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Global Fixed income markets • Soo Boo Cheah, CFA • Suzanne Gaynor recede. Investors should shift their focus back to the strong fundamental stories. The Fed is also expected to step aside under these circumstances, and intervention premiums in Treasuries will gradually dissipate. Overweight JGBs – The best performing market in a bond bear market (Exhibit 9). Neutral Bunds – The liquidity warehouse and perceived safe-haven asset of the Eurozone. The near-term range of possible outcomes for bunds is very diverse, and a neutral allocation is, therefore, prudent this quarter. Exhibit 9. 10-Year Yield Spread: U.S. minus JGB 200 150 100 50 0 -50 -100 -150 U.S. Treasuries Tend To Underperform in a Rising Rate Environment Rising Spread Rising Yield -200 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 3-Month Change in U.S. 10-Year Treasury Yield Source: Bloomberg, RBC GAM SAMPLE 42 I The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012
Currency Markets Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income & Currencies (Toronto & London) RBC Global Asset Management Inc. The recent performance of the U.S. dollar has been better than many expected, with the greenback inching higher from the all-time lows of a year ago. The slow appreciation fits with the gradually improving domestic economy. For all its progress, the greenback is still about 10% of its nadir and far from levels that would be a problem for U.S. economic growth. Valuations will not stand in the way of further strengthening for a long time, as even with another 10% gain, the U.S. dollar would remain cheap (Exhibit 1). We believe there are three reasons why U.S. dollar bearish bets, 10 years after the dollar bear market began and nearly 40% below the highs, are poor risk-reward trades. First, an improving current-account deficit, due to lower reliance on imports to meet the energy shortfall, is expected to continue (Exhibit 2). At the same time, the growth of foreign-exchange reserves has been slowing since 2009, which, combined with the Eurozone crisis, means less need to diversify reserves by selling the U.S. dollar. The second reason is valuations, as the dollar is about 16% undervalued and just a few percentage points above its line in the sand (Exhibit 3). Third is demographics, which, thanks to immigration, compares favourably not only to developed countries, but also to some emerging-market countries like China and South Korea 1 (Exhibit 4). 1 These LT fundamentals have been discussed in more depth in the Global Investment Outlook, Spring 2012. EXHIBIT 1. Billions of Cubic Feet 145 135 125 115 105 95 85 75 65 -2,500 USD Down 8 yrs -26% Long-Term U.S. Dollar Cycles Trade-Weighted USD Index (Nominal, Major Currencies) USD Up 6 yrs +67% USD Down 10 yrs -47% USD Up 7 yrs +43% USD Down 10 yrs? -40% 1971 1975 1980 1984 1989 1993 1998 2003 2007 2012 EXHIBIT 2. 5,000 2,500 Source: Bloomberg, Deutsche Bank 0 U.S. Energy Shortfall U.S. Natural Gas Shortfall -5,000 1982 1991 2001 2011 Source: U.S. Energy In the meantime, while we are waiting for dollar-bottoming to signal the turn of the trend, holding the dollar offers other advantages. It remains the safe-haven currency, as its longterm correlation with risky assets is near 40-year lows (Exhibit 5). This characteristic comes in very handy for our portfolios. Exhibit 6 compares highyield index prices with the relationship Millions of Barrels 6,000 4,000 2,000 0 -2,000 -4,000 U.S. Crude Oil Shortfall SAMPLE -6,000 1982 1992 2002 2012 Source: U.S. Energy between the U.S. and Canadian dollars. Their negative correlation, which tends to be high under normal circumstances, increases significantly under stressful periods like last fall (circled). This is what we refer to when we say that we include some U.S. dollar holdings in our portfolios as an insurance policy. Please note that when stress subsided and high-yield prices recovered, the The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 43
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 37 and 38: Global Fixed income markets • Soo
Page 43: Global Fixed income markets • Soo
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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