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Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards Asian economies are grappling with anemic appetites from Europe; Eastern European economies are decelerating along with their Western European counterparts. By all accounts, emerging-market countries are still growing much more quickly than their developed ones, but their growth relative to expectations or prior years is nonetheless underwhelming. If there is a bright spot, it is that falling inflation is emboldening policymakers to revive growth via interest rate cuts. We continue to forecast emerging-market economic growth of 6.0% in both 2012 and 2013 for our basket of EM-6 nations (China, India, South Korea, Brazil, Mexico and Russia). Decoupling Although most nations are suffering through a period of decelerating economic activity, we must make an important distinction between Europe and the rest of the world. Europe is suffering far more than other regions. Mercifully, the transmission mechanisms of economic and market pain from one part of the world to the rest are not broadcasting at their usual strength. With regard to trade, European imports have fallen, though this is of limited relevance for the U.S. and Canada, which have little trade exposure to Europe. It is more consequential for emerging Asia. Meanwhile, consumer confidence appears to have entirely decoupled between Europe and other regions. It has fallen in Europe but has rebounded elsewhere (Exhibit 17). Credit conditions are also quite different. Whereas global markets froze EXHIBIT 17. Normalized Consumer Confidence Index Bloomberg Index Level (0=Normal) 3 2 1 0 -1 -2 -3 -4 -5 3 2 1 0 -1 -2 -3 EXHIBIT 18. Diverging Confidence U.S. Euro Area 2007 2008 2009 2010 2011 2012 Source: Haver Analytics, RBC GAM Financial Conditions Have Decoupled U.S. Financial Conditions Index European Financial Conditions Index Good Poor -6 2007 2008 2009 2010 2011 2012 Source: Bloomberg, RBC GAM SAMPLE in unison in late 2008, Europe pays penitence alone this time (Exhibit 18). That could change in a heartbeat if a large European bank were to go down, but we do not expect this, and so the notable credit decoupling may persist. U.S. begins to heal The U.S. economy has downshifted in recent months, and will likely advance more slowly than in recent quarters. We continue to forecast GDP growth of 2.0% in both 2012 and 2013, the former constrained by European woes and household deleveraging, the latter by the coming fiscal cliff and likely political dysfunction. In this context, the U.S. Federal Reserve Board can be expected to avoid tightening policy, and could even deliver more stimulus should inflation ebb and global risks remain elevated. The recent decline in gasoline prices is a positive force, but the simultaneous appreciation of the U.S. dollar removes some of the gloss. Still, it is important to celebrate successes where they occur, especially ones that lay the foundation 18 I The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012
Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards for sustainable growth. Several dysfunctional elements of the U.S. economy have become rather less dysfunctional. Confidence is back in a big way, even if it has not fully translated into risk appetite. To be sure, the past few years have demonstrated repeatedly that confidence can be lost quite quickly, but the fact remains that it is currently very good despite the world’s manifold challenges. The U.S. labour market is beginning to turn. Job creation was unsustainably high early in 2012, but has since decelerated to a trend of around 100,000 new jobs per month. This is not bad, and is consistent with the underlying rate of economic growth (Exhibit 19). The unemployment rate has managed to inch lower (Exhibit 20), alleviating what had been a troubling constraint on the economy. While some of the decline in the unemployment rate relates to an aging population and job seekers losing hope, some of the improvement is real. The U.S. credit market is also beginning to improve as banks extend loans to consumers and businesses. Credit is the lifeblood of the U.S. economy, and so this is a crucial box to tick. However, this effect should not be overstated. Banks remain very stingy with residential mortgage credit (Exhibit 21). The U.S. housing market has very likely bottomed, and should eventually recover. Recent data has surprised to the upside here (Exhibit 22). Affordability is now excellent thanks to lower prices and rockbottom mortgage rates. This does not guarantee an immediate resurgence, however, as there are still 2 million to 3 million excess homes in America. EXHIBIT 19. Private Employment Monthly Change ('000) 400 200 0 -200 -400 -600 EXHIBIT 20. % 18 14 10 6 U.S. Link Between Growth and Hiring -344 -189 -102 -28 96 179 241 4 Real GDP Growth (%) Note: Data from 1975. Vertical line shows 1 standard deviation range. Source: RBC GAM, Haver Analytics U.S. Unemployment Rate Is High but Falling Broad Unemployment Rate Official Unemployment Rate 2 1994 1997 2000 2003 2006 2009 2012 Source: Bureau of Labour Statistics, RBC GAM SAMPLE EXHIBIT 21. Mortgage Demand and Supply Conditions (Standard Deviations From Norm) 2 1 0 -1 -2 -3 Mortgage Supply and Demand Remain Stingy Good Poor Supply and demand for mortgage loans are still at extremely depressed levels Demand Supply 1991 1995 1999 2003 2007 2011 Note: 12-month moving average of the simple average of the normalized SLOS survey and the underlying normalized indexed level. Source: Federal Reserve Senior Loan Survey, RBC GAM 365 The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 19
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 and 16: Global Investment Outlook • Eric
Page 19: 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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