premium versus fixed income. As a result, we are maintaining our overweight position in stocks and underweight in bonds.

S&P 500 earnings yield

12-month trailing earnings/index level

S&P 500 earnings yield

Note: As of February 28, 2021. Source: RBC GAM, RBC CM

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

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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.

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© RBC Global Asset Management Inc. 2021
Publication date: (March 15, 2021)