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Virus retreats, economic outlook improves

The pandemic is entering a new phase with vaccines at hand, case counts in decline and businesses gradually resuming normal operations. Though many variables are at play, we look for a significant rebound in economic growth this year, with most economies achieving pre-pandemic levels of output sometime this year or next.

 

Bond yields surged, valuation risk recedes

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. We think real rates could rise even higher but structural changes related to demographics, an increased preference for saving versus spending and the maturing of emerging markets will ultimately limit how high they can go.

Stocks rise to record levels led by economically sensitive segments

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.

Executive summary

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.

Stack of papers

Economy

Containing COVID-19 has been critical to the economic recovery, which we believe has much more room to grow with the help of significant monetary and fiscal stimulus.

Fixed income

Longer-term bond yields have surged with investors’ expectations of faster inflation and better economic growth.

Equities

Global equities rose to new highs and the economic recovery has driven rallies in small and mid-cap stocks, financials and industrials, and value stocks overall.

Emerging markets outlook

Emerging-market equities delivered strong overall gains in 2020. However, the returns came from a limited number of markets, with only seven of 27 countries in positive territory. Many emerging-market country indexes fell 10% to 20% over the past 12 months. We have seen better performance across most sectors. However, a handful of stocks was responsible for the improvement.

aerial view of steadily rising hills

We expect emerging-market currencies to outperform their developed-market peers. Sterling will likely underperform other major currencies such as the euro, Canadian dollar and Japanese yen.

The recent rise in U.S. bond yields has given the greenback a short-term boost, offering investors a more attractive opportunity to sell the dollar.

We expect that the Canadian loonie will appreciate to $1.18 per U.S. dollar over the next 12 months.

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Market views

Direction of rates

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This weekly update brings you the latest thinking from RBC Global Asset Management's Chief Economist Eric Lascelles.

In this monthly webcast, Eric Lascelles, Chief Economist, RBC Global Asset Management, shares his latest views on the global economy and offers insight into today’s economic issues.

Every quarter, the RBC GAM Investment Strategy Committee (RISC) develops a detailed global investment forecast. Read their latest thinking in this in-depth quarterly report and watch videos that highlight their views.


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