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Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards This is understandable given Europe’s poor economic prospects and the need for deleveraging by banks. But this deleveraging is very potent: every dollar of recapitalization represents roughly 10 dollars not lent. In this manner, small adjustments to bank balance sheets reverberate in a magnified fashion across the economy. Bank lending is now in retreat (Exhibit 9). We have long appreciated these dynamics, but nonetheless feel compelled to nudge our Eurozone GDP forecast lower to -0.75% from -0.5% for 2012. The 2013 outlook is unchanged, with the economy expected to expand 0.5%. The euro’s recent weakness and the potential for more European Central Bank (ECB) rate cuts temper the bad news. Greek exit risk Despite several bailouts and a major debt writedown, Greece’s underlying problems have never truly gone away. Now, owing to an inconclusive election, they are re-emerging from hibernation. We believe the odds of a Greek exit from the Eurozone have risen notably, but remain well under 50%. Exit is no one’s desired outcome: 81% of Greeks wish to remain a part of the Eurozone (Exhibit 10), and European leaders have said that they unanimously wish Greece to stay. Nonetheless, exit is no longer absurd to contemplate. The May 6 Greek election failed to arrive at a workable coalition of parties, and so a second election has been commissioned for June 17. Polls continue to fluctuate. Recent trends suggest Greece should emerge with a moderate ruling coalition not dissimilar to prior governments. The less likely, EXHIBIT 7. Global Risk Appetite Index Credit Availability (Standard Deviations from Norm) 9 6 3 0 -3 -6 Risk Appetite Is Poor Good Poor -9 2006 2007 2008 2009 2010 2011 2012 Source: Credit Suisse EXHIBIT 8. 2 1 0 -1 Eurozone Banks Reluctant to Lend Easy Credit Tight Credit Business Loans Consumer Credit and Others Mortgages -2 2003 2006 2008 2010 2012 Note: 12-month moving average of the simple average of the normalized Bank Lending Survey and the underlying normalized index level. Source: European Central Bank, Haver Analytics, RBC GAM SAMPLE EXHIBIT 9. Bank Loans (Y/Y % Change) 20 15 10 5 0 Eurozone Bank Lending in Retreat Households Non-Financial Corporations -5 1998 2000 2002 2004 2006 2008 2010 2012 Source: European Central Bank, Haver Analytics, RBC GAM 14 I The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012
Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards but more problematic, alternative is a much more extreme Greek government that will seek to pry loose major planks of the Greek bailout, and in so doing risk the viability of Greece within the Eurozone. In fairness, some form of renegotiation with Europe will be necessary regardless of the election’s victor: Greece still has too much debt, possibly insolvent banks and a freefalling economy. It is also missing austerity targets left and right. Meanwhile, in the lead-up to the election, Greece is effectively rudderless. A slow-motion run on its banks is occurring, and if this continues to accelerate, there are no leaders to arrest it. This is just one of several scenarios that could push Greece out of the Eurozone. A failed bluff or a simple policy misstep would also suffice. The most cogent argument in favour of continuing Greek membership is that an exit would set an awful precedent and quite possibly begin an irreversible unravelling of the Eurozone. No one wants this, and so quite a lot of firepower will be used to avoid this fate. Greece’s exit would certainly be economically devastating. Estimates vary widely, but the Greek economy would likely shrink by 15% or more, and it would suffer a massive run on its banks, widespread business bankruptcies, a bout of very high inflation, and an assortment of other ills. Meanwhile, the rest of Europe would be presented with a bill for about €300 billion in loans gone bad, and conceivably incur total costs in the range of €1 trillion. All told, the economic hit might be akin to the post- EXHIBIT 10. % EXHIBIT 11. % 100 80 60 40 20 90 80 70 60 50 0 Greece Wants Euro 81% Greeks wish to remain in Euro Source: GPO SA, May 30, 2012 Spanish Debt-to-GDP Ratio Not So Bad France Source: Haver Analytics, RBC GAM Lehman experience. Eurozone-wide GDP could easily shrink by 2% to 4%. It is difficult to say whether global financial markets would freeze with quite the ferocity of 2008 given the lessons learned since then, but they would certainly not function normally, and this would be the primary means by which a Greek exit could ricochet well beyond European shores. We reiterate that while this scenario is horrifying to contemplate, it also constitutes a central reason why a Germany 2011 52% Greeks wish to remain in Euro even if bailout not renegotiated Spain SAMPLE Greek exit remains unlikely: nobody wants the consequences. Spanish woes Spain remains a curious case. It has far less government debt than the European norm, and even than France or Germany (Exhibit 11). By this definition it is eminently solvent and in an enviable position. However, everything else about Spain is much more dour. It has a large fiscal deficit that is proving resistant The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 15
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 and 14: Global Investment Outlook Eric Lasc
Page 15: Global Investment Outlook • Eric
Page 19 and 20: 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:
This report has been provided by RB
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