THE GLOBAL INVESTMENT OUTLOOK - RBC Global …

1 THE GLOBAL . INVESTMENT . OUTLOOK . RBC GAM INVESTMENT Strategy Committee SPRING 2018. THE RBC GAM INVESTMENT . STRATEGY COMMITTEE. The RBC GAM INVESTMENT Strategy Committee These include: consists of senior INVESTMENT professionals the recommended mix of cash, fixed income drawn from all areas of RBC GAM. The Committee instruments, and equities regularly receives economic and capital the recommended GLOBAL exposure of fixed markets related input from internal and external income and equity portfolios sources. Important guidance is provided by the Committee's regional equity advisors (North the optimal term structure for fixed income America, Europe, Asia, Emerging Markets) and investments from the GLOBAL Fixed Income & Currencies the suggested sector and geographic make-up sub-committee. From this, the Committee builds within equity portfolios a detailed GLOBAL INVESTMENT forecast looking one the preferred exposure to major currencies year forward.

2 Results of the Committee's deliberations are The Committee's view includes an assessment published quarterly in The GLOBAL INVESTMENT of GLOBAL fiscal and monetary conditions, OUTLOOK . 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. CONTENTS. EXECUTIVE SUMMARY 2 CURRENCY MARKETS 52. The GLOBAL INVESTMENT OUTLOOK Dagmara Fijalkowski, MBA, CFA Head, GLOBAL Fixed Income and Currencies, Eric Savoie, MBA, CFA Senior Analyst, INVESTMENT Strategy, RBC GLOBAL Asset Management Inc. RBC GLOBAL Asset Management Inc. Daniel Mitchell, CFA Portfolio Manager, Daniel E. Chornous, CFA Chief INVESTMENT Officer, RBC GLOBAL Asset Management Inc. RBC GLOBAL Asset Management Inc. REGIONAL EQUITY MARKET OUTLOOK .

3 ECONOMIC & CAPITAL MARKETS FORECASTS 4. RBC GAM INVESTMENT Strategy Committee United States 60. Brad Willock, CFA & Senior Portfolio Manager, RBC GLOBAL Asset Management Inc. RECOMMENDED ASSET MIX 5. RBC GAM INVESTMENT Strategy Committee Canada 62. Sarah Neilson, CFA Portfolio Manager, CAPITAL MARKETS PERFORMANCE 10 RBC GLOBAL Asset Management Inc. Irene Matsyalko, CFA Portfolio Manager, Milos Vukovic, MBA, CFA & Head of INVESTMENT Policy, RBC GLOBAL Asset Management Inc. RBC GLOBAL Asset Management Inc. Europe 64. GLOBAL INVESTMENT OUTLOOK 13 Dominic Wallington Head, European Equities &. Senior Portfolio Manager, Market turbulence, macro calm RBC GLOBAL Asset Management (UK) Limited Eric Lascelles Chief Economist, RBC GLOBAL Asset Management Inc. Asia 66. Eric Savoie, MBA, CFA Senior Analyst, INVESTMENT Strategy, Mayur Nallamala Head & Senior Portfolio Manager, RBC GLOBAL Asset Management Inc.

4 RBC INVESTMENT Management (Asia) Limited Daniel E. Chornous, CFA Chief INVESTMENT Officer, RBC GLOBAL Asset Management Inc. Emerging Markets 68. Laurence Bensafi, CFA Portfolio Manager and Deputy Head, Emerging Market Equities GLOBAL FIXED INCOME MARKETS RBC GLOBAL Asset Management (UK) Limited The bond-market OUTLOOK 47. Soo Boo Cheah, MBA, CFA Senior Portfolio Manager, RBC GAM INVESTMENT STRATEGY COMMITTEE 70. RBC GLOBAL Asset Management (UK) Limited Taylor Self, MBA Analyst, RBC GLOBAL Asset Management (UK) Limited Direction of rates 50. Soo Boo Cheah, MBA, CFA Senior Portfolio Manager, RBC GLOBAL Asset Management (UK) Limited Joanne Lee, CFA Portfolio Manager, RBC GLOBAL Asset Management Inc. THE GLOBAL INVESTMENT OUTLOOK Spring 2018 I 1. EXECUTIVE SUMMARY. GLOBAL macroeconomic headwinds to GLOBAL trade, and Eric Savoie, MBA, CFA environment remains positive other risks we are monitoring relate Senior Analyst, INVESTMENT Strategy to European populism, geopolitical RBC GLOBAL Asset Management Inc.

5 Benefiting from positive momentum risks and Chinese debt. Although in 2017, the economic backdrop is Daniel E. Chornous, CFA the economy faces a number of quite good by post-crisis standards. Chief INVESTMENT Officer challenges, we should not ignore Many of the macroeconomic RBC GLOBAL Asset Management Inc. clear upside potential from structural indicators we monitor are at or near reforms in Japan and fiscal cycle highs. Financial conditions stimulus. On balance, we expect the are still reasonably supportive, The macro environment is fiscal stimulus should provide a positives to outweigh the negatives, enabling further growth in the GLOBAL transitioning away from tailwind, and the headwinds of economy. slow growth, low inflation secular stagnation may be fading as evidenced by reviving risk and highly stimulative appetite and improving productivity fiscal stimulus provides monetary policies to faster growth.

6 We upgraded several of our tailwind to already solid growth, normal inflation and developed-world growth forecasts economy for 2018 and they are mostly above Although it is unusual to deliver tightening central banks. consensus. Our emerging-market fiscal stimulus at a time when The expansion is highly growth forecasts are slightly below economies are strong enough to synchronized and GLOBAL the consensus but still suggest justify central-bank tightening, tax robust growth ahead. Taken cuts and increased government growth is running at its together, our GLOBAL growth forecast spending in the will help push fastest pace in eight years. for 2018 is , which would be the along an already strong economy. fastest growth rate since the GLOBAL The tax-cut package amounts to financial crisis. US$ trillion of stimulus over the next decade and will likely boost Risks are constantly evolving, GDP by in 2018 and but potential upside exists too in 2019.

7 The additional government Key risks to our OUTLOOK are the aging spending in the budget should add a business cycle, rising interest rates further to growth in 2018 and and protectionism. Several factors in 2019. suggest the business cycle is in its later stages: a closed output gap, Currency movements to be extremely low unemployment rates, driven largely by country- a Federal Reserve (Fed) that specific factors rather than has been tightening for some time, broad dollar trend narrow credit spreads and optimistic Our currency OUTLOOK has been sentiment. Financial conditions shifting in recent quarters away remain supportive but have tightened from double-digit returns for the somewhat as a result of higher dollar as we recognize changes interest rates. Were this upward trend in economic and monetary trends. to continue, it could drag on growth Uncertainty associated with turns and highlight debt vulnerabilities.

8 In long-term trends justifies our Tariffs imposed by the and the patient approach in calling the start renegotiation of NAFTA represent 2 I THE GLOBAL INVESTMENT OUTLOOK Spring 2018. Executive Summary | Eric Savoie, MBA, CFA | Daniel E. Chornous, CFA. of a downtrend, which, once firmly slowed. GLOBAL monetary policies been growing quite nicely and, established, we expect to last for are still quite easy by historical bolstered by the tax cuts, are many years. Past turning points in standards, but the transition from expected to advance 19% in 2018. broad dollar trends have unfolded extraordinary stimulus to normality is and another 10% in 2019. Of course, through a process whereby the clearly underway. earnings forecasts have always had greenback makes highs versus a tendency to slip as time moves different currencies in sequence Increase in yields forward and demanding valuations rather than all at once.

9 This pattern alleviated valuation risk in are vulnerable to disappointment. In is repeating, and we see an this environment it may be prudent sovereign bonds environment that is shifting in favour to lower total-return expectations of the euro and yen, while we retain Our models continue to suggest the and anticipate higher sustained a less rosy OUTLOOK on the British long-term direction for bond yields levels of volatility. pound and Canadian dollar. is higher, but that the meaningful increase in yields over the past Asset mix: reducing bond quarter has alleviated valuation Inflation transitions to more underweight and maintaining risk in the near term. Bond yields normal regime are already reflecting an inflation slight overweight in stocks For a significant portion of the post- premium close to our expectations Reflecting the balance of risks and crisis era, deflation had been a so, barring an inflation shock, any opportunities, our asset mix is now concern, but investors may now be meaningful increase in the closer to neutral than it has been in recognizing that a regime shift is 10-year bond yield over the coming many years.

10 We have been dialing underway. Our view is that inflation is years is likely to come from a rise in back our equity exposure as the simply transitioning to more normal real (after-inflation) interest rates. cycle advanced and valuations levels after many years of being too In our view real interest rates are became less compelling. That said, low, rather than shifting higher to unlikely to remain well below their we think it's too early to call the end problematic levels. In fact, a number long-term average now that the of the bull market. We recognize of structural headwinds related economy has regained its footing. that equities are not as attractive to demographics, globalization, The resulting upward pressure from as they were at previous points technological change and sector-level rising real rates on nominal bond in the cycle but, in our view, the shifts may limit just how fast prices yields means that fixed income may potential upside in corporate profits can ultimately rise.