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About this podcast

Eric Lascelles, Chief Economist at RBC Global Asset Management sits down with Dave Richardson to discuss what happened in the global economy in 2018 and to provide his outlook for interest rates, market volatility and global growth in 2019.

Transcript

David Richardson

Hello and welcome to Personally Invested. I'm Dave Richardson. Today I'm pleased to be joined again by Eric Lascelles. He's the Chief Economist at RBC Global Asset Management. We had Eric on our podcast last month and we did sort of an introduction and background of Eric, if you want to go back and listen to that. But today we start the process that we're going to follow, hopefully for a number of quarters in the future of having Eric on to talk about what's going on in the global economy, and help investors understand the impact that the global economy and news about the global economy are having on investment markets, and help you make better decisions around your investments. Today we really focus in on what happened in 2018, the forecast for future growth in the United States and China, where we are in the economic cycle and where we think things are going to move with respect to interest rates and volatility in markets in 2019. I think you'll really enjoy Eric's insights and I think it will help you make some decisions around your portfolio in the near future and for the long-term. Thanks for joining us. I am pleased to be joined by the Chief Economist of RBC Global Asset Management, Eric Lascelles, Eric, welcome.

Eric Lascelles

Thank you, good to be here.

David Richardson

Or I should say welcome back. You're our first repeat guest or victim of the Personally Invested podcast.

Eric Lascelles

I didn't realize, we got the origin story out of the way last time and now we can talk markets...

David Richardson

The origin story's out of the way, we know all about you.

Eric Lascelles

Right.

David Richardson

And now, we're going to find out if you actually know anything about what you're supposed to know about...which is, we built you up as being a fairly knowledgeable economist...

Eric Lascelles

Prepare to be disappointed, yeah, we'll see.

David Richardson

No, no, no, obviously not at all. But, and obviously the global economy is on everyone's mind, we look at market activity throughout 2018 and particularly down in the last quarter, and obviously people are concerned about the global economy. We've got the Fed raising rates, are they on the right track, are they on the wrong track? The Bank of Canada, also in tightening mode, not quite as aggressive, but certainly rates are going in the direction of higher. And so lots of concerns related to markets in the economy, so it's a great time to have you on. As you look back at 2018, we will start looking back as opposed to forward. What do you think were the main economic stories to come out of 2018?

Eric Lascelles

Right, and so, I suppose with recency being the natural bias, financial market volatility seems like one of them and of course as much as so much as that bumpiness came right at the end of the year from perhaps a North American perspective, if you had any kind of international investments or EM or European or other, really it was bumpy through the year and fairly unpleasant from the get-go. So let's acknowledge that it was a rough year from a risk asset perspective and so there's got to be one of the themes. Getting a little bit closer to my wheelhouse, it was a year of decelerating global economic growth and so that I think has got to be a theme as well, because the prior year was the pinnacle of success from a growth perspective at least over the last decade or so. And then one thing I was saying really almost from the get-go last year, it was the year of protectionism and indeed it did turn out to be the year of protectionism. The U.S. initiated for the most part and in some cases, dodging or partially dodging a bullet as in the case of NAFTA. In some cases really not having resolved that just yet as in the U.S.-China relationship and so, those would be some of the big themes that I think about as to 2018.

David Richardson

I've actually heard quoted from somewhere, I can't remember the source, but in the U.S. apparently, it's the greatest economy ever...

Eric Lascelles

Go figure, go figure...

David Richardson

Is that true? I don't know who said that...

Eric Lascelles

I would say it's the greatest economy ever most years in the sense that economies are generally designed to grow, and so if the measure is was it the biggest ever, then the answer is indeed it was. The question was; was it a pretty good rate of growth? Actually, it was, as much as I just talked about slowing growth, it was much less evident that U.S. growth was slowing, we can talk about this year and unfortunately the U.S. may yet slow, but, 2018 actually held together quite well from a U.S. perspective as much as many other markets did slow. It wasn't the fastest rate ever by any stretch of the imagination, but it was pretty good, in fact quite good by post-crisis standards.

David Richardson

So, as we start forward and certainly markets always are looking forward... is what we saw in the latter half of the year particularly in, again in U.S. markets, and you mentioned that global markets had a rougher year overall and we'll come back to sort of the global economy. But do you think markets are... do you think what's happening in the markets is a market event or an economic event? Because that's important for investors to distinguish between as they're making decisions around their portfolio.

Eric Lascelles

Right. And so, I don't doubt that some of it was a market event and we have technical analysts who say it's been x years since the bear market and these sorts of things and so, there were some market-specific elements, but I happen to think it was mostly macro, mostly economic based. It's one of those things where you can't really say "what happened?" in the first week of October that suddenly changed the story because there wasn't anything drastic that changed the story and so the timing is always questionable. But I would say the reason markets struggled to my eye in 2018 and continue to be wary at least into 2019 is the growth slowdown story, so the concern about decelerating growth and perhaps where that all ends, if it does end, and then the other one would be concern about rising rates. So it was rising rates, slowing growth, twin concerns I think that created the market distress that we've had. I'm glad to say that I think one of those two are at least partially off the table in the sense that I think the interest rate concerns are greatly diminished. And, you know as you alluded a moment ago, as much as the Fed and the Bank of Canada are still in theory pointing toward more rate hikes, I wouldn't put it past them to get a little bit more out the door. The main point is wanting which they'd greatly reduced their aspirations on that front. So we're not going to get as much rate hiking as feared, or as previously expected or as Central Banks had hoped to deliver, that's, I suppose, good news for the stock market and risk assets in general. And from a bond perspective, of course bond yields declined as they do when markets are concerned and so, you know mortgage rates aren't going up for the moment and this sort of thing. So. I think that issue has been largely addressed and even if we do see yields go a little higher again, the point is, there's a self-correcting mechanism here, which is to say that, markets get really scared or if the economy gets really weak, we're not going to have to worry about rates, they're going to fix themselves. And so that leaves the growth side, and you know, the bad news is that growth has slowed. The worst news is we are forecasting it to slow a little bit more into 2019. The silver lining in this is at least for our base-case scenario and there are other scenarios, but at least for our base-case scenario, the diminished growth of 2019 should still be about in line with the average of the last five years, both on the global basis and also if you're talking about the U.S. and we're not forecasting bad growth, it's just less than the growth we've been spoiled by over the last couple of years. And so it's not necessarily inconsistent with markets going up and that kind of thing. Obviously, there's a late cycle, recession risk story that I'm sure we're going to get into in the not too distant future, but, in terms of base case forecast it is less growth and that's disappointing, but, it's not no growth.

David Richardson

Let's go right there because the recession, and I look at the way Canadian investors are behaving right now. If we look at flows into Mutual Funds and electronically traded funds, just into stocks in general, and then we look at flows into really risk-free investments or guaranteed investment certificates, deposits, you see something very strange for a market that was reaching all-time highs or new highs in the U.S. anyways in early October. And so, do you see a recession on the horizon, or are people so attuned now, to going: "Oh, this expansion has been going on for a long time, we know recession is somewhere down the road, so let me just pull out of this now, because whether the recession is a year out or two years out, I don't want to be around when that recession hits." So, where do you see the recession coming?

Eric Lascelles

Right. And so, for a while, maybe for longer than we should have, we've been describing this as a fairly late point in the business cycle with the caveat that no one can really say precisely when these things play out and even if you know with certainty it's late cycle, which we don't, but even if you knew that, you'd still say: "Gee, that could be another year, it could be two years, it could be six months." It's something amorphously in that kind of timeframe and that's frustrating for investors, but of course if it was easy then everybody would be doing it and the money wouldn't be there to be made. So it's hard and that's fine.

I guess my attitude is an evolving one and so, you know, speaking to begin with on those risks, there are indeed risks. This is a late point, we think there's maybe something like a 35% recession risk over the next year, you can look at the yield curve and it would make a similar sort of claim. It's been flattening, but it's not inverted and it's not saying recession tomorrow, by any sort of means, but it is late cycle and it's late cycle because Central Banks have been raising rates for a few years, it's late cycle because unemployment rates are low. A lot of the things that we associate with late cycle are economies that are actually doing quite well, because they've been doing well for so long that you've got that low unemployment rate and you've got markets that have done quite nicely over the span of a decade and so, late cycle, generally it's a time where you'd be taking a little bit less risk.

The problem is you can get fairly substantial gains toward the end of the cycle, so that's part of the uncertainty associated with this. And then the other big part I suppose is just that, we've just seen markets go down quite a bit and of course in terms of our own tactical asset allocation, we had taken some risk out incrementally over the last year and a half or so and so that's worked out fairly well I suppose I should say. And so the question now is, okay, markets are lower, you know, we need to avoid the psychological tendencies of being fearful when markets are down and greedy when they're high, because actually generally the opposite tendencies are the best way to go about doing this so all else equal, we should be feeling greedy right now and very excited about buying cheaper investments and so that's one thought.

But the question is: to what extent do we feel worse about the world compared to a few months ago? So, the market's down. If we also feel a lot worse than we did a few months ago, then maybe we don't like stocks any more than we did then and, I guess what I would say is, as much as I don't love the decline in risk assets and my own portfolio reflects that as well of course. I will say, I'm sort of glad it's happened because I was worried, I didn't see markets reflecting protectionism or recession risks or late business cycle or slowing growth and that was a concern to me, and I do feel like that's much more healthily reflected right now.

And so, there are still scenarios where the world could play out worse than the markets budgeted for. You know, it's not an outright recession that's fully being budgeted for, but I do think we're in a much better position from a pricing perspective for those just getting into the market and, whereas previously we would say: "If the next year manages to sustain growth, the stock market could manage only modest gains, because it's going to come from earnings alone and earnings are going to go up a little bit, but not a lot." I think that earnings story is still brought to the same, but now we can talk plausibly, again if the expansion does persist, about reclaiming some valuation as well about possibly a rising price-earnings ratio giving a little bit of an extra pop. And so, to me personally at least, it does seem like a more interesting and perhaps even attractive environment than it did a few months ago.

David Richardson

Sure, and you know, for investors who have a longer-term time horizon, whenever we have this kind of a pullback in markets and as you reference, it's a global market pullback, so there's opportunities in a lot of places, not just in U.S. or Canadian markets. It's typically something that people want to take advantage of.

Eric Lascelles

Well, I think that's right and further to that point and I suppose further to my own comments as well, let's recognize even from a short-term perspective, we've just seen markets go down by quite a lot and so if a recession needs a 25% drop, we might have just gotten half of that. And so even if the worst-case scenario plays out, there might just be less downside left, and to the extent the downside is hardly guaranteed. You then weigh that against the higher prospect of markets going up and it doesn't make for a particularly bad risk reward proposition right now. And then the other thought, and to your point, which is really all investors should be aspiring to be long-term investors with only a very few exceptions, but from a long-term perspective, one thing to look at is what's the earnings yield on the stock market? What's the credit yield or bond yield in the bond market?

And that's a pretty good approximation for what you can get over the long run, out of the market and you know, one of the concerns over the last decade or so was that, you know, the earnings yield in the stock market was falling ever further and realistically you were going to expect ever more muted stock market returns over the long run. And because we've had this reset recently, that earnings yield has popped back up and so actually, again with no guarantees and with of course the risk of things going down in the short run, you would think over the long run you'd have the best entry point or the best valuation or opportunity in about five years in terms of where the stock market is right now. And because credit spreads have also widened, actually, you know, the credit yield, bond yield including credit is also the highest we've seen in a number of years. So we've been kind of bemoaning the fact that the long-term return in stocks and bonds would be quite limited over the last few years and in theory, when you buy now you could get about the best return we've reasonably expected over the last five years.

David Richardson

We think about one of the few areas in the world where people don't buy more when something goes on sale, are investments. Right? So, if we just stay in Canada, we just had Boxing Day, which is the day after Christmas and that's where we have sort of our Black Friday for the equivalent in the U.S., where, you know, big sales, 50, 60% off and people crowd out to the malls to buy. Right around the same time, because we had a little pullback just before Christmas, on Christmas Eve, in the U.S. markets are down 20% all around the world and people are just running away from investing in markets and you just don't get that many opportunities to have a 20% off sale in stocks. And, you know, if you've got that long-term time horizon, even if stocks go down further than 20% from when you get in the market, it's still a great entry point. You're going to look back 10, 20, 30 years later and go: "Wow! I'm glad I bought on sale, I'm glad I hopped in the car and got out to the mall on Boxing Day, and got those good deals" and in this case from an investment perspective.

Eric Lascelles

Precisely.

David Richardson

So, let's go back to the recession and if we've got investors watching, for a recession in the U.S. and we look at... we take away some sort of external shock, which causes a global recession or a recession in the U.S., and with a recession in the U.S. and then probably ultimately spill over to Canada, would it be a function more likely of the Fed getting interest rate policy wrong and sort of... the cause is coming from the U.S.? Or could it be what's going on in the rest of the world and we're going to get to China, cause I know you keep a close eye on China all the time, or is it something that's going to come from what's happening in the rest of the world that spills into the U.S., from your opinion?

Eric Lascelles

It's a great question, it could be any of the above, let's acknowledge historically, usually the U.S. has been a prime culprit and so it's worth watching the U.S. in particular, over time its share of global output shrinks and so you would think that its ability to be the sole trigger would diminish over time and again let's talk China shortly because that could well be in the mix. But, I still tend to think of the business cycle primarily in a U.S. context. And part of that is, because as much as China's big and every bit as capable of creating global swings and global cycles, it doesn't really have an obvious business cycle that we can see and so I think we're left grasping at straws just trying to know even what we're supposed to look at on that front, and so it could be, we just don't have the tools really to fully appreciate it.

And then, in the U.S. it's not that we have a 2007, 2008, 2009 scenario shaping up. We're not seeing the kind of debt in balance sheet excesses that define that crisis and so when I think about recession risks, it's mostly in a classic business cycle capacity as opposed to a debt crisis capacity, as opposed to a shock capacity of this sort you mentioned before. We haven't just had oil prices triple or anything, quite as exciting as that, and so, it really comes down more to the idea that economies seem to get quite slippery when they overheat, when they get hot, I suppose. And so, and you know we're now in a fairly hot point, unemployment rate's 4% in the U.S. and various other metrics pointing in a similar direction and, certainly Central Banks would love nothing more than just to lock that unemployment rate in and keep it there for the next decade.

But history shows unemployment rates and really economies are either moving forward or they're moving backwards, there's no sideways. And so unless you think the unemployment rate could be 3% next year and 2% the year after, which would be verging on the absolutely unprecedented, it may be difficult to keep pushing forward as aggressively as we've seen and once you start to slip a little bit backwards it's easy to slip even further. So, it really is more along the lines of hot economies do mean Central Banks have to react to avoid inflation overheating. And that cools things off, to some extent inflation overheats anyway and that creates its own little problems. To some extent both businesses and consumers overdue it often because they're feeling so good, because the economy has grown for so long and at some point, they realize: "Oops! Maybe I should pull back a little bit" and so...

That's the sort of business cycle and the sort of risk we're looking at, it's not quite as glamourous as the student loan market or something like that being the obvious catalyst for whatever is to come. So, I look at it from that perspective and then, you know one of the big questions emerging from what's happened in markets recently, which is extreme volatility and generally some pessimism is... is why I've argued some economic concerns have translated into stock market worries. To what extent does the vicious circle complete itself, in the sense that to what extent do these stock market worries then, damage business confidence and consumer confidence and have an effect? And we're getting kind of mixed readings on that so far, you know, I just saw... the small business indicator from the U.S. come out, pretty much held on to a nice reading, we saw the ISM Manufacturing come out recently. It did drop significantly, though it's still at a fine level, but it is down significantly. Some of the consumer confidence metrics are off a bit, but still okay and so I think the jury is out whether that's going to be a big second shoe to drop kind of issue or not.

David Richardson

Okay so, just a couple of more questions around the U.S. before we take a look at China. And I'm going to ask these more to tee up your future appearances... every quarter. Interest rates... and, some would say that in the middle of 2016, we moved from a 35-year secular decline in interest rates, to, now what we're going to see is a multi-year secular increase, in interest rates. Do you share that view?

Eric Lascelles

Not fully, part of it. I think we are out of the secular bull market in bonds, so that was a 30 some year experience and I think the structural decline is probably mostly done. However, I find it very unlikely that we're going to spend 30 years going back right to where we started, so just to get that extreme scenario out of the way. We have seen interest rates and yields rise somewhat over the last year or two and so, I think much of that can stick, so I do think that we're going to a slightly higher environment than we were but, there are a lot of reasons why a normal interest rate has got to be lower now than it was 10 years ago, let alone 20, 30 or 40 years ago. It has to do with speed limits on growth, it has to do with the amount of debt that's swirling out there; people can't afford higher rates in that kind of environment.

It even has to do with people being habituated over the last decade to ultra-low interest rates. Anybody who took out a loan at any point in recent memory is used to very low rates and so even a historically normal rate, it'd be quite a shock to them, and so for all of those reasons, I think most of the heavy lifting on rising rates is done. Don't get me wrong, I think Central Banks are a little bit more likely to hike than cut, the market in the U.S. thinks cuts are more likely, so to me that's been an overshoot, as much as they spent all fall saying: "There was too much hiking priced in it," it's amazing how these things can pivot on you. And so, I think there's a little bit more, but I think most of the heavy lifting is done and we're in a higher but still quite low interest rate environment.

David Richardson

Okay, and I want to come back perhaps next quarter or the quarter after, to get more in depth on sort of a longer-term view on interest rates, so that's when listeners will want to come, that's a tease as we say here in the podcast world. But, one of the interesting conversations I had recently with someone who works at an investment call center, so where clients can call and any investors can call in and move money in and out of various investment vehicles. And they indicated that they went back and they listened to a lot of taped calls, and every single time a customer or investor was pulling money out of the market, and going to cash, out of fear. The primary focus of the discussion was around President Trump. Now, Canadians, I spend a lot of time out with investors in Canada and Canadians, you know, for a lot of different reasons watch the President on television, see a lot of the policies and... you know, are... I think to be polite, disturbed by what they see, without wanting to be overly political or controversial here, on this broadcast. What do you say to people who are economic actors, as we all are, and they look at the President, and how do you separate what's the style, from the substance and the policy, and how you make investment decisions with your own portfolio based on what you're watching on TV?

Eric Lascelles

Gee, that's a great question, it's a tough one too. I mean, let's acknowledge the President is unorthodox, he's unconventional, certainly enjoys shaking things up and of course markets don't like being shaken up, always, but I guess when we look from a first two years perspective, keep in mind most of our investments are oriented towards businesses and guess what businesses like - tax cuts. And so they got that and so, tax cuts have gone a long way towards easing or healing the wounds perhaps of protectionism and some of the other less favourable policy choices and so let's recognize it hasn't been all negative, particularly for investors, in fact, so far by our math it's been more positive than negative, though that equation might start to tilt over time.

I guess I would say as well, investors, as we mentioned earlier, hopefully are investing for the long run. And let's keep in mind that no political figure, at least in a democracy is in for the long run and so whether this is a 4-year experience or an 8-year experience, generally speaking, most people are investing for longer than that and the political structures of a country are such that you get a natural balancing back and forth, and any unwise or rash choice generally gets undone if it truly is unwise or rash. And so, even if people are quite uncomfortable with the sort of direction the U.S. is currently taking politically, let's recognize all of the checks and balances are in place, including the midterm election that recently was something of a check, and, did give more power to the other party and we'll see how they choose to use that, and then recognize equally that there, by definition, will be a different president in six years and, maybe even in two, and frankly, more beyond that.

So, nothing is permanent here and we're looking at the future flow of earnings that stretches out over decades and decades when we're investing in companies. Maybe one acknowledgement would be that for all of the tax cuts being good in the short run for businesses, of course they do mean a bigger U.S. deficit and maybe that's bad in the long run for U.S. debt and one has to pay the piper at some point. But I would say, I don't see that piper having to be paid any time soon and maybe I'm just contradicting myself, having just emphasized the long run but the point being, I could see it going on decades and decades and decades and still the bond market not blinking about the U.S. debt load as much as it is fairly high.

David Richardson

I really think for people who are listening to this podcast. I think you're giving a really nice model or you're modeling how as a professional who has to evaluate what's going on in markets, and how political policy, political tone, political structure influences markets and how you think about it from a forecasting perspective, how you're able to separate the two things. People just saw that in action as you were answering the question or heard it in action, and I think it's really important for people to separate those two things. And it's very interesting to watch how difficult that's been for a lot of Canadians in particular, to make that separation, that the style is so unorthodox, using your word, that is very difficult to make that disconnect, but, when you're talking purely about dollars and cents and investing, that that's sometimes what you have to do.

Eric Lascelles

Absolutely.

David Richardson

Yeah. So, let's turn to China. What's your perspective on where China is sitting with their economy? What damage has the tariff discussion had on the Chinese economy and what do you think the outlook is for the remainder of this year?

Eric Lascelles

Yeah, and there's no getting around the fact that damage has been done to China. I should say plenty of other issues swirling and other things also affecting China and so the fact that the Chinese economy has slowed fairly markedly over the last year is hardly, purely a product of the White House and tariffs, but to some extent it is the result of that. Chinese growth has been broadly on the back of really... maybe three things, it's dangerous to give numbers and you forget one of the things, but anyway, let's call it three things and so one is China was a very poor country and poor countries can really pull themselves up by their bootstraps by mimicking what rich countries do, and so China has been great at doing that, but of course China's now getting richer and so less and less capable of pulling that trick.

And so that's been one source of diminishing growth for China. Another one is that China historically has been very competitive, very low wages, you know, cheap manufacturing and, Chinese wages have gone up a lot over the last decade, well, well outpacing Chinese productivity gain, such that it no longer has nearly the sort of competitive advantage versus the developed world that it once had. And actually it has a competitive disadvantage versus some of the other, in particular, Asian countries out there, and so those countries are now starting to pick up a lot of the low-cost manufacturing. And China to its credit, is quickly pivoting and shifting up the value chain and becoming higher value added and being reasonably successful at that and also becoming a more consumer-oriented economy and, by the way, that is the goal of economies. In the end you want to help the people in the economy, not just invest in machines, that's not really the purpose of an economy, it's all with an end goal of maximizing consumption or at least maximizing wellbeing of people.

And so, it makes sense that China's made that pivot, but consumer-oriented economies don't grow as fast as investment and manufacturing-oriented economies, so they had to make the shift, but it just doesn't map onto as much growth. And then lastly and finally, circling around to the protectionism side of things, the third really tailwind that benefited China enormously over the last several decades it's now starting to be lost, is globalization. China grew on the basis of global trade, paired of course with that good competitiveness and here we are now in an era where globalization seemingly is shrinking or at least not advancing as it once was and tariffs is one example of that.

So China has lost a lot of growth engines all at once and so here it is, a country that at one point was growing at 10% a year and now, we're forecasting more like 6% for 2019. And of course 6% is still pretty amazing by any non-Chinese standard more or less, but it does represent a continued slowdown, an undershoot of the sort of 6.5% type of target recently set and relative to what China would ideally like to pull off. And to the extent, China, depending on the metric, may be still only the second biggest economy in the world, but easily the most important driver of global growth, right?

David Richardson

Absolutely.

Eric Lascelles

So the level of output, it's not the biggest, but in terms of contribution to the growth, how much extra stuff is in the world compared to the year before, China does about one-third of the extra stuff, and so that's quite remarkable and makes it quite important to the global economy. So, slowing China is part of the slowing global economy story without a doubt.

David Richardson

Yeah. So, if I draw an analogy to someone's life, the Chinese economy has evolved to the modern economy anyway. They've gone through their childhood, it was a beautiful childhood, fabulous. Grew very healthy. And they're headed for likely a very, very satisfactory adult life as a dominant global economy. But they're kind of in their teenage years, which are always a little bit turbulent. I've got a teenager at home myself, and it's always, you know, a period of growth and change and they're sort of in that phase. The parents in this case, Chairman Xi and the party there, have generally been credited as being sort of masters of managing and steering the ship, understanding where they sit in the global economy and channeling all the various forces of the global economy into a positive wind at their sail, so, are they capable of working that transition through those teenage years into successful adulthood?

Eric Lascelles

Right. And by the way, economists like to call those teenage years the middle-income trap, a lot of countries get stuck there. I don't know if I could quite get that back to the teenage analogy fully, but nevertheless, a lot of economies get stuck at this point, they lose their ability to grow quickly and they just stop catching up to the developed world, and so this is something that some are worried about for China and the question is whether China can just keep pushing ahead or not. And to your point, Chinese policymakers, economic policymakers in particular probably are among the best in the world. Certainly they have the best track record over the last two decades, if not three or four decades and so, I don't think we should put it past them to succeed ultimately on this front, they've been very savvy and very successful at making these shifts and they've been very unorthodox themselves for that matter in the sense that they have kept, contrary to IMF recommendations, capital controls in place in certain ways, and that sort of thing...

And indeed recognizing the recent slowdown, Chinese policymakers are delivering stimulus now. In fact they just cut rates as we record this, a couple of days ago, but they've done it several times over the last year or so and they've been doing a little bit of tax cutting and they're encouraging infrastructure investment and they've tweaked their housing rules here and there, so, they're doing what they classically do, which is why it probably doesn't pay to think that China just keeps slowing to 3% in a few years. They probably do manage to stabilize this, at least for a moment. I will say though, as we debate which is the more important theme for 2019, is it the slowing growth or is it the stimulus, because you know, one makes markets feel bad and one makes markets feel good...

I'm inclined to think at least for now the slower growth is the dominant one, we've seen stimulus but it's not quite as big as I think people imagined, they would need to do more, they probably will do more, but they would need to do more to really fully stabilize, and stimulus tends to operate with a bit of a lag, and so you don't get the full benefit at least for the first half of 2019. And then lastly recognizing that stimulus is often delivered via borrowing. And I'm not really talking about the government borrowing, though some of it could be that. I'm more saying rate cuts encourage people to borrow and easier housing rules encourage borrowing and they're telling local governments to do infrastructure and guess where that money's going to come from, and so... on a number of fronts, it encourages more borrowing and for anyone who remembers back in late 2015/early 2016, there was quite a panic for a moment about Chinese debt, and so I don't quite think we'd get back to that. I think Chinese debt is in a better place now than it was a few years ago, but it's still an issue. There's a lot of debt in China, a lot of classic measures suggest there is a vulnerability there. So I guess I'm giving you a slightly more negative than positive picture in the short run from a growth and maybe a debt risk perspective, but let's not neglect all together the fact that they have competent policymakers delivering stimulus.

David Richardson

And... bottom-line, everything you've said up till now, and especially just your most recent thoughts, suggest that we're going to continue to have volatile markets, even if markets continue to go up higher... they're going to go up in a much more choppy fashion than they had between 2009 and early 2018.

Eric Lascelles

Right. Certainly, compared to the 2017 anomaly you might say, I mean I don't know if people fully appreciate this, but 2017 was bizarre in its smoothness. I mean it was wonderful, stocks just went up, but there was no volatility and let's appreciate that as an extremely rare event. I'm not sure that the level of bumpiness in 2018 is quite spot-on normal, it was probably a little bit on the high side, but yeah, I think more volatility makes sense and, just to give you a couple of big reasons why, one would be when you're fairly late in the cycle, it's not unusual to get that, as people have to reassess whether next year there is going to be an expansion or not and so that's part of it. And then the other part, and this is not unique to right now, but it does seem particularly true, is, political uncertainties are very high.

So keep in mind, as an economist we can model a lot of things, we sort of understand how various shocks work and how monetary policy works and that sort of thing but it's pretty hard to model what's going to happen on tariffs between the U.S. and China and it's pretty hard to model what's going to happen in Brexit. In other words; some of these political decisions literally are just coming out of the brains of politicians and I'd like to think they're well thought-out, but they're less predictable than certain other things, and so that contributes to the volatility.

David Richardson

Let's finish very quickly on Canada.

Eric Lascelles

Sure.

David Richardson

Let's bring it all back home, at least home for us...and how does... where do you see the Canadian economy sitting relative to the U.S. and how do you think this all plays out in the Canadian economy?

Eric Lascelles

Right. I should start with full disclosure, I tend to be pessimistic on Canada and I frankly have been too pessimistic in the past so you can sandbag what I'm about to say, but... I do see some challenges for Canada, I mean one would just be if the U.S. economy is indeed slowing and we think it does, that tends to map onto Canada, so even before we say a word about Canada itself, that's a consideration. But then on top of that, low oil prices have been a challenge. The Bank of Canada just came out and indicated its own growth forecast, both for the end of 2018 and early 2019, pretty slim pickings, we're talking you know 1% type quarterly GDP growth, which isn't very much and so that's a challenge, that's very much a nontrivial one. I've had a bee in my bonnet for a while about competitiveness and some of those things are starting to be fixed but there's still a gap on tax rates and environmental rules that are to Canada's at least business disadvantage, though you could certainly debate the societal benefit, which in some cases is quite large, for some of those measures. And then lastly, housing and of course I've learned not to predict housing busts, because they don't seem to happen with any regularity in Canada. But I will say we're seeing a much cooler housing market, household credit growth has slowed and home prices are not moving like they used to and so, no disaster there I don't think, but it does suggest less of a tailwind. So, to me, Canada unfortunately also slows to some extent, maybe even underperforms the U.S. a little bit, to the extent recession risks are there, still it would be mostly U.S. initiated type of thing, I don't think it's a made in Canada affair, but again that's just in the risk department as opposed to the base case department.

David Richardson

Yeah, and that's one of the reasons in previous podcasts with other investment managers, we've highlighted the importance for Canadians and really for anyone around the world to find the best investments all over the globe, not be overly home biased, in their investment philosophy, because there is lots of great opportunities beyond your own borders and certainly for the Canadian case... a very small country, in terms of population and economy. Canadian investors really do need to look outside of the country.

Eric Lascelles

Right. And of course, Canadian markets are highly oriented towards a few concentrated sectors, and in theory, as everyone likely knows, diversification reduces volatility without reducing return, of course that's the magic formula.

David Richardson

Well, I would love to go on more, but we have to respect our listeners and we've got some topics I think keyed up for the next couple of quarters when you're here and again, hopefully you'll join us, because it's just always a pleasure. So thanks for your thoughts and we'll talk to you about three months from now.

Eric Lascelles

Great. Always fun, until next time.

David Richardson

Great. Thanks, Eric.

Eric Lascelles

Thank you.

David Richardson

Thank you again for joining us on Personally Invested. I hope you enjoyed our conversation with Eric Lascelles. If you want to see more from Eric, find him on LinkedIn or follow him on Twitter at @RBCGAMChiefEcon. Thank you.

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