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Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards of just 0.25% in 2012, and a more respectable 1.5% in 2013. Fortunately, inflation has recently begun to settle down after an extended period of excessive price increases. This is very good news indeed, not just for the purchasing power of the average Briton, but also because it may free the Bank of England to deliver more monetary stimulus. The pound should remain steadfast versus the U.S. dollar, and may appreciate versus the euro. Japan recovers nicely Japan is recovering nicely after the March 2011 earthquake, and we maintain unchanged forecasts for sprightly GDP growth (by Japanese standards) of 1.75% in 2012 and 1.5% in 2013. The strengthening yen and slowing Chinese and European economies present a risk to this view, but so far Japan has managed to deliver despite these distractions. Fascinatingly, Japanese inflation has recently perked up after years of stagnation. This may simply be due to the latest commodity spike, which is already unwinding. But even the core CPI metric is showing some signs of life (Exhibit 27), and it could just be that the Bank of Japan’s recent commitment to a 1% inflation target is starting to work. If so, this could resolve one of Japan’s long-enduring quandaries. It is premature to render final judgment on this transformation, however. Japan’s longer-term prospects remain difficult to call. A potential sales tax could yet sap growth. The country’s fiscal deficit remains enormous, and its government debt load is unfathomably heavy. One cannot help but wonder if Japan might eventually EXHIBIT 27. Y/Y % Change EXHIBIT 28. Monthly Change in Employment ('000) 3 2 1 0 -1 -2 Japanese Inflation Has Perked Up Headline CPI Core CPI -3 2000 2002 2004 2006 2008 2010 2012 Note: Core CPI excludes food and energy. Source: Haver Analytics, RBC GAM Canadian Job Creation Revived 100 Rebound 80 60 40 20 0 -20 Soft patch -40 -60 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Haver Analytics, RBC GAM SAMPLE be punished by markets in much the same way that Europe has been. Recent sovereign downgrades put a sharp edge on the topic. Of course, Japan’s saving fiscal grace has always been that its government debt is held almost exclusively by its citizens. The impressive savings rates among households and businesses perpetuate the government excesses. But as the Japanese population ages, its capacity for saving is diminishing, and Japan’s long-standing trade surplus is in retreat – an unwelcome development for a traditionally mercantilist nation. The times are changing, and Japanese fiscal policy may need to as well. Canada bounces back The Canadian economy went through a perplexing five months of sluggish economic growth and non-existent job creation just as the rest of the world was surging in late 2011 and early 2012. But proxy indicators now suggest the economy is growing again, and job creation has returned with a vengeance (Exhibit 28). 22 I The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012
Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards It still doesn’t pay to expect the Canadian economy to grow at a materially different rate from the U.S. – history simply doesn’t bear this out – and so we look for 2.0% GDP growth in both 2012 and 2013. The 2013 forecast is a hair lower than our prior view and is motivated by the expectation that Canada’s housing market will continue to slow. The Canadian dollar is appropriately positioned at a few cents below the U.S. Indeed, when evaluating risks in Canada, there are both domestic and external threats. The external risks are widely appreciated – Europe’s crisis, China’s slowdown, the U.S. fiscal cliff. But domestic risks are also material. Probably the greatest domestic challenge is Canada’s housing market, which has defied gravity for years but is now losing altitude (Exhibit 29). Affordability remains reasonable in the context of current low interest rates, but a normalization of interest rates would render affordability statistics some 15% to 20% offside. Regulators have finally decided that enough is enough, and are endeavouring to deflate the housing market. Among these actions, the Bank of Canada is now talking of rate increases – an appropriate stance given so little remaining economic slack and the state of the housing market. But we suspect the central bank may struggle to actually pull the trigger before 2013 due to worsening global outcomes. Nonetheless, interest rates will eventually work their way higher, and with it Canada’s housing market will have to deflate. This may translate into a lean year for Canada’s economy as construction activity EXHIBIT 29. Average Home Price (Y/Y % Change) Competitiveness Gap (%) 35 25 15 5 -5 -15 Home Prices Beginning to Fall in Parts of Canada National Vancouver Toronto -25 2007 2008 2009 2010 2011 2012 Source: CREA, RBC GAM EXHIBIT 30. Index Level 30 20 10 0 -10 -20 -30 -40 800 750 700 650 600 Canada–U.S. Economic Competitiveness Canada more competitive U.S. more competitive Canada now 30% less competitive than U.S. 1981 1986 1991 1996 2001 2006 2011 Note: Competitiveness Gap calculated as currency-adjusted unit-labour cost ratio between Canada and the U.S versus the average relationship from 1981 to 2011. Source: RBC GAM, Haver Analytics SAMPLE EXHIBIT 31. Commodities Have Tempered S&P Goldman Sachs Commodity Index (LHS) Barrel of WTI Oil (RHS) 550 60 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Source: Haver Analytics, RBC GAM 120 110 100 90 80 70 US$ The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 23
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 23: 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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