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Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards has caused investors to move out of relatively risky small-cap stocks. Exhibit 40 shows the same trend using data from our quantitative model, QUBE, and other style factors that we monitor are presented in exhibits 41 to 43. In these, we use the S&P 1500 as the universe of stocks, with each chart tracking the performance of a particular style relative to the universe. In addition to small-cap stocks, value stocks (Exhibit 41) have outperformed significantly, although both gave up ground during the latest correction. Should style leadership change, we would look to some of the factors that have not been working to move to the forefront. Momentum has underperformed significantly, although in the last month it has shown some signs of life (Exhibit 42). Growth stocks, in Exhibit 43, have largely kept pace with the market since the bottom and could also be a candidate for leadership going forward. These factors will bear monitoring as we progress through the cycle, and especially as the next up-leg takes hold. Asset mix tilted toward equities Bond yields have once again plummeted, with the U.S. 10-year T-bond moving to all-time lows. Unorthodox monetary policy, aimed at stimulating the economy through targeting low policy rates and providing liquidity to the market through bond purchases, is clearly an important factor. This is referred to as ‘financial repression’ and reflects central bankers’ desire to hold yields at massively stimulative levels in the EXHIBIT 42. 2.5% 0.0% -2.5% -5.0% -7.5% -10.0% EXHIBIT 43. 5.0% 2.5% 0.0% -2.5% U.S. Factor Returns Cumulative Returns to QUBE Momentum (Technical) *Returns to momentum vs. S&P 1500 starting 03/2009 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Source: RBC GAM U.S. Factor Returns Cumulative Returns to QUBE Growth *Returns to growth vs. S&P 1500 starting -5.0% Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Source: RBC GAM SAMPLE EXHIBIT 44. 10-Year Break-Even Yields Current 10-Year Bond Yield Current Money Market Yield Current Excess Yield to Money Market Maturity Duration Break- Even* Break- Even Yield* U.S. 1.45% 0.07% 1.38% 30/06/2022 9.279 15 bps 1.60% Canada 1.63% 0.92% 0.71% 30/06/2022 9.188 8 bps 1.71% Germany 1.17% -0.03% 1.20% 30/06/2022 9.424 13 bps 1.30% U.K. 1.53% 0.38% 1.15% 30/06/2022 9.237 12 bps 1.66% Japan 0.82% 0.11% 0.70% 30/06/2022 9.614 7 bps 0.89% Source: RBC GAM 28 I The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012
Global Investment Outlook • Eric Lascelles • Daniel E. Chornous, CFA • John Richards EXHIBIT 45. Asset Class Forward Returns Current Asset Class Return U.S. Treasury Bill -0.36% hopes of spurring economic activity. In addition, considerable threats to the recovery and memories of 2008/2009 continue to worry investors. As risky assets such as equities are sold in favour of safer investments, Treasury bonds receive large inflows, moving yields even lower. Ultimately, in an environment where this level of stimulus is no longer needed or appropriate, the path for interest rates will reverse to the upside. While it is unlikely the environment and yields will normalize in the near term, barring another severe recession, both should eventually move higher. As yields rise, even modest capital losses on principal amounts may overwhelm coupon payments from bonds. Exhibit 44 shows the results of a break-even analysis for 10-year Treasury bonds in several major markets. This analysis examines the income component of bond returns versus capital gains. Bond yields have an inverse relationship with bond prices, meaning that when yields rise, prices fall, leaving investors with 1-Year Forward Return 2-Year* Forward Return 3-Year* Forward Return capital losses. Break-even in this case is the number of basis points that will generate a capital loss large enough to completely offset the income component of the bond. As we can see in Exhibit 44, from the current level of yields in the U.S. (current 10-Year Treasury Bond yield: 1.45%), a rise of only 15 basis points over the next year would be enough to wipe out any income from an investment, demonstrating just how expensive Treasury bonds have become. On the other hand, stock markets are depressed worldwide. While many came off their lows during the winter months, confidence since then has been shaken and markets have fallen back. To be sure, there are a variety of stiff headwinds facing investors. Europe continues to struggle with growth and austerity, as well as continued uncertainty regarding Greece and Spain, while patchy economic data in North America and the so-called fiscal cliff threatens the sustainability of the current business cycle. Slowing growth in China is 5-Year* Forward Return 10-Year* Forward Return U.S. 10-Year Treasury Bond -17.27% -12.68% -5.26% -3.19% -1.50% -0.19% Canada 10-Year Government Bond -17.76% -14.37% -6.74% -4.12% -1.96% -0.28% U.S. Investment Grade Bond** -10.49% -3.65% 0.62% 1.59% 2.39% 3.03% Canada Investment Grade Bond** -11.87% -6.81% -1.86% -0.22% 1.13% 2.19% 15-Year* Forward Return 20-Year* Forward Return U.S. Stocks (S&P 500) TR 29.35% 40.88% 24.05% 25.01% 18.65% 13.58% 11.78% 10.86% Canadian Stocks (TSX) TR 20.01% 21.05% 14.25% 13.58% 12.48% 10.46% 9.94% 9.66% *Annualized Returns **Bank of America ML Indexes, assuming long-term reversion to normal spread to T-bond, evenly through to end date Source: RBC GAM, Bloomberg stoking fears that it too may fall into recession. Nevertheless, in the past year, we have seen considerable advances in the economic recovery in North America and, while the problems in Europe remain complex, policymakers appear to have the tools and the wherewithal to guide the European Union to recovery, however long that may take. China’s policymakers also appear willing to support the Chinese economy, increasing the odds of a soft landing. These threats to the global economy have hit sentiment hard, driving down equity-market valuations while causing investors to bid up government bonds. In this environment, record- high corporate profits have been largely unrewarded, providing an attractive investment opportunity should risk aversion subside. Exhibit 45 demonstrates the returns to investors for various asset classes based on a highly artificial, but impactful, assumption that they all move to levels forecast by our equilibrium models over a variety of time frames. For the SAMPLE The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 29
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 29: 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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