Capital markets update. April 2017

Transcription

1 Capital markets update April 2017

2 Avg % change on previous year The economy Economic growth has improved in both developed and emerging market, with most countries managing some improvement in recent months. RBC GAM is encouraged by this improvement, but does not see it as a permanent escape from the slow growth environment. Growth forecasts are slightly upgraded, but assume some of this vigour will be shed in the second half of the year and into Weighted average consensus real GDP Growth estimates for major developed nations : 1.4% 2012: 1.2% 2013: 1.2% 2014: 1.6% 2015: 1.8% 2016: 1.6% 2017: 1.8% 2018: 1.8% Source: Consensus Economics As of Mar. 15, April 2017 Capital markets update

3 The economy The Purchasing Managers Index (PMI), a measure of manufacturing strength, was comfortably above 50 for both emerging and developed markets. The Eurozone PMI reached a five-and-a-half year high. 65 Global purchasing managers' indices 60 ISM Peak Feb 2011: Source: Haver Analytics, RBC GAM JPMorgan Global Mfg. PMI U.S. ISM Mfg. PMI China Mfg. PMI Euro Area Mfg. PMI As of Mar. 15, April 2017 Capital markets update

4 Policy rates Globally, many central banks are still focused on delivering prior quantitative-easing commitments. The one exception is the U.S. Federal Reserve which continues to press forward with its plan to nudge the fed funds rate higher. Current: Mar Forecast: Feb U.S 1.00% 1.38% Canada 0.50% 0.50% Europe -0.40% -0.40% United Kingdom 0.25% 0.25% Japan 0.00% -0.10% Rate definitions: U.S.= Fed Funds rate; Canada= Overnight rate; Europe = Eurozone policy rate; United Kingdom= Base rate; Japan= Overnight call rate. 4 April 2017 Capital markets update

5 % % Fixed income The yield on U.S. 10-year Treasuries peaked at 2.65% in December and has been trading in a narrow range since then. Bond yields followed a similar pattern in other major regions, but to a lesser extent U.S. 10-year T-Bond yield Equilibrium range Last Plot: 2.40% Current Range: 1.74% % (Mid: 2.63%) Feb. '18 Range: 2.54% % (Mid: 3.43%) Feb. '22 Range: 3.75% % (Mid: 4.64%) Canada 10-year bond yield Equilibrium range Last Plot: 1.63% Current Range: 1.52% % (Mid: 2.29%) , RBC CM As of Mar. 15, 2017, RBC CM 5 April 2017 Capital markets update

6 Fixed income The financial crisis has depressed real rates of interest to levels that are not likely to persist. The combination of both a bit more inflation and a higher real rate of interest would act as a headwind to fixed-income returns in general and pose a risk to sovereign-bond investors, in particular. Long-term interest rate forecasts March 31, 2017 Forecast: Feb U.S. 10-Year Bond 2.39% 2.50% Canada 10-Year Bond 1.62% 1.75% Germany 10-Year Bond 0.33% 0.75% United Kingdom Gilt 1.14% 1.50% Japan 10-Year Bond 0.07% 0.10% 6 April 2017 Capital markets update

7 Equity markets Currently the valuation of the S&P/TSX is moderately lower than that of the S&P 500. This seems justified given the energy-price forecast and the outsized contribution of financial-company earnings to the overall profit pool. Our own RBC GAM multi-factor model, which incorporates current levels of inflation, interest rates and corporate profitability, suggests U.S. stocks are actually a bit below fair value. However, we do recognize that stocks are not as cheap as they were, so a continued improvement in earnings is needed to fuel further equity gains S&P 500 equilibrium Normalized earnings & valuations Feb. '17 Range: (Mid: 2529) Feb. '18 Range: (Mid: 2756) Current (28-February-17): S&P/TSX Composite equilibrium Normalized earnings & valuations Feb. '17 Range: (Mid: 19314) Feb. '18 Range: (Mid: 19125) Current (28-February-17): Data as of March 15, The fair value calculation is the product of the equilibrium price/earnings ratio and the current estimate for normalized earnings. The resulting price level is then standardized by a factor representing the historic relationship of the actual market to its equilibrium level. This generates the fair value estimate or mid-point of the band. The bands boundaries capture one standard deviation of movement above and below this value. Fair value is the minimum price level consistent with mild inflation/low interest rates in a growing economy. Above-average price appreciation remains a possibility in an environment where normalcy is restored. Moreover, opportunity exists as valuations in some big markets still lie below their minimum expected levels. Corrections are always a possibility and valuations will not limit the risk of damage from systemic shocks, but the outlook for equity market returns is generally superior when stocks lie below fair value at the bands midpoint. 7 April 2017 Capital markets update

8 Equity markets Surprisingly strong economic data, surging consumer and business confidence, and better-than-expected earnings have propelled stocks higher. Although stocks have enjoyed a solid rally, we don t think that valuations are as stretched as some investors believe. Equity market forecasts Current: March 31, 2017 Forecast: Feb S&P 500 Index S&P/TSX Composite Index MSCI Europe Index FTSE 100 Index Nikkei Index MSCI Emerging Markets Index April 2017 Capital markets update

9 Asset mix RBC GAM models continue to suggest that equities will outperform fixed income through the forecast horizon as well as over the longer term. Our models continue to suggest that equities will outperform fixed income through the forecast horizon as well as over the longer term. Our recommended asset mix for a global, balanced investor is 60% equities (strategic neutral : 55%), 38% bonds (strategic neutral: 43%) and 2% in cash. Global Asset Mix Benchmark Past Range Summer 2016 Fall 2016 New Year 2017 Spring 2017 Cash 2.0% 1%-16% 3.0% 3.0% 1.0% 2.0% Bonds 43.0% 25%-54% 37.0% 37.0% 38.0% 38.0% Equities 55.0% 36%-65% 60.0% 60.0% 61.0% 60.0% Asset mix as of March 15, April 2017 Capital markets update

10 Disclosure This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It 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. 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. This report may contain forward-looking statements. 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, both about the Fund and 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 in relation to the Fund. 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. / Trademark(s) of Royal Bank of Canada. Used under licence. RBC Global Asset Management Inc April 2017 Capital markets update