the global investment outlook...suzanne gaynor – v.p. & senior portfolio manager, rbc global...

NEW YEAR 2017

THE GLOBAL INVESTMENT OUTLOOK RBC GAM Investment Strategy Committee

The RBC GAM Investment Strategy Committee consists of senior investment professionals drawn from across RBC Global Asset Management. The Committee regularly receives economic and capital markets related input from internal and external sources. Important guidance is provided by the Committee’s regional advisors (North America, Europe, Far East), from the Global Fixed Income & Currencies Subcommittee and from the global equity sector heads (financials and healthcare, consumer discretionary and consumer staples, industrials and utilities, energy and materials, telecommunications and technology). From this it builds a detailed global investment forecast looking one year forward.

The Committee’s view includes an assessment of global fiscal and monetary conditions, projected economic growth and inflation, as well as the expected course of interest rates, major currencies, corporate profits and stock prices.

From this global forecast, the RBC GAM Investment Strategy Committee develops specific guidelines that can be used to manage portfolios.

These include:

�� the recommended mix of cash, fixed income instruments, and equities

�� the recommended global exposure of fixed income and equity portfolios

�� the optimal term structure for fixed income investments

�� the suggested sector and geographic make-up within equity portfolios

�� the preferred exposure to major currencies

Results of the Committee’s deliberations are published quarterly in The Global Investment Outlook.

THE RBC GAM INVESTMENT STRATEGY COMMITTEE

CONTENTS

EXECUTIVE SUMMARY 2The Global Investment Outlook Sarah Riopelle, CFA – V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

Daniel E. Chornous, CFA – Chief Investment Officer, RBC Global Asset Management Inc.

ECONOMIC & CAPITAL MARKETS FORECASTS 4RBC GAM Investment Strategy Committee

RECOMMENDED ASSET MIX 5RBC GAM Investment Strategy Committee

CAPITAL MARKETS PERFORMANCE 10 Milos Vukovic, MBA, CFA – V.P. & Head of Investment Policy, RBC Global Asset Management Inc.

GLOBAL INVESTMENT OUTLOOK 13A new directionEric Lascelles – Chief Economist, RBC Global Asset Management Inc.

Eric Savoie, MBA, CFA – Senior Analyst, Investment Strategy, RBC Global Asset Management Inc.

Daniel E. Chornous, CFA – Chief Investment Officer, RBC Global Asset Management Inc.

GLOBAL FIXED INCOME MARKETS 43Soo Boo Cheah, MBA, CFA – Senior Portfolio Manager, RBC Global Asset Management (UK) Limited

Suzanne Gaynor – V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

CURRENCY MARKETS 48Dagmara Fijalkowski, MBA, CFA – Head, Global Fixed Income and Currencies (Toronto and London), RBC Global Asset Management Inc.

Daniel Mitchell, CFA – Portfolio Manager, RBC Global Asset Management Inc.

Taylor Self, MBA – Analyst, RBC Global Asset Management Inc.

REGIONAL EQUITY MARKET OUTLOOK

United States 56Raymond Mawhinney – Senior V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

Brad Willock, CFA – V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

Canada 58Stuart Kedwell, CFA – Senior V.P. & Senior Portfolio Manager, RBC Global Asset Management Inc.

Europe 60Dominic Wallington – Head, European Equities & Senior Portfolio Manager, RBC Global Asset Management (UK) Limited

Asia 62Mayur Nallamala – Head & Senior Portfolio Manager, RBC Investment Management (Asia) Limited

Emerging Markets 64Richard Farrell, CFA – Portfolio Manager, RBC Global Asset Management (UK) Limited

RBC GAM INVESTMENT STRATEGY COMMITTEE 66

THE GLOBAL INVESTMENT OUTLOOK New Year 2017 I 1

Risks to the outlook have diminished, but Trump victory adds uncertaintyThe risk environment has improved, with the business-cycle concerns that dominated our thinking earlier in the year seeming much less pressing today. With respect to China, we remain watchful as risks linked to debt are significant, but near-term concerns have faded and growth perked up somewhat.

There are still some notable risks. Policy uncertainty is rising as populist forces seize power and the world’s economic speed limit remains slow. The sharp increase in global interest rates presents a potential threat given that higher yields are a material economic drag and also lead to a sharp increase in borrowing costs.

Perhaps most notable is the outcome of the U.S. election. A Trump victory was certainly a surprise and creates the potential for a significant shift in U.S. public policy. On the positive side, tax cuts and infrastructure spending constitute important sources of fiscal stimulus and should add to short-term growth. In addition, the promise of fewer government regulations could also enhance economic growth, although such changes may come with less desirable side-effects for the environment and financial stability. On the other hand, greater trade barriers could do material lasting damage if implemented and limiting immigration could also constrain growth. Markets have responded to the election with surging stock prices, but also through higher interest rates and a stronger U.S. dollar, which could offset some of the potential positives highlighted above.

Continuing the trend from last quarter, economic data has improved, market sentiment has firmed and prices of risk assets have been marching higher. This is a welcome change compared with the investing environment that was in place at the beginning of this year when fears about China, U.S. rate hikes and weak economic figures led to a sharp correction in financial markets. Contrary to popular perception, this new market direction actually began before populist victories in the U.K. referendum and U.S. election. A number of trends that pre-date these events suggest that the outlook for the economy and markets has been improving since earlier this year and were further punctuated by Trump’s victory.

Sarah Riopelle, CFAV.P. & Senior Portfolio Manager RBC Global Asset Management Inc.

Daniel E. Chornous, CFAChief Investment Officer RBC Global Asset Management Inc.

2 I THE GLOBAL INVESTMENT OUTLOOK New Year 2017

EXECUTIVE SUMMARY

Upgrading our economic forecasts The world is still suffering from a low economic speed limit due to a mix of structural and cyclical restraints, but some progress is occurring as the amount of economic slack that has plagued many developed nations over the past few years has fallen. Without abandoning the principle of a “slow-growth world,” we have tweaked our global growth forecasts slightly higher to reflect this recent progress. We expect both the developed and developing world to manage more growth in 2017 than in 2016. That said, our new 2017 forecasts are still a little below the consensus expectation.

U.S. dollar strength carries on Our long-held bullish view on the U.S. dollar received a shot in the arm from the outcome of the presidential election. The impact of expected fiscal stimulus, a rollback of regulation and tax cuts on the U.S. economy, which already possessed a cyclical and inflation advantage relative to its peers, has the potential to accelerate the pace of dollar appreciation in a final up-leg of the bull market. It could just as easily extend the length of the current dollar cycle a couple of years beyond the average. At this stage, it is hard to determine which of these scenarios will prevail and any number of developments could test the greenback’s strength. We would be inclined to view any such tests as an opportunity for dollar bulls due to upcoming political risks in some major economies and disappointing economic activity in all of them.


Executive Summary | Sarah Riopelle, CFA | Daniel E. Chornous, CFA

stabilization in oil prices is a key driver of this improvement and suggests that corporate-profit growth can resume and provide a powerful force for the stock market going forward. There has been much discussion about the potential impact of a Trump administration, especially as it relates to corporate earnings. While there is still much uncertainty, the possibility for significant gains to earnings, and therefore equity prices, if everything falls into place shouldn’t be ignored. This upside potential is likely the root of the equity-market optimism that we have seen since the election.

Small changes to the asset mix over the quarterA fairly decent economic backdrop supported by solid economic data, rising inflation and diminishing risks has buoyed risk assets, most notably in the U.S. While valuation risk has moderated in the bond market as a result of the rapid rise in yields, the intermediate-to-long-term outlook for fixed-income remains unimpressive. Our models continue to suggest that stocks will outperform bonds and, therefore, our asset mix remains tilted towards stocks. As yields eventually rise over time, we will look to dial back our significant underweight position in bonds. We began that process shortly after the election by adding one percentage point to fixed income as yields spiked. Earlier in the quarter, we added one percentage point to equities, taking advantage of lower equity prices after the September sell-off. Both changes were sourced from cash. For a balanced, global investor, we currently recommend an asset mix of 61% equities (strategic neutral position: 55%), and 38% fixed income (strategic neutral position: 43%), with the balance in cash.

been reflected in rising government-bond yields. Since July, the yield on the U.S. 10-year Treasury bond has increased roughly 100 basis points from its record low, and yields in other developed markets have also risen, albeit not to the same extent. We continue to believe that bond yields will move gradually higher over time, but any near-term adjustment will likely be limited given the amount of monetary stimulus that is still in place, as well as the slow-growth environment. Longer term, as unorthodox monetary policy fades, yields will again be driven by economic conditions such as inflation and economic growth, which our models suggest could lead to higher bond yields.

Global equities show mixed resultsGlobal equities were flat in aggregate over the quarter, but that masks a significant divergence between markets. U.S. equities rose to an all-time high after the election as investors decided that a Trump victory was likely positive for corporate profits. In Europe, however, stocks failed to break higher and remained range-bound through the quarter, and emerging-market equities posted a negative return for the quarter (in U.S. dollar terms). Despite strong returns over the last few years, we continue to believe that stocks remain attractive. This view is based largely on models that adjust for inflation and interest rates, which in today’s environment justify paying a higher multiple on earnings. In fact, our global-equity composite continues to situate stocks well below fair value at levels that have historically represented attractive entry points.

In the U.S., earnings estimates are beginning to rise following almost two years of persistent downgrades. The

Inflation to edge higherWe continue to highlight the theme of rising inflation. It is not that we anticipate uncomfortably high inflation, but rather that we expect a normalization after many years of subdued readings. This is due to the fact that the worst of the commodity shock is now behind and that most developed countries have managed to substantially shrink their output gaps in recent quarters. Longer term, the combination of increased populism and diminishing globalization will likely introduce new inflationary forces.

From monetary to fiscal stimulus?Policymakers continue to engage in a slew of economic remedies designed to boost economic growth. With these programs becoming less effective, there is a belief that we will begin to see a shift away from monetary stimulus and toward fiscal stimulus. Neither monetary nor fiscal policy is inherently superior, but the combination of financial-stability concerns as monetary policy lingers for so long near the zero bound and cheap borrowing costs argue that a transition is desirable. However, this trend has yet to take hold. U.S. monetary policy will remain quite loose for the foreseeable future and most other major central banks are still in monetary stimulus-delivery mode. While a handful of countries are embarking on fiscal stimulus programs, we calculate that the global fiscal impulse will in fact be slightly restrictive over the next few years, and there is no certainty that fiscal stimulus truly lifts off outside of North America.

Bond yields surge from record lowsThe prospect of higher inflation and an improvement in the economy has

TARGETS (RBC GAM INVESTMENT STRATEGY COMMITTEE)

NOVEMBER 2016FORECAST

NOVEMBER 2017CHANGE FROM

FALL 20161-YEAR TOTAL RETURN

ESTIMATE* (%)

CURRENCY MARKETS AGAINST USD

CAD (USD–CAD) 1.34 1.44 N/C (6.9)

EUR (EUR–USD) 1.06 1.00 N/C (6.8)

JPY (USD–JPY) 114.45 115.00 5.00 (1.6)

GBP (GBP–USD) 1.25 1.15 (0.10) (8.6)

FIXED INCOME MARKETS

U.S. Fed Funds Rate 0.50 0.88 0.13 N/A

U.S. 10-Year Bond 2.38 2.25 0.25 3.6

Canada Overnight Rate 0.50 0.50 N/C N/A

Canada 10-Year Bond 1.59 1.50 N/C 2.4

Eurozone Deposit Facility Rate (0.40) (0.40) N/C N/A

Germany 10-Year Bund 0.28 0.40 0.10 (0.9)

U.K. Base Rate 0.25 0.25 N/C N/A

U.K. 10-Year Gilt 1.42 1.50 0.50 0.7

Japan Overnight Call Rate (0.05) (0.10) N/C N/A

Japan 10-Year Bond 0.03 0.00 N/C 0.3

EQUITY MARKETS

S&P 500 2199 2350 50 9.0

S&P/TSX Composite 15113 15825 575 7.5

MSCI Europe 1399 1475 (50) 9.2

FTSE 100 6784 7100 (100) 8.9

Nikkei 18308 19000 1100 5.6

MSCI Emerging Markets 863 925 (25) 9.9

*Total returns are expressed in local currencies with the exception of MSCI Europe and MSCI Emerging Markets indices whose returns are expressed in USD. Source: RBC GAM

ECONOMIC & CAPITAL MARKETS FORECASTS

ECONOMIC FORECAST (RBC GAM INVESTMENT STRATEGY COMMITTEE)

UNITED STATES CANADA EUROPE

UNITED KINGDOM JAPAN CHINA

EMERGING MARKETS1

New Year 2017

Change from Fall

2016New Year

2017

Change from Fall

2016New Year

2017

Change from Fall

2016New Year

2017

Change from Fall

2016New Year

2017

Change from Fall

2016New Year

2017

Change from Fall

2016New Year

2017

Change from Fall

2016

REAL GDP

2015A 2.38% 1.20% 1.49% 2.19% 0.47% 6.91% 4.67%

2016E 1.50% N/C 1.25% N/C 1.50% N/C 2.00% 0.50 0.50% N/C 6.75% 0.25 5.00% N/C

2017E 2.00% 0.25 1.50% N/C 1.25% N/C 1.50% 0.75 0.75% (0.25) 6.00% N/C 5.25% N/C

CPI

2015A 0.12% 1.09% 0.03% 0.05% 0.77% 1.54% 4.17%

2016E 1.25% N/C 1.50% (0.25) 0.25% (0.25) 0.75% (0.25) (0.25%) N/C 2.00% (0.25) 3.50% (0.25)

2017E 2.25% 0.25 2.25% N/C 1.50% N/C 3.00% 0.25 0.50% (0.50) 2.00% N/C 3.25% N/C

A = Actual E = Estimate 1GDP Weighted Average of China, India, South Korea, Brazil, Mexico and Russia.


Asset mix – the allocation within portfolios to stocks, bonds and cash – should include both strategic and tactical elements. Strategic asset mix addresses the blend of the major asset classes offering the risk/return tradeoff best suited to an investor’s profile. It can be considered to be the benchmark investment plan that anchors a portfolio through many business and investment cycles, independent of a near-term view of the prospects for the economy and related expectations for capital markets. Tactical asset allocation refers to fine tuning around the strategic setting in an effort to add value by taking advantage of shorter term fluctuations in markets.

Every individual has differing return expectations and tolerances for volatility, so there is no “one size fits all” strategic asset mix. Based on a 40-year study of historical returns1 and the volatility2 of returns (the range around the average return within which shorter-term results tend to fall), we have developed five broad profiles and assigned a benchmark strategic asset mix for each. These profiles range from very conservative through balanced to aggressive growth. It goes without saying that as investors accept increasing levels of volatility, and therefore greater risk that the actual experience will depart from the longer-term norm, the potential for returns rises. The five profiles presented below may assist investors in selecting a strategic asset mix best aligned to their investment goals.

Each quarter, the RBC GAM Investment Strategy Committee publishes a recommended asset mix based on our current view of the economy and return

RECOMMENDED ASSET MIX

expectations for the major asset classes. These weights are further divided into recommended exposures to the variety of global fixed income and equity markets. Our recommendation is targeted at the Balanced profile where the benchmark setting is 55% equities, 43% fixed income, 2% cash.

A tactical range of +/- 15% around the benchmark position allows us to raise or lower exposure to specific asset classes with a goal of tilting portfolios toward those markets that offer comparatively attractive near-term prospects.

This tactical recommendation for the Balanced profile can serve as a guide for movement within the ranges allowed for all other profiles.

The value-added of tactical strategies is, of course, dependent on the degree to which the expected scenario unfolds.

Regular reviews of portfolio weights are essential to the ultimate success of an investment plan as they ensure current exposures are aligned with levels of long-term returns and risk tolerances best suited to individual investors.

Anchoring portfolios with a suitable strategic asset mix, and placing boundaries defining the allowed range for tactical positioning, imposes discipline that can limit damage caused by swings in emotion that inevitably accompany both bull and bear markets.


1. Average return: The average total return produced by the asset class over the period 1976 – 2016, based on monthly results.

2. Volatility: The standard deviation of returns. Standard deviation is a statistical measure that indicates the range around the average return within which 2/3 of results will fall into, assuming a normal distribution around the long-term average.

*Citigroup World Global Bond Index **MSCI World Index Source: RBC GAM Investment Strategy Committee

GLOBAL ASSET MIX

BENCHMARK POLICY

PAST RANGE

NEW YEAR 2016

SPRING 2016

SUMMER 2016

FALL 2016

NEW YEAR 2017

CASH 2.0% 1.0% – 16% 1.0% 3.0% 3.0% 3.0% 1.0%

BONDS 43.0% 25.0% – 54.0% 37.0% 37.0% 37.0% 37.0% 38.0%

STOCKS 55.0% 36.0% – 65.0% 62.0% 60.0% 60.0% 60.0% 61.0%

Note: Effective September 1, 2014, we revised our strategic neutral positions within fixed income, lowering the ‘neutral’ commitment to cash from 5% to 2%, and moving the difference to bonds. This takes advantage of the positive slope of the yield curve which prevails over most time periods, and allows our fixed income managers to shorten duration and build cash reserves whenever a correction in the bond market, or especially an inverted yield curve, is anticipated.

REGIONAL ALLOCATION

GLOBAL BONDSCWGBI*

NOV. 2016PAST

RANGENEW YEAR

2016SPRING

2016SUMMER

2016FALL 2016

NEW YEAR 2017

North America 38.1% 18% – 40% 37.7% 38.2% 37.0% 36.9% 38.1%

Europe 38.5% 32% – 56% 45.3% 39.9% 35.3% 34.4% 33.5%

Asia 23.4% 17% – 35% 17.0% 21.9% 27.7% 28.8% 28.4%

Note: Past Range reflects historical allocation from Fall 2002 to present.

GLOBAL EQUITIESMSCI**

NOV. 2016PAST

RANGENEW YEAR

2016SPRING

2016SUMMER

2016FALL 2016

NEW YEAR 2017

North America 61.4% 51% – 61% 58.0% 59.2% 60.2% 60.0% 60.3%

Europe 19.8% 20% – 35% 23.5% 22.2% 21.6% 20.5% 20.3%

Asia 11.6% 9% – 18% 11.0% 11.1% 10.8% 12.0% 11.9%

Emerging Markets 7.3% 0% – 8.5% 7.5% 7.5% 7.5% 7.5% 7.5%

Our asset mix is reported as at the end of each quarter. The mix is fluid and may be adjusted within each quarter, although we do not always report on shifts as they occur. The weights in the table should be considered a snapshot of our asset mix at the date of release of the Global Investment Outlook.

GLOBAL EQUITY SECTOR ALLOCATION

MSCI** NOV. 2016

RBC GAM ISC FALL 2016

RBC GAM ISC NEW YEAR 2017

CHANGE FROM FALL 2016

WEIGHT VS. BENCHMARK

Energy 6.85% 4.77% 5.85% 1.07 85.4%

Materials 5.02% 3.85% 4.52% 0.67 90.0%

Industrials 11.15% 12.39% 13.65% 1.26 122.4%

Consumer Discretionary 12.42% 12.56% 12.42% (0.15) 100.0%

Consumer Staples 10.38% 11.78% 11.38% (0.41) 109.6%

Health Care 12.32% 14.50% 10.32% (4.18) 83.8%

Financials 16.82% 17.41% 17.82% 0.41 105.9%

Information Technology 15.05% 16.73% 17.05% 0.33 113.3%

Telecom. Services 3.31% 3.58% 1.31% (2.26) 39.7%

Utilities 3.39% 2.43% 2.39% (0.05) 70.5%

Real Estate 3.29% N/A 3.29% N/A 100.0%


Recommended Asset Mix


VERY CONSERVATIVEVery Conservative investors will seek income with maximum capital preservation and the potential for modest capital growth, and be comfortable with small fluctuations in the value of their investments. This portfolio will invest primarily in fixed-income securities, and a small amount of equities, to generate income while providing some protection against inflation. Investors who fit this profile generally plan to hold their investment for the short to medium term (minimum one to five years).

ASSET CLASSBENCH-MARK RANGE

LAST QUARTER

CURRENT RECOMMENDATION

Cash & Cash Equivalents 2% 0-15% 2.9% 1.1%

Fixed Income 78% 55-95% 72.6% 73.7%

Total Cash & Fixed Income 80% 65-95% 75.5% 74.8%

Canadian Equities 10% 5-20% 11.0% 11.4%

U.S. Equities 5% 0-10% 6.0% 6.4%

International Equities 5% 0-10% 7.5% 7.4%

Emerging Markets 0% 0% 0.0% 0.0%

Total Equities 20% 5-35% 24.5% 25.2%

RETURN VOLATILITY

40-Year Average 8.9% 5.5%

Last 12 Months 4.5% 2.9%

At RBC GAM, we have a team dedicated to setting and

reviewing the strategic asset mix for all of our multi-asset solutions. With

an emphasis on consistency of returns, risk management and capital

preservation, we have developed a strategic asset allocation framework for

five client risk profiles that correspond to broad investor objectives and risk

preferences. These five profiles range from Very Conservative through

Balanced to Aggressive Growth.

“

”



LAST QUARTER



Fixed Income 43% 20-60% 37.0% 38.0%



U.S. Equities 20% 10-30% 21.1% 21.6%


Emerging Markets 4% 0-10% 4.5% 4.6%

Total Equities 55% 40-70% 60.0% 61.0%

BALANCEDThe Balanced portfolio is appropriate for investors seeking balance between long-term capital growth and capital preservation, with a secondary focus on modest income, and who are comfortable with moderate fluctuations in the value of their investments. More than half the portfolio will usually be invested in a diversified mix of Canadian, U.S. and global equities. This profile is suitable for investors who plan to hold their investment for the medium to long term (minimum five to seven years).

RETURN VOLATILITY




LAST QUARTER



Fixed Income 63% 40-80% 57.3% 58.3%



U.S. Equities 10% 0-15% 11.2% 11.6%


Emerging Markets 0% 0% 0.0% 0.0%

Total Equities 35% 20-50% 39.8% 40.6%

CONSERVATIVEConservative investors will pursue modest income and capital growth with reasonable capital preservation, and be comfortable with moderate fluctuations in the value of their investments. The portfolio will invest primarily in fixed-income securities, with some equities, to achieve more consistent performance and provide a reasonable amount of safety. The profile is suitable for investors who plan to hold their investment over the medium to long term (minimum five to seven years).

RETURN VOLATILITY






LAST QUARTER



Fixed Income 28% 5-40% 21.7% 22.6%



U.S. Equities 25% 15-35% 26.2% 26.7%


Emerging Markets 6% 0-12% 6.6% 6.7%

Total Equities 70% 55-85% 75.3% 76.4%

GROWTHInvestors who fit the Growth profile will seek long-term growth over capital preservation and regular income, and be comfortable with considerable fluctuations in the value of their investments. This portfolio primarily holds a diversified mix of Canadian, U.S. and global equities and is suitable for investors who plan to invest for the long term (minimum seven to ten years).

RETURN VOLATILITY




LAST QUARTER



Fixed Income 0% 0-10% 0.0% 0.0%


Canadian Equities 32.5% 20-45% 31.9% 32.2%

U.S. Equities 35.0% 20-50% 34.6% 34.9%

International Equities 21.5% 10-35% 23.2% 22.6%

Emerging Markets 9.0% 0-15% 9.3% 9.3%

Total Equities 98% 80-100% 99.0% 99.0%

AGGRESSIVE GROWTH

RETURN VOLATILITY



Aggressive Growth investors seek maximum long-term growth over capital preservation and regular income, and are comfortable with significant fluctuations in the value of their investments. The portfolio is almost entirely invested in stocks and emphasizes exposure to global equities. This investment profile is suitable only for investors with a high risk tolerance and who plan to hold their investments for the long term (minimum seven to ten years).



The U.S. dollar rose against all major currencies during the three months ended November 30, 2016, with the gains amplified by Donald Trump’s victory in the U.S. presidential election on November 8. The greenback’s 10.6% gain versus the yen was the largest, followed by a 5.3% rise versus the euro, a 5.0% rise versus the British pound and a 2.4% gain versus the Canadian dollar. For the 12-month period, the U.S. dollar climbed 20.4% versus sterling, reflecting the U.K. decision in June to leave the EU, and 0.6% against the loonie. However, the U.S. dollar lost ground versus the euro, falling 0.3%, and the yen, against which the U.S. dollar’s decline was 7.1%.

Global fixed-income markets recorded losses during the three-month period as yields increased on speculation that higher commodity prices and the threat of populist economic policies would boost inflationary pressures. Declines were exacerbated in U.S. dollar terms by the appreciation of the greenback. The Barclays Capital Aggregate Bond Index, a broad measure of U.S. fixed-income performance, lost 3.2%,

Milos Vukovic, MBA, CFAV.P. & Head of Investment Policy RBC Global Asset Management Inc.


CAPITAL MARKETS PERFORMANCE

while European bonds fell 8.7% in U.S. dollar terms as measured by the Citigroup WGBI – Europe Index. The Citigroup Japanese Government Bond Index dropped 10.5%, and the FTSE TMX Canada Universe Bond Index, Canada’s fixed-income benchmark, declined 5.2%.

U.S. equity markets recorded gains during the three-month period, while most other major equity indexes registered losses due to the strong U.S. dollar. The S&P 500 Index rose 1.8% and the MSCI Japan gained of 0.60%, as strong local-currency gains offset the significant decline in the yen. The MSCI France dropped 1.1%, while the MSCI U.K. dropped 3.9% and the MSCI Germany dropped 4.8%. Over the 12-month period, the S&P 500 gained 8.1% and the MSCI Japan rose 2.1%. In Europe, the MSCI France decreased 2.8%, the MSCI Germany declined 5.8% and the MSCI U.K. lost 7.8%, all in U.S. dollar terms. The S&P/ TSX Composite Index rose 1.7% in U.S. dollar terms during the three months, compared with a 2.7% gain for the large-cap S&P/TSX 60 Index and a 0.1% loss for the S&P/TSX Small Cap Index. The MSCI Emerging Markets Index lost 3.1% during the three-month period and gained 8.9% over the 12-month period. Depreciation in emerging-market currencies was largely responsible for the declines.

The S&P 400 Index, a measure of the U.S. mid-cap market, rose 4.5% in the latest three-month period and 13.2% in the 12-month period, while the S&P 600 Index, a gauge of small-cap performance, rose 8.2% and 16.6%, respectively. The Russell 3000 Value Index rose 4.4% during the quarter versus a 0.4% rise for the Russell 3000 Growth Index. Over the 12 months, the Russell 3000 Value Index gained 12.6%, while the Russell 3000 Growth Index rose 4.3%.

Six of the 11 global equity sectors recorded gains during the quarter ended November 30, 2016. The best-performing sector was Financials with a gain of 8.9%, followed by Energy with a rise of 6.6% and Materials with a 3.3% increase. The worst-performing sectors over the past three months were Real Estate, which fell 8.5%; Consumer Staples, which fell 8.3%; and Telecommunication Services, which lost 7.4%. Over the 12-month period, the best-performing sectors were Materials, Energy and Industrials, and the worst-performing were Health Care, Telecommunication Services and Consumer Discretionary. The new Real Estate sector was added to the performance tables this quarter.

Capital Markets Performance | Milos Vukovic, MBA, CFA

CANADA Periods ending November 30, 2016

USD CAD

Equity Markets: Total Return3 months

(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

S&P/TSX Composite 1.65 22.02 14.86 (0.96) 1.86 4.08 15.45 7.18

S&P/TSX 60 2.70 22.33 15.12 (0.16) 2.60 5.13 15.71 7.98

S&P/TSX Small Cap (0.07) 36.24 30.64 (3.09) (2.61) 2.36 31.23 5.05

U.S.Periods ending November 30, 2016

USD CAD


(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

S&P 500 1.83 9.79 8.06 9.07 14.45 4.31 8.69 17.95

S&P 400 4.45 18.15 13.23 9.36 14.74 6.99 13.89 18.26

S&P 600 8.20 22.43 16.57 8.79 16.13 10.84 17.26 17.65

Russell 3000 Value 4.36 15.36 12.59 8.50 14.67 6.89 13.26 17.33

Russell 3000 Growth 0.40 6.07 4.25 8.81 14.08 2.84 4.86 17.67

NASDAQ Composite Index 2.12 6.32 4.21 9.45 15.23 4.60 4.82 18.36

EXCHANGE RATES Periods ending November 30, 2016

Current USD

3 months (%)

YTD (%)

1 year (%)

3 years (%)

5 years (%)

USD–CAD 1.3433 2.43 (2.92) 0.59 8.14 5.66

USD–EUR 0.9435 5.25 2.54 (0.31) 8.63 4.86

USD–GBP 0.7992 4.95 17.82 20.37 9.37 4.64

USD–JPY 114.4050 10.57 (4.82) (7.06) 3.75 8.09

Source: Bloomberg/MSCI

CANADA Periods ending November 30, 2016

USD CAD

Fixed Income Markets: Total Return3 months

(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

FTSE TMX Canada Univ. Bond Index (5.15) 5.09 2.74 (3.50) (1.99) (2.71) 3.33 4.64

U.S. Periods ending November 30, 2016

USD CAD


(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

Citigroup U.S. Government (3.21) 2.54 2.20 2.78 2.42 (0.86) 2.80 11.15

Barclays Capital Agg. Bond Index (3.17) 2.50 2.17 2.79 2.43 (0.81) 2.77 11.16

GLOBALPeriods ending November 30, 2016

USD CAD


(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

Citigroup WGBI (5.90) 2.29 2.89 (0.25) 0.49 (3.62) 3.49 7.87

Citigroup European Government (8.67) (1.21) (0.27) (2.88) 1.36

Citigroup Japanese Government (10.51) 9.69 13.18 (0.44) (4.69)

Note: all changes above are expressed in US dollar terms

Note: all rates of return presented for periods longer than 1 year are annualized


GLOBAL Periods ending November 30, 2016

USD CAD


(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

MSCI World* 0.13 5.59 3.77 4.29 10.51 2.61 4.78 12.94

MSCI EAFE* (2.75) (1.86) (3.17) (1.77) 6.10 (0.34) (2.22) 6.38

MSCI Europe* (4.49) (4.78) (7.22) (3.57) 5.46 (2.12) (6.31) 4.43

MSCI Pacific* 0.54 3.96 4.95 1.55 7.30 3.03 5.97 9.97

MSCI UK* (3.85) (4.01) (7.77) (4.78) 3.20 (1.47) (6.87) 3.12

MSCI France* (1.10) 0.43 (2.84) (2.15) 6.94 1.35 (1.90) 5.97

MSCI Germany* (4.79) (3.25) (5.81) (3.96) 7.10 (2.42) (4.89) 4.01

MSCI Japan* 0.60 1.72 2.07 2.76 8.41 3.09 3.06 11.28

MSCI Emerging Markets* (3.10) 11.28 8.86 (2.75) 1.34 (0.70) 9.92 5.31

Source: Bloomberg/MSCI

GLOBAL EQUITY SECTORS Periods ending November 30, 2016

USD CAD

Sector: Total Return3 months

(%)YTD (%)

1 year (%)

3 years (%)

5 years (%)

3 months (%)

1 year (%)

3 years (%)

Energy* 6.59 22.12 10.42 (4.98) (0.07) 9.23 11.49 2.90

Materials* 3.34 20.62 15.72 (0.24) 1.31 5.91 16.84 8.03

Industrials* 1.82 11.89 9.04 4.34 11.11 4.34 10.10 13.00

Consumer Discretionary* 0.78 1.80 (0.50) 4.43 13.98 3.28 0.47 13.09

Consumer Staples* (8.31) (1.30) (0.37) 4.31 9.49 (6.04) 0.60 12.96

Health Care* (6.94) (8.25) (6.86) 5.27 13.82 (4.63) (5.95) 14.00

Financials* 8.90 8.19 6.28 3.02 12.23 11.60 7.31 11.57

Information Technology* 1.35 9.91 7.39 11.69 13.92 3.87 8.44 20.96

Telecommunication Services* (7.44) (0.28) (0.61) 0.91 7.03 (5.15) 0.36 9.28

Utilities* (6.38) 1.50 3.04 3.13 4.54 (4.06) 4.04 11.68

Real Estate* (8.46) NA NA NA NA (6.19) NA NA

* Net of taxes Note: all rates of return presented for periods longer than 1 year are annualized


Capital Markets Performance | Milos Vukovic, MBA, CFA

A new direction

As 2016 rounds to a close, it offers important lessons for the future. The year began on a sour note, with a sharp financial-market correction motivated by fears about China and U.S. rate hikes. Even as the most acute of these worries subsequently faded, the first half of the year was further stained by feeble economic figures that put recession indicators on high alert.

Fortunately, from these ashes, a remarkable recovery then began to take hold. Economic data steadily improved, market sentiment firmed and risk assets began marching higher, first mending earlier damage and then achieving new heights.

Contrary to popular perception, this new market direction actually predated the populist victories in the U.K. referendum and U.S. election. On the latter, it is certainly helpful that markets have embraced the prospect of front-loaded U.S. fiscal stimulus and hefty corporate-tax cuts (Exhibit 1), but this response marked the continuation of an uptrend rather than the origination of a new one.

GLOBAL INVESTMENT OUTLOOK

There is good reason to anticipate a continuation of this “risk-on” trade into 2017. The global growth signal has improved markedly since the summer, with better economic-surprise indexes and leading indicators (Exhibit 2). Our own forecasts call for faster global GDP growth in 2017 than 2016. The U.S. stock market has arguably still not completely priced in the boost set to come from corporate-tax cuts. Furthermore, organic corporate

earnings have finally begun to rebound after a multi-year malaise (Exhibit 3).

The risk environment has also improved, with downside threats relating to the business cycle and China dimmed though not eliminated.

To be clear, this is hardly a perfect investing environment. There are still notable downside risks, policy uncertainty is rising as populist


Exhibit 1: Markets mostly constructive after Trump win

-40-30-20-100102030405060

-4-3-2-1012345

S&P

500

MS

CI

Wor

ld

U.S

.do

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cre

dit

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ad

Yiel

d/sp

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ch

ange

(bas

is p

oint

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Pric

e ch

ange

(%)

Note: Percentage change of S&P 500, MSCI World Index, trade-weighted exchange value of U.S. dollar and emerging market currencies since 11/8/2016. Basis point change of U.S. 1-year and 10-year yields; investment-grade, high-yield and EM credit spreads since 11/8/2016. Source: J.P. Morgan, Bloomberg, Haver Analytics, RBC GAM

Eric Lascelles Chief Economist RBC Global Asset Management Inc.

Eric Savoie, MBA, CFASenior Analyst, Investment Strategy RBC Global Asset Management Inc. Daniel E. Chornous, CFAChief Investment Officer RBC Global Asset Management Inc.

Exhibit 2: Global manufacturing accelerates

474849505152535455

2012 2013 2014 2015 2016

Man

ufac

turin

g PM

I

JP Morgan Global PMI Developed markets PMI Emerging markets PMINote: PMI refers to Purchasing Managers Index for manufacturing sector, a measure for economic activity. Source: Haver Analytics, RBC GAM

Contraction

Expansion


Effect Drivers Net effect

Positive • Fiscal stimulus Tax cuts (+ + +) Infrastructure spending (+ +)• Fewer government regulations (+)• Dislodge special interests (+?)

• More economic growth in the short run

Negative • Trade impediments (– – –)• Tighter immigration policy (– –)• Higher rates and dollar (– –)• Populism bad for growth (–)• High policy uncertainty (–?)

• Less economic growth in the long run• Net effect of short term and long

considerations is negative

Source: RBC GAM

Exhibit 3: Global earnings finally turn upwards

-1

1

3

5

7

9

11

0

20

40

60

80

100

120

140

1998 2001 2004 2007 2010 2013 2016 MSC

I 12-

mon

th tr

ailin

g EP

S

MSC

I 12-

mon

th tr

ailin

g EP

S

DM (LHS) EM (LHS) U.S. (LHS)Canada (LHS) Europe (RHS) Asia Pacific (RHS)

Note: Earnings per share (EPS) in U.S. dollars for developed markets (DM), emerging markets (EM), U.S. and Asia Pacific; euros for Europe; Canadian dollars for Canada. Source: MSCI, Bloomberg, RBC GAM

Exhibit 4: Congress at heightened level of partisanship

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1863 1901 1939 1977 2015

Libe

ral-c

onse

rvat

ive

scor

e di

ffere

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l

House SenateNote: Measured as the difference between median scores for the Democratic and Republican members in the House of Representatives and Senate. Source: Voteview.com, RBC GAM

Global Investment Outlook | Eric Lascelles | Eric Savoie, MBA, CFA | Daniel E. Chornous, CFA

forces seize power, and the world’s economic speed limit remains slow. But the main message is that economic conditions, both present and plausibly future, seem better than they were just a year ago.

A consequential electionThe U.S. election outcome was certainly a surprise – polls mostly showed Hillary Clinton rather than President-elect Trump winning. However, the result should not be construed as an outright shock. A probability-based approach argued that Trump had an entirely fathomable 30% chance of winning. Instead, a more fitting description of the election result is “consequential.” The two candidates and their parties possessed very different takes on public policy, and Trump’s populist proposals were in particular quite different from pre-existing legislation (Exhibit 4). This creates the potential for a significant shift in U.S. public policy.

Divining the precise economic implications of the new president’s policies, and for that matter of a Republican party now firmly in control of Congress, is an arduous task. There are a range of both positives and negatives (Exhibit 5).

On the positive side of the ledger, tax cuts and infrastructure spending constitute important sources of fiscal stimulus and should add to short-term growth. The promise of fewer government regulations, most palpably in the areas of energy and financial services, could also

Exhibit 5: Theoretical Trump economic effects


Market Drivers Net effect

Equities • Sharply lower corporate taxes (+ + +)• More ST economic growth (+)• Worse LT and cumulative growth (– –)

• Tax cuts dominate all other consider-ations – net positive for stocks

Rates • More public debt (yield + +)• Possibly higher inflation (yield + +)• Better ST growth (yield +)• Trump says rates too low (yield +)• Worse LT and cumulative growth (yield – –)

• Debt and inflation concerns dominate other considerations, pushing yields higher

FX • Higher rates (USD + +)• Better ST growth (USD +)• Stronger equities (USD +)• Worse LT and cumulative growth (USD – –)

• Higher rates and equities contribute to stronger U.S. dollar

Source: RBC GAM

Exhibit 6: Effect of Trump policies on U.S. GDP

+0.4

-0.8

+0.1 +0.3

-0.2-0.3 -0.3 -0.3

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

2017 2018 2019 2020 2021 2022

Perc

enta

ge p

oint

s

Cumulative effect on GDP level Effect on annual GDP growthSource: RBC GAM assumptions and calculations

Positive economiceffect in short term

Negative economiceffect in long term


enhance economic growth, although such changes may come with less desirable side-effects for the environment and financial stability. The goal of dislodging special interests from the U.S. political process is also a noble pursuit, if more easily said than done.

The new direction for U.S. policy also carries some prospective negatives. Until major legislation is hashed out, policy uncertainty will be unusually high – a potentially corrosive force that discourages risk-taking by businesses. Greater trade barriers could do material, lasting damage if implemented, and limiting immigration could also constrain growth. Lastly, markets have responded to the election with higher interest rates and a stronger U.S. dollar, which will likely dim economic growth in the short run.

How to weigh these countervailing forces? We employ a conservative approach, recognizing that presidents often tack toward the political centre once elected, that the Republicans’ narrow Senate majority may limit action, and that the White House and Congress contain very different breeds of Republican. As a result, we assume that Trump’s fiscal-stimulus platform is delivered at only half strength, and that his trade and immigration platform is delivered at just one-third strength.

With these tempering factors in place, our calculations argue for a bit more economic growth than usual in 2017 and 2018, but then slightly

less economic growth in subsequent years. These negatives eventually dominate the positives and the U.S. economy ultimately winds up almost a percentage point smaller than it would otherwise have been (Exhibit 6).

The election also has significant financial-market repercussions (Exhibit 7). Overall, it is arguably positive for equities, though mainly

because of the huge windfall from expected corporate-tax cuts rather than any broader economic narrative. The bond market responded by pushing yields higher due to increased inflation expectations and the anticipation of a heavier public-debt load. The U.S. dollar also logically rose due to higher interest rates and the prospect of inflows from corporate-profit repatriation legislation.

Exhibit 7: Theoretical Trump financial-market effects


+0.2 ppt/yr

+0.1 ppt/yr

+0.0 ppt/yr

1985-1995 1995-2008 2009-2016 Future

Addi

tiona

l glo

bal G

DP

gro

wth

(p

pt/y

ear)

?

Source: IMF, RBC GAM

10% increasein import prices

= 2% dropin GDP

Exhibit 8: Significant anti-EU sentiment

3035404550556065707580

U.K

.Sl

oven

iaC

ypru

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lyAu

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Cze

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Cro

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Rom

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Pola

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and

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Net

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ff in

side

EU

?(%

of r

espo

nden

ts w

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May-2016 Nov-2015Source: European Commission Standard Eurobarometer 84 and 85, RBC GAM

Exhibit 9: Damage from trade protectionism

-16-14-12-10

-8-6-4-202

U.S. trade war U.K. Brexit ForgoneTPP benefit

Cum

ulat

ive

GD

P im

pact

(%)

MedianNote: Bars represent range of peak effect estimates for each scenario. Scenarios are estimated discretely. Trade war impact on U.S. GDP is based on two scenarios from Peterson Institute for International Economics (PIIE). Brexit effects on U.K. GDP reflect range of estimates from several third party models. Estimates of counterfactual economic cost of forgoing TPP if trade pact fails for each of 11 countries, as estimated by PIIE. Source: Barclays, The Economist, OECD, PIIE, U.K. Treasury,RBC GAM

Min

Median

Max

Exhibit 10: Globalization tailwind fades

Populism on the riseGlobal populism is clearly on the rise. U.K. voters opted for Brexit in June and American voters warmed to a populist message in November. While these outcomes were surprises, this trend has arguably been a long time coming: a populist surge was almost universally expected in the immediate aftermath of the 2008 – 2009 global financial crisis, but this outcome took longer to materialize than many had anticipated. Ultimately, we link this populist surge to the stresses of the financial crisis, an extended period of slow economic growth and an even longer multi-decade span of rising inequality.

Europe remains especially vulnerable to populism. Polls show that a distressingly large fraction of European electorates do not believe they are net beneficiaries of EU membership (Exhibit 8). Putting these views to the test, a cluster of pivotal European elections loom in 2017 including ones in France, the Netherlands and Germany. Most of these votes should result in the election of moderate political majorities, but the risk of another populist outcome must surely be acknowledged. Populist movements are particularly damaging in Europe given their desire to exit from the EU and Eurozone. A large-scale Eurozone breakup would have grim implications for financial stability, economic growth and debt sustainability.



Populist Left Centre Right

Democracy Worse growth

Higher inflation

Slight hit to GDP of -0.1

ppt/year

Neutral Slight boost to GDP of

+0.1ppt/year

Autocracy Conflicting conclusions ranging fromno effect to GDP hit of -0.75 ppt/year

The breed of populism spreading across the world today seems defined in particular by an increasingly inward focus, at the expense of trade and immigration. Global trade is already in slight decline. Less trade and immigration can be economically damaging, as demonstrated by several examples in Exhibit 9. The IMF estimates that globalization has already shifted from a significant positive for global growth to what we suspect could become an outright negative (Exhibit 10).

Populism is also associated with higher inflation as cheaper foreign goods (and lower-paid immigrants) are replaced by more expensive domestic substitutes.

These theoretical macro implications square with the findings of empirical studies on the different types of government and their economic effects (Exhibit 11). Economic growth seems not be overly affected by the choice of democracy or autocracy, nor by whether governments lean to the left or right. Instead, it is a populist government that is the most reliable – and negative – signal.

From monetary to fiscal?Policymakers continue to engage in a slew of economic remedies (Exhibit 12). One oft-cited trend is a shift away from monetary stimulus and toward fiscal stimulus. A version of this is actively underway in the U.S., with the U.S. Federal Reserve (Fed) nudging the fed funds rate higher and U.S. fiscal stimulus seemingly


Exhibit 12: Policymakers heading off in all directions

Exhibit 11: Populism in the context of other forms of government

Political change is very costly to GDP

Political regime matters more to developing nations

But rising inequality

can eventually undermine

this

U.S. Federal Reserve

Other central banks

Fiscal stimulus

Policy rate Quantitative easing

Helicopter money

Tapering fears

Likely, but fairly small

Source: RBC GAM

Source: RBC GAM

set to expand under President-elect Trump. Neither monetary nor fiscal policy is inherently superior, but the combination of financial-stability concerns as monetary policy lingers for so long near the zero bound and cheap borrowing costs argues that a transition is desirable.

For all of this talk, however, the extent of the trend is arguably overstated. U.S. monetary policy

will remain quite loose for the foreseeable future, particularly given the Fed’s gargantuan balance sheet. Most other major central banks are still in monetary stimulus-delivery mode, and may wind up continuing these actions for longer than otherwise imagined due to the recent backup in bond yields. This assessment certainly describes the actions of the Bank of Japan (BOJ), the European Central Bank (ECB)


-8-7-6-5-4-3-2-101

Irela

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Ger

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U.K

.

U.S

.

Net

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Can

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Por

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Gre

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Out

put g

ap

(% o

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2014Source: IMF, Haver Analytics, RBC GAM

2016

Exhibit 14: Slow growth in three buckets

Exhibit 13: Global fiscal stimulus not actually stimulative

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2005 2007 2009 2011 2013 2015 2017 2019 2021

Cha

nge

in w

orld

stru

ctur

al fi

scal

ba

lanc

e (p

pt)

Fiscal boost

Fiscal drag

Note: Forecast from IMF World Economic Outlook, October 2016. PPP-based country GDP as share of world total used as weights. Source: IMF, Haver Analytics, RBC GAM

Exhibit 15: Economic slack has shrunk in a number of countries

STRUCTURAL RECENT SHOCKS

1 2 3

Persists indefinitely Persists for a decade-plus; not over yet Temporary, but powerful

• Demographics

• EM Deceleration

• Less globalization

• Populism

• High debt

• Less business investment

• Skill decay

• High policy uncertainty

• Higher yields

CRISIS-INDUCED


and the Bank of England (BOE). The Bank of Canada (BOC) looks set to remain on hold but has made dovish musings.

Meanwhile, while a handful of countries is also generating fiscal stimulus, Canada among them, the list is quite short. Japan’s newly announced “fiscal stimulus” actually adds up to an economic drag since it is less munificent than the stimulus that preceded it. To much fanfare, the U.K. removed a significant chunk of austerity in its latest budget, but it still falls well short of outright fiscal stimulus.

Skipping to the bottom line, we calculate that the global fiscal impulse will in fact be slightly restrictive over the next few years based on government policies announced to date (Exhibit 13). There is certainly fiscal space for countries to change their minds, perhaps encouraged by the U.S. example, but there is no certainty that fiscal stimulus truly lifts off outside of North America.

Slightly upgraded forecastsThe world is still suffering from a low economic speed limit due to a mix of structural and cyclical restraints (Exhibit 14). Lest this seem overly depressing, we hasten to add that economic progress is nevertheless occurring. The amount of economic slack plaguing developed nations has fallen almost universally over the past few years (Exhibit 15).

Source: RBC GAM


Maturing business cycle

Resource shock

ChinaDebt hot spots

Higher interest rates

Populism / Geopolitics

Emerging market slowdown

Exhibit 16: Global credit impulse perked up

-30-25-20-15-10

-505

101520

2001 2004 2007 2010 2013 2016

Glo

bal c

redi

t im

puls

e fo

rpr

ivat

e no

n-fin

anci

al c

orpo

ratio

ns

(ppt

)

Note: Credit impulse measured as year-over-year change in year-over-year percent change in credit outstanding. Source: IIF, RBC GAM

Credit impulse addsto GDP growth

Credit impulse detracts from GDP growth

Exhibit 17: RBC GAM GDP forecast for developed markets

2.00%

1.50% 1.50%1.25%

0.50%

1.50%

2.00%

1.25%1.50%

0.75%

0.0

0.5

1.0

1.5

2.0

2.5

U.K. U.S. Eurozone Canada Japan

Ann

ual G

DP

gro

wth

(%)

2016 2017Source: RBC GAM

Exhibit 18: Downside risks: significant, but some have shrunk

Without abandoning the principle of a “slow-growth world,” we have tweaked our global growth forecast slightly higher. Both the developed and developing world are now expected to manage more growth in 2017 than in 2016.

Several broad forces justify this upgrade. Improved leading global indicators provide a welcome starting point. The end of the commodity shock allows a significant number of resource-exporting nations to regain their feet. We also calculate a slightly positive global credit impulse (Exhibit 16). On the other hand, the recent worldwide increase in interest rates could temper such enthusiasm going forward.

For all of this ballyhooed upgrading, our new 2017 forecasts still tend to be a little below the consensus expectation. This relative positioning is as an acknowledgment that market expectations have been repeatedly too optimistic over the past decade. The U.K. constitutes an exception to our approach, as we now anticipate above-consensus growth there. We are roughly on consensus for Japan (Exhibit 17).

Shrinking risksThe world’s capacity to surprise should never be underestimated, and for this reason alternative scenarios must also be contemplated. It is good news that the world’s downside risks appear somewhat tamer than they were just a quarter ago (Exhibit 18).


Source: RBC GAM


Exhibit 19: Recession risks have receded for some regions

0

10

20

30

40

50

60

United States Euro area Japan EmergingAsia

Latin America Rest of theworld

Prob

abili

ty o

f rec

essi

on (%

)

Oct 2016 forecast Apr 2016 forecastNote: IMF estimates of probability of recession over a four-quarter horizon. Latin America includes Brazil, Chile, Colombia, Mexico and Peru. Source: IMF WEO April 2016, RBC GAM

Exhibit 20: Sovereign credit ratings deteriorating

8

1913 14

19

-17

-24

7

-19 -21-15

-11 -10-14

-30-25-20-15-10-505

10152025

2003 2005 2007 2009 2011 2013 2015

Upg

rade

s m

inus

dow

ngra

des

(num

ber)

Note: Upgrades and downgrades of foreign-currency sovereign credit ratings. Ratings change in the first six months for 2016. Source: S&P, RBC GAM

Another 36 countries with negative outlook or under credit

watch as of middle of 2016

The business-cycle risks that so dominated our thinking earlier in the year seem much less pressing today. Several of the more ominous signals have vanished. One example of this is that yield curves are no longer actively flattening. The IMF has downgraded its recession estimates for much of the developed world (Exhibit 19). We have reduced our own assessment of the U.S. recession likelihood over the next 12 months to 20% from 30% in part because of favourable economic figures, in part based on expected U.S. fiscal stimulus, and in part because a Republican-dominated U.S. government provides the capacity for rapid coordinated action should macroeconomic conditions start to unravel.

We should confess that a 20% recession risk is still higher than usual due to the age of the business and credit cycles. Examples of the latter include rising high-yield default rates, surging U.S. motor-vehicle loan delinquencies among those with lower credit ratings and deteriorating sovereign-debt ratings (Exhibit 20). But the risk is nevertheless smaller than before.

Chinese downside risks for the immediate future have also ebbed. To be clear, we still fret over the large amount of debt China has accumulated, but it is showing no evidence of imploding just yet, and, in fact, Chinese economic growth has perked up somewhat. Chinese risks haven’t so much vanished as drifted further into the future.


On the other hand, some risks have grown and others remain pressing. In the first category, the sharp increase in global interest rates presents a potential threat on a few fronts. Higher rates are a material economic drag. In a world of elevated debt loads, the stark increase in borrowing costs could yet impose suffering on a variety of vulnerable debtors. Emerging-market countries seem particularly exposed.

Finally, geopolitical risks remain pressing. We have already discussed the populist component, but not the status of global military threats. The risk here is not overly high but it is arguably growing. A simple way of seeing this is the surging number of refugees in the world (Exhibit 21). The number of global conflict deaths and European terrorist attacks are not especially high, but rising.

U.S. foreign policy appears set to become more muscular under the


Exhibit 22: U.S. housing market can continue to strengthen

0

15

30

45

60

75

90

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1986 1991 1996 2001 2006 2011 2016

NA

HB

Hou

sing

Mar

ket I

ndex

U.S

. hou

sing

sta

rts (m

illio

n un

its)

Housing starts (LHS) NAHB Housing Market Index (RHS)Note: NAHB Housing Market Index in 6-month lead. Source: Haver Analytics, RBC GAM

new administration, and is also highly unpredictable for the time being. Russia, already active on the foreign-policy front, may be emboldened by a Trump White House. Territorial disputes in the South China Sea continue to demonstrate rising tensions in Asia as China spreads its wings. Japan continues to seek constitutional changes allowing it to build a larger military.

Upgrading U.S. prospectsThe U.S. election was the dominant development in the U.S. this quarter. As already detailed, a Trump presidency should deliver net fiscal stimulus over the next few years, even once the friction from higher interest rates and a stronger U.S. dollar have been factored in. In response to this interplay, and alongside the recent favourable economic trend, we have increased our 2017 U.S. GDP growth forecast to 2.00% from 1.75%. This improvement leaves us a hair below the consensus, largely because we recognize that considerable constraints to global economic growth persist (refer back to Exhibit 14).

U.S. consumers have provided enthusiastic support for economic growth for several years. Although there is a limit to their largess, it seems likely that they will remain relatively eager spenders over the coming year given a good probability of tax cuts, soaring consumer confidence since the election and robust hiring. We also believe that


Exhibit 21: Number of refugees high and rising

05

10152025303540

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

Ref

ugee

s (m

illio

ns)

Refugees Internally displacedNote: Refugees are people who have fled their home country to escape conflict/violence. Internally displaced people are those fleeing persecution but have not crossed a border, so remain within their home country. Source: UNHCR, RBC GAM

the housing market can continue to serve as a moderate economic boost given the prospect of rising demand (Exhibit 22) and the reality of decent affordability.

Conversely, U.S. businesses have served as the curmudgeon holding back economic growth (Exhibit 23). Some of this weakness was understandably a function of the oil crash, but even non-oil sectors have put their wallets away. Although the extreme degree of

policy uncertainty revolving around the U.S. could continue to restrain business investment over the first few quarters of 2017, it seems more than plausible that the reins will then be loosened by companies enjoying the windfall of lower taxes and repatriated profits, and further motivated by strong consumer demand. Even protectionism could help in the short run as a degree of onshoring occurs.


Exhibit 24: U.S. job-openings rate better than last cycle

1.5

2.0

2.5

3.0

3.5

4.0

2001 2003 2005 2007 2009 2011 2013 2015 2017

U.S

. job

ope

ning

s ra

te (%

)

Source: BLS, Haver Analytics, RBC GAM

As this economic upgrading occurs, it must be noted that the U.S. economy no longer sports much slack. The unemployment rate is a bare-bones 4.6% and the job-openings rate is the best it has been in a few business cycles (Exhibit 24). While this is a happy situation to be in, it carries some negative implications. Higher inflation is one. Tighter Fed policy is another. We currently budget for gradual interest-rate increases in the U.S., but it is not impossible that the delivery of fiscal stimulus will necessitate tighter Fed policy as a counterweight.

U.K. defies BrexitOur most significant economic upgrade has occurred in the U.K. Whereas we had initially factored in a significant economic hit in the aftermath of the decision to leave from the EU, the happy reality is that British leading indicators and GDP alike are rejecting that interpretation handily. Instead of clamming up in response to the possibility of trade barriers, the British economy continues to bustle (Exhibit 25).

It is not completely assured that the U.K. will keep managing to defy the forces of high policy uncertainty (Exhibit 26). Fortunately, the significant depreciation of the British pound since June provides a measure of economic insulation against such damages. There is still no true British fiscal stimulus to speak of, but the BOE has provided welcome support. In turn, we have doubled our 2017 GDP forecast to


35

40

45

50

55

60

65

-45-40-35-30-25-20-15-10

-505

10

2004 2006 2008 2010 2012 2014 2016

U.K

. Com

posi

te P

MI

U.K

. con

sum

er c

onfid

ence

(%

bal

ance

)

Consumer confidence (LHS) Composite PMI (RHS)Source: Haver Analytics, RBC GAM

Exhibit 25: Worst of U.K. Brexit hit was short-lived

Exhibit 23: U.S. business investment is weak

-5-3-113579

1113

2011 2012 2013 2014 2015 2016

Rea

l non

-res

iden

tial f

ixed

in

vest

men

t (Yo

Y %

cha

nge)

Contribution from oil and mining Contribution from other sourcesSource: Haver Analytics, RBC GAM


Exhibit 26: Global policy uncertainty elevated

050

100150200250300350400450500550

2000 2004 2008 2012 2016

Eco

nom

ic P

olic

y U

ncer

tain

ty

Inde

x

U.S. EU U.K.Note: 12-month moving average shown in chart. Mean=100 for U.K. and EU; 1985-2009 mean=100 for U.S. Source: PolicyUncertainty.com, Haver Analytics, RBC GAM

Exhibit 27: European banks laden with bad loans

0 5 10 15 20 25 30 35 40

GermanyU.K.

NetherlandsBelgiumFrance

EUSpain

IrelandPortugal

ItalyCyprusGreece

Non-performing loans of all banks (% of total loans)Jun-2016 Dec-2013

Note: March 2016 data for EU and U.K. EU average for all domestic banks. Source: ECB, Haver Analytics, RBC GAM

Non-performing loans ratios remain high in peripheral Europe

1.50% growth from 0.75%. This adjustment pushes us notably above the market consensus.

We hasten to mention that the eventual severing of ties between the U.K. and EU in a few years should still hurt the British economy, potentially inflicting economic damage of more than 3 percentage points of GDP over the next decade.

One undisputed consequence of Brexit – due mainly to the pound’s depreciation – is higher U.K. inflation. We have upgraded our 2017 inflation forecast to a steamy 3.00%. This is but a temporary bounce and can be safely ignored by the central bank.

Eurozone politics to the foreEurope is most deserving of attention through a political lens given a surge in populist attitudes, a spate of consequential upcoming elections and the potential for the confluence of these two developments to be especially troublesome given Europe’s deep interconnections, soft economy, high public debt and lingering banking-sector woes (Exhibit 27).

Outside of the political sphere, however, the Eurozone is fairly dull. The lack of a Brexit backlash has allowed European economic growth to maintain a steady if uninspired trajectory. Growth signals remain flat to slightly higher. Fiscal policy is roughly neutral and the rate of money-supply growth has barely budged (Exhibit 28). On the


cautiously positive side, the ECB continues to lend an important hand and should remain helpful for much of 2017. The euro has declined and the region enjoys a marginally positive credit impulse (Exhibit 29).

Weighing these factors, we have opted to stick with a middling 1.25% GDP growth forecast for 2017. Inflation should revive to 1.5% in 2017 – a huge improvement – but still softer than most other

developed nations given the Eurozone’s weaker economic backdrop.

Grading JapanJapanese leaders have made an aggressive effort over the past four years to revive their country’s economic growth and inflation rates after decades of stagnation. Some progress has been made. For instance, Japanese consumer prices are seemingly no longer stuck in an


Exhibit 29: Eurozone credit impulse grinding lower

-10-8-6-4-20246

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Perc

enta

ge p

oint

/ Yo

Y %

cha

nge

Private sector credit impulse (ppt) Private sector demand (YoY % change)Note: Credit impulse measured as year-over-year change in 3-month change of bank loans to the private sector as % of GDP. Demand defined as the sum of private final consumption and gross capital formation. Source: ECB, Deutsche Bank, Haver Analytics, RBC GAM

endless deflationary cycle (Exhibit 30). Similarly, the Japanese labour market is now quite tight, signaling some degree of economic success (Exhibit 31). Of particular interest to investors, the country’s stock market has more than doubled, at least in yen terms, since “Abenomics” began in the fall of 2012.

However, ample criticism is still appropriate:

• A large part of Japan’s initial successes were the result of a plummeting yen rather than a reworked economic structure. Inflation would have been much softer without the falling yen. Corporate profits would not have revived to nearly the same extent either. In fairness, the yen is again in decline, suggesting the potential for further scraps of good news on these fronts, but it is not a permanent fix. The BOJ has acknowledged this failure by pushing back until 2018 its goal of returning inflation to 2%.

• The nightmare of Japan’s immense and growing public debt load has not been resolved, with the remedy of a sales tax hike pushed into the future.

• Japanese structural reforms have fizzled. Some improvements have occurred in the vein of corporate governance and labour laws, but arguably not enough. Meanwhile, the Trans-Pacific Partnership trade deal was the big focus of the country’ structural reforms, but it is now functionally dead given its rejection by President-elect Trump.


Exhibit 30: Prices in Japan have risen in past few years

919293949596979899

100101

2000 2002 2004 2006 2008 2010 2012 2014 2016

Japa

n co

re C

PI (

2000

=100

)

Core CPI, adjusted for tax hikes Core CPINote: CPI adjusted to exclude the estimated effect of sales tax hikes. Source: BoJ, Ministry of Internal Affairs and Communication, Haver Analytics, RBC GAM

2.6% higher since the trough

3.5% higher since the trough

Exhibit 28: Eurozone credit growth has been stable

-7-6-5-4-3-2-1012345

Jul-09 Dec-11 May-14 Oct-16

Ban

k lo

ans

(YoY

% c

hang

e)

Households BusinessesSource: European Central Bank, Haver Analytics, RBC GAM


Exhibit 32: Chinese economy stabilizes after long swoon

-3

-2

-1

0

1

2

3

4

56789

101112131415

1995 1998 2001 2004 2007 2010 2013 2016

Econ

omic

Act

ivity

Inde

x(s

tand

ard

devi

atio

ns fr

om

hist

oric

al n

orm

)

Chi

na G

DP

grow

th

(YoY

% c

hang

e)

GDP Growth (LHS) Economic Activity Index (RHS)Note: Index constructed using sixteen proxies for real economic activity in China.Source: Bloomberg, Haver Analytics, RBC GAM

• The rate of Japanese GDP growth has underwhelmed despite the economy’s improvement. The BOJ argues that the true growth rate is better than the official figures indicate, but this remains to be proven.

In light of this backdrop, we have downgraded our assumption for what constitutes Japan’s sustainable economic-growth rate. Whereas we had previously hoped it had expanded to something in the range of 1.00% to 1.25%, we now assume it remains stuck at no better than 0.75%. Not coincidentally, this is also our growth forecast for 2017.

With regard to monetary policy, the BOJ has successfully morphed from pursuing a bond-buying target to a yield-level target and is unlikely to unwind monetary stimulus any time soon. Meanwhile, the country technically suffers from a fiscal drag because a prior round of aggressive fiscal stimulus is now fading.

We assume that Japanese inflation manages to eke its way up from a position of slight deflation in 2016 to 0.50% in 2017.

China perks upAs highlighted earlier, the Chinese economy has defied expectations, stabilizing at just above its 6.5% growth target after a long downdraft (Exhibit 32). Given that China generates roughly one-third of global growth directly and a further portion indirectly through its interactions with other nations, its recent macro success has been a significant part of the revival of the global economy.


Exhibit 31: Labour shortage in Japan worsening

0.30.40.50.60.70.80.91.01.11.21.31.41.5

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Rat

io o

f act

ive

job

open

ings

to

appl

ican

ts

Source: MHLW, Haver Analytics, RBC GAM

Tight labour market to push wages and inflation higher

Exhibit 33: Chinese consumer activity turned positive

-5-4-3-2-1012345

1996 2000 2004 2008 2012 2016

Con

sum

er A

ctiv

ity In

dex

(sta

ndar

d de

viat

ions

from

hi

stor

ical

nor

m)

Note: Index constructed using nine proxies for Chinese consumer activities. Source: CNBS, CAAM, Tsinghua UnionPay, MNI, Westpac, Bloomberg, Haver Analytics, RBC GAM


Exhibit 34: China’s staggering corporate debt

40557085

100115

130145160175

1995 1998 2001 2004 2007 2010 2013 2016

Non

finan

cial

cor

pora

te d

ebt

(% o

f GD

P)

China EM ex ChinaSource: IIF, IMF, RBC GAM

China’s improvement is arguably rooted in three things. First, global demand has firmed somewhat, a constructive development for a country with a big export base. Indeed, China’s trade figures are no longer quite so grim. Second, the renminbi has now been depreciating for well over a year, shedding more than 10% of its value. This has helped to restore a pinch of China’s lost competitiveness. Third, and probably most importantly, China has delivered another dose of mega-credit to its economy, this time seemingly targeting the consumer. Corroborating this interpretation, our Chinese consumer activity metric has rebounded (Exhibit 33).

This is the good news. But China is hardly free of challenges. The very fact that the nation’s economic boost has been delivered via an injection of credit is concerning, as the greatest danger plaguing China’s prospects is its debt overhang (Exhibit 34). Without any pretense of precision, we estimate that Chinese banks and thus the government could eventually be on the hook for trillions of dollars in bad debt (Exhibit 35). This is likely absorbable by the national government without inducing a financial crisis, but it would greatly crimp the country’s ability to address other pressing deficiencies.

We continue to assume that Chinese growth will begin to decelerate again as the latest credit impulse fades. Several of the country’s growth engines are in decline, though not


Exhibit 35: Potential Chinese bank losses worrisome

$1.3T

$3.2T

4%

11%10%

28%

0

5

10

15

20

25

30

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

US$ trillion(LHS)

% of bank assets(RHS)

% of GDP(RHS)

Pote

ntia

l ban

k lo

sses

(% o

f ban

k as

sets

/ G

DP)

Pote

ntia

l ban

k lo

sses

(U

S$ tr

illio

n)

Low estimate High estimateSource: Haver Analytics, RBC GAM

Current bank capital = 7.7% of bank assets

all. We look for 6.0% growth in 2017 before the country slips below that threshold in subsequent years.

Two emerging-market narrativesThere are two competing narratives at work among emerging markets. The first, and one we have argued for the better part of a year, is that emerging-market growth has finally bottomed and can improve going forward. This is particularly

evident in Brazil, Russia and other commodity exporters that are finally emerging from the commodity shock (Exhibit 36).

The second, contrasting narrative is that Trump’s election victory could inflict damage on emerging-market economies. There is also some truth to this. Emerging-market assets have suffered since November 8 on concerns of rising protectionism – a disproportionately important subject for trade-dependent emerging



economies. Furthermore, a rallying U.S. dollar and rising interest rates tend to inflict outsized damage on emerging-market economies by encouraging capital outflows and making their borrowing more expensive.

Which of these narratives will win the day? Our inclination is to focus on the fact that emerging markets have proven their mettle through several bouts of financial-market stress over the past decade. As such, we suspect they will survive the latest dustup, allowing the other narrative – an improving growth story – to carry the day. We forecast more emerging-market growth in 2017 than in 2016 (Exhibit 37).

To be clear, our outlook pales in comparison to what was “normal” for emerging economies as recently as five years ago. Simply put, it is a different era. Globalization is no longer as supportive and credit booms cannot last indefinitely.

Competing oil forcesParadoxically, the short-term outlook for oil has improved at the same time that the long-term outlook has deteriorated. Both of these claims merit dissection.

In the short term, the recent OPEC decision to cut a whopping 1.2 million barrels of oil production per day – with the expectation that certain non-OPEC nations will chip in another 558,000 decline – is clearly positive for the price of oil. Consistent with this interpretation,

Exhibit 37: RBC GAM GDP forecast for emerging markets

7.50%6.75%

2.75%2.00%

-0.50%

-3.00%

7.50%6.00%

2.50% 2.25%1.50% 1.25%

-4

-2

0

2

4

6

8

India China South Korea Mexico Russia Brazil

Ann

ual G

DP

gro

wth

(%)


Exhibit 36: Brazil’s economy may be starting to rebound

-3

-2

-1

0

1

2

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Num

ber o

f sta

ndar

d de

viat

ions

fro

m n

orm

Business Confidence Index Consumer Confidence Index Industrial productionSource: CNI, FGV, IBGE, Haver Analytics, RBC GAM

the oil price has jumped from below US$40 to above US$50 in short order. The price can arguably rise somewhat further if these promises are actually delivered upon, since a cut of this magnitude should bring the oil market back into equilibrium if not insufficient supply. But we would temper any unbridled enthusiasm by observing that several OPEC members were exempted from the lower quotas and that OPEC regularly struggles to deliver on quota reductions.

In contrast to the near-term upgrade, we find ourselves downgrading our long-term assumption about where oil prices should eventually settle. This is for two reasons. First, U.S. oil extractors are now the true swing producers despite OPEC’s recent effort to reclaim that mantle. A close examination of U.S. oil production shows that shale-oil production was already starting to perk up once oil prices reached the US$45 to US$50 range (Exhibit 38). This hints that, regardless of temporary imbalances,


the long-term equilibrium for global oil prices is probably no better than about US$50 per barrel. When prices attempt to rise beyond this level, shale-oil producers will expand their output to the point of saturating demand. We had previously pegged the equilibrium oil price at about US$60 per barrel.

The second reason for longer-term pessimism is that most other sources of energy are already cheaper than oil (Exhibit 39) and continue to decline in cost. This includes environmentally attractive options such as solar energy. Relative energy costs have not historically mattered to the oil industry as it has long enjoyed something approaching a monopoly in propelling vehicles. But the rise of electric cars and improving battery technology are now beginning to threaten this hegemony.

Canada trades one drag for anotherThe Canadian economy remains highly dependent on oil. Alas, no significant investment revival in the space is likely unless oil prices rise above US$60 per barrel. This is conceivable but not likely on a sustainable basis. As a result, we cannot realistically count on oil to serve as a key driver of growth over the next few years. Nevertheless, oil prices have improved somewhat recently, removing an obstacle to growth if not actively adding to it. Our composite leading indicator for Canada has become steadily less negative in recent months (Exhibit


Exhibit 40: Canadian economic outlook still subpar, but improving

-5

-4

-3

-2

-1

0

1

2

2001 2004 2007 2010 2013 2016

Can

adia

n Ec

onom

ic C

ompo

site

(sta

ndar

d de

viat

ions

from

hist

oric

al n

orm

)

Note: Based on latest data available. Composite constructed using four leading indicators from surveys on Canadian businesses. Source: CFIB, Haver Analytics, RBC GAM

Exhibit 38: Oil prices lead U.S. rig count

2030405060708090

100110120130

2010 2011 2012 2013 2014 2015 20160200400600800100012001400160018002000

WTI

$/b

arre

l

U.S

. oil

rigs

in o

pera

tion

Rig count (RHS) WTI price (LHS)Source: Bloomberg, RBC GAM

Exhibit 39: Electricity costs already lower than conventional gasoline

0.000.050.100.150.200.250.300.350.40

Ons

hore

win

d

Nat

ural

gas

Sola

r

Hyd

ro

Nuc

lear

Coa

l

Offs

hore

win

d

Proj

ecte

d e

lect

ricity

av

g.

2015

E

lect

ricity

av

g.

2015

G

asol

ine

Cos

t ($

/ kW

h)

SubsidyNote: Future electricity cost estimated using EIA projections for 2022 and current electricity generation mix. Efficiency adjustment to account for different thermal efficiencies of electric engines (60%) vs. internal combustion engines (20%). Source: EIA Annual Energy Outlook 2016, RBC GAM

2022


40). Similarly, the country’s gaping regional economic-performance gap is finally starting to narrow (Exhibit 41).

Gazing into the future, the Canadian economy looks set to be buffeted by several powerful, competing forces. With oil mostly on the sidelines, the main economic drivers in 2017 should be fiscal stimulus worth around a third of a percentage point of extra growth, a bit of help from a softer Canadian dollar and the tentative commencement of a new free-trade deal with Europe. Recently approved pipeline projects are unlikely to have much effect on the economy for another few years. On the negative side, however, is a 0.5-percentage-point drag from a decelerating housing market (Exhibit 42) alongside the negative impact of higher interest rates and expected U.S. protectionism. All told, the Canadian economy may manage a bit more growth in 2017 than in 2016, 1.5% versus 1.25%, but this still leaves an underwhelming rate of ascent.

The BOC is unlikely to be in a rush to tighten in this environment, although a rate cut is entirely conceivable in response to any stumble.

Higher inflationWe continue to highlight the theme of rising inflation (Exhibit 43). Markets are starting to agree, though our projections remain broadly above-consensus. It is not that we anticipate uncomfortably


Exhibit 41: Ontario in decent shape while Alberta battles recession

-8-6-4-202468

2002 2004 2006 2008 2010 2012 2014 2016

Mon

thly

GD

P (Y

oY %

cha

nge)

Ontario GDP proxy Alberta GDP proxyNote: Monthly provincial GDP estimated from available monthly economic variables, combined via principal component analysis and then regressed against annual provincial GDP. Source: Haver Analytics, RBC GAM

Ontario growing

Albertain recession

Exhibit 42: Canadian housing scenarios and economic effects

Further home-price gains (30% chance)

Sideways home prices (40% chance)

Serious housing correction

(30% chance)Rationale • Housing market

regularly bucks tighter rules

• Borrowing costs very low

• Other asset class valuations not great

• Regulators seek housing soft landing

• Flat nominal prices can fix affordability over time

• Most of country not overheated

• Stretched affordability in Vancouver (+35%) and Toronto (+25%

• OECD: Big housing crashes come once every ~34 years with average 34% price decline

Total hit to GDP

over coming years

None• Strong housing added

to GDP level but isn’t actively adding to growth

-1 to -2ppt GDP hit• -1ppt wealth effect• Fewer resales• Flat to modestly neg.

construction

-2 to -8.5ppt hit to GDP• 20% home price decline

with large negative wealth effect

• 30% less construction• 30% fewer resales• Econometric model

finds smaller effect than accounting approach

high inflation, but rather that we expect a normalization of inflation after many years of subdued readings. There are three main arguments in favour of rising inflation.

First, the negative commodity shock is over. Global demand is rebounding modestly and the necessary resource-supply adjustment is well under way. For inflation to improve it suffices that commodity prices are no longer falling, but lately they have actually been rising somewhat.

Source: RBC GAM


Second, most developed countries have managed to substantially shrink their output gaps (refer back to Exhibit 15). In other words, billowing economic slack no longer demands that wages and corporate pricing power stagnate. There is particularly clear evidence of rising wage pressures in the U.S. (Exhibit 44).

Third, the pairing of populism and diminishing globalization impose new longer-term inflationary forces.

Of course, not every country faces the same mix of these inflationary forces, and currency movements also play a role:

• The U.K. faces the greatest inflationary pressures because its currency has fallen so sharply, rather than because of particularly fast economic growth.

• The U.S. has a relatively strong economy, but a strengthening currency neutralizes some of the extra inflation that would otherwise result.

• Europe exhibits considerably more economic slack than the U.S. or the U.K., but this could be partially offset by further expected euro weakness.

• Japan has underlying challenges related to its demographics and rock-bottom inflation expectations. As such, it should lag the rest. However, prices may still pick up given recent yen weakness and the country’s tight labour market.


Exhibit 43: RBC GAM CPI forecast for developed markets

1.50%1.25%

0.75%

0.25%

-0.25%

2.25% 2.25%

3.00%

1.50%

0.50%

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Canada U.S. U.K. Eurozone Japan

CP

I (Yo

Y %

cha

nge)


Exhibit 44: U.S. real wages are substantially outpacing productivity

-3

-2

-1

0

1

2

3

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

U.S

. rea

l uni

t lab

our c

ost

(YoY

% c

hang

e)

Note: YoY % change of 4-quarter moving average. Source: Haver Analytics, RBC GAM

Rapid growth and large mismatch

wages >productivity

wages < productivity

Emerging-market inflation is a somewhat different story. It may actually continue to drift lower for a mix of structural, economic and currency reasons. The structural side relates to the fact that emerging-market central banks have increasingly succeeded in wrestling inflation expectations lower as their economies mature. The economic angle is that emerging-market economies have underperformed for a number of years, reducing inflation pressures. Even as these countries

begin to revive economically in 2017, they are starting from a position of considerably more slack than was the case a few years ago. Finally, countries including Brazil and Russia have experienced major currency appreciations this year as their prospects have improved, depressing inflation.

In the developed world, however, the economic backdrop is consistent with investor expectations of faster inflation after several years of


regular negative surprises. Exhibit 45 plots the range of forecasts for year-over-year changes in U.S. CPI (bars on the chart) and the actual reading (diamond on the chart). Estimates for next year are straddling the Fed’s 2.0% target and the bias is even a bit above that (circles on the chart show the high/low of current estimates). In contrast, year-over-year changes in U.S. CPI for 2014 and 2015 came in at the lower end of estimates set at the start of the year, and it seems that the same scenario is playing out again this year. The positive shift for next year, if sustained, would likely mark a meaningful change towards healthier levels of inflation.

Market-based measures of inflation expectations have also turned higher. The difference between yields on inflation-linked bonds and nominal bonds rose decidedly in Canada and the U.S., and the gap widened in Europe as well (Exhibit 46). As this measure of inflation expectations rose, so too did demand for inflation-protected securities. Flows into the iShares TIPS Bond ETF reflect investors’ growing appetite for inflation protection since the beginning of 2015 (Exhibit 47). The flows into this ETF spiked in November following Trump’s election victory.

Bond yields surge from record lowsThe prospect of higher inflation and improvement in the economy has been reflected in rising government-


Exhibit 45: United States Inflation estimate dispersion

-3

-2

-1

0

1

2

3

4

5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

Actual Y/Y % change in CPI High/low rangesNote: The vertical bars represent the range from highest to lowest estimate in any given year. Source: Consensus Economics, RBC GAM

Ranges as at November 2016

Federal Reserve Inflation Target: 2.00%

Exhibit 46: Implied long-term inflation premiumBreakeven inflation rate: nominal vs 10-year real return bond

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

%

U.S. (last plot: 1.98%) Canada (last plot: 1.55%) Eurozone (last plot: 1.07%)Note: Eurozone represents GDP-weighted breakeven inflation of Germany, France and Italy. Source: Bloomberg, RBC CM, RBC GAM

Exhibit 47: iShares TIPS Bond ETF flowsMonthly data

-2500-2000-1500-1000

-5000

5001000150020002500

2005 2007 2009 2011 2013 2015 2017 2019

US

D m

illio

ns

Source: Bloomberg, RBC GAM

Net inflows

Net outflows


bond yields. Since July, the yield on the 10-year Treasury bond has increased roughly 100 basis points from its record low, moderating valuation risk. Nevertheless, aside from Treasuries, yields remain below our estimates of equilibrium in all other major regions (Page 40).

Our models suggest that U.S. 10-year bond yields will move gradually higher over time, but any near-term adjustment will likely be limited. The RBC GAM equilibrium model points to another 50 to 100 basis points increase over the year ahead and, while this is not our core forecast, it serves as a gauge for how much higher yields could go. As unorthodox monetary policy fades, yields will again be driven by economic conditions such as inflation and economic growth. Exhibit 48 separates our equilibrium model for the U.S. 10-year yield into its components of an inflation premium and a real, or after-inflation, rate of interest. A modest increase in inflation could add another 60 basis points to nominal bond yields, and the real rate, driven by changes in the real economy, could add an additional 26 basis points, but that would be toward the upper end of our expectations. The large increase that we’ve recently seen pushed yields from well-below to slightly above our modeled level of current equilibrium. As a result, yields may have run their course in the near term. Our forecast is for a modestly lower U.S. 10-year yield of 2.25% in a year’s time.


-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1960 1970 1980 1990 2000 2010 2020

%

Real T-Bond Yield Real 10-Year Time Weighted YieldSource: RBC GAM, RBC CM

+1 SD

-1 SD Average: 2.1%

Last Plot: 1.0%

12-Month Forecast: 1.26%-4

-2

0

2

4

6

8

10

12

14

16

1960 1966 1973 1980 1986 1993 2000 2006 2013 2020

%

36-month Centred CPI Inflation Actual Monthly CPI InflationSource: RBC GAM, RBC CM

Last Plot: 1.3%12-Month Forecast: 1.9%

36-month Centred

Exhibit 48: U.S. 10-year bond yield Fair-value estimate composition

0

2

4

6

8

10

12

14

16

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 2.38% Current Range: 1.34% - 3.11% (Mid: 2.23%)Source: RBC GAM, RBC CM

United StatesCPI Inflation

United StatesReal 10-year T-bond yield

U.S. 10-year T-bond yield Equilibrium range

+

Our belief that global interest rates will remain lower than normal for the foreseeable future is supported by several observations. This outlook is related partly to the significant monetary stimulus pursued by the ECB and the BOJ. It is also a function of a slower global economic-growth potential, an aging population that prefers safer investments, a shortage of safe assets, a global savings glut and high levels of wealth inequality.

Several forces may drive increased demand for U.S. fixed-income assets, in particular, and dampen any rise in yields. First, an increasing focus on liability-driven investing (LDI) by pension plans means their appetite for long-dated bonds will grow as yields rise. Exhibit 49 illustrates that the funded status of U.S. pension plans has been deteriorating since 1999, mostly because falling interest rates increased the present value of future


U.S. stocks are in a desirable valuation zoneOur view that stocks remain attractive is based largely on models that adjust for inflation and interest rates, which in today’s environment justify paying a higher multiple on earnings. However, not all popular valuation metrics are in accord (Exhibit 52). Although five of the measures in the chart suggest the market is expensive (high z-score), they don’t incorporate interest rates

In Europe, stocks failed to break higher and remained range-bound through the quarter. As a result, U.S. equities are closer to fair value while international and emerging-market equities are significantly below (Page 41). On balance, our global-equity composite continues to situate stocks well below equilibrium, and at levels that have historically represented attractive entry points (Exhibit 51).

obligations. Any increase in yields from current levels may prompt pension plans to add to their fixed-income exposure, making it easier to offset sudden changes in the value of their long-term liabilities. Second, the recent sell-off in Treasuries has made them more attractive to international investors. Even after the cost of hedging currency exposure, a Japanese investor, for example, can pick up a yield advantage by investing in 10-year Treasuries versus 10-year Japanese government bonds (JGBs) (Exhibit 50). Whereas that advantage had narrowed to almost zero during the summer because of higher hedging costs, the recent rise in Treasury yields has lifted it back to roughly 50 basis points.

Global equities mixedGlobal equity markets were flat in aggregate over the quarter with a few notable exceptions. U.S. equities rose to an all-time high as investors began to price in the potentially positive impact of Trump’s proposal to boost infrastructure and defense spending, cut corporate taxes and reduce regulation. While such policies would clearly benefit the U.S. economy, it is not so obvious that they would help the rest of the world. In the wake of Trump’s win, emerging-market equities were hurt by a strengthening U.S. dollar and the rise in Treasury yields, as well as the possibility that the new U.S. administration would pursue protectionist trade policies.


Exhibit 49: U.S. pension-plan funded status

60

70

80

90

100

110

120

130

140

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

E

Fund

ed s

tatu

s (%

)

Note: Includes 311 calendar year end companies with defined benefit pension plans. 2016 is an estimate. Source: Company data, Compustat, Worldscope, Credit Suisse

Last plot: 75.8%

Exhibit 50: Sovereign-bond yieldsJapanese investors’ perspective

-1

0

1

2

3

4

2011 2012 2013 2014 2015 2016 2017 2018

%

U.S. 10-year yield Japan 10-year yield JPY/USD currency-hedged U.S. 10-year yield



into their calculations and the ones that indicate the market is cheap (low z-score) do. Our own RBC GAM Fair Value model – a multi-factor approach – suggests the market is not particularly expensive and that current valuations may support further gains in stocks.

A historical analysis tells us that equities generally perform well at their current valuation levels. Exhibit 53 plots a version of our fair-value model, where the band has been ‘stretched’ horizontally for clarity and the midpoint (i.e. fair value) is represented by the dotted line running through the centre of the chart. We’ve categorized zones or “buckets” based on standard deviations from fair value and assembled performance statistics for data back to 1960 (Exhibit 54). The S&P 500 is currently situated in Bucket 2, between fair value and -1 standard deviation from the mid-point. In this zone, the market has historically provided the highest 1-year batting average (85.5%), the second-best annual return (12.0%), and the lowest standard deviation of returns (13.8%).

While rising interest rates are generally harmful to equity valuations, our modelling suggests that a rise in rates from current levels could actually boost P/Es, at least initially. Exhibits 55 and 56 plot our modeled equilibrium P/E as a function of short-term interest rates and long-term bond yields, which together make up 50% of the weight in our valuation model.


Exhibit 51: Global stock-market compositeEquity-market indexes relative to equilibrium

-60

-40

-20

0

20

40

60

80

100

1980 1985 1990 1995 2000 2005 2010 2015 2020

% a

bove

/bel

ow fa

ir va

lue

Source: RBC GAM

Last Plot: -18.4%

Exhibit 52: S&P 500 IndexNormalized valuation metrics as at November 2016

0.37

1.42 1.22 1.03 0.76 0.70

-0.35-0.89 -0.91

-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5

Average Marketcap ÷

U.S. GDP

Tobin's Q 12-Mtrailing

P/E

12-Mforward

P/E

ShillerP/E

(CAPE)

RBCGAM fair

value

Fedmodel

Equityrisk

premium

Z-sc

ore

Market is expensive

Market is cheap

Notes: Historical data from Jan 1956 for 12-M Trailing P/E, 12-M Forward P/E, Equity risk premium, Shiller P/E and Fed model. Historical data from Mar 1956 for market cap ÷ U.S. GDP. Historical data from Jan 1960 for RBC GAM fair value. Source: Haver Analytics, RBC CM, RBC GAM

Market is slightly expensive

Market is slightly cheap

Exhibit 53: Standardized S&P 500 fair-value bands

1960 1967 1974 1981 1988 1995 2002 2009 2016Source: Haver Analytics, RBC GAM

S&P 500 most overvalued

S&P 500 most undervalued

+1 SD

-1 SD

FV

4

3

2

1


Notice the multi-linear relationship in both charts. Falling bond yields normally cause a rise in equity valuations and vice versa. But when rates fall beyond a certain point, the effect is reversed. That’s because a macroeconomic scenario that drops the yield on the 30-year Treasury to 2% from 4% was probably not a good one (e.g. economic crisis, financial repression). Conversely, leaving a period of crisis can lead rates back towards historically normal levels at the same time that rising investor confidence supports higher P/E multiples.

Market rotation signals improving prospects A number of trends that pre-date the U.S. election suggests that the outlook for the economy and markets has been improving since earlier this year and were further punctuated by Trump’s victory. Barometers of economic conditions such as the price of copper, and changes in style leadership to growth from value and to small cap from large cap (exhibits 57 to 59) turned as early as January. Also confirming the improving outlook is the gradual steepening of the yield curve since July (Exhibit 60). Within equity markets, sector leadership has changed as well. Improving prospects for economic growth and rising yields weighed on already stretched valuations in the Utilities and Consumer Staples sectors, but helped Financials and Industrials (exhibits 61 to 64). Trump’s plan for increased fiscal spending and less


Exhibit 55: S&P 500 equilibrium modelP/E factor as a function of 3-month T-Bill rate

0

5

10

15

20

25

0 2 4 6 8 10 12 14 16 18 20

Mod

eled

equ

ilibr

ium

P/E

3-month T-bill rate (%)Source: RBC GAM

Current (3-month T-bill: 0.37%, P/E: 19.0)

Equilibrium model R-squared: 0.37Weight in model: 28.3%

Exhibit 56: S&P 500 equilibrium modelP/E factor as a function of 30-year bond yield

02468

101214161820

0 2 4 6 8 10 12 14 16 18 20

Mod

eled

equ

ilibr

ium

P/E

30-year T-bond yield (%)Source: RBC GAM

Weight in model: 22.1%

Current (30-year T-bond: 3.04%, P/E: 17.3)

Equilibrium model R-squared: 0.29

Exhibit 54: S&P 500 IndexReturn prospects by valuation zone

ValuationData set

1-year average return

Batting average^

1-year average return in

win*Max loss

1-year return STD

4 -0.7% 50.0% 14.8% (27.5%) 17.0%

3 3.4% 62.1% 13.0% (41.4%) 15.6%

2 12.0% 85.5% 16.0% (44.8%) 13.8%

1 14.7% 80.2% 19.9% (12.8%) 16.3%

*Win = Periods where returns are above 0%. ^Batting average = Incidence of winning in any given period. Source: RBC GAM

(S&P 500 most overvalued) 1 SD Above

Equilibrium

1 SD Above(S&P 500 most undervalued)


Exhibit 58: Value to growth relative performanceS&P 500 Value Index / S&P 500 Growth Index

-14%-12%-10%-8%-6%-4%-2%0%2%4%6%

2013 2014 2015 2016 2017 2018

Cum

ulat

ive

rela

tive

perfo

rman

ce


Nov 9, 2016: Trump wins U.S. election

Trough: Jan 25, 2016

regulation further benefited the latter two.

Earnings turn higherEarnings estimates are beginning to rise following almost two years of persistent downgrades (Exhibit 65). The collapse in oil prices between late 2014 and early 2016 weighed heavily on S&P 500 profits, wiping out roughly 10% of the earnings pool. Crucially, the pain was mostly isolated to the Energy sector as corporate profits excluding energy continued to advance through the collapse in oil prices (Exhibit 66). Even including energy though, index earnings bottomed in the first quarter of 2016 and have been improving steadily since along with the recovery in oil (Exhibit 67). The chart in Exhibit 67 shows that S&P 500 profits grew at their fastest year-over-year clip since 2014 and that analysts estimate earnings growth to accelerate to a double-digit pace in 2017. The stabilization in oil prices suggests that corporate-profit growth can resume and provide a powerful force for the stock market going forward.

Gauging the potential for stocksStocks could deliver sizeable returns over the year ahead if analysts’ earnings estimates materialize and the market trades at our modelled equilibrium P/E. Combining top-down S&P 500 earnings estimates for 2017 of $127.33 with an equilibrium P/E of 18.5 – the multiple consistent with current and forecast levels of inflation, interest


Exhibit 57: Copper – COMEX U.S. cents per lb

150

200

250

300

350

400

2013 2014 2015 2016 2017 2018Source: Bloomberg, RBC GAM


Trough: Jan 15, 2016

Exhibit 59: Relative strength to S&P 500 IndexRebased to 100 as of Jan 1, 2015

959799

101103105107109111

Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17S&P 100 Mega Cap Index S&P 600 Small Cap IndexS&P 400 Mid Cap Index

Source: Haver Analytics, RBC GAM


Exhibit 64: S&P 500 Industrials IndexIndex level and relative strength

0.900.951.001.051.10300

350400450500550600

2013 2014 2015 2016 2017 2018

Inde

x le

vel

S&P 500 Industrials IndexS&P 500 Industrials Index / S&P 500 Index


Nov 9, 2016: Trump wins U.S.

election

Trough: Jul 24, 2016

Exhibit 60: U.S. yield curve10-year minus 2-year government bond yields

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2013 2014 2015 2016 2017 2018

%



Trough: Jul 8, 2016

Exhibit 63: S&P 500 Financial IndexIndex level and relative strength

0.900.951.001.051.10200

220240260280300320340360380400

2013 2014 2015 2016 2017 2018

Inde

x le

vel

S&P 500 Financial IndexS&P 500 Financial Index / S&P 500 Index


Nov 9, 2016: Trump wins

U.S. election

Trough: Jul 7, 2016

Exhibit 62: S&P 500 Consumer Staples IndexIndex level and relative strength

0.900.951.001.051.10350

400

450

500

550

600

2013 2014 2015 2016 2017 2018

Inde

x le

vel

S&P 500 Consumer Staples IndexS&P 500 Consumer Staples Index / S&P 500 Index



Peak: Feb 11, 2016

Exhibit 65: S&P 500 Composite IndexConsensus earnings estimates

110115120125130135140145150155160

2011 2012 2013 2014 2015 2016 2017

Con

sens

us e

arni

ngs

estim

ates

($U

S)

2014 2015 2016 2017

Source: Thomson Reuters, Bloomberg


Exhibit 61: S&P 500 Utilities IndexIndex level and relative strength

0.800.901.001.10150

160170180190200210220230240250260270280

2013 2014 2015 2016 2017 2018

Inde

x le

vel

S&P 500 Utilities IndexS&P 500 Utilities Index / S&P 500 Index


Nov 9, 2016: Trump wins U.S. electionPeak:

Jun 27, 2016


107.3

116.5 116.1 117.0

131.2

94.7

104.0

111.2115.8

126.2

80

90

100

110

120

130

140

2013 2014 2015 2016F 2017F

Ear

ning

s pe

r sha

re ($

)

S&P 500 S&P 500 ex-energyNote: actual data for 2015 and prior, consensus estimates for 2016 onward. Based on a bottom-up aggregation of current index constitutents. For real estate companies, funds from operations was used in place of earnings. Source: Bloomberg, RBC GAM

rates and corporate profitability – the index would rise to 2,361 by the end of next year and generate a 9% total return from November 30, 2016 (Exhibit 68). Note, however, that these estimates have not been adjusted for Trump’s proposed corporate-tax cuts, which could boost S&P 500 corporate profits by as much as $10.00 per share. Applying the same math to earnings per share of $137.33 (i.e. $127.33 top-down estimate plus $10.00) and a 18.5 P/E would place the S&P 500 at 2,547 by the end of 2017 for a total return of 17.5%! We recognize that the overall impact of a Trump administration is still uncertain at this point but, in our view, the possibility for significant gains if everything falls into place shouldn’t be ignored. This upside potential is likely the root of the equity-market optimism that we have seen since the election.

Asset mix – maintaining overweight equities and underweight bondsA fairly decent economic backdrop supported by solid economic data, rising inflation and diminishing risks has buoyed risk assets, most notably in the U.S. This environment supports further policy normalization by the Fed, though we expect rate hikes to be gradual and stretched over a long period. We remain cognizant that, while Trump’s policies may boost near-term growth and inflation, the positives are likely to be accompanied by the longer-term consequences of


Exhibit 67: S&P 500 Index earnings per shareQuarterly earnings % change from same quarter in prior year

-10

-5

0

5

10

15

'12-

Q1

'12-

Q2

'12-

Q3

'12-

Q4

'13-

Q1

'13-

Q2

'13-

Q3

'13-

Q4

'14-

Q1

'14-

Q2

'14-

Q3

'14-

Q4

'15-

Q1

'15-

Q2

'15-

Q3

'15-

Q4

'16-

Q1

'16-

Q2

'16-

Q3

'16-

Q4

'17-

Q1

'17-

Q2

'17-

Q3

'17-

Q4

Yea

r-ove

r-ye

ar %

cha

nge

Actual Estimate

Source: Thomson Reuters, RBC GAM

Exhibit 66: S&P 500 earnings per shareActuals and bottom-up consensus estimates

Exhibit 68: Earnings estimates and alternative scenarios for valuations and outcomes for the S&P 500 Index

ConsensusConsensus + 10.00 from

corporate tax cuts2017

Top down2017

Bottom up2017

Top down2017

Bottom up

P/E $127.3 $133.2 $137.3 $143.2

+1 Standard Deviation 22.8 2903.0 3036.1 3131.0 3264.1

+0.5 Standard Deviation 20.7 2632.1 2752.8 2838.8 2959.5

Equilibrium 18.5 2361.2 2469.5 2546.6 2654.9

-0.5 Standard Deviation 16.4 2090.2 2186.1 2254.4 2350.3

-1 Standard Deviation 14.3 1819.3 1902.8 1962.2 2045.7

Source: RBC GAM


have gained some ground relative to bonds in recent years, but the relationship remains well below its long-term average, and these cycles can typically last several decades.

We remain tilted towards stocks in our asset mix and remain concerned about the longer-term prospects for fixed income. As yields eventually rise over time, we will look to dial back our significant underweight position in bonds. We began that

a higher U.S. sovereign-debt load. The near-term risk is that Trump fails to deliver on his promises and that growth and inflation underwhelm. If corporate profits don’t materialize as investors expect, equity markets would certainly be vulnerable to correction. Other risks to our outlook include rising interest rates, burgeoning populist movements, slower emerging-market growth and European politics. Our base case is for economic growth to accelerate in 2017 versus 2016.

We maintain a variety of models indicating the range of long-term returns that are possible. While the numbers vary, most models forecast low-to-negative returns for sovereign bonds, positive but still low returns for credit, and comparatively attractive returns for equities. Supporting the view that stocks are likely to outperform bonds is the relative performance of these two asset classes on a trailing 10-year basis (Exhibit 69). Stocks


Exhibit 69: 10-year U.S. stock and bond performanceStock market 10-year total return minus long bond 10-year total return

-200

-100

0

100

200

300

400

500

600

1935 1945 1955 1965 1975 1985 1995 2005 2015 2025

Sto

ck m

arke

t out

perfo

rman

ce %

Source: Ned Davis Research

Mean: 111.6%

+1 std dev

-1 std dev

-2 std dev

+2 std dev

process shortly after the election by adding one percentage point to fixed income as yields spiked. Earlier in the quarter, we added one percentage point to equities in light of the September sell-off. Both changes were sourced from cash. For a balanced, global investor, we currently recommend an asset mix of 61% equities (strategic neutral position: 55%) and 38% fixed income (strategic neutral position: 43%), with the balance in cash.

“Aside from Treasuries, yields

remain below our estimates of

equilibrium in all other major

regions.”

GLOBAL FIXED INCOME MARKETS


Eurozone 10-Year Bond YieldEquilibrium range

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 0.90% Current Range: 1.04% - 2.20% (Mid: 1.62%)

Source: RBC GAM, RBC CM

U.S. 10-Year T-Bond YieldEquilibrium range

0

2

4

6

8

10

12

14

16

1980 1985 1990 1995 2000 2005 2010 2015 2020

%



Canada 10-Year Bond YieldEquilibrium range

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%



Japan 10-Year Bond YieldEquilibrium range

-2

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 0.03% Current Range: -0.11% - 0.73% (Mid: 0.31%)


U.K. 10-Year Gilt Equilibrium range

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%





GLOBAL EQUITY MARKETS


S&P/TSX Composite EquilibriumNormalized earnings and valuations

400

800

1600

3200

6400

12800

25600

1960 1970 1980 1990 2000 2010 2020Source: RBC GAM

Nov. '16 Range: 14672 - 22191 (Mid: 18432)Nov. '17 Range: 14096 - 21321 (Mid: 17708)Current (30-November-16): 15113

S&P 500 EquilibriumNormalized earnings and valuations

40

80

160

320

640

1280

2560

5120

1960 1970 1980 1990 2000 2010 2020

Source: RBC GAM

Nov. '16 Range: 1808 - 3020 (Mid: 2414)

Nov. '17 Range: 2018 - 3371 (Mid: 2694)

Current (30-November-16): 2199

Eurozone Datastream Index Normalized earnings and valuations

90

180

360

720

1440

2880

5760

1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: Datastream, Consensus Economics, RBC GAM


Japan Datastream IndexNormalized earnings and valuations

65

130

260

520

1040

1980 1985 1990 1995 2000 2005 2010 2015 2020



Emerging Market Datastream IndexNormalized earnings and valuations

20

40

80

160

320

640

1995 2000 2005 2010 2015 2020

Source: Datastream, RBC GAM


U.K. Datastream IndexNormalized earnings and valuations

210

420

840

1680

3360

6720

13440

26880

1980 1985 1990 1995 2000 2005 2010 2015 2020




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Soo Boo Cheah, MBA, CFASenior Portfolio Manager RBC Global Asset Management (UK) Limited

Suzanne GaynorV.P. & Senior Portfolio Manager RBC Global Asset Management Inc.


The bond market has been suffering from a “Trump-tantrum” rout since the U.S. election on November 8. The speed and magnitude of the sell-off is reminiscent of the so-called taper tantrum that afflicted bond markets in the summer of 2013, when the U.S. Federal Reserve (Fed) said it would begin phasing out asset purchases. In hindsight, we know that bond yields were lower 12 months later, prompting us to ask: will the impact of Donald Trump’s election victory on bond yields be enduring, or will it have faded away by this time next year?

Investor optimism has escalated since the election on expectations that a Trump administration will bolster economic growth through fiscal stimulus and deregulation, pushing up inflation in a scenario that would be detrimental to bond prices. With this economic outlook comes a greater likelihood that the Fed will finally get moving on tightening monetary policy, jettisoning fears of disinflation that have dominated its thinking since the financial crisis. Consequently, we see that both components of the 10-year Treasury yield – the real rate, which is tied to economic growth, and the inflation break-

GLOBAL FIXED INCOME MARKETS

even – are rising together (Exhibit 1). Expectations of growth with higher inflation are also indicated by the steepening yield curve, with long-maturity bonds suffering near-double-digit losses in the two weeks following the election. From a broader perspective, the global bond bull market in place since the early 1980s is in jeopardy given that the emergence of populist politics – as expressed in Brexit and Trump’s election – often lead to government policies aimed at reflating the economy.

Bond skepticism We should, however, question whether large-scale fiscal programs and regulatory rollbacks are sufficient to alter the fundamental forces of the bond bull market: aging populations and a related preference for saving, as well as massive accumulations of bonds by global central banks. Our yield forecast for the 10-year Treasury bond is 2.25% and any volatility over the next year

would face technical resistance at the 2.50% and 3.00% levels. These levels are not high enough to reverse the long-term bullish trend (Exhibit 2). What the uptick in yields does do for investors is improve the attractiveness of bonds as longer-term investments.

Why are we skeptical of the rush out of bonds? For one thing, the impact of even large fiscal-spending programs takes several years to kick in while investors’ strong reaction to Trump has been rapid and front-loaded, and disappointment is especially keen when optimism runs strong. Regulatory reform is also a multi-year process. A case in point was the aftermath of Japanese Prime Minister Abe’s landslide election victory in 2012, which was premised on monetary and fiscal stimulus coupled with structural reforms. Four years later, the reform efforts are falling short and Japanese government-bond yields are lower than they were when Abe took power. The economy has also failed

0

20

40

60

80

100

120

Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016

10-y

ear T

reas

ury

Yiel

dC

umul

ativ

e C

hang

e (b

ps)

Total Change U.S. Real Yield Inflation Breakeven

Trum

p el

ecte

d

Source: Bloomberg

Exhibit 1: U.S. Treasury has been selling off on the back of rising real yield and inflation expectations


Global Fixed Income Markets | Soo Boo Cheah, MBA, CFA | Suzanne Gaynor

to generate the inflation promised by the Bank of Japan (BOJ), never reaching the government’s 2% target (adjusted for a 2014 consumption-tax hike).

Historical viewsHistory provides some guidance on what we might expect in periods when governments pursue aggressive fiscal stimulus. Shortly after the enactment of significant U.S. fiscal programs in 2003 and 2010, the yield on the 10-year Treasury bond rose about 110 basis points. In 2003, the U.S. budget deficit ballooned by 1 percentage point of GDP a year after the Bush tax cuts were introduced. At the time, the real yield and inflation break-even initially rose together, but in the end it was inflation expectations that accounted for the whole move, as prospects for faster economic growth had faded (Exhibit 3). A very different economic climate prevailed in 2010, but the outcome for yields was the same. In the 2010 episode, the Obama administration extended the Bush tax cuts while the economy was reeling in the aftermath of the financial crisis and the government was running the largest budget deficits in at least half a century. Still, the 10-year Treasury yield rose 100 basis points in the months after the tax-break extension, before dropping back (Exhibit 4). In the current sell-off, which began in July, yields have already risen about 100 basis points on the assumption that significant fiscal stimulus is in store. Yields shouldn’t rise much further

Exhibit 2: Ten-year Treasury yield faces technical resistance at the 2.5% and 3% levels

Exhibit 3: Bond sell-off peaked at around 120 basis points within two months of the Bush tax cut in 2003

0

2

4

6

8

10

12

14

16

18

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Bond

Bul

l Tre

nd10

-yea

r Tre

asur

y Yi

eld

%

2.5%3.0%

Resistant Levels

Source: Bloomberg

-40-20

020406080

100120140160

May2003

Jun2003

Jul2003

Aug2003

Sep2003

Oct2003

Nov2003

Dec2003

Jan2004

Feb2004

Mar2004

10-y

ear T

reas

ury

Yiel

dC

umul

ativ

e C

hang

e (b

ps)

Total Change Real Yield Inflation BreakevenSource: Bloomberg

-120

-80

-40

0

40

80

120

Oct2010

Nov2010

Dec2010

Jan2011

Feb2011

Mar2011

Apr2011

May2011

Jun2011

Jul2011

Aug2011

Sep2011

Oct2011

10-y

ear T

reas

ury

Yiel

dC

umul

ativ

e C

hang

e (b

ps)

Total Change Real Yield Inflation BreakevenSource: Bloomberg

Exhibit 4: Bond sell-off peaked at around 110 basis points three months after the Bush tax-cut extension in 2010



We expect the bond sell-off to pause given our belief that inflation fears reflect current expectations of the scope of a Trump stimulus. Our forecast is that bond yields a year from now will be near last month’s highs. The yield curve has been steepening along with the rise in rates, as a tighter U.S. labour market and rising commodity prices prompt investors to begin abandoning the deflationary thinking that dominated the market in recent years. Now that yields have escalated, bond investors can feel more confident putting their capital toward building a portfolio that compounds income at higher rates, while insuring against the possibility that Trump will disappoint investors’ supercharged expectations.

Direction of ratesThe focus of financial markets over the next year will be on the credibility of the Trump administration’s fiscal-stimulus programs. Until these programs arrive, the economy will have to endure the drag from even higher interest rates and an even stronger U.S. dollar. Global bond yields could still rise somewhat, but will likely differ little in 12 months’ time. We expect central banks in Europe and Japan to refrain from cutting already negative deposit rates further, and that the Fed intends to raise rates as long as economic growth and inflation do not stumble.

U.S. – A rate hike from the Fed is expected this month, followed by another in the first half of 2017.

in not much more than a year on February 3, 2018. Trump’s campaign assertions that interest rates are too low were imprudent given that he needs an accommodative Fed if his stimulus is to have a decent chance of success. A Fed that raises rates based on political pressure rather than macroeconomic need risks sending the global economy into a tailspin, and a flat or inverted yield curve would likely tell us whether a recession were in the cards.

We have written previously that, in today’s debt-dependent economy, low interest rates and high asset values are the only way the economy can afford to service its liabilities. Throughout history, large stockpiles of debt have tended to result in either defaults or inflation that makes the debt easier to carry, and investors will therefore be keeping a close eye on global inflation expectations and the trajectory of bond yields.

Currently, investors assume that the new U.S. administration will increase demand for capital to finance its spending, thereby pushing up capital costs. However, the banking system’s large pool of liquid assets and a preference for saving by households mean that rising demand for capital will not automatically raise its cost. The real risk is that a runaway borrow-to-spend approach by the government could push inflation beyond the bounds of what is acceptable to investors, and that would lead to higher capital costs.

in our view unless the result of any stimulus package is uncomfortably high inflation.

Considering political risksAs professional investors we are obsessively focused on markets, but Trump’s election forces us to more seriously consider political risks in addition to economic ones. For one thing, the president-elect’s economic program envisions higher tariffs on imports. Barry Eichengreen, a University of California at Berkeley scholar who studies risks to financial stability, argues that higher tariffs could disrupt international finance, as free trade and free capital flows almost always go together. He points to the 1930 Smoot-Hawley Act, which imposed tariffs that exacerbated the Great Depression and fostered geopolitical tensions, making diplomatic cooperation more difficult as Europe slid toward war. Bond yields fell during this period, as the Fed slashed rates in response to a series of bank failures in the U.S. and continental Europe.

The Fed’s futurePresident-elect Trump’s stated views on monetary policy have raised doubts about his commitment to the independence of the Fed and have been cited as contributors to the bond sell-off. Upon taking office, Trump will have the power to nominate two governors to the Fed’s seven-member policymaking Board of Governors. He will also be able to name a replacement for Chair Yellen when her term expires


Like investors, the Fed will be seeking clarity on the potential for a Trump fiscal-stimulus package to stoke inflation. Inflation pressures had been exerting themselves even before the U.S. election as the economy neared its operating capacity. We believe that a stimulus package, along with Trump’s plans to cut income taxes, would most likely result in rising inflationary pressures rather than increased growth at this stage of the U.S. economic cycle.

We expect volatility to settle down as markets price in the impact of U.S. fiscal stimulus on global economic growth and expectations that the European Central Bank (ECB) and BOJ will be less inclined to increase bond purchases. Yields could still rise as optimism continues to run high, but 2.5% and 3.0% are very strong technical-resistance levels for the 10-year yield. In our view, 10-year yields will likely settle around 2.25% 12 months from now as investors start to factor in the risk that fiscal policy – like monetary policy – will prove disappointing for long-term growth.

Germany – European politics will be the driver of bond yields across Europe. Italians voted against constitutional reform earlier this month, while the Dutch and French will hold general elections in the spring. Given the Brexit referendum and U.S. election outcome, the odds of a flare-up of the European crisis and renewed questions about whether the EU can survive long term are likely to resurface. While


U.S.

3-month 2-year 5-year 10-year 30-year Horizon

return (local)

Base 0.88% 1.45% 1.85% 2.25% 3.05% 1.99%

Change to prev. quarter 0.13% 0.25% 0.25% 0.25% 0.45%

High 1.25% 2.00% 2.50% 2.75% 3.30% (0.37%)

Low 0.38% 0.60% 0.80% 1.25% 2.00% 8.47%

Expected Total Return US$ hedged: 2.40%

GERMANY


return (local)

Base (0.40%) (0.10%) 0.15% 0.40% 0.90% (1.17%)


High 0.00% 0.65% 0.80% 1.00% 1.25% (5.65%)

Low (0.50%) (0.50%) (0.30%) (0.25%) 0.25% 5.79%


JAPAN


return (local)

Base (0.10%) (0.10%) (0.05%) 0.00% 0.60% 0.29%


High 0.00% 0.05% 0.10% 0.25% 1.00% (4.69%)

Low (0.20%) (0.20%) (0.25%) (0.25%) 0.25% 5.19%


CANADA


return (local)

Base 0.50% 0.90% 1.00% 1.50% 2.00% 2.52%


High 0.75% 1.25% 1.50% 2.00% 2.40% (1.43%)

Low 0.00% 0.00% 0.10% 0.50% 1.25% 11.10%


U.K.


return (local)

Base 0.25% 0.60% 1.00% 1.50% 2.20% (0.31%)


High 0.25% 0.75% 1.25% 1.75% 2.25% (1.39%)

Low 0.00% 0.00% 0.10% 0.50% 1.25% 13.72%


INTEREST RATE FORECAST: 12-MONTH HORIZON Total Return calculation: Nov. 28, 2016 – Nov. 27 2017

Source: RBC GAM


U.K. – Following Brexit, the Bank of England (BOE) faces the worst economic scenario among the major developed economies. A weak currency is leading to higher inflation and businesses are delaying investments amid uncertainty about the U.K.’s relationship with its biggest trading partner, the EU. Consumer confidence has been dented because higher inflation reduces purchasing power while wages are not keeping pace. Fiscal spending should support economic growth, but Chancellor Phillip Hammond does not have much leeway because the country’s budget deficit is high and rising.

We expect the BOE to keep its policy rate at 0.25%. We are raising our 12-month forecast for the 10-year gilt to 1.50%, an increase of 50 basis points, to reflect higher inflation and higher global yields.

Regional preferencesWe are keeping our overweight recommendation on JGBSs at five percentage points and the underweight on German bunds at the same amount. JGBs are neutrally priced while German bunds do not yet reflect the rising odds that the ECB will scale back purchases of German bonds. We are neutral on U.S. bonds.

Canada – Weak non-energy exports will likely keep Canadian growth below potential and the outlook for the Canadian economy would be further hampered if President-elect Trump carries out his threat to withdraw from NAFTA or impose more severe protectionist measures. Bank of Canada (BOC) worries about the housing market have abated somewhat regarding Vancouver, where a new tax has rapidly cooled sales and prices. While demand continues to surge in Toronto, new mortgage-insurance rules and higher lending rates will likely dampen interest and slow the rise in prices. Increased uncertainty about U.S. policies under Trump will reinforce the BOC’s steady policy stance, at least until some specifics are offered by the new U.S. administration. Canadian-government-bond yields will head higher with Treasuries, albeit at a pace consistent with slower growth projections.

We expect the benchmark Canadian rate to remain unchanged at 50 basis points through 2017, with the BOC retaining an easing bias. Risks are tilted somewhat to the downside if growth is weaker than expected and a rate cut ensues. Our 12-month forecast for the BOC policy rate and 10-year government bonds are unchanged at 50 basis points and 1.50%, respectively.


U.S. inflationary pressures are strengthening, the same cannot be said for Europe due to low wage growth, and high levels of both unemployment and economic slack. We expect signs of inflation to diminish by the second quarter of 2017 as the base effect of low energy prices fades. The ECB, in our view, will extend asset purchases as long as inflation does not rise significantly and political risks remain heightened in peripheral Eurozone countries.

We leave our ECB deposit-rate forecast at negative 0.40%. Our forecast for the 10-year yield increases to 0.40%, 0.10% higher than our previous forecast.

Japan – We expect the BOJ to continue with “yield-curve control,” by which it targets the 10-year JGB yield near 0% while keeping the quantity of annual purchases at 80 trillion yen (710 billion U.S. dollars). Volatility in the JGB market nearly vanished after the introduction of the yield-curve control policy, and we expect the BOJ to remain status quo on policy until the end of Governor Kuroda’s term in April 2018. We expect little change to JGB yields over the coming 12 months, and further cuts in the deposit rate are not in the cards. We are keeping our yield forecast for the 10-year JGB at 0.00% and the deposit rate at negative 0.10%.

CURRENCY MARKETS

The election of Donald Trump as U.S. president has spurred a rapid appreciation of the dollar, as the prospect of fiscal stimulus and tax reform being applied to an economy with little observable slack has caused a significant repricing of assets. Movements in currencies since the November 8 vote brought many of our 12-month forecasts well within reach. Framing these short-term moves in the context of long-term trends, we believe structural dollar-positive forces remain in play. At over five-and-a-half years in length, the current bull market still has some space to catch up with past bull markets. In addition, the radical shift of policies under a Trump presidency could be the shot in the arm that gives this dollar cycle a longer-than-average life.

As the dollar’s upswing stretches towards six years, we are cognizant that the current cycle is probably closer to its conclusion than its commencement. However, with so many arguments in favour of a stronger dollar, we feel reasonably confident that the current bull market has room to run (Exhibit 1).

Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income & Currencies (Toronto & London) RBC Global Asset Management Inc.

Daniel Mitchell, CFAPortfolio ManagerRBC Global Asset Management Inc.

Taylor Self, MBAAnalyst RBC Global Asset Management Inc.

Relative economic-growth differentials between the U.S. and its major trading partners remain supportive.

As for monetary policy, the case for the Fed to raise interest rates can be made convincingly, in stark contrast to other central banks around the world. U.S. inflation is at or near the Fed’s 2% target. At the same time, unemployment is low and wage growth has risen to its long-term average. The addition of fiscal stimulus to this economic picture has increased expectations of future inflation, budget deficits and the rate at which the Fed will raise interest rates. Meanwhile, the picture outside the U.S. has not changed much as other central banks are still a ways from considering the removal of monetary stimulus. All in all, a re-ignition of the monetary-policy divergence trade has bolstered the dollar’s fortunes.

In addition to monetary policy, Trump’s election has provided

a catalyst for dollar strength. In the previous issue of the Global Investment Outlook, we highlighted a nascent global shift towards fiscal stimulus as a way to buoy economic activity. The election of Trump has brought this movement to the U.S. The broad strokes of fiscal stimulus and tax reform can be considered positive for the dollar.

A particular boon for the dollar is Trump’s interest in changing corporate taxation on overseas earnings, which would have an effect similar to the Homeland Investment Act of 2004. Under the current tax code, U.S. firms are required to pay taxes on their global earnings, but do not actually pay these taxes until such profits are brought back to the U.S. This has resulted in multinational companies leaving the bulk of their foreign earnings overseas. The total amount of capital that U.S. firms have amassed overseas that would otherwise have been repatriated since the last tax holiday is estimated between US$2


Exhibit 1: U.S. trade-weighted dollar

1.00

1.10

1.20

1.30

1.40

1.50

1.60

-1,000 -500 0 500 1,000 1,500 2,000 2,500Days into U.S. dollar bull market

1978 - 1985 1994 - 2002 2011 - Present

Source: Federal Reserve, RBC GAM


Currency Markets | Dagmara Fijalkowski, MBA, CFA | Daniel Mitchell, CFA | Taylor Self, MBA

trillion and US$3 trillion, according to Citigroup. It may be that only a modest share of this total would be repatriated, as some of the foreign earnings have surely been reinvested in markets where they were generated. It is also true that some of the foreign earnings have already been converted into U.S. dollars. Even so, the Homeland Investment Act experience shows that a tax holiday can lead to significant repatriation and dollar appreciation (Exhibit 2).

In addition to the repatriation of profits, there are other supportive flows for the dollar. The combination of negative interest rates and quantitative easing by the Bank of Japan (BOJ) and European Central Bank (ECB) has spurred massive financial outflows from these markets (Exhibit 3). Banks, insurance companies and asset managers have had to replace bonds bought by central banks in their home markets with higher-yielding fixed-income securities abroad. With some of the highest developed-market bond yields, the U.S. has been the recipient of a large share of these flows.

We would expect most of these flows to be currency-hedged, and believe that a significant portion have been up until now. European and Japanese investors have been able to invest in U.S. government bonds at higher yields than those on offer in their home markets, while hedging the currency risk. However, the funding cost of such hedges has risen dramatically over the past year

and erased this yield advantage. As a result, we believe that hedge ratios will be reduced and this shift entails buying U.S. dollars.

The renminbiGiven our outlook for the U.S. dollar, we are becoming marginally more concerned about China. A stronger dollar and higher interest rates not only affect economic activity and corporate profits in the U.S. but also raise concerns about their effects across the globe, especially

in emerging markets. The nexus of these concerns is China. Remember that it was massive capital outflows and uncertainty surrounding the renminbi in early 2016 that derailed expectations that the Fed would raise interest rates by as many as four times this year, and prompted Chinese authorities to launch large fiscal and monetary stimulus programs.

While not our core scenario, the combination of a stronger dollar and tighter global financial conditions

Exhibit 3: QE-induced outflows

-1000

-800

-600

-400

-200

0

200

400

600

2010 2011 2012 2013 2014 2015 2016

Billi

ons

of U

.S. d

olla

rs

(12-

mon

th s

um)

Japan EuropeSource: Bank of Japan, Eurostat

Exhibit 2: U.S. earnings held offshoreSeasonally adjusted at an annual rate

0

100

200

300

400

500

600

700

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Billi

ons

of U

.S. d

olla

rs

Dividends paid back to U.S.

Homeland Investment Actof 2004

Source: Bureau of Economic Analysis


likely to be very accommodative as inflation and growth remain steady but unspectacular. Political risks are also rising, and these should weigh on the euro’s value as well. The combination of the above factors should spur continued and substantial capital outflows from the Eurozone, further supporting our forecast.

In terms of monetary policy, we believe that the ECB will continue to be one of the most accommodative central banks in the world. The ECB’s quantitative-easing program, which was to conclude in March, has been extended to the end of 2017. To be sure, inflation in the Eurozone is rising. However, nearly all of increase has been due to the fact that oil prices are no longer falling (Exhibit 5). More importantly for the ECB, core inflation, which excludes the impact of energy and food prices, has not yet begun rising towards the ECB’s 2% target. Instead, it has remained around 1% (Exhibit 6). At the aggregate level,

foreign assets. At the same time, modest inflows into the Chinese debt market have resumed, combining with a still-large current-account surplus to offset some of these capital outflows.

In summary, the Chinese renminbi is almost certainly set to continue depreciating. This is part and parcel of the country’s shift towards a more balanced economic-growth model, and the shift is surely more complicated in a world where global financial conditions are tightening as a result of the Fed and a stronger U.S. dollar. The bellwether of confidence in China will be the renminbi. Therefore, the renminbi bears watching closely in 2017.

The euroWe expect the euro to move towards parity over the next 12 months. Part of our forecast is based on continued U.S. dollar strength, but it also relies on an indifferent set of circumstances for the Eurozone. Monetary policy is

raises the risk that 2016’s negative feedback loop becomes established once more (Exhibit 4). In this scenario, dollar strength begets renminbi weakness, accelerating capital outflows from China. These, in turn, undermine market-risk appetite and further drive dollar strength. In early 2016, the Fed was able to short-circuit this loop by walking back expectations for tightening policy. Now, expectations for hiking by the Fed over the next year are modest in comparison, meaning that this circuit-breaker might be impaired. A Trump presidency also raises concerns about the renminbi and China more generally, considering the pitched rhetoric deployed by the president-to-be on the campaign trail. Like all campaign promises, however, we expect that the more extreme views will be tempered by the U.S. Congress.

It is true that China is now in a much better position to deal with a higher dollar and tighter global financial conditions. After depreciating against the U.S. dollar for the better part of a year, the Chinese currency has unwound much of its overvaluation. A change to the country’s currency-management framework has also lowered the pressure on authorities to maintain the dollar-renminbi exchange rate. Meanwhile, fears of a hard landing for the economy have receded and capital outflows have moderated. Chinese corporations have paid off a large portion of their U.S.-dollar liabilities and are now amassing


Exhibit 4: Negative feedback loop

USDstrength

Asian FXweakness

CNYUSD weakensto keep basket stable

Capital outflows

Riskaversion

Source: RBC GAM


Exhibit 6: Eurozone inflation

-1%

0%

1%

2%

3%

4%

5%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Per

cent

age

chan

ge y

ear-o

n-ye

ar

ECB Inflation Target Overall CoreSource: Eurostat

yen on a weaker footing vis-à-vis the dollar.

Since the previous edition of the Global Investment Outlook, there has been a change to the BOJ’s monetary-policy framework. In September, the central bank announced that it would start using the shape of the yield curve as a policy instrument. Going forward, the BOJ will be targeting both short-term interest rates as well as the yield on 10-year Japanese

bring more depreciatory pressure to bear on the euro.

The yenLike the euro, our bias continues to be towards the yen being weaker in 12 months. This is based on Japan’s mixed economic picture, low inflation, continued capital outflows and monetary-policy factors. Overall, we believe that the BOJ will continue to supply substantial monetary stimulus, and this will keep the

growth has also been steady and unemployment has fallen. However, this ignores substantial differences in economic reality among individual nations. Another factor that would lead the ECB to err on the side of continued stimulus is the state of Europe’s banking sector. Overall, the net effect of higher headline inflation and a continued accommodative monetary stance will be lower real interest rates in the Eurozone, which should be negative for the euro.

Aside from accommodative monetary policy, politics will be important in 2017. Scheduled elections in the heart of the European project – among them, a presidential vote in France and a parliamentary one in Germany – will bolster political risks in the Eurozone. Further raising the political risk premium is the fact that confidence in polling, which currently shows status quo results for both France and Germany, has been eroded by surprise outcomes in the U.K. and U.S. With lower levels of confidence, uncertainty is necessarily higher and this will weigh on the single currency.

Our final contributor to a weaker euro is the continued and substantial outflow of capital from the Eurozone. Since March 2015, over €800 billion has left the Eurozone. As mentioned, much of these flows were into overseas bonds that were currency-hedged. However, the amount of hedging demand has increased the cost of doing so substantially. Future outflows should therefore involve less hedging and, by extension,


Exhibit 5: Euro area inflation components

-2%

-1%

0%

1%

2%

3%

4%

1996 1999 2002 2005 2008 2011 2014 2017Services Fuels Goods Alcohol/Tobacco Foods HICP

Source: Eurostat


government bonds (JGBs) at –0.10% and 0.0%, respectively. The intent of the change is to maintain a steeper yield curve in order to minimize the impact of negative interest rates and quantitative easing on the profitability of banks.

Whatever the intention, the change in policy has raised questions about whether the BOJ will reduce asset purchases. In effect, the BOJ wants to control both the price as well as the quantity of purchased JGBs, which raises a good deal of scepticism. These are questions to which we have not received sufficiently comprehensive answers. It remains to be seen how the BOJ will square its desire to control the yield curve with its intent to continue purchasing large amounts of JGBs.

Since September, developments outside Japan have overwhelmed domestic monetary-policy developments. The net effect of the BOJ’s new framework has been to lower the volatility of JGBs and amplify the impact of divergence in monetary policy with the U.S. The implementation of “yield-curve control” by the BOJ means that the spread between U.S. and Japanese bonds has become entirely a function of changes in U.S. interest rates. In turn, the yen has weakened to 112 from 102 in line with the U.S. 10-year yield rising to 2.32% from 1.44% since the U.K. referendum in June.

As the U.S. Treasury market settles, structural factors will again weigh


Exhibit 7: Japan basic balance of payments

-50-40-30-20-10

01020304050

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

12-m

onth

sum

(JP

Ytrn

)

Net Portfolio Net FDI Current Account Basic Balance of PaymentsSource: Bank of Japan

on the yen. Inflation in Japan has remained stubbornly low and this will keep monetary policy loose. Even though the BOJ’s new framework signals little about additional policy measures, it does indicate a long-term commitment to an accommodative stance. Moreover, capital outflows from Japan should continue in earnest, keeping pressure on the yen.

In terms of inflation, the prospects for the BOJ to generate sustained price rises above a 2% annual rate are poor. While the yen’s weakness will pass through to domestic prices, this effect will be transitory. A very tight labour market does raise the odds that wage growth could pick up, but most new jobs go to part-timers or women, two groups that have little wage-bargaining power under Japanese laws and customs. All in all, the prospects for inflation to rise sustainably are poor without meaningful reforms to the labour market.

Meanwhile, capital outflows from Japan should continue. This is important for our outlook, as portfolio flows as well as outward direct investment must overcome Japan’s sizeable current-account surplus for the yen’s weakening path to be clear. This is indeed the case (Exhibit 7). Very low interest rates and BOJ purchases will continue to spur flows into overseas financial markets. Again, currency hedging has become much more costly, which should lead to a bigger impact on the yen. Moreover, flows relating to investment, mergers and acquisitions by Japanese companies are long-term themes that involve selling yen.

The poundFears surrounding the U.K.’s exit from the EU have receded markedly since June. After an initial shock, economic activity in the U.K. has so far proved resilient and a significant uptick in inflation largely avoided.


Markets are even tentatively pencilling in rate hikes by the Bank of England (BOE) over the next two years (Exhibit 8). However, we believe that inflation is set to rise and economic growth too slow, leading to negative real wage growth and a weaker pound. Political noise should also grow in volume in 2017, as the U.K. starts its exit negotiations with the EU. All in all, forces continue to align for a weaker pound.

In terms of monetary policy, we believe that the BOE will be focused on supporting economic activity, to the detriment of its inflation mandate. While growth has been resilient thus far, the uncertainty surrounding the U.K.’s relationship with the EU should start to weigh more heavily on business investment and consumer confidence. At the same time, inflation is set to rise, predominantly from prior pound weakness feeding through into domestic prices. With the central bank keeping short-term interest rates low, higher inflation should lead to a steepening of the yield curve, which has historically been negative for the currency.

The global movement towards fiscal stimulus to spur growth has seemingly spread to the U.K. with the government’s decision to suspend some of its more ambitious fiscal-consolidation targets. However, government spending is still being cut overall and this will weigh on economic growth. The

mediocre growth outlook, coupled with the central bank’s intent to look beyond inflation, means that market-based expectations that the BOE will hike interest rates around twice over the next two years are too optimistic.

Another important parameter for our outlook is the political picture in the U.K. and on the continent. Over a long-term horizon, we are less concerned about the confusion surrounding whether parliamentary prerogative extends to invoking Article 50 than we are about the fundamental disconnect between what the EU and the U.K. are willing to accept under a new arrangement. The U.K.’s desire to divorce access to the EU’s single market from freedom of movement is distinctly at odds with the EU’s steadfast refusal to do so. The net effect of this impasse is a drawn-out process that keeps the pound burdened with a large uncertainty discount.

The final component of our pound forecast is the U.K.’s yawning

current-account deficit, which ranks among the largest in the world. Over the past several years, the U.K. has been a large beneficiary of financial flows into equities and government bonds, as well as direct investment in U.K. companies with, among other things, ready access to Europe (Exhibit 9). These flows may be harder to come by in the future, as investor confidence is undermined by uncertainty. The gap between the U.K.’s large external funding needs and the amount of capital it will be able to attract as a new relationship with Europe crimps economic growth will have to be bridged via a weaker pound.

The Canadian dollarIn line with other major currencies, the Canadian dollar should also lose ground against the greenback. An uninspiring economic picture should keep the Bank of Canada (BOC) on hold, widening the monetary-policy divergence with the Fed. The necessity of finding sufficient


Exhibit 8: Bank of England expectationsDots = Meeting dates

0.00%

0.25%

0.50%

0.75%

Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

Bank Rate



Exhibit 10: USDCAD and USDMXN Exchange RatesRebased to April 2011 = 1.00

0.80

1.00

1.20

1.40

1.60

1.80

2011 2012 2013 2014 2015 2016USDCAD USDMXN

Source: Bloomberg

funding to cover the current-account deficit should also weigh on the loonie.

The Canadian economy and, by extension, the loonie, seem beset on all sides by mediocre outcomes. Modestly higher oil prices have reduced some of the pressure on the oil-producing segments of the economy, but prices are not high enough to encourage new investment. Meanwhile, a weaker Canadian dollar has so far failed to significantly buoy the manufacturing sector, suggesting that the currency may not be weak enough yet. This point is especially clear when we compare the exchange rates of Canada and Mexico, principal competitors for the U.S. market. Mexico’s peso has fallen much more dramatically against the U.S. dollar (Exhibit 10). In short, economic activity in Canada has disappointed, and we believe that it will take further weakness in the currency to encourage new investments, including those from abroad, and spur exports.

Canada’s housing sector also looks like it is starting to cool down, especially in the major metropolitan areas of Vancouver and Toronto. New taxes, such as those on foreign buyers in Vancouver, macro-prudential measures such as higher down payments and borrower stress tests, as well as higher mortgage rates due to rising bond yields should dampen the housing market. All of these will crimp marginal demand for housing and weigh on economic activity. To be sure,


the government’s fiscal stimulus should offset some of the economic weakness, but the impact will be felt only gradually.

The state of Canada’s balance of payments completes the negative loonie picture. The current-account balance has moved further into negative territory, primarily on the back of a deteriorating trade balance. This has increased the amount of funding that must be sourced from abroad and has

concomitantly raised the risks to the loonie.

In summary, higher but not high enough oil prices, a weaker but not weak enough Canadian dollar and a slower housing market will make for a very cautious BOC. The growing divergence in the paths of the BOC and the Fed will likely lead to loonie depreciation against the U.S. dollar. Finally, the lack of adjustment in the balance of payments leads us to believe that the loonie needs to

Exhibit 9: U.K. balance of payments

-25%-20%-15%-10%-5%0%5%

10%15%20%25%

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

4-qu

arte

r rol

ling

sum

, % o

f GD

P

Portfolio Flows Current Account FDI Basic Balance of Payments




weaken even more. We forecast the loonie to depreciate to 1.44 per U.S. dollar over the next 12 months.

ConclusionOur long-held bullish view on the U.S. dollar received a shot in the arm from the outcome of the presidential election. The impact

of expected fiscal stimulus and tax cuts on the U.S. economy, which already possessed a cyclical and inflation advantage relative to its peers, has the potential to accelerate the pace of dollar appreciation in a final up-leg of the bull market. It could also just as likely serve to extend the current dollar cycle a couple of years beyond the average.

At this early stage, it is hard to determine which of these scenarios will prevail. In any case, divergence has returned both in the short and medium term. Political risks in some major economies and disappointing economic activity in all of them mean the U.S. dollar will continue to appreciate.


40

80

160

320

640

1280

2560

5120

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020Source: RBC GAM


Ray Mawhinney Senior V.P. & Senior Portfolio Manager RBC Global Asset Management Inc.

Brad Willock, CFA V.P. & Senior Portfolio Manager RBC Global Asset Management Inc.

REGIONAL OUTLOOK – U.S.

UNITED STATES RECOMMENDED SECTOR WEIGHTS

RBC GAM INVESTMENT STRATEGY COMMITTEE

November 2016

BENCHMARK S&P 500

November 2016

Energy 7.0% 7.6%

Materials 3.0% 2.9%

Industrials 12.0% 10.6%

Consumer Discretionary 12.0% 12.4%

Consumer Staples 9.0% 9.2%

Health Care 12.5% 13.7%

Financials 16.0% 14.9%

Information Technology 22.0% 20.4%

Telecommunication Services 2.0% 2.5%

Utilities 2.0% 3.1%

Real Estate 2.5% 2.7%

Source: RBC GAM

The U.S. stock market continued to plod higher over the past three months, extending the recovery that began in the first quarter of the year. In the quarter ended November 30, the S&P 500 rose slightly more than 1%, setting an all-time high about three weeks after the election of U.S. President-elect Donald Trump. However, the index’s modest gains do not tell the whole story, as aggressive rotation between sectors and styles was where almost all of the action occurred. In fact, the underlying change within the market began earlier in the year with the peak (at the time) in the U.S. dollar and the low point in the price of oil. Since that time, value stocks have outperformed growth stocks by more than 8 percentage points, as the market began to discount a ‘less bad’ economic backdrop. The pause in the U.S. dollar rally and the recovery in oil prices allowed fears of a debt crisis in the emerging world to dissipate, driving markets to new highs in late April and again in early June before the Brexit vote took investors by surprise later that month.

As fall approached, economic data continued to improve and central bankers around the world began musing about ways to encourage

encouraged investors to accelerate the move of money away from stable growth stocks to more cyclical value stocks, and Financials benefited in particular from this shift. As November approached, investors began to fret about the outcome of the U.S. election and stocks pulled back slightly. By election night, the S&P 500 had fallen 1.4% since

economic growth without resorting to lower or, in the case of some countries, more negative interest rates. In mid-September, the Bank of Japan altered its monetary policy by seeking to steepen the yield curve by controlling the 10-year government bond, and yield curves around the world responded by steepening too. This move in global bond markets

S&P 500 EQUILIBRIUM Normalized earnings and valuations


Regional Outlook – U.S. | Ray Mawhinney | Brad Willock, CFA

the end of August and Washington pundits and betting markets were placing the odds of Trump winning the presidency at between 5% and 25%. Internally, we pegged the odds of a Trump victory at closer to 30%. In our minds, those odds were too high to bet one way or the other, particularly with the presidential primaries and the Brexit surprises fresh in our minds.

Of course, Donald Trump won the election and the stock market went down as many had predicted – but only for a few hours. Perhaps the turnaround was catalyzed by Trump’s acceptance speech, which surprised many by its measured tone, or maybe it was simply that investors had a few hours to think calmly about the potentially positive economic implications of Trump’s policies. On the negative side, Trump’s stance on immigration and trade are both likely negative for economic growth and corporate earnings. On the other hand, Trump’s plans to pare regulation, reduce taxes and rebuild America’s infrastructure are likely reflationary and should lead to more jobs, increased incomes, and better economic growth and profits. Clearly the market has decided to focus on the positive potential of a Trump presidency, at least in the short term.

The S&P 500 has gained almost 3% since the election, as investors have focused on Trump’s tax-reform plan, which is a priority for Republicans and something that they are likely to want to accomplish first. Assuming Republicans are successful in getting the tax plan through Congress, the corporate-tax rate could drop by a third and add roughly $10 per share to S&P 500 earnings. In theory, the S&P 500 would rise between 150 and 170 points, or about 7%, were markets to fully reflect the impact of any such tax legislation. Given the potential for pro-business regulatory changes and an undetermined amount of infrastructure spending, corporate earnings would likely rise even more. However, one must keep in mind the chance that not all of Trump’s wishes come true, and that even if they do, they will likely take more time to realize than many investors currently believe. In addition, the potential downside risk could be significant if Trump’s anti-immigration and/or anti-trade policies move up the priority list.

In review, the market has had a lot to digest since the election and there is still much we do not know. However, the economic backdrop, both globally and in the U.S., has been improving as seen in the global manufacturing PMI at a 2.5 year high

and the U.S. manufacturing PMI at 54.1. Inflation expectations and bond yields have been rising since early July, and they received an extra boost following the election and the recent run-up in oil prices following OPEC’s November 30 decision to cut oil production. If oil prices continue to rise and the yield curve to steepen, earnings estimates for the Energy and Financials sectors will likely be raised, and this dynamic should support the continued rotation from stocks exhibiting stable growth to those considered to represent cyclical value. However, we would note that this trade is less attractive than it was last quarter and that, by our estimation, is roughly 70% complete. As a result, our task in the near term is to hang on to our winners given the high probability that interest rates, inflation, economic growth and corporate earnings are headed higher as we move into 2017. Nevertheless, we must be mindful over the next few quarters that higher interest rates and a higher U.S. dollar will potentially emerge as headwinds to the economy and corporate profits. In addition, we must remain wary of protectionist moves by the president-elect, as such measures could crimp the profitability of many of the market’s largest companies.


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The S&P/TSX Composite Index is ending 2016 as one of the pacesetting global equity markets, strengthening in the latest three-month period and at times flirting with all-time high highs. The total return for the S&P/TSX was 4.1%, versus a 1.8% gain for the S&P 500 and a 0.4% decline in the MSCI World Index. The Canadian dollar fell 2.5% in the period ended November 30, 2016, finishing at 74.4 cents per U.S. dollar. In a year where macroeconomic events were difficult to predict, let alone investors’ reaction to them, the quarter did not disappoint. Following Donald Trump’s surprise U.S. election win, investor attention quickly shifted to the potential for a better economic environment and the likelihood of improved earnings. The majority of the quarter’s share gains came in the last month of trading and Canadian markets were further buoyed on the last day of November, when an OPEC agreement to cut supply sent oil prices significantly higher.

The internals of the stock market shifted dramatically in the latest quarter. With bond yields increasing and the focus moving towards a better economy, interest-sensitive and cyclical stocks surged while those with more visible cash flows and higher valuations stalled. Market valuations, although elevated in absolute terms, are not inconsistent

Stuart Kedwell, CFA Senior V.P. & Senior Portfolio Manager RBC Global Asset Management Inc.

CANADA RECOMMENDED SECTOR WEIGHTS


November 2016

BENCHMARK S&P/TSX COMPOSITE

November 2016

Energy 21.0% 21.4%

Materials 11.0% 11.9%








Utilities 2.5% 2.8%


Source: RBC GAM

REGIONAL OUTLOOK – CANADA

gains coming from insurance stocks. Manulife Financial surged about 31% in the latest quarter alone, as the company’s third-quarter earnings were strong and investors focused on the benefits of higher interest rates. Commodity prices were generally strong, with copper, oil, natural gas and corn all ringing in gains exceeding 10%. Gold bullion was an exception, dropping about 11%.

with a low-interest-rate, low-inflation environment. That said, earnings acceleration will now be a key focus.

The Energy and Financials sectors led the way this quarter, rising 12.8% and 7.7%, respectively. In Energy, two-thirds of the gains came on the quarter’s final day. Rising interest rates were a powerful driver for the Financials sector, with the biggest

S&P/TSX COMPOSITE EQUILIBRIUM Normalized earnings and valuations


Regional Outlook – Canada | Stuart Kedwell, CFA

Our expectations for the global economic expansion continue to be modest, and our forecasts for 2017 growth now sit at 1.75% for the U.S. and 1.5% for Canada. Market indicators suggest more interest-rate increases next year by the U.S. Federal Reserve than were expected before the election. Notably, we have increased our U.S. CPI estimate to 2.25% for 2017. Whether current expectations will prove to be aggressive is open to debate, the path for U.S. interest rates is likely higher. We continue to believe that interest-rate increases in Canada will be delayed and that the ascent will be slower than the U.S. experience. Concerns about the Canadian economy’s reliance on housing, the ability of consumers to maintain spending and the future of large energy projects remain points of discussion. A new wrinkle for the outlook could be the impact on trade of any tariff or regulatory changes by the Trump administration.

For the S&P TSX Composite, estimates for 2017 earnings are now just over $900, which is a considerable uptick versus 2016. A key to this increase are substantial earnings improvements in the Materials and Energy sectors, with expectations for the remainder of the earnings pool in line with historical levels. Importantly, this year’s persistent downtrend in earnings expectations stabilized over the past three months and is no longer falling.

Ongoing regulatory changes to the Canadian mortgage market are likely

to weigh on home lending but could offer a degree of protection from the negative impact of a housing bubble. Consensus estimates bake in mid-single-digit earnings growth for the banks in the coming years as they focus on efficiency in a sluggish revenue-growth environment. The success of the banks’ non-domestic businesses will likely be a key differentiator of performance. Bank valuations have improved and are back to the higher end of the range seen in the past five years. Current yields are attractive and we continue to expect mid-single-digit dividend growth.

The shares of insurance companies surged with higher interest rates, which should boost profits and capital levels. Moreover, many insurers have large wealth-management businesses and exposure to fast-growing Asian markets. In a stable to gradually rising interest-rate environment, insurance stocks could continue to outperform.

Valuations in the Telecommunication Services, Utilities and Real Estate sectors, which tend to have stable cash flows and whose stocks had reached the top end of historical ranges, struggled in the latest quarter and will continue to face headwinds if interest rates keep rising. Growth in these types of businesses may not offset the rise in interest costs and the discount rate applied to their cash-flow valuations. One area in this group that is improving is grocery stores, where valuations are

more attractive following a period of concern about falling food prices and their potentially negative impact on profit margins.

Oil prices are difficult to forecast in the short run, but remain below our estimate of the marginal cost of production. While OPEC’s plan to cut output is a positive, the reduction mechanism has left longer-dated prices below levels that would trigger major new projects. We continue to believe that large companies with long-life reserves and strong balance sheets will deliver attractive levels of free cash as crude prices rally. North American natural-gas prices rallied later in the year, as forecasts for a frigid North American winter led to surging demand for heating fuel. While equities of natural-gas producers have begun to reflect the positive momentum of the underlying commodity, we are cautious about the longer term because rising prices could lead to expanded infrastructure that would again allow volumes to more than satisfy demand.

Many commodity-related sectors have stabilized or rallied this year. The advance in the price of coal used in steelmaking – metallurgical coal – is a reminder of the type of acceleration that often occurs as a period of low prices ends and supply often struggles to meet a modest increase in demand. In the case of metallurgical coal, the price has almost tripled in the past six months, pushing up the stock price of Teck Resources.


EUROPE RECOMMENDED SECTOR WEIGHTS


November 2016

BENCHMARK MSCI EUROPE

November 2016

Energy 7.0% 7.7%

Materials 8.5% 8.5%








Utilities 2.5% 3.5%


Source: RBC GAM

EUROZONE DATASTREAM INDEX EQUILIBRIUMNormalized earnings and valuations

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both strength and weakness. The economies of Northern Europe and Switzerland are fairly robust, but it is not possible for the Eurozone to deliver needed reforms in the current political atmosphere. As a result, we believe that economic growth will remain fairly lacklustre.

Is policy undergoing a change that might lead to a more inflationary

REGIONAL OUTLOOK – EUROPE

European equity markets were little changed over the past quarter, but the headline stability masked significant shifts in currencies and sector rotation.

The factor that affected us most as equity investors in the region was the rotation into riskier assets that began to pick up speed in October. The areas of the equity market that have done best over the past 10 years, the so-called bond proxies, became a source of cash as investors moved to cyclical stocks during the quarter. We have seen a number of these rotations during the last few years but, as always, it is important to determine whether this one will unwind as others have, or whether the outlook has changed in some fundamental way. Let’s address these issues in a series of questions and answers.

What effect has Brexit had on markets?

Equity markets focus on corporate profitability and economic growth, and despite an initial plunge, U.K.-based equities have subsequently tracked the benefits that are likely to accrue from sterling weakness. The process of Brexit itself remains fairly distant and opaque, and it is too early to assign much credence to a worst-case scenario for corporate profits and the economy given

that company managers and the government are working hard to reduce the risks.

Have European economies reached an escape velocity that will support cyclical and commodity-related businesses?

The picture within Europe remains somewhat mixed with pockets of

Dominic WallingtonHead, European Equities & Senior Portfolio Manager RBC Global Asset Management (UK) Limited


environment, and how might that affect our investment preferences?

Theresa May’s government has abandoned fiscal orthodoxy and returned the U.K. government to centre stage regarding industrial policy and social cohesion. Trump’s electoral success demonstrates that the British referendum was not a unique event and suggests that fiscal policy is likely to be more broadly adopted where there is the potential for political change. Conversely, the Eurozone’s political architecture is not democratic and therefore is rigid at a time when more flexibility is required. We believe that this situation will lead to the Balkanization of the region rather than hoped-for integration.

We have favored the Consumer Discretionary sector for a considerable time and remain committed to the media business, especially those companies that have reduced their capital intensity and broadened their exposure through the internet. We have been adding to our holdings of select luxury-goods producers given that China’s economy appears to be stabilizing and U.S. growth looks set to accelerate. The Consumer Staples sector remains a natural home for us given the high-quality companies that exist in this area, but it will face short-term valuation headwinds. Most of the themes that are being expressed in our exposure to this sector are global in nature and aimed at capitalizing on the growing middle class in emerging markets.

Our concerns about increased capital expenditures and weak production growth in the Energy sector have receded somewhat. Valuations are at almost unprecedentedly low levels, both in absolute and relative terms, and dividend yields are high. However, high levels of capital expenditures are only just covered by cash flow at many large companies in the sector.

Among Financials, a tighter regulatory backdrop for banks means that they are unlikely to return to levels of profitability seen before the financial crisis, and many banks will struggle to generate returns above their cost of equity. Our preference remains for banks with high returns on equity and strong balance sheets, resulting in a bias towards the Nordic region and limited exposure to the Eurozone. The insurers that have maintained good pricing and high returns also tend to be restricted to the Nordics. The dividend yield of the sector remains attractive. Our exposure resides in multi-line insurance and mainly in Scandinavia.

We are less optimistic about the outlook for the Health Care sector. Valuations are attractive and recent mergers, acquisitions and asset swaps represent a substantial form of progress towards creating an industry with focused, high-return franchises. The sector’s strong balance sheets, robust cash flows, low earnings volatility and focus on capital returns are positives. However, we see short-term headwinds that are style-related, and in the longer term we believe that the costs of the

Regional Outlook – Europe | Dominic Wallington

sector create a natural headwind to earnings.

Our preference in the Industrials sector has been for companies exhibiting secure growth, and whose returns are high and stable or benefiting from operational momentum. Information Technology remains a preferred sector in Europe and we expect software companies to benefit from increased corporate spending in the coming years.

We remain unenthusiastic about prospects for the Materials sector. Mining companies have lost the growth valuations acquired during the earlier decade of rising commodity prices and now trade at levels more akin to dividend stocks (although we have seen these dividends start to be cut). We have some mining exposure, but our preference is for certain speciality-chemicals stocks and niche flavours and fragrance producers, where we see high barriers to entry and good growth and return profiles.

Over the past few years, Telecommunication Services has been one of Europe’s best-performing sectors, driven by an improvement in the traditional telecom operators and a more favourable regulatory backdrop. Capital expenditures are falling at some telecom companies, which means that free cash flow should ramp up quickly. However, weak underlying fundamentals more than offset the attractions of the sector’s valuation discount to the overall market and the highest dividend yields of any sector.


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is lower than the current market rate. As a result, we expect earnings estimates, and potentially capital expenditures, to be raised.

On the economic front, Japan is gradually improving with accommodative fiscal and monetary policies. Conversely, Japanese government-bond yields have risen in sympathy with the increase in U.S. Treasury yields, compounding

the challenge for policymakers who want to keep borrowing costs low in a bid to spur stubbornly low inflation. Against this backdrop, the Bank of Japan’s (BOJ) 2.0% inflation target remains well out of reach. In response, the Japanese central bank recently reviewed its monetary policy and has shifted to a policy of manipulating the yield curve by targeting yields on 10-year Japanese-government bonds at 0%. The goal

REGIONAL OUTLOOK – ASIA

Equity markets across Asia traded in a range earlier in the period, but weakened following Donald Trump’s victory in the U.S. presidential election. Trump’s pledge to cut taxes and increase infrastructure spending has pushed up bond yields as such measures would likely lead to higher inflation. Rising yields and related strength in the U.S. dollar historically have not been positive for Asian markets. Trump’s protectionist rhetoric during the campaign adds another potentially seriously negative dimension, given the large trade surpluses that many North Asian economies are running with the U.S. These factors have contributed to the weakness in Asian markets with the exception of Japan, where the weaker yen has helped equity markets in local currency terms since the election. Expectations of a rate hike by the U.S. Federal Reserve (Fed) in December and a sharp steepening of the U.S. 10-year yield curve has prompted investors to shift their portfolios into value and cyclical stocks across the region, in line with other global moves.

JapanEquity markets in Japan surged in the wake of Trump’s upset victory, as the yen reversed gains versus the U.S. dollar. Exporters had assumed that the U.S. dollar would trade at 107 yen in the second half of 2016, which

ASIA RECOMMENDED SECTOR WEIGHTS


November 2016

BENCHMARK MSCI PACIFIC

November 2016

Energy 2.5% 3.0%

Materials 5.0% 6.6%








Utilities 3.0% 2.9%


Source: RBC GAM

Mayur NallamalaHead & Senior Portfolio Manager RBC Investment Management (Asia) Limited

JAPAN DATASTREAM INDEX EQUILIBRIUMNormalized earnings and valuations


of this policy is to alleviate pressures generated by a flat yield curve and negative interest rates. On the fiscal front, we expect Prime Minister Shinzo Abe to make progress on a 28 trillion yen (250 billion U.S. dollars) stimulus package passed by the Japanese cabinet earlier this year. The stimulus project should provide much-needed infrastructure spending, as well as subsidies for child and elderly care.

Asia-Pacific ex-JapanIn the immediate term, risks from a Trump presidency emanate from expectations that inflation will accelerate and that U.S. interest-rate hikes will lead to a higher greenback. Emerging-market investments and currencies have been hit by the rotation into U.S.-dollar assets. Furthermore, threats by Trump to pass anti-trade measures and ‘rip up’ existing trade agreements would likely lead to higher inflation in the U.S. and lower inflation in export-oriented Asian economies such as China, South Korea and Taiwan. Moreover, Asian central banks are unlikely to hike interest rates in the near term given the potentially sluggish outlook for trade in the region, fostering further weakness in local currencies and possibly exacerbating flows out of the region. On the positive side, many Asian policymakers have sufficient fiscal ammunition to aggressively ramp up spending were growth to slow sharply in the coming months.

Regarding China, our concern remains whether President-elect

Regional Outlook – Asia | Mayur Nallamala

Trump will fulfill his pledge to declare China a currency manipulator on his first day in office and otherwise embark on a broader trade war. We view the imposition of wide-ranging U.S. tariffs on Chinese exports as a blow to China’s economy and one that is likely to cause reverberations across the region.

Chinese GDP growth is expected to grind lower in the coming year as government-infused infrastructure investments are more than offset by decelerating property construction and related investments. Fiscal spending will remain important in light of slower income growth and consumption growth that has largely been propped up by the recent run in property prices and the resultant wealth effect.

The launch of a program that facilitates equity trading between the Hong Kong and Shenzhen stock exchanges is scheduled to take place before the end of the year. The Shenzhen exchange, often referred to as “China’s NASDAQ,” is a technology-heavy clutch of companies that generally trade at much higher valuations than their Hong Kong-listed counterparts. We view the expanded trading link as a marginally positive development in the liberalization of the Chinese financial system because global investors will have direct access to Asia’s largest and third-largest equity markets. Most importantly, the venture opens a door in China’s regulatory wall restricting money from fleeing its borders. That said, we

question whether the new program, formally known as the Shenzhen-Hong Kong Stock Connect Program, would lift markets or lure significant foreign investments based on what we observed after the introduction of a similar agreement linking the Shanghai and Hong Kong stock exchanges two years ago. Today, north-south trading volumes remain a shadow of what they were during the euphoria before Chinese equity markets tumbled in mid-2015.

Recent developments have been somewhat momentous for India. In a bid to curtail the country’s huge shadow economy, Prime Minister Narendra Modi on November 8 announced the surprise elimination of larger-denomination currency notes that account for almost 90% of the total value of cash in circulation. India’s shadow economy is the major driver of inflation, which hurts the poor and deprives the government of tax revenue. Thus far, investors’ opinion on the move is divided and the people of India are also equally split. Inevitably, the current liquidity drain from the economy will be a drag to economic growth for at least a few quarters given the pervasiveness and importance of cash to the Indian economy. Equally important are the large challenges to implementing this unprecedented measure. While we support Modi’s motives, many investors are questioning whether the government is up to the task of smoothly transitioning to a new-money regime.


REGIONAL OUTLOOK – EMERGING MARKETS

money overseas. After a surprise renminbi devaluation in August 2015, China foreign-exchange reserves had several months of declines exceeding US$50 billion and estimated “hot-money” outflows exceeding US$100 billion. Since peaking in December with over US$150 billion in outflows, we have seen stabilization. In hindsight, given the latest data from the Bank of International Settlements, it is clear that the outflows were primarily driven by companies refinancing foreign-currency-denominated debt into renminbi and an unwind in carry-trade positions rather than domestic capital flight.

One much talked-about trend has been the stagnation of global trade over the past half-decade. A key positive for emerging-market economic growth is that the strong emerging-market currency underperformance now means that emerging-market competitiveness has increased significantly at a time

Emerging-market equities entered 2016 with five years of underperformance versus developed-market equities, as emerging-market economies and earnings growth slowed. This year started out with ‘risk-off’ market action driven by a collapse in the oil price and a depreciating Chinese currency. However, emerging-market equities have recovered since bottoming at the end of January. Through November 30, the total return for emerging-market equities was 11.3% compared with a 3.0% gain for developed-market equities. We note that the emerging-market gain had been 15% before Donald Trump’s election win on November 8.

One factor that turned supportive this year for emerging-market equities is that emerging-market currencies have held firm against the U.S. dollar after five years of depreciation. This improvement in the performance of emerging-market currencies is important for equity performance, which generally correlates strongly with currency moves. As of November 30, the J.P. Morgan Emerging Market Currency Index was about flat. The resilience we have seen this year is in response to lower aggregate emerging-market current-account deficits and attractive real effective exchange rates versus developed markets.

Emerging-market currencies have been among the best-performing globally this year, aside from the Japanese yen.

Given the improving fundamentals, emerging-market currencies still appear to be very cheap. Emerging-market currency valuations have improved significantly over the past five years based on both real effective exchange rates and purchasing power parity (PPP). Due to their historically low valuations, emerging-market currencies still have scope for further outperformance even if the U.S. dollar stays firm against developed-market currencies. Furthermore, the dramatic improvements in emerging-market current accounts, combined with high and increasingly positive real interest rates, support further flows.

A key concern this year has been a further devaluation in the Chinese renminbi, which is thought to be driven by depositors moving

EMERGING MARKET DATASTREAM INDEX EQUILIBRIUM Normalized earnings and valuations

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Richard Farrell, CFA Portfolio Manager RBC Global Asset Management (UK) Limited


when many exporters are moving up the value chain to counteract rising labour costs and overcapacity. Excluding China, emerging markets’ share of global exports has fallen over the past five years after peaking at about 14% in 2011, but competitiveness has increased significantly in the past two years as measured by trade-weighted PPP valuations. If we include China, the emerging-market share of global exports has actually increased in the past five years as China’s share increased to more than 14% from about 10%.

One reason why we are more positive is that many indicators of emerging-market economic momentum have begun to show improvement. Emerging-market equities tend to follow Purchasing Managers’ Index (PMI) orders more than developed markets and relative PMI orders have started rising again, and there is still good potential for further increases in PMI orders given past history. Industrial-production growth also looks positive on a relative basis. Looking even further ahead, the key factor that we believe supports continued expansion in emerging-market growth is the significant level of reforms that we are seeing throughout the emerging-market universe. Since the U.S. election, emerging-market equities have underperformed, as the prospect of higher U.S. rates gets priced in. However, history shows that any repricing due to a change in interest-rate expectations

is temporary and that a pickup in U.S. growth from Trump’s proposed infrastructure stimulus will benefit a number of key emerging-market economies over the medium term.

Emerging-market returns on equity have deteriorated over the past five years, primarily driven by falling profit margins. To this point, the 2015 average operating earnings was more than 6% below the 10-year average. After a long period of declines to 10.2% this past April from 15% in 2011, the average emerging-market return on equity recently stabilized at 10.5%.

Looking at the long term, it appears that returns on equity are at cyclical lows for emerging markets and we are increasingly confident that they could improve for two key reasons. First, wage inflation has fallen considerably since 2012. Second, productivity has started to improve. Profit margins over the long term tend to be cyclical and have been weak in this period due to overcapacity and strong wage growth. Trends toward lower capital expenditures and wage inflation, along with improving earnings, should now support returns on equity.

Earnings momentum has improved with economic momentum, and the expected improvement in margins can be seen in analysts’ earnings expectations. After six years of EPS downgrades ranging from 10% to 30%, downgrades so far this year are less than 5%. Furthermore,

the IBES consensus earnings forecast for the next 12 months has increased since the start of the year, suggesting that 2016 will mark a low in aggregate emerging-market earnings.

Valuations of emerging-market equities remain attractive even after this year’s rally. The current price-to-book ratio is now 1.58, up from 1.33 at the end of January. The historical average is 1.83. Emerging-market equity valuations are also supportive compared with developed-market equities, as the emerging-market price-to-book ratio sits at a 27% discount to developed markets. The divergence for the cyclically adjusted Shiller price-earnings ratio is even more pronounced at 9.7 for emerging markets versus 26.2 for developed markets. Absolute and relative valuations of emerging-market equities have been compelling in recent years, but may be even more compelling now that economic, earnings and price momentum appears to be turning positive.

In terms of sector positioning, the weights of the strategy have been stable since inception and reflect a bias for domestic growth, and therefore a preference for the consumer sectors. We are now paying closer attention to more cyclical areas based on valuation and expected policy support, as the focus shifts to fiscal measures from monetary policy, especially given Trump’s election victory.

Regional Outlook – Emerging Markets | Richard Farrell, CFA


Daniel E. Chornous, CFA

Chief Investment Officer RBC Global Asset Management

Chair, RBC GAM Investment Strategy Committee

Dan Chornous is Chief Investment Officer of RBC Global Asset Management Inc., which has total assets under management of $395 billion. Mr. Chornous is responsible for the overall direction of investment policy and fund management. In addition, he chairs the RBC Investment Strategy Committee, the group responsible for global asset-mix recommendations and global-fixed income and equity portfolio construction for use in RBC Wealth Management’s key client groups including retail mutual funds, International Wealth Management, RBC Dominion Securities Inc. and RBC Phillips, Hager & North Investment Counsel Inc. He also serves on the Board of Directors of the Canadian Coalition for Good Governance and is Chair of its Public Policy Committee. Prior to joining RBC Asset Management in November 2002, Mr. Chornous was Managing Director, Capital Markets Research and Chief Investment Strategist at RBC Capital Markets. In that role, he was responsible for developing the firm’s outlook for global and domestic economies and capital markets as well as managing the firm’s global economics, technical and quantitative research teams.

Stephen is a fixed-income portfolio manager and Head of the Quantitative Research Group, the internal team that develops quantitative research solutions for investment decision-making throughout the firm. He is also a member of the PH&N IM Asset Mix Committee. Stephen joined Phillips, Hager & North Investment Management in 2002. The first six years of his career were spent at an investment-counselling firm where he quickly rose to become a partner and fixed-income portfolio manager. He then took two years away from the industry to begin his Ph.D. in Finance and completed it over another three years while serving as a fixed-income portfolio manager for a mutual-fund company. Stephen became a CFA charterholder in 1994.

As Head of Global Fixed Income & Currencies at RBC Global Asset Management, Dagmara oversees 15 investment professionals in Toronto and London, with more than $40 billion in assets under management. In her duties as a portfolio manager, Dagmara looks after foreign-exchange hedging and active currency-management programs for fixed-income and equity funds, and co-manages several of the firm's bond portfolios. Dagmara chairs the RBC Fixed Income & Currencies Committee. She is also a member of the RBC GAM Investment Policy Committee, which determines the asset mix for RBC balanced products, and the RBC GAM Investment Strategy Committee, which establishes global strategy for the firm.

Members


Stu began his career with RBC Dominion Securities in the firm’s Generalist program and completed rotations in the Fixed Income, Equity Research, Corporate Finance and Private Client divisions. Following this program, he joined the RBC Investments Portfolio Advisory Group and was a member of the RBC DS Strategy and Stock Selection committees. He later joined RBC Global Asset Management as a senior portfolio manager and now manages the RBC Canadian Dividend Fund, RBC North American Value Fund and a number of other mandates. He is co-head of RBC Global Asset Management’s Canadian Equity Team.

Eric is the Chief Economist for RBC Global Asset Management Inc. (RBC GAM) and is responsible for maintaining the firm’s global economic forecast and generating macroeconomic research. He is also a member of the RBC GAM Investment Strategy Committee, the group responsible for the firm’s global asset-mix recommendations. Eric is a frequent media commentator and makes regular presentations both within and outside RBC GAM. Prior to joining RBC GAM in early 2011, Eric spent six years at a large Canadian securities firm, the last four as the Chief Economics and Rates Strategist. His previous experience includes positions as economist at a large Canadian bank and research economist for a federal government agency.

Dagmara Fijalkowski, MBA, CFA

Head, Global Fixed Income & Currencies (Toronto and London) RBC Global Asset Management

Eric Lascelles

Chief Economist RBC Global Asset Management

Stephen Burke, PhD, CFA

Vice President and Portfolio Manager RBC Global Asset Management

Stuart Kedwell, CFA

Senior Vice President and Senior Portfolio Manager RBC Global Asset Management


RBC Global Asset Management

Sarah Riopelle, CFA

Vice President and Senior Portfolio Manager RBC Global Asset Management

Martin Paleczny, who has been in the investment industry since 1994, began his career at Royal Bank Investment Management, where he developed an expertise in derivatives management and created a policy and process for the products. He also specializes in technical analysis and uses this background to implement derivatives and hedging strategies for equity, fixed-income, currency and commodity-related funds. Since becoming a portfolio manager, Martin has focused on global allocation strategies for the full range of assets, with an emphasis on using futures, forwards and options. He serves as advisor for technical analysis to the RBC GAM Investment Strategy Committee.

Since 2009, Sarah has managed the entire suite of RBC Portfolio Solutions, including the RBC Select Portfolios, RBC Select Choices Portfolios, RBC Target Education Funds and RBC Managed Payout Solutions. Sarah is a member of the RBC GAM Investment Strategy Committee, which sets global strategy for the firm, and the RBC GAM Investment Policy Committee, which is responsible for the investment strategy and tactical asset allocation for RBC Funds’ balanced products and portfolio solutions. In addition to her fund management role, she works closely with the firm’s Chief Investment Officer on a variety of projects, as well as co-manages the Global Equity Analyst team.

Martin Paleczny, CFA

Vice President and Senior Portfolio Manager RBC Global Asset Management

William E. (Bill) Tilford

Head, Quantitative Investments RBC Global Asset Management

Bill is Head, Quantitative Investments, at RBC Global Asset Management and is responsible for expanding the firm’s quantitative-investment capabilities. Prior to joining RBC GAM in 2011, Bill was Vice President and Head of Global Corporate Securities at a federal Crown corporation and a member of its investment committee. His responsibilities included security-selection programs in global equities and corporate debt that integrated fundamental and quantitative disciplines, as well as management of one of the world’s largest market neutral/overlay portfolios. Previously, Bill spent 12 years with a large Canadian asset manager, where he was the partner who helped build a quantitative-investment team that ran core, style-tilted and alternative Canadian / U.S. funds. Bill has been in the investment industry since 1986.

Ray Mawhinney

Senior Vice President and Senior Portfolio Manager RBC Global Asset Management

Hanif Mamdani is Head of both Corporate Bond Investments and Alternative Investments. He is responsible for the portfolio strategy and trading execution of all investment-grade and high-yield corporate bonds. Hanif is Lead Manager of the PH&N High Yield Bond Fund and the PH&N Absolute Return Fund (a multi-strategy hedge fund). He is also a member of the Asset Mix Committee.Prior to joining the firm in 1998, he spent 10 years in New York with two global investment banks working in a variety of roles in Corporate Finance, Capital Markets and Proprietary Trading. Hanif holds a master's degree from Harvard University and a bachelor's degree from the California Institute of Technology (Caltech).

Ray leads the U.S. Equity team in Toronto and brings a wealth of expertise to his role, having specialized in U.S. equities since 1984. He joined the firm in 1992 and is involved in managing several of the firm's U.S. equity funds. Ray is also a member of the RBC GAM Investment Policy Committee, which determines asset mix for balanced products, and the RBC GAM Investment Strategy Committee, which establishes a global asset mix covering mutual funds, as well as portfolios for institutions and high-net-worth private clients. Ray graduated from the University of Manitoba with a bachelor's of commerce degree in finance, with honours.

Hanif Mamdani

Head of Alternative Investments RBC Global Asset Management


RBC Global Asset Management

> Philippe Langham Senior Portfolio Manager,

Emerging Markets RBC Global Asset Management (UK) Limited

> Ray Mawhinney Senior V.P. & Senior Portfolio Manager,

U.S. & Global Equities RBC Global Asset Management Inc.

> Mayur Nallamala Head & Senior V.P., Asian Equities

RBC Investment Management (Asia) Limited

> Martin Paleczny, CFA V.P. & Senior Portfolio Manager,

Asset Allocation & Derivatives RBC Global Asset Management Inc.

> Dominic Wallington Head, European Equities &

Senior Portfolio Manager, RBC Global Asset Management (UK) Limited

> Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income & Currencies

(Toronto and London) RBC Global Asset Management Inc.

> Soo Boo Cheah, MBA, CFA Senior Portfolio Manager,

Global Fixed Income & Currencies RBC Global Asset Management (UK) Limited

> Suzanne Gaynor V.P. & Senior Portfolio Manager, Global

Fixed Income & Currencies RBC Global Asset Management Inc.

GLOBAL EQUITY ADVISORY COMMITTEE

> Eric Lascelles Chief Economist

RBC Global Asset Management Inc.

GLOBAL FIXED INCOME & CURRENCIES ADVISORY COMMITTEE

This report has been provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC Global Asset Management Inc. (RBC GAM Inc.). In Canada, this report is provided by RBC GAM Inc. (including Phillips, Hager & North Investment Management). In the United States, this report is provided to institutional investors by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe and the Middle East, this report is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by RBC Investment Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC GAM Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Alternative Asset Management Inc., the asset management division of RBC Investment Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.

This report has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the above-listed entities in their respective jurisdictions. Additional information about RBC GAM may be found at www.rbcgam.com.

This report is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. The investment process as described in this report may change over time. The characteristics set forth in this report are intended as a general illustration of some of the criteria considered in selecting securities for client portfolios. Not all investments in a client portfolio will meet such criteria. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Due to the possibility of human and mechanical error as well as other factors, including but not limited to technical or other inaccuracies or typographical errors or omissions, RBC GAM is not responsible for any errors or omissions contained herein. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.

Any investment and economic outlook information contained in this report has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions.

All opinions and estimates contained in this report constitute RBC GAM’s judgment as of December 15, 2016, are subject to change without notice and are provided in good faith but without legal responsibility. To the full extent permitted by law, neither RBC GAM nor any of its affiliates nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of the outlook information contained herein. Interest rates and market conditions are subject to change.

Return estimates are for illustrative purposes only and are not a prediction of returns. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods. It is not possible to invest directly in an unmanaged index.

A note on forward-looking statements This report may contain forward-looking statements about future performance, strategies or prospects, and possible future action. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “forecast,” “objective” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.

DISCLOSURE

®/TM Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2016.

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the global investment outlook...suzanne gaynor – v.p. & senior portfolio manager, rbc global...

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