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Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards the winter and spring, denting global growth. Fortunately, commodity prices are now easing. Fourth, European woes have re-intensified as angry voters bring rather less austerity-friendly politicians to the fore, just as forward progress becomes all the more urgent. European growth has been snuffed out. Fifth, the Chinese economy continues to decelerate due to the country’s moderating real estate market. Sixth, the global economy is simply incapable of outsized economic growth during the post-financial-crisis period. Prior brief spurts have repeatedly proven unsustainable. Steady aim Even as the economic outlook has deteriorated, we have held mostly firm with our own forecasts (Exhibit 4). This is not due to neglect or obstinacy, but rather because our forecasts already capture the deteriorating state of affairs. We continue to have a more sluggish outlook than the consensus, and so are able to hold fast to our prior convictions even as others scramble to downgrade their views. Outside of Europe, we still do not expect recession. Most metrics show a U.S. recession to be a low-probability outcome, and even as the economy slows, there is nothing pointing to outright decline. To the extent that the threat of a U.S. recession exists, it is based on massive event risks. The U.S., Canada and Japan are all on track for growth near 2% in 2012. This is slightly disappointing for the U.S. and Canada, and rather positive for an aging Japan. The U.K. should eke out a sliver of growth in 2012 but is technically in EXHIBIT 3. U.S. Heating Degree Days, Deviation from Normal (4m moving avg) Y/Y GDP Change (%) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 80 40 0 -40 -80 -120 -160 EXHIBIT 4. Unprecedented Warm Winter in U.S. Cooler than usual Warmer than usual Warmest winter in over a decade 1998 2000 2002 2004 2006 2008 2010 2012 Source: Haver Analytics, RBC GAM RBC GAM Forecast for Developed Market GDP 2.00% 2.00% 2.00% 2.00% 2012 2013 1.75% 1.50% 0.25% 1.50% -0.75% 0.50% U.S. Canada Japan U.K. Eurozone Source: RBC GAM SAMPLE recession. The Eurozone is stuck in a deepening recessionary rut. Among the few tweaks to our forecasts are quarterpercentage-point snips to both the U.K. and Eurozone economic outlooks for 2012, taking already below-consensus views even lower. Our 2013 economic outlook is less grim on an absolute basis, yet is even further below consensus. It is hard to fathom why so many forecasters provide such a sunny weather forecast given long-enduring overcast conditions. Fiscal drags will apply themselves with even greater conviction next year in the U.S., Europe’s recession does not look to be easily solved, and slow growth remains the mantra in a post-crisis world of deleveraging banks, businesses, households and governments. Growing drags, mounting risks A rogue’s gallery of drags and risks continues to loom, and the danger has increased in recent months. As we discuss in this report, Eurozone risks have again soared due to growing fears of a Greek exit, Spain’s mounting woes 12 I The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012
Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards and the corrosive effect of deepening recession. China is also manifestly slowing, with an uncertain trajectory. The U.S. grapples once again with its debt ceiling this fall and confronts a sheer fiscal cliff at year-end. Together, this imperilled trio – the Eurozone, China and America – make up fully half of the global economy. For all the fear-mongering and even our own below-consensus forecasts, let us be clear that these are risks and not realities. In each case, we anticipate rather more benign outcomes than the worst-case scenarios discussed here. The winning investing strategy over the past several years – despite the many risks throughout – has been to maintain a steady keel. Unsung heroes Policymakers continue to be the unsung heroes in this era of discontent, delivering additional stimulus whenever the situation has demanded it. Real interest rates remain outright negative (Exhibit 5). They are a key reason why worst-case scenarios have generally not transpired. Lately, great gobs of monetary stimulus have been ladled onto emerging nations, adding to the stimulative elixir already brewing in developed nations. There remains a good chance that more monetary stimulus may yet be conjured in the developed world, too. In contrast, fiscal policy has its back up against the wall in many parts of the world, and is unable to materially improve growth without risking an even larger debt problem. This represents a constraint that did not exist in 2008 or 2009. EXHIBIT 5. Global Real Policy Rate (%) 5 4 3 2 1 0 -1 -2 2000 2002 2004 2006 2008 2010 2012 Regions included: U.S., Canada, U.K., Eurozone, Switzerland, Sweden, Norway, Japan, Australia, China, India, South Korea, Russia, Brazil, Mexico. PPP weights by GDP share. Source: Haver Analytics, RBC GAM EXHIBIT 6. Fiscal Drag in 2012 Eurozone Germany France Greece Italy Spain Portugal Global Real Monetary Policy Rate 0.4 0.9 0.9 2.2 2.5 3.1 3.3 0 1 2 3 4 Change in Budget Balance as a % of GDP Note: A positive number is a reduction in budget balance in 2012 compared to 2011. Source: International Monetary Fund, Haver Analytics, RBC GAM SAMPLE European recession as easy as 1-2-3 Europe has now indisputably tumbled into recession. The trio of fiscal austerity, rock-bottom confidence and weakening credit have seen to that. While fiscal austerity is biting hard in several peripheral European nations, the Eurozone-wide drag is not particularly overwhelming due to far smaller drags among large members like Germany and France. We expect that fiscal austerity will subtract no more than a percentage point from overall Eurozone GDP growth in 2012 and 2013 (Exhibit 6). Consumer and investor confidence is low in Europe, translating into a dearth of risk-taking and a concomitant safehaven bid for bonds (Exhibit 7). Hardly the most obvious, but possibly the most pernicious, drag on European growth is the scourge of poor credit conditions. Banks and financial markets are increasingly unwilling to extend credit within Europe (Exhibit 8). The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 13
Page 1 and 2: The Global Investment Outlook RBC I
Page 3 and 4: Contents Executive Summary 2 The Gl
Page 5 and 6: Executive summary • Sarah Riopell
Page 7 and 8: Recommended Asset Mix Asset mix - t
Page 9 and 10: Recommended Asset Mix Balanced Asse
Page 11 and 12: Capital markets performance • Mil
Page 13: Global Investment Outlook Eric Lasc
Page 17 and 18: Global Investment Outlook • Eric
Page 37 and 38: Global Fixed income markets • Soo
Page 45 and 46: Currency Markets Dagmara Fijalkowsk
Page 47 and 48: Currency markets • Dagmara Fijalk
Page 57 and 58: Regional outlook - U.S. • Ray Maw
Page 59 and 60: Regional outlook - CANADA • Stuar
Page 61 and 62: Regional outlook - Europe • Domin
Page 63 and 64: Regional outlook - Asia • Yoji Ta
Page 65 and 66:
Regional outlook - emerging markets
Page 67 and 68:
Eric Lascelles Chief Economist RBC
Page 69 and 70:
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