the global investment outlook - gam · 2016-10-03 · contents executive summary 2 the global...

FALL 2016

THE GLOBAL INVESTMENT OUTLOOK RBC GAM Investment Strategy Committee

The RBC GAM Investment Strategy Committee consists of senior investment professionals drawn from across RBC Global Asset Management. The Committee regularly receives economic and capital markets related input from internal and external sources. Important guidance is provided by the Committee’s regional advisors (North America, Europe, Far East), from the Global Fixed Income & Currencies Subcommittee and from the global equity sector heads (financials and healthcare, consumer discretionary and consumer staples, industrials and utilities, energy and materials, telecommunications and technology). From this it builds a detailed global investment forecast looking one year forward.

The Committee’s view includes an assessment of global fiscal and monetary conditions, projected economic growth and inflation, as well as the expected course of interest rates, major currencies, corporate profits and stock prices.

From this global forecast, the RBC GAM Investment Strategy Committee develops specific guidelines that can be used to manage portfolios.

These include:

�� the recommended mix of cash, fixed income instruments, and equities

�� the recommended global exposure of fixed income and equity portfolios

�� the optimal term structure for fixed income investments

�� the suggested sector and geographic make-up within equity portfolios

�� the preferred exposure to major currencies

Results of the Committee’s deliberations are published quarterly in The Global Investment Outlook.

THE RBC GAM INVESTMENT STRATEGY COMMITTEE

CONTENTS

EXECUTIVE SUMMARY 2The Global Investment Outlook Sarah Riopelle, CFA – V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

Daniel E. Chornous, CFA – Chief Investment Officer, RBC Global Asset Management Inc.

ECONOMIC & CAPITAL MARKETS FORECASTS 4RBC GAM Investment Strategy Committee

RECOMMENDED ASSET MIX 5RBC GAM Investment Strategy Committee

CAPITAL MARKETS PERFORMANCE 10 Milos Vukovic, MBA, CFA – V.P. & Head of Investment Policy, RBC Global Asset Management Inc.

GLOBAL INVESTMENT OUTLOOK 13Green shoots trump BrexitEric Lascelles – Chief Economist, RBC Global Asset Management Inc.

Eric Savoie, MBA, CFA – Senior Analyst, Investment Strategy, RBC Global Asset Management Inc.

Daniel E. Chornous, CFA – Chief Investment Officer, RBC Global Asset Management Inc.

GLOBAL FIXED INCOME MARKETS 42Soo Boo Cheah, MBA, CFA – Senior Portfolio Manager, RBC Global Asset Management (UK) Limited

Suzanne Gaynor – V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

CURRENCY MARKETS 47Dagmara Fijalkowski, MBA, CFA – Head, Global Fixed Income and Currencies (Toronto and London), RBC Global Asset Management Inc.

Daniel Mitchell, CFA – Portfolio Manager, RBC Global Asset Management Inc.

Taylor Self, MBA – Analyst, RBC Global Asset Management Inc.

REGIONAL EQUITY MARKET OUTLOOK

United States 56Raymond Mawhinney – Senior V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

Brad Willock, CFA – V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

Canada 58Stuart Kedwell, CFA – Senior V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

Europe 60James Jamieson – Portfolio Manager, RBC Global Asset Management (UK) Limited

Asia 62Mayur Nallamala – Head & Senior Portfolio Manager, RBC Investment Management (Asia) Limited

Emerging Markets 64Christoffer Enemaerke – Associate Portfolio Manager, RBC Global Asset Management (UK) Limited

RBC GAM INVESTMENT STRATEGY COMMITTEE 66

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 1

Downside risks have moderatedRisks to the global economy and markets have indeed diminished, but have not disappeared. Business-cycle risks are still front and centre, but perhaps a little less acute than before. Chinese downside risks remain sizeable, but our concerns for the country’s housing and debt markets have shrunk slightly. Global debt risks are significant, but don’t appear on the cusp of being triggered. Most evidently, the risk of further downside from emerging-market economies or commodity prices has been progressively fading for several quarters. One source of mild trepidation is that markets have been unusually complacent and it seems reasonable to budget for something a little bumpier, especially with the many event risks approaching over the fall. While there are many reasons for concern, our base case scenario is one where the economy is able to handle these challenges and continue to grow, albeit slowly.

The U.K. public’s surprise vote to leave the EU has so far proven less problematic for markets and economies than initially feared. The economic impact of Brexit beyond British shores has been almost non-existent, at least for now. The main global consequence is a further increase in political risks, both in the context of higher policy uncertainty and greater populist pressures now rearing their heads elsewhere.

As we reflect back on a quarter that contained one of the most surprising and consequential geopolitical shocks in years – the U.K. vote to leave the European Union – it is remarkable that financial markets managed to deliver handsome gains to investors and exuded calm. Economic data improved over the summer, global downside risks shrank somewhat and the decline in bond yields over the period seemed to strengthen the “search-for-yield” mentality, resulting in narrower credit spreads and higher stock valuations.

Sarah Riopelle, CFAV.P. & Senior Portfolio Manager RBC Global Asset Management Inc.

Daniel E. Chornous, CFAChief Investment Officer RBC Global Asset Management Inc.

2 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

EXECUTIVE SUMMARY

Speed limit for economic growth remains low Seven years following the financial crisis, investors are perhaps starting to realize that the slow-growth, low-inflation environment is structural in nature and therefore here to stay. Our growth forecasts remain heavily informed by the experience of the post-financial-crisis era. Central to this, the speed limit for economic growth remains low for a variety of reasons. Some of the recent temporary drags are mercifully ebbing, such as the abatement of tight financial conditions, but Brexit is a new risk and policy uncertainty has arguably increased. In short, it is unlikely that global growth is about to break completely out of its recent rut.

Recognizing the persistent constraints on growth, our developed-world growth forecasts have been revised moderately lower this quarter, and land slightly short of the consensus. Our emerging-market growth forecasts have been revised a little higher, and we now find ourselves in the unusual position of being slightly above the consensus with our 2016 calls.

U.S. dollar bull market is not over yet We continue to expect the U.S. dollar to resume its rising trend. While central-bank policy divergence may be losing importance, factors such as relative economic-growth rates will likely emerge to support the argument for additional U.S. dollar strength. In Japan and Europe, enormous financial outflows and rising hedging costs should exert downward pressure on the yen and


Executive Summary | Sarah Riopelle, CFA | Daniel E. Chornous, CFA

quarters, given that a number of indicators suggest equities are now expensive. However, the average of the eight valuation measures that we look at indicates that stocks are roughly in line with the historical norm and we therefore do not share the market’s view that equities are expensive.

While there is still some room for an upward move in valuations, earnings growth will be critical to sustaining any meaningful advance in stocks. Fortunately, the two largest headwinds to corporate profits since the end of 2014 – the collapse in oil prices and the strengthening U.S. dollar – have moderated and should allow for corporate profit growth to resume in the coming quarters.

No change to asset mixWe have opted to maintain our recommendation for a moderately overweight equity allocation. This is motivated primarily by the superior valuations of equities over bonds, and secondarily by our belief that further economic advances remain more likely than not, especially as downside risks have declined slightly. Even slow economic growth will be sufficient to allow for a modest increase in interest rates, which will act as a headwind for fixed-income investments. Coupons are so low that they do little to cushion against capital losses resulting from even a slight increase in yields. We forecast negative total returns for 10-year sovereign bonds across all major developed regions over the year ahead and remain underweight fixed income as a result. For a balanced, global investor, we currently recommend an asset mix of 60% equities (strategic neutral position: 55%), and 37% fixed income (strategic neutral position: 43%), with the balance in cash.

still powerful downward forces on yields at work.

Many international bodies continue to call for a new round of fiscal stimulus as a means of taking pressure off over-worked central bankers. We support any such effort, so long as the stimulus is implemented in areas with high fiscal multipliers such as infrastructure spending.

Continue to forecast rising yieldsThe world remains trapped in an extraordinarily low interest-rate environment given the slow economic growth and low inflation, as well as an aging population, high income inequality, elevated debt loads and a shortage of safe assets. Global bond yields fell to record lows during the quarter, with some bond markets characterized by negative yields even at the longer end of the yield curve. Our models project that yields should rise from these unusually low levels, but any near-term adjustment will be constrained by the current low speed limit on economic growth. While a bit of extra inflation and a Fed rate hike or two could prompt bond yields to move higher, a return to historically normal rates appears quite unlikely over the forecast horizon.

Stocks extend gainsWe saw further gains in global equities over the quarter, supported by improving credit markets, better-than-expected economic data and low interest rates, and it was these factors that allowed stocks to mostly shrug off what many investors had assumed would be the widespread negative impact of Brexit.

Investors have voiced surprise at the stock market’s buoyancy in recent

the euro. Meanwhile, the pound will be dogged by questions surrounding the country’s exit from the EU. Canada’s economic adjustment has been only slight thus far, and we expect further loonie weakness.

Inflation to edge higherGlobal inflation remains low by historical standards. But this is at least partially an illusion, as it represents the remnants of the commodity shock depressing headline inflation rates. Core inflation levels are much closer to normal, as they are better able to convey general economic conditions. We anticipate a gradual normalization of headline-inflation rates as they shake off the prior effects of the commodity shock and converge toward current core inflation readings. With this forecast, we are a little above the market consensus.

Central banks still front and centreThe U.S. Federal Reserve (Fed) continues to press forward with its plan to nudge the fed funds rate higher. A rate hike is considered more likely than not by the end of 2016. While we believe a modicum of Fed tightening is justified and thus at worst benign for risk assets, we must not completely forget that the financial markets struggled in the months after the last rate increase.

Globally, many central banks are still focused on delivering prior quantitative-easing commitments, and some are continuing to build on those promises. The Bank of England has been buying corporate bonds anew since Brexit, while the Bank of Japan increased the clip of its asset buying in the spring. The European Central Bank is also pressing forward with its own bond-buying program. Thus, there are

TARGETS (RBC GAM INVESTMENT STRATEGY COMMITTEE)

AUGUST 2016FORECAST

AUGUST 2017CHANGE FROM SUMMER 2016

1-YEAR TOTAL RETURN ESTIMATE* (%)

CURRENCY MARKETS AGAINST USD

CAD (USD–CAD) 1.31 1.44 N/C (8.8)

EUR (EUR–USD) 1.12 1.00 N/C (11.5)

JPY (USD–JPY) 103.42 110.00 (10.00) (7.3)

GBP (GBP–USD) 1.31 1.25 (0.13) (5.6)

FIXED INCOME MARKETS

U.S. Fed Funds Rate 0.50 0.75 (0.25) N/A

U.S. 10-Year Bond 1.58 2.00 (0.25) (2.2)

Canada Overnight Rate 0.50 0.50 N/C N/A

Canada 10-Year Bond 1.02 1.50 (0.25) (3.4)

Eurozone Deposit Facility Rate (0.40) (0.40) 0.10 N/A

Germany 10-Year Bund (0.06) 0.30 (0.20) (3.7)

U.K. Base Rate 0.25 0.25 (0.50) N/A

U.K. 10-Year Gilt 0.64 1.00 (1.00) (2.8)

Japan Overnight Call Rate (0.05) (0.10) 0.30 N/A

Japan 10-Year Bond (0.06) 0.00 0.20 (0.7)

EQUITY MARKETS

S&P 500 2171 2300 70 8.1

S&P/TSX Composite 14598 15250 450 7.3

MSCI Europe 1470 1525 (45) 7.4

FTSE 100 6782 7200 500 10.2

Nikkei 16887 17900 (575) 7.9

MSCI Emerging Markets 894 950 65 8.9

*Total returns are expressed in local currencies with the exception of MSCI Europe and MSCI Emerging Markets indices whose returns are expressed in USD. Source: RBC GAM

ECONOMIC & CAPITAL MARKETS FORECASTS

ECONOMIC FORECAST (RBC GAM INVESTMENT STRATEGY COMMITTEE)

UNITED STATES CANADA EUROPE

UNITED KINGDOM JAPAN CHINA

EMERGING MARKETS1

Fall 2016

Change from

Summer 2016

Fall 2016

Change from

Summer 2016

Fall 2016

Change from

Summer 2016

Fall 2016

Change from

Summer 2016

Fall 2016

Change from

Summer 2016

Fall 2016

Change from

Summer 2016

Fall 2016

Change from

Summer 2016

REAL GDP

2015A 2.38% 1.20% 1.49% 2.19% 0.47% 6.91% 4.67%

2016E 1.50% (0.25) 1.25% (0.25) 1.50% N/C 1.50% (0.25) 0.50% N/C 6.50% 0.25 5.00% 0.25

2017E 1.75% (0.25) 1.50% (0.25) 1.25% (0.50) 0.75% (1.25) 1.00% N/C 6.00% 0.25 5.25% 0.25

CPI

2015A 0.12% 1.09% 0.03% 0.05% 0.77% 1.54% 4.17%

2016E 1.25% N/C 1.75% (0.25) 0.50% N/C 1.00% N/C (0.25%) (0.75) 2.25% N/C 3.75% 0.25

2017E 2.00% N/C 2.25% N/C 1.50% N/C 2.75% 0.75 1.00% (0.25) 2.00% (0.25) 3.25% 0.25

A = Actual E = Estimate 1GDP Weighted Average of China, India, South Korea, Brazil, Mexico and Russia.


Asset mix – the allocation within portfolios to stocks, bonds and cash – should include both strategic and tactical elements. Strategic asset mix addresses the blend of the major asset classes offering the risk/return tradeoff best suited to an investor’s profile. It can be considered to be the benchmark investment plan that anchors a portfolio through many business and investment cycles, independent of a near-term view of the prospects for the economy and related expectations for capital markets. Tactical asset allocation refers to fine tuning around the strategic setting in an effort to add value by taking advantage of shorter term fluctuations in markets.

Every individual has differing return expectations and tolerances for volatility, so there is no “one size fits all” strategic asset mix. Based on a 40-year study of historical returns1 and the volatility2 of returns (the range around the average return within which shorter-term results tend to fall), we have developed five broad profiles and assigned a benchmark strategic asset mix for each. These profiles range from very conservative through balanced to aggressive growth. It goes without saying that as investors accept increasing levels of volatility, and therefore greater risk that the actual experience will depart from the longer-term norm, the potential for returns rises. The five profiles presented below may assist investors in selecting a strategic asset mix best aligned to their investment goals.

Each quarter, the RBC GAM Investment Strategy Committee publishes a recommended asset mix based on our current view of the economy and return

RECOMMENDED ASSET MIX

expectations for the major asset classes. These weights are further divided into recommended exposures to the variety of global fixed income and equity markets. Our recommendation is targeted at the Balanced profile where the benchmark setting is 55% equities, 43% fixed income, 2% cash.

A tactical range of +/- 15% around the benchmark position allows us to raise or lower exposure to specific asset classes with a goal of tilting portfolios toward those markets that offer comparatively attractive near-term prospects.

This tactical recommendation for the Balanced profile can serve as a guide for movement within the ranges allowed for all other profiles.

The value-added of tactical strategies is, of course, dependent on the degree to which the expected scenario unfolds.

Regular reviews of portfolio weights are essential to the ultimate success of an investment plan as they ensure current exposures are aligned with levels of long-term returns and risk tolerances best suited to individual investors.

Anchoring portfolios with a suitable strategic asset mix, and placing boundaries defining the allowed range for tactical positioning, imposes discipline that can limit damage caused by swings in emotion that inevitably accompany both bull and bear markets.


1. Average return: The average total return produced by the asset class over the period 1976 – 2016, based on monthly results.

2. Volatility: The standard deviation of returns. Standard deviation is a statistical measure that indicates the range around the average return within which 2/3 of results will fall into, assuming a normal distribution around the long-term average.

*Citigroup World Global Bond Index **MSCI World Index Source: RBC GAM Investment Strategy Committee

GLOBAL ASSET MIX

BENCHMARK POLICY

PAST RANGE

FALL 2015

NEW YEAR 2016

SPRING 2016

SUMMER 2016

FALL 2016

CASH 2.0% 1.0% – 16% 2.0% 1.0% 3.0% 3.0% 3.0%

BONDS 43.0% 25.0% – 54.0% 36.0% 37.0% 37.0% 37.0% 37.0%

STOCKS 55.0% 36.0% – 65.0% 62.0% 62.0% 60.0% 60.0% 60.0%

Note: Effective September 1, 2014, we revised our strategic neutral positions within fixed income, lowering the ‘neutral’ commitment to cash from 5% to 2%, and moving the difference to bonds. This takes advantage of the positive slope of the yield curve which prevails over most time periods, and allows our fixed income managers to shorten duration and build cash reserves whenever a correction in the bond market, or especially an inverted yield curve, is anticipated.

REGIONAL ALLOCATION

GLOBAL BONDSCWGBI*

AUG. 2016PAST

RANGEFALL 2015

NEW YEAR 2016

SPRING 2016

SUMMER 2016

FALL 2016

North America 36.9% 18% – 40% 37.5% 37.7% 38.2% 37.0% 36.9%

Europe 39.4% 32% – 56% 40.7% 45.3% 39.9% 35.3% 34.4%

Asia 23.8% 17% – 35% 21.8% 17.0% 21.9% 27.7% 28.8%

Note: Past Range reflects historical allocation from Fall 2002 to present.

GLOBAL EQUITIESMSCI**

AUG. 2016PAST

RANGEFALL 2015

NEW YEAR 2016

SPRING 2016

SUMMER 2016

FALL 2016

North America 61.7% 51% – 61% 58.2% 58.0% 59.2% 60.2% 60.0%

Europe 19.9% 21% – 35% 22.9% 23.5% 22.2% 21.6% 20.5%

Asia 11.1% 9% – 18% 11.4% 11.0% 11.1% 10.8% 12.0%

Emerging Markets 7.3% 0% – 8.5% 7.5% 7.5% 7.5% 7.5% 7.5%

Our asset mix is reported as at the end of each quarter. The mix is fluid and may be adjusted within each quarter, although we do not always report on shifts as they occur. The weights in the table should be considered a snapshot of our asset mix at the date of release of the Global Investment Outlook.

GLOBAL EQUITY SECTOR ALLOCATION

MSCI** AUG. 2016

RBC GAM ISC SUMMER 2016

RBC GAM ISC FALL 2016

CHANGE FROM SUMMER 2016

WEIGHT VS. BENCHMARK

Energy 6.52% 5.79% 4.77% (1.02) 73.2%

Materials 4.85% 4.11% 3.85% (0.26) 79.4%

Industrials 10.89% 12.51% 12.39% (0.13) 113.8%

Consumer Discretionary 12.56% 12.94% 12.56% (0.38) 100.0%

Consumer Staples 10.78% 10.70% 11.78% 1.09 109.3%

Health Care 13.50% 13.08% 14.50% 1.41 107.4%

Financials 19.16% 17.98% 17.41% (0.57) 90.9%

Information Technology 14.73% 14.67% 16.73% 2.06 113.6%

Telecom. Services 3.58% 4.82% 3.58% (1.24) 100.0%

Utilities 3.43% 3.40% 2.43% (0.97) 70.9%


Recommended Asset Mix


VERY CONSERVATIVEVery Conservative investors will seek income with maximum capital preservation and the potential for modest capital growth, and be comfortable with small fluctuations in the value of their investments. This portfolio will invest primarily in fixed-income securities, and a small amount of equities, to generate income while providing some protection against inflation. Investors who fit this profile generally plan to hold their investment for the short to medium term (minimum one to five years).

ASSET CLASSBENCH-MARK RANGE

LAST QUARTER

CURRENT RECOMMENDATION

Cash & Cash Equivalents 2% 0-15% 2.9% 2.9%

Fixed Income 78% 55-95% 72.6% 72.6%

Total Cash & Fixed Income 80% 65-95% 75.5% 75.5%

Canadian Equities 10% 5-20% 11.4% 11.0%

U.S. Equities 5% 0-10% 6.4% 6.0%

International Equities 5% 0-10% 6.7% 7.5%

Emerging Markets 0% 0% 0.0% 0.0%

Total Equities 20% 5-35% 24.5% 24.5%

RETURN VOLATILITY

40-Year Average 9.0% 5.9%

Last 12 Months 6.0% 2.8%

At RBC GAM, we have a team dedicated to setting and

reviewing the strategic asset mix for all of our multi-asset solutions. With

an emphasis on consistency of returns, risk management and capital

preservation, we have developed a strategic asset allocation framework for

five client risk profiles that correspond to broad investor objectives and risk

preferences. These five profiles range from Very Conservative through

Balanced to Aggressive Growth.

“

”



LAST QUARTER



Fixed Income 43% 20-60% 37.0% 37.0%



U.S. Equities 20% 10-30% 21.5% 21.1%


Emerging Markets 4% 0-10% 4.5% 4.5%

Total Equities 55% 40-70% 60.0% 60.0%

BALANCEDThe Balanced portfolio is appropriate for investors seeking balance between long-term capital growth and capital preservation, with a secondary focus on modest income, and who are comfortable with moderate fluctuations in the value of their investments. More than half the portfolio will usually be invested in a diversified mix of Canadian, U.S. and global equities. This profile is suitable for investors who plan to hold their investment for the medium to long term (minimum five to seven years).

RETURN VOLATILITY




LAST QUARTER



Fixed Income 63% 40-80% 57.3% 57.3%



U.S. Equities 10% 0-15% 11.6% 11.2%


Emerging Markets 0% 0% 0.0% 0.0%

Total Equities 35% 20-50% 39.8% 39.8%

CONSERVATIVEConservative investors will pursue modest income and capital growth with reasonable capital preservation, and be comfortable with moderate fluctuations in the value of their investments. The portfolio will invest primarily in fixed-income securities, with some equities, to achieve more consistent performance and provide a reasonable amount of safety. The profile is suitable for investors who plan to hold their investment over the medium to long term (minimum five to seven years).

RETURN VOLATILITY






LAST QUARTER



Fixed Income 28% 5-40% 21.7% 21.7%



U.S. Equities 25% 15-35% 26.6% 26.2%


Emerging Markets 6% 0-12% 6.6% 6.6%

Total Equities 70% 55-85% 75.3% 75.3%

GROWTHInvestors who fit the Growth profile will seek long-term growth over capital preservation and regular income, and be comfortable with considerable fluctuations in the value of their investments. This portfolio primarily holds a diversified mix of Canadian, U.S. and global equities and is suitable for investors who plan to invest for the long term (minimum seven to ten years).RETURN VOLATILITY




LAST QUARTER



Fixed Income 0% 0-10% 0.0% 0.0%


Canadian Equities 32.5% 20-45% 32.6% 31.9%

U.S. Equities 35.0% 20-50% 35.3% 34.6%

International Equities 21.5% 10-35% 21.8% 23.2%

Emerging Markets 9.0% 0-15% 9.3% 9.3%

Total Equities 98% 80-100% 99.0% 99.0%

AGGRESSIVE GROWTH

RETURN VOLATILITY



Aggressive Growth investors seek maximum long-term growth over capital preservation and regular income, and are comfortable with significant fluctuations in the value of their investments. The portfolio is almost entirely invested in stocks and emphasizes exposure to global equities. This investment profile is suitable only for investors with a high risk tolerance and who plan to hold their investments for the long term (minimum seven to ten years).



The U.S. dollar rose significantly versus the British pound, fell against the yen and euro, and finished flat against the Canadian dollar during the three-month period ended August 31, 2016. The gain against sterling was 10.3% after the U.K. voted to leave the EU in late June (Brexit), while the 6.6% drop versus the yen stemmed from disappointment about the pace of economic stimulus. The greenback lost 0.3% versus the euro in the three-month period. Over the 12 months ended August 31, 2016, the U.S. dollar rose 16.9% against the pound, while falling 14.7% against the yen. The U.S. dollar declined 0.3% against the Canadian dollar, but rose 0.6% versus the euro.

Global fixed-income markets posted gains during the three-month period, as yields declined modestly. The Barclays Capital Aggregate Bond Index, a broad measure of U.S. fixed-income performance, climbed 2.3%, while European bonds rose 2.4% in U.S. dollar terms as measured by the Citigroup WGBI – Europe Index.

Milos Vukovic, MBA, CFAV.P. & Head of Investment Policy RBC Global Asset Management Inc.


CAPITAL MARKETS PERFORMANCE

The Citigroup Japanese Government Bond Index climbed 6.2%, aided by the strong yen, and the FTSE TMX Canada Universe Bond Index, Canada’s fixed-income benchmark, rose 2.7%.

Major equity markets generally recorded gains during the three-month period, with the exception of the U.K. and France after Brexit. The S&P 500 Index rose 4.1%. The MSCI Germany climbed 3.4%, while the MSCI Japan rose 4.3%, aided again by the strong yen. The MSCI U.K. lost 0.8% and the MSCI France lost 1.1%. Over the 12-month period, the S&P 500 gained 12.6%, outperforming other developed markets. The MSCI U.K. dropped 4.0% and the MSCI France lost 1.9%. The MSCI Germany gained 1.9% and the MSCI Japan gained 2.9%. The S&P/TSX Composite Index rose 4.5% in U.S. dollar terms during the three months, in line with the 4.5% gain for the large-cap S&P/TSX 60 Index and lower than the 7.1% rise for the S&P/TSX Small Cap Index. The MSCI Emerging Markets Index rose 11.9% during the three-month period and gained 11.8% over the 12-month period. Appreciations in emerging-market currencies fueled the gains.

The S&P 400 Index, a measure of the U.S. mid-cap market, rose 5.3% in the latest three-month period and rose 12.3% in the 12-month period, while the S&P 600 Index, a gauge of small-cap performance, rose 7.2% and 13.3% respectively. The Russell 3000 Growth Index rose 4.0% during the quarter versus a 4.9% rise for the Russell 3000 Value Index. Over the 12 months, the Russell 3000 Growth Index gained 10.0%, while the Russell 3000 Value Index rose 13.0%.

All of the 10 global equity sectors gained during the quarter ended August 31, 2016. The best-performing sector was Materials with a gain of 7.5%, followed by Information Technology with a rise of 7.1% and Industrials with a 4.7% increase. The worst-performing sectors over the past three months were Utilities, which rose 0.4%; Telecommunication Services, which rose 0.7%; and Health Care, with a 1.0% return. Over the 12-month period, the best-performing sectors were Information Technology, Consumer Staples and Industrials, and the worst-performing were Health Care, Financials and Consumer Discretionary.

Capital Markets Performance | Milos Vukovic, MBA, CFA

CANADA Periods ending August 31, 2016

USD CAD

Equity Markets: Total Return3 months

(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

S&P/TSX Composite 4.54 20.74 9.04 0.43 (0.15) 4.54 8.69 8.06

S&P/TSX 60 4.47 19.85 8.10 0.94 0.31 4.47 7.75 8.61

S&P/TSX Small Cap 7.14 37.42 23.08 (1.27) (4.85) 7.15 22.69 6.22

U.S.Periods ending August 31, 2016

USD CAD


(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

S&P 500 4.10 7.82 12.55 12.30 14.69 4.11 12.19 20.83

S&P 400 5.25 13.12 12.33 11.45 14.07 5.25 11.97 19.92

S&P 600 7.16 13.15 13.26 11.03 15.18 7.17 12.90 19.45

Russell 3000 Value 4.87 10.55 12.98 10.51 14.24 4.88 12.61 18.90

Russell 3000 Growth 4.04 5.65 9.99 12.94 14.60 4.04 9.64 21.51

NASDAQ Composite Index 5.36 4.11 9.14 13.24 15.11 5.36 8.79 21.84

EXCHANGE RATES Periods ending August 31, 2016

Current USD

3 months (%)

YTD (%)

1 year (%)

3 years (%)

5 years (%)

USD–CAD 1.3114 0.00 (5.23) (0.32) 7.59 6.02

USD–EUR 0.8965 (0.25) (2.57) 0.60 5.82 5.19

USD–GBP 0.7615 10.30 12.26 16.86 5.68 4.34

USD–JPY 103.4650 (6.57) (13.92) (14.66) 1.76 6.20

Source: Bloomberg/MSCI

CANADA Periods ending August 31, 2016

USD CAD

Fixed Income Markets: Total Return3 months

(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

FTSE TMX Canada Univ. Bond Index 2.72 10.81 6.10 (1.41) (1.24) 2.72 5.76 6.07

U.S. Periods ending August 31, 2016

USD CAD


(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

Citigroup U.S. Government 2.04 5.15 5.07 3.59 2.53 2.05 4.74 11.46

Barclays Capital Agg. Bond Index 2.32 5.86 5.97 4.37 3.24 2.33 5.63 12.30

GLOBALPeriods ending August 31, 2016

USD CAD


(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

Citigroup WGBI 2.91 8.70 8.08 2.57 1.16 2.91 7.74 10.35

Citigroup European Government 2.43 8.17 5.89 2.03 1.60 2.44 5.55 9.77

Citigroup Japanese Government 6.21 22.57 25.55 2.32 (2.73) 6.21 25.15 10.09

Note: all changes above are expressed in US dollar terms

Note: all rates of return presented for periods longer than 1 year are annualized


GLOBAL Periods ending August 31, 2016

USD CAD


(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

MSCI World* 3.14 4.99 6.68 7.39 9.51 3.45 5.20 15.49

MSCI EAFE* 1.61 0.49 (0.12) 2.48 5.00 1.92 (1.50) 10.20

MSCI Europe* (0.15) (0.86) (3.14) 1.48 4.81 0.15 (4.48) 9.13

MSCI Pacific* 4.92 3.24 6.01 4.24 5.39 5.24 4.54 12.10

MSCI UK* (0.76) (0.21) (3.96) (0.35) 3.85 (0.46) (5.29) 7.17

MSCI France* (1.13) 0.61 (1.93) 1.28 4.01 (0.83) (3.29) 8.92

MSCI Germany* 3.35 0.88 1.94 2.98 6.94 3.66 0.52 10.75

MSCI Japan* 4.25 0.93 2.85 5.57 6.66 4.57 1.43 13.53

MSCI Emerging Markets* 11.94 14.55 11.83 1.12 (0.42) 12.28 10.28 8.74

Source: Bloomberg/MSCI

GLOBAL EQUITY SECTORS Periods ending August 31, 2016

USD CAD

Sector: Total Return3 months

(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

Energy 2.79 14.58 5.35 (5.00) (0.80) 3.10 3.89 2.17

Materials 7.45 16.72 11.29 1.23 (1.11) 7.77 9.75 8.87

Industrials 4.66 9.89 12.70 8.19 10.36 4.98 11.14 16.35

Consumer Discretionary 2.17 1.01 4.00 8.60 13.55 2.47 2.56 16.79

Consumer Staples 2.65 7.64 14.52 10.34 11.64 2.96 12.93 18.66

Health Care 1.00 (1.41) (1.04) 11.90 15.33 1.31 (2.41) 20.34

Financials 1.79 (0.65) (0.57) 4.01 8.55 2.10 (1.95) 11.85

Information Technology 7.14 8.44 16.18 15.45 14.52 7.47 14.57 24.16

Telecommunication Services 0.67 7.74 7.46 8.10 8.54 0.97 5.97 16.25

Utilities 0.43 8.42 10.00 7.56 5.83 0.74 8.47 15.67

* Net of taxes Note: all rates of return presented for periods longer than 1 year are annualized


Capital Markets Performance | Milos Vukovic, MBA, CFA

Green shoots trump Brexit

As we reflect back on a quarter that contained one of the most surprising and consequential geopolitical shocks in years – the U.K. vote to leave the European Union (EU) – it is remarkable that financial markets managed to deliver handsome gains to investors and exuded calm.

This improbable outcome was thanks to three other developments. First, economic data flitted pleasantly higher over the summer. Second, global downside risks shrank somewhat. Third, the decline in bond yields over the period seemed to strengthen the “search for yield” mentality, resulting in narrower credit spreads and higher stock valuations.

The improved macroeconomic trend is most easily observed via the recent increase in purchasing manager indexes (Exhibit 1). Global economic surprises have also been largely positive. Corporate earnings, long mired in a slump, are hinting at green shoots, and global trade is no longer decelerating. A tentative uptick in emerging-market growth is

GLOBAL INVESTMENT OUTLOOK

particularly welcome, coming as it does after years of downgrades.

Sifting through the most prominent threats to growth (Exhibit 2), it strikes us that several have been shrinking recently. Business-cycle risks are still front and centre, but perhaps a bit less acute than before. Chinese downside risks remain sizeable, but our concerns for the country’s housing and debt markets have shrunk slightly. Global

debt risks remain enormous, but don’t appear on the cusp of being triggered. Most evidently, the risk of further downside from emerging-market economies or commodity prices has been progressively fading for several quarters.

Of course, the task at hand is anticipating the future performance of financial markets, not admiring recent gains. On this front, one source of mild trepidation is that


Exhibit 1: An uptick in global manufacturing

474849505152535455

2012 2013 2014 2015 2016

Man

ufac

turin

g PM

I

JP Morgan Global PMI Developed markets PMI Emerging markets PMINote: PMI refers to Purchasing Managers Index for manufacturing sector, a measure for economic activity. Source: Haver Analytics, RBC GAM

Contraction

Expansion

Exhibit 2: Significant but slightly shrinking risks

Debt hot spots

EM slowdown

Resource shock

China

Fed rate hikes

Geopolitics

Maturing business cycle

Eric Lascelles Chief Economist RBC Global Asset Management Inc.

Eric Savoie, MBA, CFASenior Analyst, Investment Strategy RBC Global Asset Management Inc. Daniel E. Chornous, CFAChief Investment Officer RBC Global Asset Management Inc.

Source: RBC GAM


Exhibit 3: Market volatility has been low lately

23.1

14.114.1

17.9

12

14

16

18

20

22

24

Equities

CB

OE

Mar

ket V

olat

ility

Inde

x

Latest MedianNote: Top and bottom of box represent the 75th and 25th percentiles for CBOE Market Volatility Index and Merrill Lynch Option Volatility Estimate since 1990; and for Deutsche Bank Currency Volatility Index since 2001. Source: Bloomberg, RBC GAM

Mer

rill L

ynch

Opt

ion

Vol

atili

ty

Est

imat

e

110.3

79.4

71.2

95.6

65707580859095

100105110115

Bonds

11.0

8.4

9.59.5

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

Currencies

Cur

renc

y V

olat

ility

Inde

x

Exhibit 4: S&P 500 now diverging from economic surprises

-90

-70

-50

-30

-10

10

30

50

1800

1850

1900

1950

2000

2050

2100

2150

2200

May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16

Citi

U.S

. Eco

nom

ic S

urpr

ise

Inde

x

S&

P 5

00 In

dex

SPX Index (LHS) Citigroup Economic Surprise Index (RHS)Source: Citigroup Alpha Surprise Index, Bloomberg, RBC GAM

Global Investment Outlook | Eric Lascelles | Eric Savoie, MBA, CFA | Daniel E. Chornous, CFA

markets are unusually complacent right now (Exhibit 3). Investors expect the recent period of low volatility to persist for both stocks and bonds. The future may well continue to unfurl in an unusually leisurely manner, but it seems more reasonable to budget for something a little bumpier, especially with the many event risks approaching over the fall.

Additionally, we suspect the recent trend of unexpectedly happy economic data may be starting to fade. Economic surprises are beginning to drift back down to a more neutral reading (Exhibit 4) and the autumn’s first smattering of purchasing manager indexes suggests a tentative tempering of earlier enthusiasm. To be clear, they are still signaling growth, just of a more pedestrian variety. Let us also not forget that while Brexit has so far been less problematic than expected, it is not entirely consequence-free as policy uncertainty and political risks have indisputably increased.

Weighing these considerations, we have opted to maintain our recommendation for a moderately overweight equity allocation within a balanced investment portfolio. This is motivated primarily by the superior valuations of equities over bonds, and secondarily by our belief that further economic advances remain more likely than not, especially as downside risks have declined slightly.

Exhibit 5: Markets have rebounded from post-Brexit extremes

-100-80-60-40-20020406080

-14-12-10-8-6-4-202468

FTS

EA

ll S

hare

S&

P 5

00

GB

PU

SD

U.S

.do

llar

U.K

.10

yr y

ield

U.S

.10

yr y

ield

IG c

redi

tsp

read

HY

cre

dit

spre

ad

EM

cre

dit

spre

ad

Yiel

d/sp

read

cha

nge

(bas

is p

oint

s)

Pric

e ch

ange

(%)

Latest ExtremeNote: Percentage change of FTSE All Share Index, S&P 500, pound-dollar (GBPUSD) exchange rate and trade-weighted exchange value of U.S. dollar since 6/23/2016. Basis point change of U.K. and U.S. 10-year yields; investment-grade, high-yield and EM credit spreads since 6/23/2016. Source: Bloomberg, Haver Analytics, RBC GAM


Exhibit 6: Marked U.K. economic hit from Brexit

45474951535557596163

-40

-30

-20

-10

0

10

20

1986 1992 1998 2004 2010 2016

U.K

. Com

posi

te P

MI

U.K

. con

sum

er c

onfid

ence

(%

bal

ance

)

Consumer confidence (LHS) Composite PMI (RHS)Source: Haver Analytics, RBC GAM


Brexit aftermathThe U.K. public’s surprise vote to bolt from the EU has so far proven less problematic for markets and economies than initially feared. While financial markets initially reacted quite negatively to the news, they have since more than fully recovered (Exhibit 5). The pound remains significantly weaker than before Brexit and government yields have fallen – both clear markers of Brexit’s vestigial effects. Fortunately, however, both serve to improve U.K. financial conditions rather than undermine them.

The odds of a U.K. recession following Brexit have also fallen, with the initial probability of 60% now down to no more than 40%. This is partly because of the aforementioned improvement in financial conditions, and partly because we can already see that economic activity has dipped by less than feared in the months after Brexit. The short-term economic implications were always something of a guessing game given that the main channels are via confidence and expectations rather than specific economic hurdles. Let us be clear: we still expect some negative consequences given the material decline in consumer and business confidence already demonstrated (Exhibit 6), and we still budget for weaker-than-normal U.K. economic performance over the next year (Exhibit 7) with 1.5% growth in 2016 and just 0.75% growth in 2017.

The Bank of England (BOE) certainly hasn’t let its guard down, having responded to the shock with a measured 25-basis-point rate cut and a new round of credit-oriented quantitative easing (Exhibit 8). Additional fiscal stimulus is also expected in the upcoming budget.

Of course, nothing has changed yet regarding the U.K.’s relationship with the EU. The clause governing the exit of a member country has

yet to be activated, meaning formal negotiations are some distance off. The U.K. is busy adjusting to new Prime Minister Theresa May and must also ramp up its trade-negotiating capabilities – a branch of the civil service that had withered given the EU’s dominion over trade. We expect Article 50 will be activated in 2017, allowing a multi-year negotiation process to begin. That said, there is still perhaps a 25% chance that Brexit never takes

Exhibit 7: U.K. in modest recovery

-12-10-8-6-4-20246

2008 2010 2012 2014 2016 2018

GD

P gr

owth

(QoQ

% a

nnua

lized

)

Source: ONS, Haver Analytics, RBC GAM

Recession

Pre-Brexitworries

Europeandebt

crisisInitial recovery

U.K.renaissance

Post-Brexit recession?

Medium-run under

performance

Forecast


0

50

100

150

200

250

300

350

400

2000 2004 2008 2012 2016Econ

omic

Pol

icy

Unc

erta

inty

Inde

x

U.S. EU U.K.Note: 12-month moving average shown in chart. Mean=100 for U.K. and EU; 1985-2009 mean=100 for U.S. Source: PolicyUncertainty.com, Haver Analytics, RBC GAM

Exhibit 8: United Kingdom 10-year bond yieldEquilibrium range

02468

1012141618

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 0.64% Current Range: 0.37% - 2.37% (Mid: 1.37%)Source: RBC GAM, RBC CM

Exhibit 9: Most models predict a moderate medium-term Brexit hit

-10

-8

-6

-4

-2

0

2

Aver

age

Ope

n Eu

rope

IEA

CE

PR

CB

I/Pw

C

Berte

lsm

ann

LSE

CEP

Oxf

ord

Eco

n.

OE

CD

U.K

. Tr

easu

ry

Eco

nom

ic im

pact

on

leve

l of G

DP

(ppt

)

Note: Projections cover varying timeframes. Source: Barclays, The Economist, OECD, U.K. Treasury, RBC GAM

Optimistic

Central

Pessimistic

Exhibit 10: Brexit plunges world into uncertainty

place. It is conceivable that during the course of negotiations, the British public’s attitude changes or that sufficient concessions are made by the EU such that a severing of ties is no longer necessary to achieve U.K. aims.

Over the medium run, the economic damage from Brexit will primarily involve a dimmed trading relationship between the U.K. and the rest of Europe, fewer European head offices in London and conceivably fewer immigrants. There are a variety of opinions on the economic ramifications of these eventualities (Exhibit 9), with much depending on the precise contours of the new relationship. Most models point to the loss of 2% to 3% of economic activity over the coming decade relative to if the U.K. had remained within the EU.

So far, the economic impact of Brexit beyond British shores has been almost non-existent. The main global consequence is a further increase in political risks, both in the context of higher policy uncertainty (Exhibit 10) and greater populist pressures now in evidence elsewhere.

Upcoming geopolitical risksThese populist inclinations happen to be especially consequential right now given an unusually large number of upcoming political inflection points (Exhibit 11).

There is the upcoming U.S. presidential election, obviously – a subject we tackle in more detail



YearE- Election /

R- Referendum CountryPolitical Stability Index

(Percentile Rank)

2016

R Hungary 69

E Austria 96

R Italy 64

E United States 67

2017

E Netherlands 86

E France 59

E Iran 17

E Germany 79

E South Korea 54

2018

E Cyprus 69

E Finland 96

E Russia 18

E Mexico 21

E Ireland 86

Wildcard (Snap Elections)

Italy 64

Greece 47

Note: Political Stability Index percentile ranks for 2014. Source: World Bank, Haver Analytics, RBC GAM

later. Spain continues to struggle to secure a working political majority despite two elections in short succession. Voters in the Netherlands, France and Germany will all go to the polls in 2017 as populist inclinations are surging in response to high economic inequality, feeble economic growth, elevated debt levels and the divisive politics of bailouts and austerity programs. On the whole, populist policies tend not to be growth-enhancing.

Of Europe’s many political risks, Italy warrants the greatest attention. As seen in the Venn diagram (Exhibit 12), the country sits at the intersection of four risk factors. Italy a) is a large nation, b) has troubled banks, c) suffers from a weak economy and high public debt, and d) suffers from fractious politics. These political issues are coming to a head in the form of a referendum on Senate reform scheduled for later this fall. The consequences of the vote could be enormous given that the prime minister has threatened to resign if Italians reject the reforms. A snap Italian election would be dangerous because the Eurosceptic Five-Star Movement is flirting with first place in recent political polls. It would not take much for Italy to begin careening down an anti-European path.

We do not look for a Eurozone breakup, but the risk must surely be higher after Brexit.


Exhibit 12: Italy sits in the middle of a Venn diagram of risk

Exhibit 11: Election schedule offers breathing room, but threat of snap election

Large nation

Troubled banks

Weak economy/ High public

debt

Fragile politics

Italy

Source: RBC GAM


1.5% 1.5% 1.5%

1.25%

0.5%

1.75%

1.25%

0.75%

1.5%

1.0%

0.0

0.5

1.0

1.5

2.0

U.S. Eurozone U.K. Canada Japan

Ann

ual G

DP

gro

wth

(%)

2016 2017Source: RBC GAM

Exhibit 13: Slow growth in three buckets

Exhibit 14: Financial conditions unwinding tightness nicely

98

99

100

101

102

103

104

105

2004 2007 2010 2013 2016

U.S

. Fin

anci

al C

ondi

tions

Inde

x

Source: Goldman Sachs, Bloomberg, RBC GAM

Exhibit 15: RBC GAM GDP forecast for developed markets

STRUCTURAL RECENT SHOCKS

1 2 3

Persists indefinitely Persists for a decade-plus; not over yet Temporary, but powerful

• Demographics

• EM Deceleration

• Less globalization

• High debt

• Less business investment

• Skill decay

• Tighter financial conditions

• High policy uncertainty

• Brexit

CRISIS-INDUCED


Updated forecastsOur growth forecasts remain heavily informed by the experience of the post-financial-crisis era. Central to this, the speed limit for economic growth remains low for a variety of reasons (Exhibit 13). Some of the recent temporary drags are mercifully ebbing, such as the abatement of tight financial conditions (Exhibit 14), but the Brexit drag is new and policy uncertainty has arguably increased. In short, it is unlikely that global growth is about to break completely out of its recent rut.

Collectively, our developed-world growth forecasts have been revised moderately downward this quarter, and land slightly short of the consensus (Exhibit 15). Some of this is purely a mathematical response to weak second-quarter GDP readings. But it is more fundamentally based on our recognition of the persistent constraints on growth, partly because consensus growth forecasts are still trending downward (Exhibit 16), and also because the winning bet has repeatedly been on below-consensus growth outcomes.

In contrast to the developed-world forecasts, our emerging-market growth forecasts have been revised a little higher this quarter, and we now find ourselves in the unusual position of being slightly above the consensus with our 2016 calls.

Business-cycle risksOur attitude toward business-cycle risks remains one of high alert.

Source: RBC GAM


0

3

6

9

12

15

2008 2010 2012 2014 2016

Hig

h-yi

eld

bond

def

ault

rate

(%)

Developed markets Emerging marketsSource: BofAML, RBC GAM

Exhibit 16: Steady downgrading of 2016 consensus forecasts

Jan-15

Aug-16

Jan-15Aug-16

Jan-15

Aug-16

Jan-15

Aug-16

Jan-15

Aug-16-0.5

0.0

0.5

1.0

1.5

2.0

2.5

0.5 1.0 1.5 2.0 2.5 3.0

Con

sens

us fo

reca

st fo

r inf

latio

n (%

)

Consensus forecast for GDP growth (%)U.S. Canada Eurozone U.K. Japan

Source: Consensus Economics, RBC GAM

Exhibit 17: U.S. yield curves flattening

107.7

74.282.1

40.2

0

20

40

60

80

100

120

Nominal Real

Diff

eren

ce in

yie

lds

betw

een

10-y

ear a

nd 2

-yea

r bon

ds (b

ps)

6 months prior CurrentNote: As of September 6, 2016. Real and nominal U.S. Treasury spreads calculated using Bloomberg BVAL data. Source: Bloomberg, RBC GAM

Real curve even flatter

than nominal

Exhibit 18: Global default rates rising

The current economic expansion in North America is now longer than the average cycle, rendering it somewhat vulnerable. The precise age itself is not so much the issue as the fact that enough time has passed that most U.S. economic slack has evaporated. The U.S. Federal Reserve (Fed) is now responding to this, and the commencement of Fed tightening cycles precedes the next downturn by an average of two years. While admittedly imprecise, this would argue for a late 2017 recession.

Another indicator of rising recession risk is the recent flattening (and unusual flatness) of the yield curve (Exhibit 17). The credit cycle also continues to age, with potential implications for the broader economic cycle. Whereas credit spreads have narrowed, default rates are edging inexorably higher (Exhibit 18), and sovereign downgrades have now outpaced upgrades for six consecutive years.

Fortunately, a few other gauges of the business cycle have lately become a bit less problematic:

1. Earnings growth may now be starting to stabilize after a lengthy period of decline (Exhibit 19).

2. Global trade appears to be stabilizing, if in a position of almost non-existent growth (Exhibit 20).

3. The amount of temporary hiring in the U.S. labour force – traditionally a leading indicator



Exhibit 19: Global earnings have declined, but are they about to stabilize?

0

20

40

60

80

100

120

140

1998 2001 2004 2007 2010 2013 2016MSC

I 12-

mon

th tr

ailin

g ea

rnin

gs

per s

hare

(mul

tiple

cur

renc

ies)

DM (USD) EM (USD) U.S.Canada (CAD) Europe (EUR) Asia Pacific (USD)

Source: MSCI, Bloomberg, RBC GAM

Exhibit 20: Tentative sign of bottoming in global trade

-40

-30

-20

-10

0

10

20

30

40

2001 2004 2007 2010 2013 2016

Wor

ld e

xpor

ts (Y

oY %

cha

nge)

Nominal exports Real exportsNote: Year-over-year % change of 3-month moving average of world exports. Nominal exports in U.S. dollars. Source: IMF, Credit Suisse, Haver Analytics, RBC GAM

Exhibit 21: Temporary employment signal not great

of the employment trend – has stabilized after pointing ominously lower last quarter (Exhibit 21).

In aggregate, then, business-cycle risks remain concerning, but are no longer actively rising. We believe the risk of a U.S. recession over the next year rests at around 30%, whereas the likelihood of a U.K. or Canadian recession is higher at 40%.

Presidential previewThe quadrennial U.S. election cycle is again upon us. This one looks to be unusually consequential, with quite a lot of daylight between the policy positions of this cycle’s two candidates.

At the time of writing, betting markets have assigned the Democrats’ Hillary Clinton a nearly 80% chance of victory, while the Republicans’ Donald Trump trails well behind with just over a 20% likelihood (Exhibit 22).

We believe the race is marginally closer than this, as Brexit demonstrated that populist inclinations are now unusually strong. Trump has repeatedly exceeded expectations in his short political career to date and now appears to be belatedly tacking somewhat closer to the political centre where many voters sit. Moreover, it is not unreasonable to believe that his supporters are being undercounted in the polls due to a mix of bashfulness and media distrust, and any bout of bad economic news or sour financial


1.01.21.41.61.82.02.22.42.62.83.0

85

90

95

100

105

110

115

120

125

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Non

farm

pay

roll

empl

oym

ent,

tem

pora

ry h

elp

serv

ices

(mill

ions

)

Non

farm

pay

roll

empl

oym

ent,

tota

l priv

ate

(mill

ions

)

Total private (LHS) Temporary help services (RHS)Source: BLS, Haver Analytics, RBC GAM

Temporaryemployment

wavering


Exhibit 22: Democrats lead in Presidency and Senate

78%69%

5%

22%31%

95%

0102030405060708090

100

White House Senate House

Prob

abili

ty o

f win

ning

(%)

Democratic RepublicanSource: pivit.io, RBC GAM

markets between now and the November 8 election would also increase his prospects with voters.

Let us be clear that Clinton remains by far the more likely victor, but the race is not quite done yet. From a policy perspective, she can best be thought of as a status-quo candidate, likely to extend most of President Obama’s legacy of centre-left policies. Her most striking policy differences with Obama are a declining appetite for free trade and perhaps more hawkish military inclinations.

In contrast, Trump offers a political philosophy that splices strands of populism and authoritarianism. From an economic perspective, his promise of a large infrastructure-spending program and sizeable tax cuts would be quite stimulative in the short run (if delivered), conceivably enabling faster economic growth for a few years. Of course, such largesse does not come cheap: analysis from a bipartisan policy think tank argues his platform would send the U.S. public-debt-to-GDP ratio sharply higher over the next decade.

On the other hand, Trump’s proposals to clamp down on illegal aliens, restrict immigration and reduce the breadth of free trade could induce a significant economic drag over the medium run.

Financial markets appear to prefer a Clinton victory, fretting over the additional policy uncertainty and medium-term economic damage


that a Trump administration could bring. Of course, presidents are rarely able to achieve their full legislative agenda. Congress exerts considerable sway, and the prospect of a split Congress means that either president would struggle to implement bold legislative changes.

We continue to hold out hope that the eventual winner is able to push through a moderate-sized infrastructure program that would help the economy and restore some

of the fraying U.S. infrastructure. With interest rates so low, such an effort could be financed on the cheap.

Central banks still front and centreThe Fed continues to press forward with its plan to nudge the fed funds rate higher. Expectations are again congealing around this prospect, to the point that a rate hike is considered more likely than not by the end of 2016 (Exhibit 23).

Exhibit 23: Odds of U.S. rate hike have risen

36%

60%

0

10

20

30

40

50

60

70

September 2016 December 2016

Pro

babi

lity

of F

ed ra

te h

ike

(%)

Note: As of 8/29/2016. Source: Bloomberg, RBC GAM


Exhibit 24: Massive quantitative easing continues

FedQE1 BoE

QE

SNBintervention Fed

QE2

FedQE3

BoJbegins

ECBbegins

BoEbegins

0

2

4

6

8

10

12

2007 2009 2011 2013 2015 2017

Col

lect

ive

mon

etar

y ba

se

(US

$ tri

llion

s)

Note: U.S. Fed, BoE, ECB, BoJ and SNB balance sheets combined using PPP exchange rates. Shaded area represents forecast. Source: Bank of England, Bank of Japan, Federal Reserve Board, European Central Bank, Swiss National Bank, Haver Analytics, OECD, RBC GAM

Central bankbond buying of around $1.2 trillion per year from 2011 to

2016

The logic behind this expectation is twofold. First, the U.S. economy appears to be operating close to its full potential, as demonstrated by an unemployment rate below 5.0%, core inflation around 2.0% and broadening wage pressures. Second, the Fed has now clearly signaled its tightening intention in speeches by Chair Yellen and Vice Chair Fischer. We peg the odds of a rate increase by year-end at around 65%.

Another Fed rate increase, however limited, would be consequential given the U.S. central bank’s outsized influence on global markets. While we believe a modicum of Fed tightening is justified and thus at worst benign to risk assets, we must not completely forget that financial markets struggled in the months after the last rate increase.

Despite its importance, the Fed is not currently much of a trendsetter for the other major central banks. Globally, many central banks are still focused on delivering prior quantitative-easing commitments (Exhibit 24), and some are continuing to build on those promises. The BOE has been buying corporate bonds anew since Brexit, while the Bank of Japan (BOJ) increased the clip of its asset buying in the spring. The European Central Bank (ECB) is pressing forward with its own bond-buying extravaganza. Thus, there are still powerful downward forces on yields at work.

As for other policy levers, central banks have shown a diminished


enthusiasm for further excursions into the world of negative interest rates after the market response was tepid to their initial forays. Were another major crisis or recession to arrive within the next few years, we continue to believe that “helicopter money” would be seriously contemplated by some central banks (most obviously, Japan) since the tool’s promise of a more powerful and better targeted economic stimulus would outweigh the “threat” of higher inflation for a country that has long suffered from insufficient inflation.

Many international bodies continue to call for a new round of fiscal stimulus as a means of taking pressure off over-worked central bankers. We support any such effort, so long as the stimulus is implemented in areas with high fiscal multipliers (such as infrastructure spending). Some countries are already aboard this effort, such as Japan and Canada. It remains to be seen how aggressive

the U.K. fiscal response is to Brexit, and it is conceivable that the U.S. squeezes off a round of infrastructure spending with a new president in place. But the bulk of the world’s nations remain firmly on the sidelines.

U.S. economy in two partsThe U.S. economy continues to grind along. The country’s first-half economic performance was underwhelming, but the start of the second half has been somewhat better. Still, we are tracking just 1.50% economic growth for 2016 and project 1.75% for 2017. It is some consolation that, in the present environment of slow productivity growth and changing demographics, this rate of growth constitutes on or even slightly above potential economic growth. In other words, the U.S. economy can continue nibbling away at any last remnants of economic slack.

The goods-producing sectors tend to receive a disproportionate share


0

5

10

15

20

25

1986 1992 1998 2004 2010 2016

% o

f U.S

offi

ce p

rope

rties

vac

ant

Source: Haver Analytics, RBC GAM

Close to prior cycle low

Exhibit 25: Low office-vacancy rate implies little service-sector slack

Exhibit 26: U.S. real wages are substantially outpacing productivity

-3

-2

-1

0

1

2

3

1990 1995 2000 2005 2010 2015

U.S

. rea

l uni

t lab

our c

ost

(YoY

% c

hang

e)

Note: YoY % change of 4-quarter moving average. Source: Haver Analytics, RBC GAM

Rapid growth and large mismatch

wages >productivity

wages < productivity2016

Exhibit 27: U.S. consumer spending remains solid while business investment fades

-20

-15

-10

-5

0

5

10

15

2002 2004 2006 2008 2010 2012 2014 2016

YoY

% c

hang

e

PCE Business investmentNote: Year-over-year percent change of U.S. real personal consumption expenditure and real business investment. Source: BEA, Haver Analytics, RBC GAM

of the attention when efforts are made to evaluate the amount of slack remaining. It is also useful to consider the more elusive service sector. We find that it, too, has little remaining slack as evidenced by a number of metrics including the low U.S. office-vacancy rate (Exhibit 25).

Unsurprisingly, then, wage pressures are beginning to mount. We care less about the absolute rate of wage growth, and more about whether wages are outpacing productivity. Indeed, this is now happening to a significant degree (Exhibit 26). Given the hawkish Fed implications, we continue to anticipate another leg of the U.S. dollar secular bull market.

The U.S. economy remains highly differentiated. Consumer growth is strong, while business investment is weak (Exhibit 27). This difference is somewhat understandable: consumers have already restored their savings rates to respectable levels and are now deploying the proceeds of strong hiring and improving wage growth. In contrast, business investment is undermined by the drop in oil-related capital expenditures, generally weak foreign demand and uncertainty about the path for public policy going forward. Looking ahead, the gap between consumer and business spending could start to narrow as the rate of hiring dips, car-buying stabilizes at a lower level, oil prices edge higher and foreign demand recovers somewhat.



Exhibit 29: Migrant movement into Europe is lower than last year

0

50

100

150

200

250

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Num

ber o

f mig

rant

s (th

ousa

nds)

2015 2016Note: Data shows migration by sea. Data for migration by land is not readily available and represented less than 4% of overall migration. Source: UNHCR, RBC GAM

EU deal with Turkey slows

migration

Eurozone politics in focusThe Eurozone economy may be slowing slightly, and now looks to be operating within a 1.00% to 1.50% growth band. Our growth forecast for 2016 remains unchanged at 1.50%. Primarily in response to Brexit, we have slightly downgraded the outlook for 2017 to 1.25%. Like the U.S., Europe’s pace of growth shows little sign of picking up.

Despite the considerable efforts of the ECB, there has been some recent evidence of tightening credit conditions on the continent (Exhibit 28). This is a risk to growth if the trend continues. On the other hand, we continue to anticipate a weaker euro, which could help boost growth.

Although some political pressures are fading – for instance, migrant inflows to Europe are down sharply compared with a year ago (Exhibit 29), and some polls suggest the shock of Brexit has actually reduced the separatist inclinations among some remaining EU members – European political risks continue to be both large and relevant in our estimation.

Japan is all about the yenJapan remains a country of contradictions. The economy is sputtering, alternating between quarters of growth and decline (Exhibit 30). And yet its labour market is now tight as a drum (Exhibit 31). This disconnect is only possible when a country has an extremely low economic speed limit.


Exhibit 30: Japanese growth teetering

-16

-12

-8

-4

0

4

8

12

2008 2009 2010 2011 2012 2013 2014 2015 2016

Rea

l GD

P

(QoQ

% c

hang

e an

nual

ized

)

Source: Cabinet Office of Japan, Haver Analytics, RBC GAM

Abenomics

Exhibit 28: Eurozone business lending has stopped improving

-7-6-5-4-3-2-1012345

Aug-09 May-11 Feb-13 Nov-14 Aug-16

Ban

k lo

ans

(YoY

% c

hang

e)

Households BusinessesSource: European Central Bank, Haver Analytics, RBC GAM


Exhibit 32: Japanese yen strengthens

60

70

80

90

100

110

12070

80

90

100

110

120

130

1402000 2002 2004 2006 2008 2010 2012 2014 2016

Nom

inal

effe

ctiv

e ex

chan

ge ra

tetra

de-w

eigh

ted

Japa

nese

yen

U.S

. dol

lar-

Japa

nese

yen

spot

exc

hang

e ra

te

USD-JPY spot exchange rate (LHS) Nominal effective exchange rate (RHS)Source: J.P. Morgan, Haver Analytics, RBC GAM

There is no denying that the country’s latest bout of economic pain has centred around the yen’s appreciation over the past year, much as Japan’s earlier success with Abenomics was largely the result of extreme currency weakness (Exhibit 32). The strengthening yen has damaged corporate profits, and can be seen on the expenditures side of the ledger in scaled-back machinery orders.

We look for the yen to relinquish some of its recent strength, but only a little, and the country still needs further structural reform to boost sustainable growth. After this summer’s successful elections, Prime Minister Abe appears in a better position for such reforms. The question is whether he will deploy his newfound political capital in that direction, or instead focus on re-militarization.

We have left our Japanese growth forecasts unchanged at 0.50% for 2016 and 1.00% for 2017. The positive influences of a recently announced fiscal-stimulus program and additional monetary stimulus are roughly offset by a more muscular currency. The delay of Japan’s next sales-tax increase to 2019 from 2017 is one reason that we are able to anticipate a growth uptick in 2017.

For all of the public criticism of Japan’s inflation-revival efforts, it must be acknowledged that the country has at least achieved a partial victory. The rate of inflation remains well shy of +2% per year, but core prices have at least escaped


Exhibit 31: Labour shortage in Japan becomes more severe

0.30.40.50.60.70.80.91.01.11.21.31.41.5

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Rat

io o

f act

ive

job

open

ings

to

appl

ican

ts

Source: MHLW, Haver Analytics, RBC GAM

Tight labour market to push wages and inflation higher

Exhibit 33: Prices in Japan have risen in recent years

919293949596979899

100101

2000 2002 2004 2006 2008 2010 2012 2014 2016

Japa

n co

re C

PI

(200

0=10

0)

Core CPI, adjusted for tax hikes Core CPINote: CPI adjusted to exclude the estimated effect of sales tax hikes. Source: BoJ, Ministry of Internal Affairs and Communication, Haver Analytics, RBC GAM

2.6% higher since the trough

3.4% highersince the trough


Exhibit 34: China’s inevitable slowdown

-3

-2

-1

0

1

2

3

4

56789

101112131415

1995 1998 2001 2004 2007 2010 2013 2016

Eco

nom

ic A

ctiv

ity In

dex

(sta

ndar

d de

viat

ions

from

hi

stor

ical

nor

m)

Chi

na G

DP

gro

wth

(Y

oY %

cha

nge)

GDP Growth (LHS) Economic Activity Index (RHS)Note: Index constructed using sixteen proxies for real economic activity in China.Source: Bloomberg, Haver Analytics, RBC GAM

from the prior interminable downdraft (Exhibit 33). Deflation is over; the issue now is whether a proper level of inflation can assert itself. A key test will be if inflation can be sustained now that the yen is no longer providing artificial assistance. We are monitoring a slight decline in prices in 2016, but pencil in a 1.0% increase for 2017.

China finds its feetAs the generator of roughly one-third of global economic growth, China matters hugely. For years, we have looked for – and gotten – a steady deceleration in Chinese economic growth as the country loses prior important tailwinds such as its high level of competitiveness and the advantage of a rapidly globalizing world. Ultimately, we are still in the “slowdown” camp, but acknowledge that the Chinese economy has recently managed to stabilize its growth rate in the mid-6% range (Exhibit 34). This has prompted us to slightly upgrade our 2016 and 2017 growth forecasts for China to 6.5% and 6.0%, respectively.

Much as global trade now looks to be flattening after a period of deceleration, Chinese trade has managed a partial recovery (Exhibit 35). This is of disproportionate importance to China given its heavy reliance on exporting.

The country continues to make a gradual transition toward a more consumer-oriented model, though consumer-spending growth is also arriving more slowly than expected (Exhibit 36).


Exhibit 35: Chinese trade is finally flattening out

-40-30-20-10

010203040506070

2000 2002 2004 2006 2008 2010 2012 2014 2016

Chi

na tr

ade

in g

oods

(Y

oY %

cha

nge)

Exports ImportsNote: Year-over-year % change of 3-month moving average of goods exports and imports. Source: State Administration of Foreign Exchange, Haver Analytics, RBC GAM

Exhibit 36: Chinese consumer spending still slower than usual

-5-4-3-2-1012345

1996 2000 2004 2008 2012 2016

Con

sum

er A

ctiv

ity In

dex

(sta

ndar

d de

viat

ions

from

hi

stor

ical

nor

m)

Note: Index constructed using nine proxies for Chinese consumer activities. Source: CNBS, CAAM, Tsinghua UnionPay, MNI, Westpac, Bloomberg, Haver Analytics, RBC GAM



We recently published an Economic Compass on China’s housing market, which represents a startling 19% of the country’s GDP (Exhibit 37). Several factors point to worrying excesses in the market, none more starkly than the fact that 29% of Chinese homes are vacant (Exhibit 38). However, the true story is somewhat more nuanced than this:

• On a flow basis, China’s pace of new-home completions is not obviously running ahead of new demand.

• On a stock basis, China has far more urban households than occupied urban homes. Presuming that households will seek out their own dwellings as the country grows richer, China may actually have too few homes even after factoring in the high initial vacancy rate.

As such, China’s housing market constitutes a real risk, but perhaps a slightly less worrying one than we had previously assumed.

China’s main problem is its high and rising debt load. While this is partially a function of the aforementioned housing market, it is just as crucially linked to struggling heavy industries, an underdeveloped stock market and a government that has been dead-set on sustaining rapid economic growth even when this could only be achieved through waves of new credit. We estimate that Chinese banks will eventually have to write off between US$1.3 trillion and US$3.2 trillion in loan losses representing between 11%

Exhibit 37: Housing sector is a crucial part of China’s GDP

10.6%

7.0%

1.3%

0

2

4

6

8

10

12

Residential investment Related industries Housing wealth effect

% o

f GD

P

Housing is 19% of GDP

Note: Current (2015) contribution to GDP of the housing sector in China.Source: China National Bureau of Statistics, Haver Analytics, RBC GAM

Exhibit 38: Elevated share of Chinese housing stock is unoccupied

71%

20%

2%

7%

Sold and occupiedSold but unoccupiedCompleted but unsoldExcess under construction

29% of housing stock is

unoccupied

Note: Share of Chinese housing (in units) by status in 2015. Completed but unsold unavoidably includes both new and existing units for sale. Excess under construction (in units) measured as floor space under construction less floor space completed estimated based on the historical relationship of housing under construction and completion. Source: China Household Finance Survey, Credit Suisse, CICC, Haver Analytics, RBC GAM

Exhibit 39: Potential Chinese bank losses worrisome

$1.3T

$3.2T

4%

11%10%

28%

0

5

10

15

20

25

30

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

US$ trillion(LHS)

% of bank assets(RHS)

% of GDP(RHS)

Pote

ntia

l ban

k lo

sses

(% o

f ban

k as

sets

/ G

DP

)

Pot

entia

l ban

k lo

sses

(U

S$

trilli

on)

Low estimate High estimateSource: Haver Analytics, RBC GAM

Current bank capital = 7.7% of bank assets


45

65

85

105

125

145

165

185

1995 1998 2001 2004 2007 2010 2013 2016

Non

finan

cial

cor

pora

te d

ebt

(% o

f GD

P)

China EM ex ChinaSource: IIF, IMF, RBC GAM

Exhibit 40: RBC GAM GDP forecast for emerging markets

7.5%6.5%

2.75% 2.75%

-0.25%

-3.0%

7.5%6.0%

2.75% 2.75%

1.5% 1.0%

-4

-2

0

2

4

6

8

India China South Korea Mexico Russia Brazil

Annu

al G

DP

grow

th (%

)


Exhibit 41: Brazil’s economic malaise may be bottoming

-3

-2

-1

0

1

2

3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Num

ber o

f sta

ndar

d de

viat

ions

fro

m n

orm

Business Confidence Index Consumer Confidence Index Industrial production

Source: CNI, FGV, IBGE, Haver Analytics, RBC GAM

Exhibit 42: Chinese corporations on borrowing binge

and 28% of Chinese GDP (Exhibit 39). This amount is just barely manageable given the Chinese government’s history of assistance and financial clout.

Fortunately, recent government statements have suggested that China’s era of excessive credit expansion could be starting to come to an end. This is bad news from an economic-growth perspective, but good news from a risk perspective. Of course, the debt threat won’t go away overnight.

Emerging markets stabilizeEmerging-market leading indicators have improved somewhat over the past quarter, and we have responded by revising our emerging-market growth forecasts a little higher (Exhibit 40).

There are several reasons for our slightly more optimistic outlook:

• We suspect that emerging-market growth is finally bottoming after many years of deceleration. Growth is unlikely to return to prior norms, but the bulk of the decline may now be over.

• China, the behemoth of the emerging-market basket, has done a bit better.

• Resource-oriented emerging economies appear to be bottoming now that commodity prices have risen from their lows. Brazil is an example that seems poised for a return to some semblance of growth in the next year (Exhibit 41)



Canada continues to grapple with the tail end of the global oil shock. The problem is not the country’s production of oil – this is still near record highs once the Fort McMurray fires are adjusted for (Exhibit 44). Rather it is that oil prices remain too low for energy-sector capital expenditures to return to pre-plunge levels.

Our Canadian composite leading indicator continues to point to subdued economic growth. Indeed,

2017. The levels of aggregate supply and demand in the global market continue to inch toward one another, with sizeable help from falling U.S. crude production. But risks remain. U.S. production has lately stabilized for at least the moment, indicating that the normalization process is slowing. And the world is still awash in oil inventories – the result of earlier production excesses (Exhibit 43).

• The combination of improved global risk appetite and an ever-strengthening “search for yield” has flooded emerging-market nations with additional capital, decreasing their cost of funding and increasing their ability to drive business investment.

• Emerging-market corporate debt risks, while still high, are less worrying when one disentangles them geographically and recognizes that the bulk of the increase in emerging-market corporate debt is in China rather than spread across a host of smaller, more vulnerable nations (Exhibit 42).

• Emerging-market equity valuations remain cheap, motivating our own equity overweight in the sector.

To be clear, it is rarely a one-way street with emerging markets. Potential headwinds exist in our expectation that the U.S. dollar will again rise, the risk that a Fed rate hike could dim the flow of emerging-market-bound capital and the fact that global trade is unlikely to resume soaring as it did across the halcyon first decade of the millennium. Emerging markets are also unavoidably among the more vulnerable sectors in the event of a major shock to the global economy. Nevertheless, for now, they are looking somewhat better.

Canada still strugglesWe continue to anticipate moderately higher oil prices over the next year, with a target of US$60 by the end of


Exhibit 43: Global oil inventory is too high

2000

2200

2400

2600

2800

3000

3200

1995 1998 2001 2004 2007 2010 2013 2016

OEC

D c

rude

oil

inve

ntor

y(m

illio

n ba

rrel

s)

Source: IEA, RBC GAM

465 MM barrels

overnorm

Exhibit 44: Canadian oil production back to normal after wildfires

3.03.23.43.63.84.04.24.44.64.85.0

2010 2011 2012 2013 2014 2015 2016 2017

Can

adia

n cr

ude

oil p

rodu

ctio

n(m

illio

n b/

d)

Crude oil production (historical) August 2016 forecastSource: EIA, RBC GAM

EIAforecast

Production dropped 600,000 b/d in May due to Fort McMurray fire


Exhibit 46: Canadian job market remains dismal

the country suffered a few months of falling GDP even before the Fort McMurray wildfires undermined second-quarter performance (Exhibit 45). The fire’s effects have since been largely unwound, but the damage was done in the form of a 1.6% decline in second-quarter annualized GDP. The third quarter should manage to claw back a sizeable chunk of this weakness, but underlying growth remains poor. One sign of the residual softness is in the employment figures, which were late in signaling Canada’s economic weakness but have since made up for lost time (Exhibit 46).

Canada’s economic performance remains highly variable by region. Oil-producing Alberta and its brethren remain in recession, while export-oriented Ontario, British Columbia and Quebec have benefited from the weaker Canadian dollar and respectable U.S. demand (Exhibit 47).

Looking ahead, our expectation for a further depreciation of the Canadian dollar should help restore competitiveness and get exports moving. Similarly, oil prices that are higher than a year ago should slightly diminish the pain of the oil sector. But Canada’s housing sector is suddenly looking more vulnerable as some of the most toppish markets have begun to unwind and regulators have resumed policies that may dampen housing demand (Exhibit 48). In all of this, the Bank of Canada appears likely to remain on the sidelines.


0.20.40.60.81.01.21.41.61.82.02.2

2011 2012 2013 2014 2015 2016

Can

adia

n em

ploy

men

t (Y

oY %

cha

nge)

Source: Statistics Canada, Haver Analytics, RBC GAM

Exhibit 47: Ontario holding up, Alberta struggles

-8-6-4-202468

2002 2004 2006 2008 2010 2012 2014 2016

Mon

thly

GD

P (Y

oY %

cha

nge)

Ontario GDP proxy Alberta GDP proxyNote: Monthly provincial GDP estimated from available monthly economic variables, combined via principal component analysis and then regressed against annual provincial GDP. Source: Haver Analytics, RBC GAM

Ontario faringwell

Alberta unusually weak

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16

Rea

l GD

P g

row

th (M

oM %

cha

nge)

Source: Statistics Canada, Haver Analytics, RBC GAM

Initial oil shock

Fort McMurray fire andrebound

New boutof weakness

Exhibit 45: Canadian economy remains soft


Exhibit 48: Threats to Canada’s housing boomInflation to edge higherGlobal inflation remains low by historical standards. But this is at least partially an illusion, as it represents the remnants of the commodity shock depressing headline inflation rates. Core inflation rates are much closer to normal, as they are better able to convey general economic conditions. While economic growth has been slow, potential growth rates have been slower yet, meaning that capacity pressures are building. In this unusual environment, slow growth is not incompatible with higher inflation (Exhibit 49).

We anticipate a gradual normalization of headline-inflation rates as they shake off the prior effects of the commodity shock and converge toward current core inflation readings (Exhibit 50). With this forecast, we are a little above the market consensus. This expectation is grounded in our outlook for moderately higher oil prices, in our belief that economic slack is almost gone in the U.S. and has faded somewhat elsewhere, and that wage pressures are beginning to increase. Also, our general view that the U.S. dollar will strengthen should nudge inflation higher in most countries.

The U.K. represents something of a special case given its sharp Brexit-influenced currency depreciation, and so we expect faster inflation of 2.75%.


Higher interest rates

Economic recession

Parabolic home price increase

Tighter regulations

• Hurts affordability

• Increases unemployment

• Higher mortgage default rate

• Prices out buyers

• What goes up must come down

• Tentative signs of falling sales in hot markets

• Constrains access to or desirability of home buying

• Actions spanning national and regional gov’ts

LOW MEDIUM HIGH HIGH

Threat

Why

Near- term risk

Exhibit 49: Slow growth and higher inflation not incompatible

Exhibit 50: RBC GAM CPI forecast for developed markets

1.75%

1.25%1.0%

0.5%

-0.25%

2.25%2.0%

2.75%

1.5%

1.0%

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Canada U.S. U.K. Eurozone Japan

CP

I (Yo

Y %

cha

nge)


Higher inflation

Poor economic

growth

Mutually compatible when potential growth rate very low

Source: RBC GAM

Source: RBC GAM


Exhibit 51: Implied fed funds rate 12-months futures contracts

-252575

125175225275325375

May

-15

Jun-

15Ju

l-15

Aug

-15

Sep

-15

Oct

-15

Nov

-15

Dec

-15

Jan-

16Fe

b-16

Mar

-16

Apr

-16

May

-16

Jun-

16Ju

l-16

Aug

-16

Sep

-16

Oct

-16

Nov

-16

Dec

-16

Jan-

17Fe

b-17

Mar

-17

Apr

-17

May

-17

Jun-

17Ju

l-17

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Bas

is p

oint

s (b

ps)

Market-implied forecast as of August 31, 2016 FOMC median projections as of Sep 2014FOMC median projections as of Dec 2014 FOMC median projections as of Mar 2015FOMC median projections as of Jun 2015 FOMC median projections as of Sep 2015FOMC median projections as of Dec 2015 FOMC median projections as of Mar 2016FOMC median projections as of June 2016

Source: Bloomberg, U.S. Federal Reserve, RBC GAM

Exhibit 52: Central banks and uncertainty drive yields lower

-1

0

1

2

3

1M 3M 6M 9M 1Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y

Gov

ernm

ent b

ond

yiel

d (%

)

U.S. Canada U.K. Germany France Italy JapanSource: Bloomberg, Haver Analytics, RBC GAM

Emerging-market inflation is also fairly low, and could prove less responsive to the upward trend given the strong possibility of La Nina-related food deflation over the next year.

The great rate debateThe world remains trapped in an extraordinarily low interest-rate environment given the slow economic growth and low inflation discussed above, as well as an aging population, high income inequality, elevated debt loads and a shortage of safe assets. Seven years following the financial crisis, investors are perhaps starting to realize that the slow-growth, low-inflation world is structural in nature and will therefore define the environment going forward too.

The Fed has slowly been coming around to the view that interest rates may remain lower for longer and that their estimate of neutral level for the fed funds rate should be reduced. The evolution in the Fed’s view can be seen in Exhibit 51, which plots the FOMC’s projected level of interest rates for every quarter over the past seven quarters. Had interest rates followed the September 2014 projections, the fed funds rate would have been over 2.0% by now compared with today’s actual setting of 37.5 basis points. The bottom line in the chart represents market-implied projections for the fed funds rate and illustrates that investors have been right to price in a lower-for-longer interest rate scenario. Looking forward, there is little on


the horizon to suggest that a sharp upward adjustment in interest rates by the Fed is necessary. We continue to look for a single Fed hike over the next year.

Bond yields move lowerGlobal bond yields fell to record lows during the quarter, with some bond markets characterized by negative yields even at the longer end of the yield curve (Exhibit 52). Our models project that yields will rise from

these unusually low levels, but any near-term adjustment will be limited given the current low speed limit on economic growth (Page 40).

The yield on U.S. 10-year Treasuries is slightly below our model’s estimate of equilibrium. Exhibit 53 breaks down our 10-year bond-yield model into its components of inflation premia and real rates of interest. While inflation is currently close to the level forecast by the model, the real rate of interest is


roughly 75 basis points below what the model estimates as appropriate. The model incorporates investors’ adaptive expectations by assigning more weight to recent experience and, as low interest rates persist, the model gradually recalibrates its expectation of “normal” downward. Note that the equilibrium bands move higher with time, as the model begins to incorporate higher inflation and a return in the real rate of interest to its long-term average by the end of 2020. In our view, bond yields are not likely to rise as quickly as the model suggests, at least in the short term. While a bit more inflation and a Fed rate hike or two could prompt bond yields to move higher, a return to historically normal rates appears quite unlikely over the forecast horizon.

Stocks extend gainsWe saw further gains in global equities over the quarter, supported by improving credit markets, better-than-expected economic data and low interest rates, allowing stocks to mostly shrug off what many investors had assumed would be the widespread negative impact of Brexit. A number of equity indexes rest near all-time highs and yet remain below our estimates of fair value (Page 41). Our global stock-market composite has moved closer to equilibrium since last quarter but continues to signal that there is still room for further gains (Exhibit 54).

Many investors have voiced surprise at the stock market’s buoyancy in recent quarters, given that


Exhibit 54: Global stock-market compositeEquity-market indexes relative to equilibrium

-60

-40

-20

0

20

40

60

80

100

1980 1985 1990 1995 2000 2005 2010 2015 2020

% a

bove

/bel

ow fa

ir va

lue

Source: RBC GAM

Last Plot: -14.4%

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1960 1970 1980 1990 2000 2010 2020

%

Real T-Bond Yield Real 10-Year Time Weighted YieldSource: RBC GAM, RBC CM

+1 SD

-1 SD Average: 2.1%

Last Plot: 0.5%

12-Month Forecast: 1.26%-4

-2

0

2

4

6

8

10

12

14

16

1960 1966 1973 1980 1986 1993 2000 2006 2013 2020

%

36-month Centred CPI Inflation Actual Monthly CPI InflationSource: RBC GAM, RBC CM

Last Plot: 1.0%12-Month Forecast: 1.6%

36-month Centred

Exhibit 53: U.S. 10-year bond yield Fair-value estimate composition

0

2

4

6

8

10

12

14

16

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 1.58% Current Range: 1.07% - 2.85% (Mid: 1.96%)Source: RBC GAM, RBC CM

United StatesCPI Inflation

United StatesReal 10-year T-bond yield

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

+


Exhibit 56: Standardized S&P 500 fair-value bands

1960 1967 1974 1981 1988 1995 2002 2009 2016Source: Haver Analytics, RBC GAM

S&P 500 most overvalued

S&P 500 most undervalued

+1 SD

-1 SD

FV

4

3

2

1

Exhibit 55: S&P 500 IndexNormalized valuation metrics as of August 2016

0.17

1.45 1.160.85 0.81 0.67

-0.22

-1.00

-2.36-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5

Average Marketcap ÷ U.S.

GDP

Tobin's Q 12-Mtrailing

P/E

12-Mforward

P/E

Shiller P/E(CAPE)

RBC GAMfair value

Equity riskpremium

Fedmodel

Z-sc

ore

Market is expensive

Market is cheap

Notes: Historical data from Jan 1956 for 12-M Trailing P/E, 12-M Forward P/E, Equity risk premium, Shiller P/E and Fed model. Historical data from Mar 1956 for market cap ÷ U.S. GDP. Historical data from Jan 1960 for RBC GAM fair value. Source: Haver Analytics, RBC CM, RBC GAM

Market is slightly expensive

Market is slightly cheap

valuations appear elevated relative to the historic norm. In a world of extremely low interest rates, though, investors’ are prepared to pay a higher price for higher-returning risky assets. As a result, we are not surprised that equity valuations have risen, and point out that some of the most popular metrics for valuing stocks ignore the critical inverse relationship between interest rates and inflation, on the one hand, and the present value of future earnings, on the other. Exhibit 55 plots, in standard deviations (z-score), the distance that eight popular valuation metrics lie above or below their historical average. The results vary widely depending on whether interest rates and/or inflation are incorporated into the calculation. Metrics that are driven solely by unadjusted P/E ratios suggest that the market is expensive (high z-score), whereas those that are a function of interest rates and/or inflation indicate that the stock market is still attractively priced (low z-score). The average of the eight measures indicates that stocks are roughly in line with the historical norm. Our proprietary fair-value metric, a multi-factor model that incorporates current and forecast levels of interest rates, inflation, and corporate profitability, suggests that stocks are slightly below fair value.

Historically, the S&P 500 has performed better when it trades below fair value than when it is above fair value, and the January correction created the right backdrop for this year’s rally by easing


Exhibit 57: S&P 500 IndexReturn prospects by valuation zone

ValuationData set

1-year average return

Batting average^

1-year average return in

win*Max loss

1-year return STD

4 -0.7% 50.0% 14.8% (27.5%) 17.0%

3 3.4% 62.1% 13.0% (41.4%) 15.6%

2 12.0% 85.5% 16.0% (44.8%) 13.8%

1 14.7% 80.2% 19.9% (12.8%) 16.3%

*Win = Periods where returns are above 0%. ^Batting average = Incidence of winning in any given period. Source: RBC GAM

(S&P 500 most overvalued) 1 SD Above

Equilibrium

1 SD Above(S&P 500 most undervalued)


valuations. Exhibit 56 shows that stocks fell decidedly below fair value in early 2016, as indicated by the horizontal dotted line at the centre of the chart. Even now, stocks trade in a range that historically generates the second-highest 1-year average returns, the highest batting average (incidence of positive monthly returns) and the lowest volatility (standard deviation of returns) of the four valuation zones that we’ve identified (Exhibit 57). Interestingly, the low volatility that we’ve seen recently is consistent with current market valuations.

Ceiling on earnings may be liftingWhile valuations may be supportive of equities in the current environment, earnings growth will be critical to sustaining any meaningful advance in stocks. Fortunately, the two largest headwinds to corporate profits since the end of 2014 – the collapse in oil prices and the strengthening U.S. dollar – have moderated and should allow for corporate profit growth to resume (Exhibit 58). One sign that earnings growth may rebound from last year’s decline is a significant narrowing in credit spreads. Exhibit 59 plots the inverse of the corporate-bond spread against the year-over-year change in S&P 500 earnings and suggests that the two are correlated. While the recent narrowing in credit spreads hasn’t yet been accompanied by an increase in earnings, the deterioration in profits appears to have ended. In fact, a


Exhibit 58: Crude oil and the U.S. dollar

65

70

75

80

85

90

95

1002030405060708090

100110120

2011 2012 2013 2014 2015 2016 2017

$US

NYMEX crude oil (LHS) U.S. trade weighted major currency dollar (RHS, inv.)Source: Bloomberg, RBC GAM

Exhibit 59: Corporate bond spread (inverted) vs. S&P 500 earnings

-100-80-60-40-200204060801000

100

200

300

400

500

600

700

8001980 1985 1990 1995 2000 2005 2010 2015 2020

Y/Y

% c

hang

e

Bas

is p

oint

s

Baa corporate yield minus 10-year T-bond yield (inverted, LHS)S&P 500 earnings (RHS)

Source: RBC CM, RBC GAM

Exhibit 60: S&P 500 IndexActual and bottom-up consensus earnings-growth estimates

8.7%

-0.5%

0.7%

12.8%

9.9%

6.9%

4.1%

9.6%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2014 2015 2016F 2017F

YoY

% c

hang

e

S&P 500 Index S&P 500 Index excluding EnergyNote: actual data for 2015 and prior, bottom-up consensus estimates for 2016 onward. Based on a bottom-up aggregation of current index constitutents. Source: Bloomberg, RBC GAM


Value stocks have outperformed growth stocks since the end of January (Exhibit 62) in what appears to be a reversal of the trend that had been in place for two and a half years. Investors tend to favour value over growth stocks when economic prospects are improving because value stocks, which generally trade at cheaper valuations, tend to be more reliant on the economy’s pulse to drive their businesses. Small and mid-cap stocks have also outperformed. Stocks of smaller-

Exhibit 62: Value to growth relative performanceS&P 500 Value Index / S&P 500 Growth Index

-14%-12%-10%

-8%-6%-4%-2%0%2%4%6%

2013 2014 2015 2016 2017

Cum

ulat

ive

rela

tive

perfo

rman

ce

Source: Bloomberg, RBC GAM

look at S&P 500 earnings growth excluding the Energy sector reveals that non-Energy earnings have been rising despite earnings weakness at the overall index level (Exhibit 60). Looking forward, analysts expect earnings to deliver double-digit growth in 2017.

Potential scenarios for equitiesTo gauge the potential for equities, we look at a range of scenarios for earnings and P/E multiples for the S&P 500 Index (Exhibit 61). The market would finish 2016 close to where it is now, assuming a P/E of 18 (the level consistent with current and forecasted interest rates, inflation and corporate profitability), along with a top-down S&P 500 consensus earnings estimate of US$118.10. Next year, however, there is room for decent gains, given the current top-down S&P 500 consensus earnings estimate of US$128.30 and using the equilibrium P/E. In that scenario, the index would rise to 2313 by the end of next year, generating a 9% total return from the close on August 31. These both assume that equity market valuations rise no further than to their ‘normal’ level relative to current and anticipated interest rates, inflation and corporate profitability.

Styles suggest optimistic outlookThe recent improvement in economic data has been reflected in the relative strength of value stocks since the early-2016 correction.


Exhibit 61: Earnings estimates and alternative scenarios for valuations and outcomes for the S&P 500 Index

CONSENSUS

2016 Top down

2016 Bottom up

2017 Top down

2017 Bottom up

P/E $118.1 $117.5 $128.3 $133.0

+1 Standard Deviation 22.2 2617.8 2603.2 2844.0 2946.5

+0.5 Standard Deviation 20.1 2373.3 2360.1 2578.3 2671.3

Equilibrium 18.0 2128.8 2116.9 2312.7 2396.0

-0.5 Standard Deviation 16.0 1884.3 1873.7 2047.0 2120.8

-1 Standard Deviation 13.9 1639.7 1630.6 1781.4 1845.6

Source: RBC GAM

companies usually benefit more than large caps when the economy is improving because smaller companies are also frequently more sensitive to changes in economic growth. Exhibit 63 plots the relative strength of small-, mid- and mega-cap stocks relative to the S&P 500 large-cap Index. The chart shows that small and mid-cap stocks have outperformed significantly since January, while the largest companies have underperformed. These trends


9596979899

100101102103104105

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16S&P 100 Mega Cap Index S&P 600 Small Cap Index S&P 400 Mid Cap Index

Source: Haver Analytics, RBC GAM

suggest that the bull market in equities still has some momentum.

U.S. election market impact

We mentioned earlier that the November U.S. presidential election could have a significant impact on financial markets over the next few months. A look at how stock markets performed during past U.S. elections may provide a basis as for what to expect this time around. The average performance of the Dow Jones Industrial Average Index (DJIA) going back to 1900 and covering 29 presidential cycles suggests that markets perform better in election years when the incumbent party wins (Exhibit 64). So far this year, markets are tracking the favoured scenario (for equity market performance) of an incumbent party win by Hillary Clinton, the Democratic Party candidate. Further analysis breaks down the performance of stocks depending on which party controls the White House and Congress (Exhibit 65). The best gains, on average, occur when the U.S. government was made up of a Democratic president, Republican House of Representatives and Democratic Senate. While a Clinton victory appears to be priced into markets, we acknowledge that a Trump win is a real possibility and that it could have potential negative consequences for financial markets.


Exhibit 65: U.S. government composition and performance of Dow Jones Industrial Average

Exhibit 64: U.S. presidential election yearDow Jones Industrial Average

-15%

-10%

-5%

0%

5%

10%

15%

20%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Cum

ulat

ive

pric

e re

turn

Current cycle (2016) Average of all election yearsAverage of years when incumbent party wins Average of years when incumbent party loses

2016 2017

Note: based on daily data back to Jan 1, 1900. Source: Ned Davis Research, Bloomberg, RBC GAM

PresidentControl of

HouseControl of

Senate% gain/ annum

% of time

Republican Republicans Republicans 7.03 22.5

Republican Democrats Democrats 2.44 19.1

Republican Republicans Democrats (10.68) 1.7

Republican Democrats Republicans (2.92) 8.7

Democrat Republicans Republicans 8.72 10.1

Democrat Democrats Democrats 7.17 34.6

Democrat Republicans Democrats 10.37 3.5

Democrat Democrats Republicans N/A 0.0

Notes: based on daily data back to January 1, 1900. Source: Ned Davis Research

Exhibit 63: Relative strength to S&P 500 IndexRebased to 100 as of Jan. 1, 2015


Reflecting the balance of opportunities and risks, our asset mix continues to tilt toward stocks and away from bonds. Our equity position remains five percentage points above our strategic neutral position, although a bit below its prior peak. We continue to underweight fixed income and hold a slight overweight cash position to serve as a buffer against the possibility of further equity-market volatility. For a balanced, global investor, we currently recommend an asset mix of 60% equities (strategic neutral position: 55%) and 37% fixed income (strategic neutral position: 43%), with the balance in cash.

increase in yields. For example, it takes only a 13-basis-point increase in the U.S. 10-year yield to completely offset coupon income over the next 12 months (Exhibit 66). We forecast negative total returns for 10-year sovereign bonds across all major developed regions over the year ahead and remain underweight fixed income as a result.

Expected returns for equities are much more compelling. Exhibit 67 shows prospective returns for various asset classes should they move to our estimate of fair value over specified time frames. As mentioned, forward returns are low or even negative across fixed-income markets for most periods. However, if equities rise to equilibrium, stock gains could be in the double digits in the next few years and in the high single digits over longer time frames.

Asset mix – maintaining overweight stocks and underweight bondsImproving economic data, narrowing credit spreads, stabilizing corporate profit estimates and constructive market breadth during the past quarter have been well-received by financial markets. However, the recent experience of better-than-expected economic data is not likely to persist. Risks have indeed diminished, but have not disappeared. The possibility of an economic downturn is arguably higher than it was as we recognize that the business cycle is aging, so it would be prudent to temper expectations. Key risks to the global economy and financial markets include the impact of Brexit, the upcoming U.S. election, elevated debt levels in China, potential Fed rate hikes and geopolitical instability. While there are many reasons for concern, our base case scenario is one where the economy is able to handle these challenges and continue to grow, albeit slowly.

In our view, even slow economic growth should be sufficient to allow for a modest increase in interest rates, which will act as a headwind for fixed-income investments. Coupons are so low that they do little to cushion against capital losses resulting from even a slight


Exhibit 66: U.S. 10-year TreasuryRequired move in yields for break-even return against 30-day T-Bill

5

10

15

20

25

30

35

40

45

50

2009 2010 2011 2012 2013 2014 2015 2016 2017

Basi

s po

ints

(bps

)

Source: RBC CM, RBC GAM

Last plot: 13 bps



EXHIBIT 67: Asset-class forward returns

Asset classCurrent return1

1-year forward return

2-year* forward return






U.S. Treasury Bill 0.05%

U.S. 10 Year Treasury Bond -3.46% -7.22% -4.44% -2.83% -1.24% -0.01%

Canada 10 Year Government Bond -10.96% -13.50% -7.82% -5.30% -3.04% -1.26%

German 10 Year Government Bond -9.96% -11.52% -7.28% -5.78% -4.22% -2.98%

U.S. Investment Grade Bond** -4.38% -6.32% -3.08% -1.36% 0.31% 1.61%

Canada Investment Grade Bond** -7.64% -8.47% -4.24% -2.26% -0.46% 0.97%

Europe Investment Grade Bond** -9.58% -9.98% -5.82% -4.32% -2.76% -1.47%

U.S. High Yield Bond*** -4.23% -0.97% 2.24% 3.86% 5.36% 6.50%

U.S. Stocks (S&P 500) Total Return 7.35% 22.09% 17.69% 13.76% 11.77% 10.22% 9.64% 9.33%

Canadian Stocks (TSX) Total Return 33.20% 26.95% 14.45% 12.83% 11.20% 9.88% 9.37% 9.10%

1If market moves to equilibrium. *Annualized returns **Bank of America ML Indexes, assuming long-term reversion to normal spread to T-bond, evenly through to end date. ***Credit Suisse High Yield Index STW, assuming long-term reversion to normal spread to T-bond, evenly through to end date Source: RBC GAM, Bloomberg

“Our models project that yields

will rise from these unusually

low levels, but any near-term

adjustment will be limited given

the current low speed limit on

economic growth.”

GLOBAL FIXED INCOME MARKETS


Eurozone 10-Year Bond YieldEquilibrium range

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 0.35% Current Range: 1.02% - 2.18% (Mid: 1.60%)

Source: RBC GAM, RBC CM

U.S. 10-Year T-Bond YieldEquilibrium range

0

2

4

6

8

10

12

14

16

1980 1985 1990 1995 2000 2005 2010 2015 2020

%



Canada 10-Year Bond YieldEquilibrium range

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%


Source: RBC GAM, RBC

Japan 10-Year Bond YieldEquilibrium range

-2

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: -0.06% Current Range: 0.07% - 0.91% (Mid: 0.49%)


U.K. 10-Year Gilt Equilibrium range

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%





GLOBAL EQUITY MARKETS


S&P/TSX Composite EquilibriumNormalized earnings and valuations

400

800

1600

3200

6400

12800

25600

1960 1970 1980 1990 2000 2010 2020Source: RBC GAM

Aug. '16 Range: 15165 - 22880 (Mid: 19023)Aug. '17 Range: 14429 - 21770 (Mid: 18100)Current (31-August-16): 14598

S&P 500 EquilibriumNormalized earnings and valuations

40

80

160

320

640

1280

2560

5120

1960 1970 1980 1990 2000 2010 2020

Source: RBC GAM

Aug. '16 Range: 1712 - 2860 (Mid: 2286)

Aug. '17 Range: 1947 - 3253 (Mid: 2600)

Current (31-August-16): 2171

Eurozone Datastream Index Normalized earnings and valuations

90

180

360

720

1440

2880

5760

1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: Datastream, Consensus Economics, RBC GAM


Japan Datastream IndexNormalized earnings and valuations

65

130

260

520

1040

1980 1985 1990 1995 2000 2005 2010 2015 2020



Emerging Market Datastream IndexNormalized earnings and valuations

20

40

80

160

320

640

1995 2000 2005 2010 2015 2020

Source: Datastream, RBC GAM


U.K. Datastream IndexNormalized earnings and valuations

210

420

840

1680

3360

6720

13440

26880

1980 1985 1990 1995 2000 2005 2010 2015 2020



Soo Boo Cheah, MBA, CFASenior Portfolio Manager RBC Global Asset Management (UK) Limited

Suzanne GaynorV.P. & Senior Portfolio Manager RBC Global Asset Management Inc.


Economists have long associated rising fiscal stimulus with higher bond yields as increased government spending generally leads to faster economic growth, rising inflation and higher debt levels. Higher fiscal spending is also thought to have a ‘crowding-out’ effect whereby large government borrowings shrink the availability of capital for private borrowers, forcing them to pay relatively high interest. These days, with investors turning more strident in their criticism of monetary policy and major elections in the U.S. and Germany taking place against a backdrop of social discontent, the pressure is on governments to rev up fiscal spending. Now is the time to examine what impact a jump in fiscal stimulus could have on bond yields.

Let’s start with a review of how monetary policy fell out of favour. In the 10 years preceding the financial crisis, economic growth relied on ever-expanding private debt, so the collapse of private-sector balance sheets in 2008 made central-bank purchases of financial assets necessary to prevent the implosion of the banking system.

However, what were at the time considered temporary monetary

GLOBAL FIXED INCOME MARKETS

tools have become lasting features of today’s debt-dependent economy. Interest rates near zero have allowed private borrowers to service their debt loads, while quantitative easing has propped up asset prices and prevented a deflationary spiral.

The U.S. Federal Reserve (Fed) ceased bond purchases in October 2014, but has since managed to raise its policy rate only once and also refrained from attempting to shrink its US$4.4 trillion balance sheet. The European Central Bank (ECB) also succumbed to the appeal of asset purchases when Eurozone deflationary risks jumped in recent years. The ECB embarked on quantitative easing in March 2015 and the program has been extended through March 2017 to include purchases of corporate bonds. Countries including Japan, Switzerland and Sweden are experimenting with negative interest rates on deposits in an effort to stimulate lending and spending.

The heavy and prolonged intervention by global central banks has driven up the wealth of people who hold stocks, bonds and real estate. But critics have blamed central-bank policies in part for the populism and anti-establishment views that led U.K. voters to cut ties with the EU in a referendum during the summer and Republicans to choose Donald Trump as their presidential candidate. Regardless of whether Trump or Democrat Hillary Clinton wins the presidency, we expect fiscal spending in the U.S. to escalate to address social discontent and economic inequality. In Europe, most governments have been backing away from the fiscal austerity in place since the financial crisis, and this shift in attitude has been contributing to economic growth in the region since 2014. Further government spending across major economies could help reverse slow economic growth around the globe and aid in calming the rise of political populism.

0

50

100

150

200

250

1995 1999 2003 2007 2011 2015

% o

f Jap

an G

DP

GovernmentDebt

HouseholdDebt

Source: IIF

Exhibit 1: Japanese government has been borrowing to keep the economy afloat


with weak institution tends to be especially inflationary.

We believe therefore that with global economic growth slow and inflation low, government bond yields will likely stay near the levels of the past two years. Japan’s 2½ decades of lost economic growth are a reasonable template for what is to come for the other major economies. Over the intermediate term, the odds of higher Treasury yields stem from higher inflation as the labour market

periods of slow growth and the Fed will be accommodative – the very circumstances in which yields tend to decline.

We must stress that not all countries enjoy this privilege, and bond investors will likely penalize countries with weak institutions by requiring higher yields. This is due to the elevated risks of currency depreciation and the fact that government spending in countries

Global Fixed Income Markets | Soo Boo Cheah, MBA, CFA | Suzanne Gaynor

Japan’s experience demonstrates convincingly that ramping up fiscal spending does not necessarily lead to increased interest rates. In fact, ballooning government spending in Japan has been accompanied by falling interest rates over the past two decades. Exhibit 1 illustrates that Japanese household debt as a percentage of GDP has flat-lined since the bursting of the country’s asset bubble in the 1990s, while government spending fueled by debt sales sustained economic growth.

The global economy seems to be trapped in a Japanese-style escalation of government debt as the private sector takes a vacation from adding to its overall debt levels (Exhibit 2). Global household debt has stopped rising as a percentage of GDP and governments have been borrowing to keep economies expanding, albeit weakly. Signaling a similar trend, our research shows that 10-year Treasury yields have frequently fallen in periods when governments went on borrowing binges. Exhibit 3 illustrates that the yield on the 10-year Treasury bond has declined two-thirds of the time when government spending increased. The crowding-out effect, it turns out, does not appear to apply in the U.S. and other developed economies with strong regulatory environments. This may be because the theory fails to take into account the fact that higher U.S. government spending generally occurs during periods of weak economic growth, and often recession. Inflation will naturally be relatively weak in

Exhibit 2: Global government-debt profile starting to resemble Japan’s

Exhibit 3: The 10-year Treasury yield tends to fall when government spends more

40

50

60

70

80

90

1999 2003 2007 2011 2015

% o

f Glo

bal G

DP

Government

HouseholdDebt

Source: IIF

-500-400-300-200-1000100200300400500

-8 -7 -6 -5 -4 -3 -2 -1 0 US

10-y

ear y

ield

12-

mos

cha

nge

(bps

)

U.S. Government incremental spending % GDP12-mos change in Budget Balance % GDP (1970 - 2016)

1970 - 1999 2000 - 2016Source: Bloomberg


-3

-2

-1

0

1

2

3

4

2009 2010 2011 2012 2013 2014 2015 2016

Rea

l Lon

g-te

rm In

tere

st R

ates

(5

y5y

OIS

-In

flatio

n S

wap

s)

R* USD R* EUR R* GBP R* JPYSource: Bloomberg

Exhibit 4: Long-term real interest rate looks fairly priced in Japan, but expensive elsewhere


In our view the most likely outcome is that 10-year yields will remain in a range, but with some volatility driven by regulations that limit the size of bank balance sheets. The 10-year Treasury yield could rise to 2.00% sometime over the next 12 months, 0.25% lower than our previous forecast.

Germany – Trust among Germans in the ECB is the lowest of the Eurozone’s core countries and continues to decline. We suspect that it was the imposition of negative deposit rates that is contributing to this deterioration in sentiment. However, a majority of Germans still favour the continuation of the Eurozone. The lack of confidence in the ECB and affection for the single currency are not necessarily at odds, and we think that the ECB will do its best to narrow this polarization, which is the last thing that Chancellor Merkel needs ahead of next year’s federal elections. With rising populism and heightened political risk throughout the euro

U.S. – The Fed continues to seek the economic daylight required to raise the fed funds rate, suggesting that short-term rates are too low for an economy operating at full capacity and with a targeted inflation rate of at least 2%. We expect one rate hike over the next 12 months, one less than in our previous forecast, to reflect the age of the current U.S. business cycle, and decrease our fed funds forecast to 0.75% from 1.00%. This aligns with the Fed habit of continuously lowering its projected pace of monetary tightening. The Fed can talk all it wants about tightening, but economic reality may not support significant action.

Near-term optimism surrounding fiscally induced global economic growth as well as expectations that the ECB and Bank of Japan (BOJ) will stop pursuing further negative deposit rates should allow bond yields to head higher. However, uncertainty about November’s presidential election adds to downward pressure on bond yields.

continues to improve, economic slack contracts and central banks appear to be scaling back their penchant for easing.

Direction of ratesThe focus of financial markets over the next year will likely shift to fiscal stimulus from aggressive monetary easing. This change could at first lift the 10-year U.S. yield to the cycle highs of about 2.50% posted in the summer of 2015, as this is the first level of technical resistance. We expect central banks in Europe and Japan to refrain from cutting already negative deposit rates further, but to maintain and possibly expand asset-purchase programs. We also continue to believe that the Fed intends to keep its tightening bias intact and expect one policy-rate hike by the end of 2016. Investors will be presented with better yield levels to accumulate government bonds as economic optimism revives on fiscal spending.

From a valuation standpoint, today’s thin yields mean that global government-bond prices are rich. Our calculations show the U.K. rate is the most expensive at about 200 basis points below fair value, followed by Europe at 80 basis points and the U.S. at 60 basis points. Interestingly, only Japan is close to fairly valued on this measure (Exhibit 4). Researchers at both the Bank of England (BOE) and the Fed estimate that long-term real interest rates across the major economies should be around 0%, rather than at current negative real yields.


area, we believe the ECB will step back from policies that have in some cases pushed interest rates deep into negative territory. Banks are also a consideration for the ECB, as negative interest rates are making it almost impossible for weaker banks to weather high levels of non-performing loans. We raise our ECB deposit-rate forecast to negative 0.40%, compared with our previous forecast of negative 0.50%. Our forecast for the 10-year yield falls to 0.30%, a 0.20% reduction from our previous forecast of 0.50%.

Japan – We expect the BOJ to continue engaging in asset purchases and stay put on deposit rates, leaving them at negative 0.10%. Prime Minister Abe recently announced a ¥28 trillion (US$280 billion) stimulus package. The amount was impressive on the surface, but in reality only ¥7.5 trillion represented new spending. JGB yields rose after a combination of the fiscal disappointment; the fact that the government said it would finance the spending with longer-term bonds, for which demand is relatively low; and the intention of the BOJ to suspend, at least temporarily, its pursuit of even more-aggressive easing. At this time, JGBs may be the only major bonds that are fairly priced.

We are increasing our yield forecast for the 10-year JGB to 0.00% from negative 0.20%.

Canada – The Canadian economy clearly stumbled in the second quarter, with lower oil production


U.S.

3-month 2-year 5-year 10-year 30-year Horizon

return (local)

Base 0.75% 1.20% 1.60% 2.00% 2.60% (0.70%)

Change to prev. quarter (0.25%) (0.40%) (0.30%) (0.25%) (0.30%)

High 1.25% 1.75% 2.25% 2.50% 3.00% (3.54%)

Low 0.38% 0.50% 0.60% 1.00% 1.70% 5.18%

Expected Total Return US$ hedged: (0.40%)

GERMANY


return (local)

Base (0.40%) (0.20%) 0.10% 0.30% 0.60% (2.73%)

Change to prev. quarter 0.10% (0.10%) 0.00% (0.20%) (0.50%)

High 0.00% 0.40% 0.60% 0.75% 1.25% (8.73%)

Low (0.50%) (0.50%) (0.75%) (0.50%) (0.16%) 1.80%


JAPAN


return (local)

Base (0.10%) (0.10%) (0.05%) 0.00% 0.45% (0.32%)

Change to prev. quarter 0.30% 0.25% 0.25% 0.20% 0.15%

High 0.00% 0.05% 0.10% 0.20% 0.80% (4.75%)

Low (0.20%) (0.20%) (0.25%) (0.25%) 0.25% 2.71%

Expected Total Return US$ hedged: 1.00%

CANADA


return (local)

Base 0.50% 0.90% 1.00% 1.50% 2.00% (2.20%)

Change to prev. quarter 0.00% (0.10%) (0.25%) (0.25%) (0.35%)

High 0.75% 1.25% 1.50% 2.00% 2.40% (5.93%)

Low 0.00% 0.00% 0.10% 0.50% 1.15% 6.69%


U.K.


return (local)

Base 0.25% 0.50% 0.75% 1.00% 1.60% (3.95%)

Change to prev. quarter (0.50%) (0.50%) (0.75%) (1.00%) (1.10%)

High 0.25% 0.75% 1.25% 1.50% 2.00% (9.31%)

Low 0.00% 0.00% 0.10% 0.25% 1.25% 1.94%


INTEREST RATE FORECAST: 12-MONTH HORIZON Total Return calculation: Aug. 24, 2016 – Aug. 23, 2017

Source: RBC GAM


that the BOE will lower rates again in the near term given that fiscal stimulus is probably in the pipeline. We expect gilt yields to rise from their current rich valuations, and our 12-month forecast for the 10-year gilt is at 1.00%, a big drop from 2.00% last quarter before Brexit. We forecast that the BOE policy rate remains unchanged at 0.25% over the next 12 months.

Regional preferencesWe are maintaining our recommendation from previous quarter to overweight Japanese government bonds by five percentage points and underweight German bunds by a similar amount. JGBs are neutrally priced, while German bunds do not yet reflect the rising odds that the ECB will scale back purchases of German bonds and pause on driving short-term interest rates further into negative territory. Our view on the U.S. remains neutral.

nowhere close to raising rates. The tone from the BOC suggests a high threshold for further easing, and markets currently have priced in no chance of a rate cut over the next year.

We have lowered our expectations for the 10-year government bond to 1.50% from 1.75% while leaving our forecast for the BOC policy rate unchanged at 0.50%.

U.K. – The BOE, aware that the U.K. decision to leave the EU has left the domestic economy vulnerable, lowered its policy rate on August 4 while committing to the purchase of £60 billion (US$79 billion) of government bonds and £10 billion of corporate bonds. BOE Governor Mark Carney also launched a program making it easier for banks to lend to small and medium-sized businesses.

In response, longer-dated gilt yields fell to historically low levels. We are skeptical of the market’s view


due to wildfires in Alberta and a surprise drop in exports leading to a decline in GDP. Rebuilding efforts in Alberta should provide a boost in the third quarter, but the Canadian economy is growing modestly at best. We don’t expect to see any Bank of Canada (BOC) rate hikes until the end of 2017, and the BOC might even lower rates sometime this year if the economic rebound is weaker than expected. The BOC has been worried about overheated housing markets in Vancouver and Toronto, but a new tax imposed on Vancouver property buyers from abroad should help cool prices.

Canadian bonds continue to attract foreign money due to the allure of Canada’s stable financial and political system, good market liquidity and relatively high yields. We expect Canadian bonds to outperform U.S. fixed income since we continue to believe that the Fed will hike rates at least once in the next 12 months, while the BOC is

CURRENCY MARKETS

After appreciating for three straight years, the U.S. dollar has moved sideways for the past 18 months. Dollar bulls are understandably disappointed by the greenback’s performance, and some are even switching to a bearish view, proclaiming that a multi-year downtrend has begun. Indeed, the U.S.-dollar bear camp is growing. We caution that turning points for the U.S. dollar are exceptionally difficult to predict, a task made even harder when so many long-term factors remain supportive. The acquisition of U.S. companies by foreigners, the substantial overseas appetite to own U.S. financial assets and a rate of economic growth that is expected to outpace much of the developed world all portend continued demand for the U.S. dollar. This year marks the fifth of the current U.S. dollar cycle, while U.S. dollar bull markets last seven years on average and involve an appreciation of between 40% and 60%. As is clear from Exhibit 1, the U.S. dollar is like any other financial asset in that it does not gain or lose value in a straight line. So while the range-bound

Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income & Currencies (Toronto & London) RBC Global Asset Management Inc.

Daniel Mitchell, CFAPortfolio ManagerRBC Global Asset Management Inc.

Taylor Self, MBAAnalyst RBC Global Asset Management Inc.

behaviour of the greenback over the past year and a half is disappointing, it is hardly unusual (Exhibit 2). We remain bullish on the U.S. dollar, although less so, acknowledging the aging of the U.S. dollar cycle.

Over the past few years, we have pinpointed diverging monetary policies among the world’s central banks as the primary driver of U.S. dollar strength. As the rate of dollar appreciation reached its zenith in

2015, expectations for the path of U.S. monetary policy stood in stark contrast to those of Japan and Europe. These days, however, expectations for tighter policy from the U.S. Federal Reserve (Fed) are much more modest. Monetary policymakers have been challenged by a high degree of uncertainty regarding developments in China and the rest of the world. Another complication for the Fed is that investors have been driving the U.S.


Exhibit 1: U.S. trade-weighted dollar

65

7585

95

105115

125135

145

71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16U.S. trade-weighted dollar

8 yrs-26%

6 yrs+67%

10 yrs-47%

7 yrs+43%

9 yrs-40%

5 yrs+41%

Source: Federal Reserve, Bloomberg

Exhibit 2: Comparison of previous U.S. dollar bull markets

1.00

1.10

1.20

1.30

1.40

1.50

1.60

-1,000 -500 0 500 1,000 1,500 2,000 2,500Days into bull market

1978 - 1985 1994 - 2002 2011 - PresentNote: Values indexed to 1 at begining of bull market. Source: Federal Reserve, Bloomberg


Currency Markets | Dagmara Fijalkowski, MBA, CFA | Daniel Mitchell, CFA | Taylor Self, MBA

dollar higher when they believe that higher rates are coming, and the simple rise in the greenback makes tightening less necessary.

Monetary policy remains extraordinarily accommodative considering the state of the U.S. economy. Unemployment is below 5% and several measures of wage growth are near pre-crisis levels. What’s more, most measures of core inflation are at or near the Fed’s 2% target. Nevertheless, headline GDP growth remains sluggish, stirring questions over the economy’s ability to stomach higher short-term interest rates. Money markets have been very reluctant to price even one hike over the next 12 months, which strikes us as too dovish and leaves open the possibility that the Fed might hike sooner than markets expect.

Indeed, conviction regarding the need for tighter monetary policy in the U.S. has abated, and other major central banks are finding that extraordinary measures such as negative interest rates and asset purchases are much less potent than expected. These programs also come with consequences that may outweigh their perceived benefits. All of this is to say that the potential for diverging monetary policies to serve as the primary driver of the U.S. dollar rally seems much diminished.

As monetary policy fades as the primary stimulant of economic growth, there is a growing call for fiscal measures to take up the

slack. Canada, China and Japan, to name a few countries, have already announced or implemented spending programs, and both U.S. presidential candidates are campaigning for greater infrastructure spending. The president of the Federal Reserve Bank of San Francisco, John Williams, has also called for greater government spending, a sentiment echoed recently by Fed Chair Janet Yellen and G20 leaders. With low interest rates so prevalent, we believe that differences in economic growth rates, rather than interest-rate differentials, are set to become a greater focus for currency markets. This development reinforces a theme we have identified in past editions of the Global Investment Outlook: faster growth in the U.S. compared with other countries would provide support for the U.S. dollar (Exhibit 3).

An eye on the renminbiWe have also been keeping an eye on the travails of the Chinese renminbi, which is set to formally

join the International Monetary Fund’s Special Drawing Rights (SDR) basket in October. Following a shift in August 2015 in the way China manages its currency, many investors believed that a sudden and substantial devaluation was only a matter of time. Our view was, and still is, more sanguine.

We agree that the currency will weaken, but only gradually. Even though the currency regime has changed to allow greater fluctuations in the renminbi, the currency remains a government policy tool. But while policymakers seem open to continued currency weakness, declines will be orchestrated in a way that is minimally disruptive to global financial markets. Among the factors that we expect to weigh on the renminbi are continued capital outflows and the fact that the Chinese currency is still modestly overvalued to the tune of 5% to 10%.

Critically, Chinese capital outflows are much more muted than they were

Exhibit 3: U.S. economic-growth differential with major trading partners

-6%

-4%

-2%

0%

2%

4%

6%

60

80

100

120

140

83 86 89 92 95 98 01 04 07 10 13 16U.S. – Trading partner growth differential (RHS) USD Index (LHS)8Qtr MA of growth differential

Source: Westpac


last year, when domestic businesses were scrambling to repay offshore debts. With much of those liabilities having been repaid (Exhibit 4), currency markets are no longer exhibiting stress. Chinese reserves have stabilized and authorities are continuing to emphasize reforms aimed at encouraging greater inflows. This may prove successful considering the relatively high yields offered by Chinese bonds as well as the fact that foreign holdings of government debt are minimal (Exhibit 5). A steady, but orderly, depreciation of the renminbi implies a lighter tailwind for the U.S. dollar versus emerging-market currencies. Some of these currencies had weakened substantially in recent years and their attractive yields will entice investors during periods of low volatility.

The euroIt has been over a year and a half since the euro traded meaningfully outside the 1.05 to 1.15 range against the U.S. dollar (Exhibit 6). The primary reason for the euro’s inertia may be that investors are underestimating the risks that continue to reside in Europe. Correspondingly, the monetary machinations of the European Central Bank (ECB) and ECB President Mario Draghi have retreated from the front pages. Even when concerns about the future of Europe have come to the fore, as was the case during the U.K. referendum on EU membership, they have quickly retreated. The


Exhibit 4: International claims on China

0100200300400500600700800900

1,000

2004 2006 2008 2010 2012 2014 2016Other Trade Credits Currency & Deposits Loans

Source: SAFE, Macrobond

Exhibit 5: Foreign ownership of Chinese bonds

0%

10%

20%

30%

40%

50%

60%

Mal

aysi

a

Indo

nesi

a

S. A

frica

Mex

ico

Bra

zil

Thai

land

Kore

a

Indi

a

Chi

na

Source: J.P. Morgan

Exhibit 6: EUR-USD exchange rate

0.951.001.051.101.151.201.251.301.351.401.45

Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16Source: Bloomberg


Exhibit 7: Eurozone basic balance of payments

-800

-600

-400

-200

0

200

400

600

2000 2002 2004 2006 2008 2010 2012 2014 2016

12-m

onth

sum

(EU

Rbn

)

Net portfolio flows Net foreign direct investmentCurrent account Basic Balance

Source: Eurostat

The yenWe now turn to what has proven to be the most difficult currency to forecast – the yen. It has been nearly four years since the announcement of “Abenomics,” an ambitious package of monetary easing, fiscal measures and structural reforms. So far, the program has failed to alter the long-term trajectory of the Japanese economy; the country is still saddled with an enormous debt load, low wage growth, anemic inflation and economic growth that has fallen far short of target. We recognize that the quality of delivery from the political side of the reform equation has left much to be desired. However, for believers in the power of central banks, it is an inescapable fact that the results have been sobering.

Excluding the impact of a consumption-tax hike in 2014, core inflation in Japan has risen at an annualized pace of just 1% since 2013, a far cry from the Bank of Japan’s (BOJ) goal of 2%. Indeed,

going forward and take on currency risk. This development will be increasingly negative for the euro.

The second potential catalyst comes in the form of political risks, which seem to have faded for now but could come home to roost for the euro over the next 12 months. Later this year, the Italian government faces a referendum on Senate reform that has been transformed into a vote on the government’s competence. In 2017, the U.K. is expected to formally start EU divorce proceedings by invoking Article 50 and Germans will head to the polls to pass judgment on the recent tenure of Chancellor Angela Merkel.

In summary, large and persistent capital outflows from the Eurozone, changing hedging behavior and rising political risks lay a solid foundation for our belief that Europe’s single currency will weaken. We expect the euro to reach parity with the U.S. dollar over the next 12 months.

referendum does not seem to have been the much-feared harbinger of Euroscepticism. Notwithstanding market volatility following Brexit, concerns that populist efforts would spread to the continent were eased by Spanish elections that, on balance, indicated a status quo result rather than a revolt against Brussels.

We acknowledge that there are forces supporting the euro. Economic activity in the Eurozone, while not spectacular, has been decidedly steady. Inflation, though it continues to fall short of the ECB’s 2% goal, has stabilized at a positive rate. Moreover, this lacklustre headline inflation number belies the fact that weaker oil prices continue to exert a significant drag on consumer prices. The second euro-supportive issue is that the threat of a Greek default and related debt-market contagion have receded. New catalysts are needed to provide fresh impetus for a weaker euro, especially since valuations offer little guidance on the direction of the single currency.

The first of these catalysts may be QE-induced portfolio outflows, which have not yet been as negative for the euro as we had expected. While these outflows have more than offset the Eurozone’s large current-account surplus (Exhibit 7), the fact that they are hedged means that they have had little negative impact on the euro to date. This substantial activity, however, has forced the cost of hedging much higher, making Europeans likelier to shun hedges



since Abenomics began we have yet to witness a single 12-month period over which prices rose by 2%. Meanwhile, after an initial rise, expectations for future inflation have dropped near previous lows. What is more, the government has considered the economy too weak to bear the brunt of another proposed hike in the consumption tax. The increase, originally scheduled for October 2015, has been postponed indefinitely.

Adding insult to injury, the yen is now stronger on a trade-weighted basis than it was in April 2013, when the BOJ launched quantitative easing and Abenomics debuted (Exhibit 8). Attempts to engineer a weaker yen, an unspoken pillar of Abenomics, have been running up against the fact that the currency is already undervalued. At the start of Abenomics, the yen was near a trade-weighted 30-year low. Investors believed at the time that a determined government, in conjunction with a willing central bank, could make it happen. It turned out, however, that policymakers have repeatedly missed opportunities to demonstrate their resolve, turning the currency tailwinds of Abenomics into headwinds. The BOJ now owns nearly 40% (and climbing) of the government-bond market, is a top-10 shareholder of most Japanese companies through ETF purchases, and is imposing negative interest rates on banks. To even the untrained eye, the


Exhibit 8: Japan’s nominal effective exchange rate

400

420

440

460

480

500

520

540

560

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

JPY NEER JPY NEER at announcement of QQESource: Bloomberg

results of Abenomics have been underwhelming.

The BOJ’s fecklessness was perfectly typified by its monetary policy meeting at the end of July when it disappointed investors. The BOJ nearly doubled ETF purchases, and kept interest rates and bond purchases unchanged. In the run-up to the meeting, expectations for even more easing had been running quite high, with rumours of coordinated fiscal and monetary stimulus. Governor Kuroda’s efforts to warn investors away from expecting further easing measures failed because he had, months earlier, denied negative interest rates were being considered just prior to their implementation. All of this serves to highlight the fact that not only has the BOJ disappointed, but that the Japanese central bank has a credibility problem.

The next event to watch for comes on September 21, when the BOJ publishes its comprehensive policy

review. While we do not expect significant changes in policy, the BOJ’s recent record of catching investors off-guard means that we will be watching closely. In the meantime, the Japanese central bank continues to conduct an enormous amount of quantitative easing against a backdrop of paltry new issuance and a very flat government yield curve.

The net result of this backdrop has been to spur substantial portfolio outflows by Japanese investors searching for positively yielding bonds. As with Europeans, Japanese investors used to be able to achieve a significant yield pickup by switching from Japanese government bonds into U.S. Treasuries without taking any currency risk (Exhibit 9). However, the massive volume of outflows and the corresponding hedging of U.S. dollar risk mean that this yield advantage has been erased in a way that is similar to Europe. Going forward, we believe that Japanese investors will


continue to have an appetite for foreign bonds, which will still look attractive against the paltry yields on offer at home, but that they may need to accept more currency risk on these investments. The other source of outflows from Japan has been outward direct investment, as Japanese companies have either moved a greater share of their operations offshore or acquired foreign businesses. On a net basis, outward direct investment totaled 14 trillion yen over the 12-month period ended in June, almost fully offsetting Japan’s current-account surplus over the same period (Exhibit 10).

We continue to expect yen weakness over a 12-month time horizon driven mostly by changes in the nature of the outflows. However, experience has shown us that there is a meaningful risk that the BOJ and the government will fail to deliver on the necessary reforms and policy initiatives required to generate higher growth and inflation. As such, our conviction regarding a weaker yen is lower. We forecast the yen to reach 110 per dollar over the 12-month forecast period.

The poundIt would be an understatement to simply remark that things have changed for the U.K. The vote to leave the EU has had immediate implications for the pound, as the currency depreciated 10% in the week following the event. This reaction is consistent with the long-term political and economic uncertainty generated by the result.

Going forward, we expect an easing bias from the Bank of England (BOE), as well as the country’s large current-account deficit, to continue to weigh on the pound.

With regards to the impact of the Brexit vote, we still have more questions than answers. The U.K. has yet to invoke Article 50, which would mark the formal start of exit negotiations with Brussels, and just what the U.K.’s new relationship with the continent will look like is

anyone’s guess. Initial indications suggest that the two sides remain far apart in their visions. The impact on economic activity is also unclear, though the range of outcomes must be skewed towards weaker rather than stronger growth.

The economy already showed signs of a slowdown even before the referendum. In response to the economic shock, the BOE delivered a decisive round of monetary easing at its August meeting, and


Exhibit 10: Japan’s basic balance of payments

-60

-40

-20

0

20

40

60

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

12-m

onth

sum

(JPY

trn)

Net portfolio flows Net foreign direct investmentCurrent account Basic balance

Source: Bank of Japan, Ministry of Finance

Exhibit 9: Hedged U.S. 10-year bonds compared with Japanese 10-year bonds

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2012 2013 2014 2015 2016

Yiel

d

U.S. 10-year treasury (hedged to yen) Japan 10-year government bondSource: Bloomberg


-10%

-5%

0%

5%

10%

15%

20%

25%

Col

ombi

aU

.K.

Aus

tralia

S.Af

rica

Turk

eyB

razi

lM

exic

oU

.S.

Indo

nesi

aIn

dia

Belg

ium

Pola

ndPo

rtuga

lS

pain

Italy

Mal

aysi

aP

hilip

pine

sC

hina

Japa

nS

wed

enR

ussi

aN

orw

ayH

unga

ryK

orea

Ger

man

yN

ethe

rland

sIre

land

Switz

erla

ndTa

iwan

Sing

apor

e

Source: Bloomberg

clearly indicated that more was on the way. The combination of measures included a rate cut, an expansion of quantitative easing and facilities supporting loans to small and medium-sized businesses. In contrast to the recent experience of the BOJ and the ECB, the pound responded in the manner expected for monetary easing: it depreciated.

Concerns about inflation, which had previously preoccupied several members of the Monetary Policy Committee have been relegated to the sidelines by the more pressing issue of supporting economic activity. Comments by BOE Governor Carney that inflation will be of secondary concern in coming months will likely be negative for the pound.

The other thing that the vote to leave the EU has brought to the fore is the U.K.’s yawning current-account deficit. At over 5% of GDP, the deficit is worse than those of serial deficit-runners Turkey and South Africa, and is almost as bad as Colombia’s (Exhibit 11). It is important to recognize that not all current-account deficits are created equal. What is often more important than the magnitude of a deficit is how it is funded. We are generally less concerned with countries that fund deficits with incoming foreign direct investment, which tends to be a long-term capital flow. The U.K., in contrast, has been relying heavily on what Carney has referred to as the “kindness of strangers.” These are inward portfolio-investment flows that can leave as quickly as they


arrive (Exhibit 12) and may be more fickle as a result of the vote.

Going forward, we expect the prospect of further easing to keep the pound on a depreciatory path as the BOE battles lacklustre economic growth. We forecast the pound to decline to 1.25 over the next 12 months.

The loonieWe continue to forecast that the Canadian dollar will lose ground

against its U.S. counterpart over the next year. The expected benefits of a lower Canadian dollar have, by and large, not yet materialized, leaving economic activity mixed at best. In addition, the funding of the current-account deficit is a risk to the loonie, and a worsening trade balance is doing nothing to ameliorate the situation.

This lack of adjustment leads us to believe that the loonie is just not cheap enough to spur the

Exhibit 12: U.K.’s basic balance of payments

-25%-20%-15%-10%

-5%0%5%

10%15%20%25%

1987 1990 1993 1996 1999 2002 2004 2007 2010 2013 2016

4-qu

arte

r rol

ling

sum

, % o

f GD

P

Net porfolio flows Current accountNet foreign direct investment Basic balance

Source: Office for National Statistics

Exhibit 11: Current-account balances (% of GDP)


necessary changes. According to our purchasing power parity (PPP)valuation model, the Canadian dollar is only moderately undervalued. We would have to see values closer to 1.50 to say definitively that the loonie’s weakness was at the extremes that would have a large impact on non-energy exports.

While the economy managed to outperform the expectations of many in the aftermath of the global oil-price collapse, this should not be taken as a portent that the economy is in robust health. In fact, growth has been quite sluggish. Non-energy exports, which should be receiving a boost from a weaker loonie, have not shown signs of taking up the slack from the energy sector (Exhibit 13).The disappointing result only serves to underscore the fact that the global financial crisis, followed by years of Canadian-dollar strength, did not just cause manufacturing companies to retrench, but resulted in the outright destruction of capacity. Similar results were brought about by a decade of poor Canadian labour competitiveness, which has only recently started to turn (Exhibit 14). This type of damage will take several years of a significantly weaker loonie to repair.

Absent an uptick from exports, the Bank of Canada (BOC) has been content to stay its hand in pursuing easier monetary policy, citing the expected impact of increased government spending. This will provide a modest boost to the economy over the next couple


of years, but the private sector will eventually need to accelerate as well. Aside from non-energy manufacturing, concerns about the state of the Canadian housing market are also growing, propelled by the recent imposition of a foreign buyers’ tax in the Vancouver region. The direct and indirect impacts of any wobble in house prices would extend well beyond the real estate sector. At any rate, it is more likely than not that the BOC will remain cautious in its approach to the

eventual tightening of monetary policy and further cuts are a probability rather than a possibility.

A decline in energy exports, coupled with the lack of improvement in non-energy exports on the back of a weaker loonie, means that Canada’s balance-of-payments profile is also deteriorating. A worsening trade balance has paralleled steady and substantial direct investment outflows, which are only being partially offset by the appetite of

Exhibit 13: Canadian manufacturing employment and USD-CAD exchange rate

0.70

0.85

1.00

1.15

1.30

1.45

1.60

1.75

1,300

1,500

1,700

1,900

2,100

2,300

2,500

76 81 86 91 96 01 06 11 16

Manufacturing Employment, SA 000s 2yr Lag (LHS) USD-CAD (RHS)Source: Statistics Canada, Bloomberg

Exhibit 14: Relative Canada-U.S. labour competitiveness

-50

-40

-30

-20

-10

0

10

20

30

1981 1986 1991 1996 2001 2006 2011 2016

Wag

e co

mpe

titiv

enes

s (%

)

Real USD Nominal USDNote: Competitiveness measured as gap between Canadian and U.S. inflation-adjusted unit labour cost. Source: Haver Analytics, RBC GAM

U.S. more competitive

Canada more competitive


enormous financial outflows and rising hedging costs should exert downward pressure on the yen and the euro. Meanwhile, the pound will be dogged by questions surrounding the country’s exit from the EU. Canada’s economic adjustment has been only slight thus far, and we expect further loonie weakness.

SummaryWe continue to expect the U.S. dollar to resume its rising trend. While central-bank policy divergence may be losing importance, factors such as relative economic-growth rates will likely emerge to support the argument for additional U.S. dollar strength. In Japan and Europe,

foreign investors for Canadian bonds (Exhibit 15). Inflows into the “other” investment category, such as bank deposits, are also plugging the funding gap at the moment. Neither of these sources is particularly robust, and some adjustment will be necessary in the form of currency weakness.

We also do not think that a resurgence in oil prices will create a long-term life line for the Canadian dollar. Nor would further weakness in crude necessarily lead to loonie weakness. It is our belief that the Canadian economy is in the middle of an adjustment that extends beyond the oil sector and its dependents. As we have shown previously, the Canadian dollar does not solely depend on the trajectory of oil, and neither does our forecast. We expect the loonie to weaken to 1.44 over the next year.


Exhibit 15: Canada’s basic balance of payments

-8%-6%-4%-2%0%2%4%6%8%

10%

2000 2003 2006 2009 2012 20154-qu

arte

r rol

ling

sum

(% o

f GD

P)

Current account Net portfolio flowsNet foreign direct investments Basic balance

Source: Statistics Canada


40

80

160

320

640

1280

2560

5120

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020Source: RBC GAM


Ray Mawhinney Senior V.P. & Senior Portfolio Manager RBC Global Asset Management Inc.

Brad Willock, CFA V.P. & Senior Portfolio Manager RBC Global Asset Management Inc.

REGIONAL OUTLOOK – U.S.

UNITED STATES RECOMMENDED SECTOR WEIGHTS

RBC GAM INVESTMENT STRATEGY COMMITTEE

August 2016

BENCHMARK S&P 500

August 2016

Energy 6.0% 7.0%

Materials 3.0% 2.9%

Industrials 11.0% 10.0%

Consumer Discretionary 12.3% 12.2%

Consumer Staples 10.5% 10.1%

Health Care 14.0% 14.6%

Financials 16.0% 16.3%

Information Technology 22.5% 21.1%

Telecommunication Services 2.0% 2.7%

Utilities 2.8% 3.3%

Source: RBC GAM

The U.S. stock market continued to march higher over the three-month period, extending the recovery which began early in the year. In the quarter ended August, the S&P 500 rose over 4%, setting an all-time high two weeks prior to the end of the quarter. The only excitement during the period occurred following the surprising outcome of the Brexit vote, after which the S&P 500 plunged 113 points in two days but recovered all of the losses within eight days. The general stock rebound this year has been driven by better-than-expected U.S. economic data, a continued pause in the U.S. dollar’s long-term rally, stabilization in emerging-market economic data and a sense that the negative implications of the Brexit decision were more local than global. These forces combined to reduce the likelihood of an imminent crisis that could have negatively impacted the U.S. economic outlook. In response, corporate-bond spreads tightened and stocks marched higher as the worst-case scenario appeared increasingly less likely.

Although the global growth outlook continues to be uninspiring, business activity in the U.S. appears to be improving. The job market remains robust as the economy has

will likely hit an all-time record given the recent new high in the stock market. Importantly, there appear to be few excesses in the economy, as credit standards have remained relatively tight, except in auto loans, and the share of borrowing done by those with the lowest credit scores has been small since the financial crisis. Overall, the U.S. economy appears to be grinding ahead and,

added on average 175,000 jobs per month over the past six months and the unemployment rate remains below 5%. Wages are now rising at a 2.4% pace, and those with the courage to change jobs are being rewarded with average increases of 4%. In addition, household credit growth is running at about 5%, home prices have risen over 5% a year for several years and household wealth

S&P 500 EQUILIBRIUM Normalized earnings and valuations


Regional Outlook – U.S. | Ray Mawhinney | Brad Willock, CFA

given the favourable setup for housing and the prospects for future wage growth, it does not appear that the end of the economic cycle is imminent. In fact, according to the Federal Reserve Bank of Atlanta’s real-time GDP forecast, the U.S. is on track to produce growth of about 3.5% in the current quarter, exceeding that of most other developed economies.

The S&P 500 currently trades at roughly 17 times 12-month forward earnings estimates, in line with our estimate of fair value. While many investors are arguing over whether the overall market is cheap or expensive, we believe the discussion should focus on the distribution of stock valuations. The most expensive stocks have steady and predictable earnings, offer high dividend yields, exhibit low price volatility and trade like bond proxies (their prices rise when bond yields fall). These stocks have been in high demand because of aging demographics, too much debt and too little growth. In a world where over half of all government debt yields less than 1%, these stocks are seen as a good source of income despite trading at an average P/E of 22. On the other hand, the cheapest stocks are mostly drawn from cyclical sectors, where the worry is that the economic cycle is on its last

legs. These stocks suffered through an 18-month period of U.S. dollar strength that began in mid-2014 as commodity prices turned down and global growth slowed. This group trades at an average P/E of 12.5 and has staged a bit of a recovery since February, when expectations of a slower pace of rate hikes by the U.S. Federal Reserve caused the U.S. dollar to weaken and commodity prices to stabilize and recover somewhat. What is clear is that the U.S. dollar is a key determinant of the market’s future. Assuming the greenback remains range-bound, value stocks could stage a significant rally.

We see a number of opportunities among value stocks. The most obvious are in the Energy sector, where a historic bust has resulted in industrywide writedowns of more than 10% – greater than during the mid-1980s oil crash. The sector is cheap and there was fortunately a supply response last year, when the rig count and production were cut. Globally, the supply of and demand for oil should come into balance later this year. While inventories are high, the price of oil should gradually climb, pulling energy stocks with it. Most energy companies have done what they can to adapt, but some help from OPEC would really boost the odds of success.

Another sector that presents an opportunity is Financials, where recent relative returns have been 60% correlated with changes in interest rates, a relationship that has emerged just twice since the Great Depression. Of note, the largest regulated financial companies sport a total shareholder yield (dividends plus buybacks) of between 6% and 8% compared to the market average of 4%. If interest rates move higher, these stocks have significant potential for higher valuations, but patience will be required.

While we may be late in the business cycle, we believe that the global economy and markets should continue to trudge forward with the strength of the U.S. just enough to offset the weakness of Japan and the Eurozone. The world’s central banks have done most of the heavy lifting during the recovery and there is now speculation that fiscal authorities may become more engaged in the fight to promote economic growth. If this trend catches on, the business cycle should continue and value stocks would have their day. However, if the politicians disappoint, investors should expect mid-single digit earnings growth to drive modest returns over the next year.


400

800

1600

3200

6400

12800

25600

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020Source: RBC GAM


Strength in the S&P/TSX Composite Index continued in the latest three-month period, beating the total return of the S&P 500 Index and outperforming many of its global counterparts. The total return for the S&P/TSX was 4.5%, versus a 4.1% rise in the S&P 500 and a 3.1% increase in the MSCI World Index. The Canadian dollar was effectively flat during the quarter, finishing the period at 76.3 U.S. cents. Notwithstanding significant volatility before and after the Brexit vote in late June, equity markets were buoyed by investors looking for alternatives to longer-term interest rates that keep plumbing new lows. With dividend yields surpassing bond yields by meaningful amounts in many cases, investors focused on the attractiveness of equities relative to fixed income rather than on absolute valuations, which remain at elevated levels.

Gold stocks were the best-performing area of the S&P/TSX again in the three-month period, finishing up 10% following last quarter’s move of more than 14%. Gold stocks outpaced bullion, which was up 7%. The price of oil eased after its strong rally last quarter, as the inventory of crude remained elevated. The price of West Texas Intermediate crude fell 9%. The Financials sector lagged the index due to company-specific and macroeconomic concerns, most notably affecting insurers. The

Stuart Kedwell, CFA Senior V.P. & Senior Portfolio Manager RBC Global Asset Management Inc.

CANADA RECOMMENDED SECTOR WEIGHTS


August 2016

BENCHMARK S&P/TSX COMPOSITE

August 2016

Energy 19.5% 20.0%

Materials 12.0% 13.1%








Utilities 2.5% 2.7%

Source: RBC GAM 0.0% 1.0%

REGIONAL OUTLOOK – CANADA

forecast for both Canada and the U.S. Our forecast for 2017 growth now sits at 1.50% for Canada and 1.75% for the U.S. Given this modest expectation of economic growth, we are not expecting any move higher in terms of interest rates from the Bank of Canada. That said, we do expect one interest-rate increase in the U.S. The weakening Canadian dollar is providing a tailwind to parts of the Canadian economy, but the

Canadian banks were the sector’s strongest performers, as concerns about credit provisions on energy loans continued to recede and capital-markets activity was strong. Insurance companies were negatively impacted by soft financial results and the further drop in interest rates.

Our expectations for economic growth around the world continue to be ratcheted downwards, with 0.25% removed from the growth

S&P/TSX COMPOSITE EQUILIBRIUM Normalized earnings and valuations


Regional Outlook – Canada | Stuart Kedwell, CFA

weakness is not likely to be enough to drive a meaningful acceleration in growth.

We continue to believe that there will be more Canadian-dollar weakness over the intermediate term. Even in the near term, the desire of the U.S. Federal Reserve to increase interest rates and uncertainty regarding oil prices suggest that the Canadian dollar won’t strengthen much beyond the $1.25 level of purchasing power parity. The domestic economy’s reliance on housing and questions about the ability of consumers to maintain their spending remain key points of discussion. Furthermore, we have not seen any significant upturn in manufacturing, and the price of crude must move significantly higher to justify restarting massive oil-sands developments.

S&P/TSX earnings estimates for 2017 are now over $900, which is a considerable uptick versus 2016. Key to this increase is a substantial improvement for the Energy and Materials sectors, with expectations for the remainder of the earnings pool in line with historical levels. Importantly, in the last three months, the estimate for 2017 earnings has flat-lined after a period of steady decline. Looking to 2017, both the S&P 500 and S&P/TSX carry similar valuations. Broadly speaking, Canadian financial stocks are attractively valued but not outliers when compared to U.S. sector valuations. The non-financial, non-energy sectors have valuations that are slightly elevated relative to their U.S. peers. As has been the case,

hopes for Canadian stock-market outperformance rest with further strength in energy prices. The sector is aided by current pricing still below the marginal cost of new supply, while the case for prices exceeding the marginal cost of production is not as robust.

After a strong period of performance, the focus for bank investors continues to shift towards the drivers of growth. While energy losses could continue, they have likely crested as a point of concern. Looking into 2017, consensus estimates target 4%-5% profit growth, which is reasonable for the environment we envision. Slowing loan growth, net-interest-margin pressure and regulatory impacts continue to be headwinds. In this environment, reasonable dividend yields coupled with modest dividend growth are attractive to longer-term investors. The focus on the housing market is likely to intensify in the coming months given the acceleration in house-price gains and government scrutiny. In the latest quarter, some banks struck a note of caution and began to pull back from the housing market.

Valuations in some sectors that traditionally exhibit stable earnings have reached levels that would be near the top end of historical ranges. For example, profit margins and earnings multiples in the Consumer Staples sector have risen, suggesting it is time for selectivity. Grocery companies dominate the Consumer Staples sector in Canada, and there are signs that competition and a stronger loonie are preventing them

from raising prices as readily as they did last year. This development could lead to lower profit margins and valuations, and eventually to stock underperformance. The same could be said in the Telecommunication Services sector, where strong share gains mean that investors are required to pay healthy valuations for businesses that may experience pressures on free cash flow.

Oil prices remain difficult to forecast in the short run but are still below our estimate of the marginal cost. Large companies with long-life reserves and strong balance sheets are set to deliver attractive levels of free cash if and when crude prices bounce back to the US$65-US$70 level.

Many commodity sectors have stabilized or rallied so far this year. One area that has remained subdued is agriculture, with the price of corn falling again this quarter. In Canada, fertilizer companies have been the most impacted with Potash Corp. prudently cutting its dividend for the second time given the protracted bottoming process in the potash cycle. That said, the company’s current share price trades at a meaningful discount to the replacement cost of its assets, and potash gross margins are at cyclically low levels relative to history. With a dividend more in line with cash flow, the ingredients for a longer-term investment in Potash Corp. look interesting. Mergers often happen at the tops and bottoms of cycles, and so it wasn’t surprising that late in the period Agrium and Potash Corp. said they had held merger discussions.


EUROPE RECOMMENDED SECTOR WEIGHTS


August 2016

BENCHMARK MSCI EUROPE August 2016

Energy 6.0% 6.8%

Materials 7.0% 7.5%








Utilities 3.5% 4.0%

Source: RBC GAM

EUROZONE DATASTREAM INDEX EQUILIBRIUMNormalized earnings and valuations

90

180

360

720

1440

2880

5760

1980 1985 1990 1995 2000 2005 2010 2015 2020Source: Datastream, Consensus Economics, RBC GAM


first time in three years. The only significant signs of post-Brexit stress have occurred in the real estate market, where redemptions have been suspended by some property companies, and in Italian banking, which initially came under pressure ahead of the July stress tests by the European Central Bank.

REGIONAL OUTLOOK – EUROPE

Contrary to market expectations, U.K. voters chose to leave the EU in late June, setting a precedent and giving rise to grievances across the soon-to-be 27-member trading bloc. The anti-EU stance expressed in the referendum was not unique to the U.K., and the outcome could have been the same in many countries across Europe. Our view is that the result illustrated disillusionment with the incumbent system rather than any considered dissatisfaction with EU membership. This conflation goes some way to explaining the success of Euroskeptic populist parties. The election of these parties would present a threat to Europe’s future, as would their ability to influence mainstream political parties to become more sympathetic to their ideas.

Ordinarily, currency moves would not serve as our first point of reference, but the impact of extreme foreign-exchange fluctuations on investment flows and earnings-per-share revisions make it an appropriate place to begin. The 12% drop in sterling since the Brexit vote is not so surprising. But the relatively small 3.5% drop in the euro versus the U.S. dollar is interesting because it is in part this stability that leads Europeans to be supportive of the common currency. The problem is that you can’t have the euro without further integration of the EU.

With U.K. equities instantly and significantly cheaper for U.S. dollar investors, buying support entered the market quickly after the June 23 vote. The MSCI Europe has recovered almost all of the losses incurred after the vote in euro terms. However, allocations to Europe have not returned to pre-Brexit levels, and global asset allocators are now underweight Europe for the

James JamiesonPortfolio ManagerRBC Global Asset Management (UK) Limited


From a top-down perspective, the consequences of the U.K.’s vote to leave the EU are not yet visible in the regional statistics, with measures of economic activity largely unchanged since the referendum. For example, money-supply indicators remain healthy, while the composite Purchases Managers’ Index indicates that GDP growth continues to be stable for now. However, it should be noted that measures of expectations have begun to turn down, and we therefore find ourselves waiting for some guidance on the direction of economic data. The important point is that it is not just the investment community that is waiting for cues on where the European economy is headed. So, too, are corporations, which want more visibility to inform their capital-allocation decisions, and governments and central banks, which are searching for guidance to inform their policy decisions.

Regional earnings revisions after Brexit have been driven predominantly by foreign-exchange shifts, and do not yet reflect the dampening effect that Brexit could have on economic activity. Companies relying on domestic growth have been harder-hit than their internationally focused counterparts, which will benefit from the drop in sterling. As a result, many of the market drivers have followed currency patterns, with domestically focused mid-cap stocks underperforming international equities. Meanwhile, valuations have come back into greater focus.

Brexit brings a future wracked with uncertainty. As one would expect, the reaction to this new environment has resulted in higher equity-risk premiums in the U.K., with the extent of the change a function of financial leverage and return profiles. In spite of high contagion risk, Europe’s risk premium excluding the U.K. continues to fall on a relative basis. We think Europe should face a higher hurdle rate and have adjusted our analysis accordingly.

The good news is that European equities were cheap before and they remain cheap, even when revised to discount lower corporate profits. The equity-to-bond yield spread has widened further, which signifies the relative value of European equities versus bonds.

Apart from the Bank of England last month, there has been an absence of policy response following Brexit. However, expectations of stimulus have increased, which is serving to support the stock market. We can have no idea what shape or form or size such initiatives would take as decision makers will have to react based on economic conditions.

Several events on the horizon could give a clue to the direction of European politics, and therefore the region’s economies. Hungarians will vote October 2 on whether to accept EU-dictated migrant quotas, and the vote is an important read on member states’ willingness to fall in line with

Regional Outlook – Europe | James Jamieson

policies decided in Brussels. In the same month, Italians will decide whether to approve the most extensive changes to the country’s constitution in seven decades. The significance of the Italian vote is more subtle, but perhaps carries even higher stakes, because its failure could culminate in the resignation of Prime Minister Renzi and would likely lead to the populist Eurosceptic 5* Movement coming to power.

Our investment process attempts to identify high-return businesses that exhibit stability across the economic cycle. Such companies are predominantly global leaders with the culture and financial resources to expand through time. The multinational operations of these businesses provide diversification in a portfolio sense, but also the flexibility to manage cyclicality by allocating capital to the parts of the world where returns are highest.

The consistency of this approach means that Brexit has not culminated in high levels of turnover in the portfolios. Instead, trading has occurred at the edges in an attempt to position for medium-term developments rather than chase short-term gains. To this end, we have reduced our already small exposure to mid-cap stocks and concentrated our banking exposure entirely back into Scandinavia.


65

130

260

520

1040

1980 1985 1990 1995 2000 2005 2010 2015 2020Source: Datastream, Consensus Economics, RBC GAM


JapanPrime Minister Shinzo Abe’s economic strategy is under increasing pressure as evidenced by the unwanted and sustained rise in the yen, even though a weak currency was considered a core policy of Abenomics. While inflation continues to be below the Bank of Japan’s (BOJ) target, the failure of negative interest rates to have the

desired impact appears to have led the central bank to pare aggressive monetary policy in the near term. The ruling Liberal Democratic Party strengthened its hold on parliament in July elections, and policy stimulus – be it a renewed monetary push or the potential for a large fiscal program – remains a key ingredient in the outlook for Japan’s equity market.

REGIONAL OUTLOOK – ASIA

Asian markets drifted lower early in the period but rallied strongly after the U.K. voted to leave the EU (Brexit) in late June. The Asian region appears in many ways to be the biggest beneficiary of Brexit. Fund flows into the region have improved sharply, especially for emerging markets, due in part to asset allocators seeking alternatives to uncertainty in Europe and U.S. financial markets at all-time highs. There is a virtuous cycle that occurs on the back of large flow-driven moves: local currencies tend to stabilize or rise against the U.S. dollar, which usually supports local equity markets. As one would expect, economies where demand is driven domestically (southeast Asia and India) have performed much better than countries with a greater reliance on exports (northern Asia). This has been particularly true in the case of Japan, where returns in local currency were minimal during the period.

Across the region, the Materials sector continued to perform strongly, and we saw a rebound in the Consumer Discretionary and Information Technology sectors. The Health Care and Energy sectors have lagged after a strong start to the year.

ASIA RECOMMENDED SECTOR WEIGHTS


August 2016

BENCHMARK MSCI PACIFIC August 2016

Energy 2.0% 2.8%

Materials 5.5% 6.1%








Utilities 3.0% 3.1%

Source: RBC GAM

Mayur NallamalaHead & Senior Portfolio Manager RBC Investment Management (Asia) Limited

JAPAN DATASTREAM INDEX EQUILIBRIUMNormalized earnings and valuations


After buying up a significant portion of the Japanese government-bond market, the BOJ is expanding its ownership of local equities via ETF purchases. The program itself began in 2010, but ETF purchases have continued to sharply increase over time and are now slated to rise to 6 trillion yen (US$60 billion) annually in the year ended July. It is easy to wonder about how long extraordinary monetary measures will continue and what the end game is, but for now the government is making increasingly desperate attempts to keep a semblance of optimism in place regarding the efficacy of Abenomics.

We are increasingly concerned about the outlook for Japan. There remain significant risks that the extremely positive changes that have happened over the past few years will not be enough to bolster inflation or lead to more robust economic growth, especially in the face of a sharply appreciating yen. Among the positive changes have been significantly higher female participation in the labour force, a necessity given the country’s rapidly aging population; improved corporate governance; and economic incentives offered under Abe’s reforms.

Asia-Pacific excluding JapanBrexit has distracted from a renminbi depreciation that has occurred largely under the radar. The Chinese currency now trades lower against the U.S. dollar than it did in early

Regional Outlook – Asia | Mayur Nallamala

January, when a modest devaluation almost led to a panic. In addition to fund flows being supportive for financial markets, there has been reasonably supportive economic and policy newsflow from Asia’s largest economy, further allowing for markets to grind higher over the period.

While reform efforts continue, on-the-ground progress remains slow, and the way forward is fraught with danger in an environment where global growth continues to be weak. Turning off the credit taps by imposing more stringent loan standards could cause a significant market disruption. However, there are encouraging noises being made about the removal of excess capacity in heavy industry, as well as a cleaning-up of bad loans. More encouragingly, new-credit formation has slowed in recent months, and a continuation of this trend would be a long-term positive in addressing the massive leverage issue that exists.

Southeast Asian markets have continued to perform well given a weaker trade-weighted U.S. dollar, as well as increasingly supportive monetary policy from the region’s central banks. In Indonesia, a decision by the president to include opposition politicians in the cabinet and the start of a tax-amnesty program have revived animal spirits and strengthened consumer confidence. Elsewhere, Thais voted in a referendum to approve a new constitution that will usher in a new election process.

India has announced a replacement for the well regarded outgoing Reserve Bank of India Governor Raghuram Rajan. The new governor, Urjit Patel, is an able technocrat who will likely cause few ripples among the ruling-party elite, but is also likely to maintain recent central-bank mandates aimed at tackling inflationary threats to the economy. Financial markets have continued to perform reasonably well, helped by the first decent monsoon in three years. The rains have helped rural incomes and consumption to recover.

In Australia, Prime Minister Malcolm Turnbull’s plan to buttress his coalition majority by dissolving both houses of parliament – the first “double dissolution” since 1987 - backfired as the ruling party eked out a one-seat majority in the House of Representatives. The country has continued to struggle with political deadlock since the end of John Howard’s tenure as prime minister in 2007. Mining stocks continue to perform well, bolstering overall market returns. The Reserve Bank of Australia cut its benchmark interest rate to a record low of 1.50% in early August. The move aided stocks in the interest-rate-sensitive Financials sector, as most banks have bolstered net interest margins by declining to pass on lower rates to customers.


REGIONAL OUTLOOK – EMERGING MARKETS

has actually fallen in each of the past three years, a potential support for profit margins and returns on investment. The recovery in ROEs would reverse a long period of declines from 15% in 2011 to the current 10.5%. The current level has historically marked a cyclical low.

Over the past 40 years, differences in growth rates between emerging and developed markets have been a major long-term indicator of the attractiveness of emerging-market equities. Between 2010 and 2015, emerging-market growth rates slowed relative to those in developed markets, and this appears to have been one of the main factors for underperformance of emerging-market equities in this period. Emerging-market equities have outperformed those in developed markets when the growth differential expanded and it is therefore worth highlighting that the World Bank forecasts that relative growth will start to favour emerging

Emerging-market equities gained 15% between January and August, extending a rebound that followed almost five years of range-bound performance.

About a third of the gains came from an overall rise in emerging-market currencies versus the U.S. dollar. The greenback has weakened since January, leading to a strong rebound in prices for oil and other commodities that account for a relatively large proportion of growth in some commodity-exporting emerging markets.

Brazil has been the best-performing emerging market, with a remarkable 62% U.S.-dollar return so far in 2016. Progression toward the impeachment of President Dilma Rousseff on corruption charges was among the developments taken positively by investors. On the other hand, China’s stock market was one of the worst-performing, up about 6% since January, due to weaker-than-expected macroeconomic data.

From a sector perspective, Materials and Energy have been the best performing so far this year, as they benefited from the weaker U.S. dollar and the recovery in commodity prices. The Industrials, Health Care and Consumer Discretionary sectors were the weakest performers.

The rebound in commodity prices has largely reversed the negative impact that they have had on emerging-market earnings. In four of the past five years, corporate earnings actually grew at low double-digit rates excluding the impact of the Energy and Materials sectors measured in local currencies. The Energy and Materials sectors used to represent 50% of the total net profits. However, the contribution has fallen to 10%, and other more domestically focused sectors such as the Financials, Industrials and consumer sectors have increasingly taken over. In our view, the declining impact of the resources sectors on emerging-market earnings should help stabilize net profit margins.

Another potential positive for earnings are signs that corporations have been reducing capital investments since 2014 after big increases between 2010-2013, Emerging-market capital spending

EMERGING MARKET DATASTREAM INDEX EQUILIBRIUM Normalized earnings and valuations

20

40

80

160

320

640

1995 2000 2005 2010 2015 2020Source: Datastream, RBC GAM


Christoffer EnemaerkeAssociate Portfolio Manager RBC Global Asset Management (UK) Limited


markets starting this year, driven by an improvement in growth in most areas other than China.

Central-bank policies could also have a positive impact on emerging-market equities. First, inflation has been slowing across emerging markets, which could allow for more accommodative policies. Moreover, interest rates in many emerging markets (unlike developed markets) are higher than inflation, which gives their central banks added flexibility to lower rates. Even if the U.S. Federal Reserve does raise interest rates this year, we would expect the increases to be gradual and not have a significant negative impact on emerging markets.

Valuations for emerging-market equities have increased, but remain relatively supportive even after the strong rally in the first half of the year. The price-to-book ratio has risen to 1.50 from 1.33 at the end of January, but the current valuation is still well below the 10-year mean of 1.90. Valuations are also supportive compared with those for developed-market equities, with the emerging-market P/B ratio at a more than 30% discount to developed markets, compared with the average discount of 17% since 2000.

The fall in the U.S. dollar since the beginning of the year has been a positive for emerging-market equities. Valuations of emerging-market currencies are cheap and most countries have built up foreign-exchange reserves to cover short-term financing needs. Only the Chinese renminbi still appears expensive. Looking ahead, any further U.S. dollar strength will likely be against other developed-market currencies rather than emerging-market ones.

One outlier is the Chinese renminbi. Notwithstanding the fact that the currency has slipped to its lowest level against the U.S. dollar since mid-2010, the renminbi still looks expensive on an inflation-adjusted, trade-weighted basis. To be sure, widespread concerns surrounding a sharp devaluation of the Chinese currency have subsided. The forces driving the rapid rundown of China’s foreign-exchange reserves in 2015 and early 2016, such as the repayment of foreign-currency debt by onshore corporations, seem to have been largely exhausted. Going forward, we expect the renminbi to experience a gradual and managed depreciation.

The consumer and Industrials sectors are attractive given their dependence on emerging-market domestic economic growth. On the other hand, we are less optimistic about companies in the Energy and Materials sectors, which tend to have relatively poor corporate governance and invest in low-return projects. We are taking a more positive view of cyclical areas based on relatively attractive valuations and expectations that countries will shift their emphasis to fiscal measures from monetary policy to stimulate economies.

Positioning among countries is broadly neutral with the exception of underweight positions in China, South Korea and Russia, where corporate governance tends to be relatively poor, and an overweight position in India, where we find many high-quality companies with good corporate governance.

Regional Outlook – Emerging Markets | Christoffer Enemaerke


Daniel E. Chornous, CFA

Chief Investment Officer RBC Global Asset Management

Chair, RBC GAM Investment Strategy Committee

Dan Chornous is Chief Investment Officer of RBC Global Asset Management Inc., which has total assets under management of $378 billion. Mr. Chornous is responsible for the overall direction of investment policy and fund management. In addition, he chairs the RBC Investment Strategy Committee, the group responsible for global asset-mix recommendations and global-fixed income and equity portfolio construction for use in RBC Wealth Management’s key client groups including retail mutual funds, International Wealth Management, RBC Dominion Securities Inc. and RBC Phillips, Hager & North Investment Counsel Inc. He also serves on the Board of Directors of the Canadian Coalition for Good Governance and is Chair of its Public Policy Committee. Prior to joining RBC Asset Management in November 2002, Mr. Chornous was Managing Director, Capital Markets Research and Chief Investment Strategist at RBC Capital Markets. In that role, he was responsible for developing the firm’s outlook for global and domestic economies and capital markets as well as managing the firm’s global economics, technical and quantitative research teams.

Stephen is a fixed-income portfolio manager and Head of the Quantitative Research Group, the internal team that develops quantitative research solutions for investment decision-making throughout the firm. He is also a member of the PH&N IM Asset Mix Committee. Stephen joined Phillips, Hager & North Investment Management in 2002. The first six years of his career were spent at an investment-counselling firm where he quickly rose to become a partner and fixed-income portfolio manager. He then took two years away from the industry to begin his Ph.D. in Finance and completed it over another three years while serving as a fixed-income portfolio manager for a mutual-fund company. Stephen became a CFA charterholder in 1994.

As Head of Global Fixed Income & Currencies at RBC Global Asset Management, Dagmara oversees 15 investment professionals in Toronto and London, with more than $40 billion in assets under management. In her duties as a portfolio manager, Dagmara looks after foreign-exchange hedging and active currency-management programs for fixed-income and equity funds, and co-manages several of the firm's bond portfolios. Dagmara chairs the RBC Fixed Income & Currencies Committee. She is also a member of the RBC GAM Investment Policy Committee, which determines the asset mix for RBC balanced products, and the RBC GAM Investment Strategy Committee, which establishes global strategy for the firm.

Members


Stu began his career with RBC Dominion Securities in the firm’s Generalist program and completed rotations in the Fixed Income, Equity Research, Corporate Finance and Private Client divisions. Following this program, he joined the RBC Investments Portfolio Advisory Group and was a member of the RBC DS Strategy and Stock Selection committees. He later joined RBC Global Asset Management as a senior portfolio manager and now manages the RBC Canadian Dividend Fund, RBC North American Value Fund and a number of other mandates. He is co-head of RBC Global Asset Management’s Canadian Equity Team.

Eric is the Chief Economist for RBC Global Asset Management Inc. (RBC GAM) and is responsible for maintaining the firm’s global economic forecast and generating macroeconomic research. He is also a member of the RBC GAM Investment Strategy Committee, the group responsible for the firm’s global asset-mix recommendations. Eric is a frequent media commentator and makes regular presentations both within and outside RBC GAM. Prior to joining RBC GAM in early 2011, Eric spent six years at a large Canadian securities firm, the last four as the Chief Economics and Rates Strategist. His previous experience includes positions as economist at a large Canadian bank and research economist for a federal government agency.

Dagmara Fijalkowski, MBA, CFA

Head, Global Fixed Income & Currencies (Toronto and London) RBC Global Asset Management

Eric Lascelles

Chief Economist RBC Global Asset Management

Stephen Burke, PhD, CFA

Vice President and Portfolio Manager RBC Global Asset Management

Stuart Kedwell, CFA

Senior Vice President and Senior Portfolio Manager RBC Global Asset Management


RBC Global Asset Management

Sarah Riopelle, CFA

Vice President and Senior Portfolio Manager RBC Global Asset Management

Martin Paleczny, who has been in the investment industry since 1994, began his career at Royal Bank Investment Management, where he developed an expertise in derivatives management and created a policy and process for the products. He also specializes in technical analysis and uses this background to implement derivatives and hedging strategies for equity, fixed-income, currency and commodity-related funds. Since becoming a portfolio manager, Martin has focused on global allocation strategies for the full range of assets, with an emphasis on using futures, forwards and options. He serves as advisor for technical analysis to the RBC GAM Investment Strategy Committee.

Since 2009, Sarah has managed the entire suite of RBC Portfolio Solutions, including the RBC Select Portfolios, RBC Select Choices Portfolios, RBC Target Education Funds and RBC Managed Payout Solutions. Sarah is a member of the RBC GAM Investment Strategy Committee, which sets global strategy for the firm, and the RBC GAM Investment Policy Committee, which is responsible for the investment strategy and tactical asset allocation for RBC Funds’ balanced products and portfolio solutions. In addition to her fund management role, she works closely with the firm’s Chief Investment Officer on a variety of projects, as well as co-manages the Global Equity Analyst team.

Martin Paleczny, CFA

Vice President and Senior Portfolio Manager RBC Global Asset Management

William E. (Bill) Tilford

Head, Quantitative Investments RBC Global Asset Management

Bill is Head, Quantitative Investments, at RBC Global Asset Management and is responsible for expanding the firm’s quantitative-investment capabilities. Prior to joining RBC GAM in 2011, Bill was Vice President and Head of Global Corporate Securities at a federal Crown corporation and a member of its investment committee. His responsibilities included security-selection programs in global equities and corporate debt that integrated fundamental and quantitative disciplines, as well as management of one of the world’s largest market neutral/overlay portfolios. Previously, Bill spent 12 years with a large Canadian asset manager, where he was the partner who helped build a quantitative-investment team that ran core, style-tilted and alternative Canadian / U.S. funds. Bill has been in the investment industry since 1986.

Ray Mawhinney

Senior Vice President and Senior Portfolio Manager RBC Global Asset Management

Hanif Mamdani is Head of both Corporate Bond Investments and Alternative Investments. He is responsible for the portfolio strategy and trading execution of all investment-grade and high-yield corporate bonds. Hanif is Lead Manager of the PH&N High Yield Bond Fund and the PH&N Absolute Return Fund (a multi-strategy hedge fund). He is also a member of the Asset Mix Committee.Prior to joining the firm in 1998, he spent 10 years in New York with two global investment banks working in a variety of roles in Corporate Finance, Capital Markets and Proprietary Trading. Hanif holds a master's degree from Harvard University and a bachelor's degree from the California Institute of Technology (Caltech).

Ray leads the U.S. Equity team in Toronto and brings a wealth of expertise to his role, having specialized in U.S. equities since 1984. He joined the firm in 1992 and is involved in managing several of the firm's U.S. equity funds. Ray is also a member of the RBC GAM Investment Policy Committee, which determines asset mix for balanced products, and the RBC GAM Investment Strategy Committee, which establishes a global asset mix covering mutual funds, as well as portfolios for institutions and high-net-worth private clients. Ray graduated from the University of Manitoba with a bachelor's of commerce degree in finance, with honours.

Hanif Mamdani

Head of Alternative Investments RBC Global Asset Management


RBC Global Asset Management

> Philippe Langham Senior Portfolio Manager,

Emerging Markets RBC Global Asset Management (UK) Limited

> Ray Mawhinney Senior V.P. & Senior Portfolio Manager,

U.S. & Global Equities RBC Global Asset Management Inc.

> Stuart Morrow, CFA Portfolio Manager, U.S. Equities &

Vice President Global Equity Research RBC Global Asset Management Inc.

> Mayur Nallamala Head & Senior V.P., Asian Equities

RBC Investment Management (Asia) Limited

> Martin Paleczny, CFA V.P. & Senior Portfolio Manager,

Asset Allocation & Derivatives RBC Global Asset Management Inc.

> Dominic Wallington Chief Investment Officer,

RBC Global Asset Management (UK) Limited

> Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income & Currencies

(Toronto and London) RBC Global Asset Management Inc.

> Soo Boo Cheah, MBA, CFA Senior Portfolio Manager,

Global Fixed Income & Currencies RBC Global Asset Management (UK) Limited

> Suzanne Gaynor V.P. & Senior Portfolio Manager, Global

Fixed Income & Currencies RBC Global Asset Management Inc.

GLOBAL EQUITY ADVISORY COMMITTEE

> Eric Lascelles Chief Economist

RBC Global Asset Management Inc.

GLOBAL FIXED INCOME & CURRENCIES ADVISORY COMMITTEE

This report 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 Philips, Hager & North Investment Management). In the United States, this report is provided to institutional investors by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe and the Middle East, 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 Investment Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

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 Alternative Asset Management Inc., the asset management division of RBC Investment 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. Due to the possibility of human and mechanical error as well as other factors, including but not limited to technical or other inaccuracies or typographical errors or omissions, RBC GAM is not responsible for any errors or omissions contained herein. 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 09.15.2016, are subject to change without notice and are provided in good faith but without legal responsibility. To the full extent permitted by law, neither RBC GAM nor any of its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of the outlook information contained herein. 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 made. 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.

DISCLOSURE

®/TM Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2016.

100537 (09/2016)

the global investment outlook - gam · 2016-10-03 · contents executive summary 2 the global...

Documents