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Mar 21, 2022

The two-week-old war between Russia and Ukraine and the global response to the conflict are evolving rapidly, and in a way that suggests the trajectories of economic growth and financial-market performance have been significantly altered from just a month ago. Although we continue to think that the most likely outcome is for the global economy to continue expanding, we now expect slower growth and higher inflation, and we presume that the odds of recession have increased.

Economy

  • Russia delivered on its threat to go to war with Ukraine and the invasion has opened up the possibility of a drawn-out period of uncertainty.
  • Although the pandemic continues to recede and consumer and business spending is rising, their impact on growth is much less pronounced than it was a year ago.
  • A tightening of financial conditions, slowing Chinese growth, reduced U.S. government spending and elevated inflation were already working to undermine the economic expansion as the Ukraine conflict began.
  • Global growth is set to decelerate to 3.6% in 2022 from 6.2% in 2021. Developed-world growth should fall to 3.0% from 5.1%, while growth in emerging markets is set to slow to 4.1% from 7.3%.

RBC GAM GDP forecast for developed markets

RBC GAM GDP forecast for developed markets

Note: As of March 1, 2022. Source: RBC GAM

Fixed Income

  • Rising rates and higher inflation pushed bond yields sharply higher at the start of year but the potential hit to growth from the war boosted demand for safe-haven assets and pulled yields lower toward the end of the quarter.
  • Our models continue to suggest that the long-term direction for yields is higher, mostly due to the fact that real, or after-inflation, interest rates are unsustainably low at -2.8%, their lowest level in 60 years.
  • War-related risks to economic growth could temporarily limit the increase in yields but we expect higher nominal yields and low or even slightly negative sovereign-bond returns over the longer term.

U.S. 10-year T-bond yield

Equilibrium range
U.S. 10-year T-bond yield

Note: as of February 28, 2022. Source: RBC GAM, RBC CM

Equity markets

  • After a strong 2021, global equity markets tumbled in the first two months of 2022 as major indexes experienced declines of 10% to 20% from their recent peaks.
  • The prospect of tighter Fed policy prompted a significant cut to the valuations of the market’s most expensive companies, in particular.
  • While the war in Ukraine is causing stock-market volatility, economic growth and earnings are forecast to continue rising, albeit at a slower pace.
  • Extremely pessimistic investor sentiment and lower valuations could result in a significant positive swing in investors’ attitude toward stocks should the outlook improve.

Global stock-market composite

Equity-market indexes relative to equilibrium
Global stock-market composite

Note: As of March 8, 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

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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 investors 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 and permissible, 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.


® / TM Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2022

Publication date: March 15, 2022

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