Global Investment Outlook

7/25/2019 Global Investment Outlook

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NEW YEAR 2016

THE GLOBALINVESTMENTOUTLOOKRBC Investment Strategy Committee



The RBC 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

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

as the expected course of interest rates, major

From this global forecast, the RBC Investment

that can be used to manage portfolios.

These include:

instruments, and equities

income and equity portfolios

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 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 RBC Global Asset Management Inc.

ECONOMIC & CAPITAL MARKETS FORECASTS 4RBC Investment Strategy Committee

RECOMMENDED ASSET MIX 5RBC Investment Strategy Committee

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

GLOBAL INVESTMENT OUTLOOK 13Girding for rate hikes and geopolitical risks

Eric 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 RBC Global Asset Management Inc.

GLOBAL FIXED INCOME MARKETS 46Soo 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 52Dagmara Fijalkowski, MBA, CFA – Head, Global Fixed Incomeand Currencies (Toronto and London),

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

WHY THIS TIME IS DIFFERENT 61Taylor Self, MBA – Analyst,Global Fixed Income and Currencies,RBC Global Asset Management Inc.

REGIONAL EQUITY MARKET OUTLOOK

United States 64Raymond 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 66Stuart Kedwell, CFA – Senior V.P. & Senior Portfolio Manager,RBC Global Asset Management Inc.

Europe 68David Lambert – Senior Portfolio Manager,RBC Global Asset Management (UK) Limited

Asia 70Mayur Nallamala – Head & Senior Portfolio Manager,RBC Investment Management (Asia) Limited

Emerging Markets 72 Veronique Erb – Portfolio Manager,RBC Global Asset Management (UK) Limited

RBC INVESTMENT STRATEGY COMMITTEE 74

THE GLOBAL INVESTMENT OUTLOOK New Year 2016 I 1



creating a challenging environment

for investors. The geopolitical

environment has been fraught

quite some time, and this is only

increasing. The most salient recent

developments relate to ISIS, but there

are also long-term trends brewing

with regard to the polarization of

developed-world politics, Russia’sincreased aggression and China’s

growing global clout. Although

recently stabilized and it continues

to defy hard-landing fears. We would

the prospect of tighter U.S. monetary

policy to the list of headwinds that we

are monitoring closely.

Minor revisions to our

economic forecasts

Global economic growth has

unquestionably slowed over the

past year, with some concerned that

the process is accelerating into a

more severe correction. We fail to

the recent downward trend in the

U.S. ISM Index, the latest batch of

leading indicators has tentatively

pushed higher and global industrial

production remains fairly normal-

higher in the leading indicators

proves prescient, current levels

remain inconsistent with a global

recession. We have made only minor

quarter, nudging them slightly lower

Economic data remains

uninspiring in most regions,

although the threat ofrecession seems modest.

While we continue to expect

moderate economic growth,

we recognize that warning

signs are more and more

evident and that it is prudent

to raise the alert status. The

downward trend for the U.S.

ISM Index, sluggish corporate

based indicators, including a

sustained widening of high-

yield-bond spreads, sensitizes

us to the possibility that

the business cycle may be

maturing. Sovereign-bond

yields have traded in a fairly

tight range over the last quarter

still mostly below the levels of

last summer, they have been

of the year. We expect the

heightened level of volatility

to persist over the coming

quarters.

Sarah Riopelle, CFA

Vice President & Senior Portfolio Manager

RBC Global Asset Management Inc.

Daniel E. Chornous, CFA


2 I T HE GLOBAL INVESTMENT OUTLOOK New Year 2016

EXECUTIVE SUMMARY

U.S. dollar bull marketmaturing

Many investors expect continued

dollar strength, and they may be

correct given that previous dollar

incredible dollar strength. The

prospect of policy normalizationby the U.S. Federal Reserve (Fed),

coupled with expansionary monetary

policies elsewhere, means that

run. However, with the U.S. dollar

no longer deeply undervalued and

the prospect of volatility rising, our

four major currencies we expect most

and the Canadian dollar, leaving thepound little changed in our forecasts.

move higher

of the commodity supercycle has

effect over the past few years.

However, we believe the downward

abate as resource prices have largely

completed their swoon and there

is the potential for modest gains

in some commodities in the years

ahead. We continue to believe that

threat remains limited. We can

low today, and those pressures are

inherently temporary. Altogether, we




supportive of higher equity prices

going forward. With higher valuation

in 2016 and 2017, but given that

earnings estimates have been coming

down for most of this year, this bears

watching.

A little less underweight bondsAs the Fed begins a new tightening

cycle, we expect bond yields to rise,

albeit at a gradual pace. That said,

even a modest rise in yields from the

pressure on bond returns. However,

bonds offer stability through periods

of higher volatility and, as yields rise,

we expect to increase our exposure

following positive U.S. employment

data and added one percentage

sourced from cash.

Our models continue to indicate

bonds so we remain overweight

this volatile investing environment.

Should our stress indicators worsen,

it may be prudent to begin scaling

in the months and quarters ahead.

For a balanced, global investor, we

recommend an asset mix of 62%

equities (strategic neutral position:

(strategic neutral position: 43%), with

the balance in cash.

bond yields higher over the comingquarters. However, there are a

number of factors that may discourage

to be patient, subtle and transparent

as it sets itself on the long path

to restoring “normal” monetary

conditions. In addition, relatively low

yields elsewhere in the world have

made U.S. Treasury bonds attractive

to global investors and the demand

for Treasuries should limit how far

yields can rise in the near term.

to outlook

volatility so far in 2015 driven by the

sideways or down through 2015

as valuations have moderated and

earnings estimates have experienced

constant negative revisions since the

end of 2014.

over the last few months has

bolstered the long-term return

fair value in the spring of 2015,

for periods of sustained growth,

Valuations are considerably more

attractive in Europe and other global

However, as expanding valuations

2016, but not all the way to a normallevel, and we suspect that the revival

will be a tad more gradual than the

Divergent monetary policies

The theme of diverging monetary

pronounced in the coming quarters.

entertaining the delivery of more

stimulus, the rationale generally

developed world and decelerating

other monetary policy extreme, the

Fed – is set to begin raising rates. We

the economy on its optimal growth

are priced for this outcome, and the

Fed has emphasized its desire toproceed with extreme caution, this

should not be overly problematic.

Forecasting a modest increase

in bond yields

Interest rates remain low and have

proven adept at defying widespread

forecasts over the past several years

that they would rise. There is a

especially given the downward

pressure that comes from ultra-

In the U.S., some of these conditions

seem more vulnerable to reversal

than they have been for some time.

new tightening cycle, rising short-

term interest rates should nudge



TARGETS (RBC INVESTMENT STRATEGY COMMITTEE)

NOVEMBER 2015FORECAST

NOVEMBER 2016CHANGE FROM

FALL 20151-YEAR TOTAL RETURN

ESTIMATE (%)

CURRENCY MARKETS AGAINST USD

1.34 1.40 N/C

1.06 1.00 N/C (6.0)

133.00 N/C

1.51 1.51 N/C 0.3

FIXED INCOME MARKETS

U.S. Fed Funds Rate 0.25 1.00 N/C N/A

U.S. 10-Year Bond 2.22 2.50 (0.25) (0.2)

Canada Overnight Rate 0.50 0.50 N/C N/A

Canada 10-Year Bond 1.57 1.75 N/C (0.1)

Eurozone Policy Rate 0.05 -0.10 (0.15) N/A

Germany 10-Year Bund 0.47 0.50 (0.50) 0.2

U.K. Base Rate 0.50 1.00 (0.25) N/A

U.K. 10-Year Gilt 2.40 (0.35) (3.3)

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

Japan 10-Year Bond 0.31 0.50 (0.10) (1.6)

EQUITY MARKETS

S&P 500 2275 50 11.4

S&P/TSX Composite 13470 14500 (1000)

MSCI Europe 1564 1750 (150) 15.2

FTSE 100 6356 N/C 11.0

22000 N/C 13.0

N/C 13.6

Source: RBC GAM

ECONOMIC & CAPITAL MARKETS FORECASTS

ECONOMIC FORECAST (RBC INVESTMENT STRATEGY COMMITTEE)

UNITEDSTATES CANADA EUROPE

UNITEDKINGDOM JAPAN CHINA

EMERGINGMARKETS1

New Year2016

Changefrom

Fall 2015New Year

2016

Changefrom

Fall 2015New Year

2016

Changefrom

Fall 2015New Year

2016

Changefrom

Fall 2015New Year

2016

Changefrom

Fall 2015New Year

2016

Changefrom

Fall 2015New Year

2016

Changefrom

Fall 2015

REAL GDP

2014A 2.42% 2.40% 2.56% 0.00% 7.41% 5.50%

2015E 2.50% 0.25 1.00% N/C 1.50% N/C 2.50% N/C 0.75% N/C 6.75% N/C 4.75% N/C

2016E 2.50% N/C 1.50% (0.25) 2.00% (0.25) 2.50% N/C 1.50% (0.25) 6.00% N/C 5.00% (0.25)

CPI

2014A 1.61% 0.43% 1.47% 2.75% 2.00% 4.15%

2015E 0.00% N/C 1.00% 0.25 0.00% N/C 0.00% N/C 0.50% N/C 1.50% N/C 4.00% N/C

2015E 1.50% (0.25) 1.75% (0.25) 1.00% N/C 1.50% (0.25) 1.50% N/C 2.25% N/C 3.75% N/C

A = Actual E = Estimate 1




bonds and cash – should include both strategic and

tactical elements. Strategic asset mix addresses the blend

portfolio through many business and investment cycles,

independent of a near-term view of the prospects for the

Every individual has differing return expectations and

strategic asset mix. Based on a 35-year study of historical

returns and the volatility of returns (the range around

the average return within which shorter-term results

aggressive growth. It goes without saying that as investors

accept increasing levels of volatility, and therefore greater

presented below may assist investors in selecting a

strategic asset mix best aligned to their investment goals.

Each quarter, the RBC Investment Strategy Committee

publishes a recommended asset mix based on our current

view of the economy and return expectations for the

major asset classes. These weights are further divided

into recommended exposures to the variety of global

3 2

RECOMMENDED ASSET MIX

asset classes with a goal of tilting portfolios toward

term prospects.

serve as a guide for movement within the ranges allowed

way toward its upper limit of 70% for equities), that would

imply a tactical shift of + 5.02% to 25.02% for the Very

allowed range of +/- 15%).

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

investors.

Anchoring portfolios with a suitable strategic asset mix,

tactical positioning, imposes discipline that can limit

damage caused by swings in emotion that inevitably


1. Average return:

2. Volatility: The standard deviation of returns. Standard deviation is a statistical measure that indicates the range around the averagereturn 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 Investment Strategy Committee

GLOBAL ASSET MIX

BENCHMARK

POLICY

PASTRANGE

NEW YEAR2015

SPRING2015

SUMMER2015

FALL2015

NEW YEAR

2016

CASH 2.0% 1% – 16% 1.0% 1.0% 2.0% 2.0% 1.0%

BONDS 43.0% 25% – 54% 36.0% 37.0%

STOCKS 55.0% 36% – 65% 61.0% 61.0% 60.0% 62.0% 62.0%

N is anticipated.

REGIONAL ALLOCATION

GLOBAL BONDSCWGBI*

NOV. 2015

PASTRANGE

NEW YEAR2015

SPRING2015

SUMMER2015

FALL2015

NEW YEAR

2016

North America 37.7% – 40% 36.4% 37.5% 37.7%

Europe 40.3% 32% – 56% 40.5% 40.7% 40.7% 45.3%

Asia 22.0% 17% – 35% 21.4% 23.1% 22.4% 17.0%

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

GLOBAL EQUITIESMSCI**

NOV. 2015PAST

RANGENEW YEAR

2015SPRING

2015SUMMER

2015FALL2015

NEW YEAR

2016

North America 60.3% 51%– 61% 60.5% 58.0%

Europe 21.5% 21% – 35% 22.4% 23.5%Asia 11.0% – 11.3% 10.5% 11.5% 11.4% 11.0%

Emerging 7.3% 0% – 7.5% 7.5% 7.5% 7.5% 7.5%

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 InvestmentOutlook.

GLOBAL EQUITY SECTOR ALLOCATION

MSCI**

NOV. 2015

RBC ISCFALL 2015

RBC ISC

NEW YEAR 2016

CHANGE FROMFALL 2015

WEIGHT VS.BENCHMARK

Energy 0.31

Materials 4.56% 3.77% 3.56% (0.21)

Industrials 10.66% 12.16% 2.50 114.1%

13.36% 15.10% 14.36% (0.74) 107.5%

Consumer Staples 10.30%

Health Care 13.12% 14.12% 107.6%

Financials 20.65% 21.15% 20.15% (1.00)

Information Technology 15.05% 1.14 114.1%

Telecom. Services 3.36% 3.42% 2.66% (0.76)

Utilities 3.12% 1.10% 1.62% 0.52 51.9%


Recommended Asset Mix




VERY CONSERVATIVE Very Conservative investors will

preservation and the potential for modest

capital growth, and be comfortable with

investments. This portfolio will invest

a small amount of equities, to generate

income while providing some protection

investment for the short to medium term

(minimum

ASSET CLASSBENCH-MARK RANGE

LASTQUARTER

CURRENT

RECOMMENDATION

Cash & Cash Equivalents 2% 0-15% 2.0% 1.2%

Fixed Income 72.3% 73.1%

Total Cash & Fixed Income 74.3% 74.3%

Canadian Equities 10% 5-20% 11.6% 11.5%

U.S. Equities 5% 0-10% 6.6%

International Equities 5% 0-10% 7.5%

0% 0% 0.0% 0.0%

Total Equities 20% 5-35% 25.7% 25.7%

RETURN VOLATILITY

35-Year Average

Last 12 Months 3.4%

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

Balanced to Aggressive Growth.

“

”





LASTQUARTER

CURRENT

RECOMMENDATION


Fixed Income 43% 20-60% 36.0% 37.0%

Total Cash & F ixed Income 45% 30-60%

Canadian Equities 10-30% 20.7%

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

International Equities 12% 5-25% 14.7% 15.5%

4% 0-10% 4.7% 4.7%

Total Equities 55% 40-70% 62.0% 62.0%

BALANCEDThe Balanced portfolio is appropriate

long-term capital growth and capital

preservation, with a secondary focus on

modest income, and who are comfortable

of their investments. More than half the

portfolio will usually be invested in a

for investors who plan to hold their

investment for the medium to long term

RETURN VOLATILITY

35-Year Average

Last 12 Months 5.5%


LASTQUARTER

CURRENT

RECOMMENDATION


Fixed Income 63% 56.7% 57.5%

Total Cash & Fixed Income 65%

Canadian Equities 15% 5-25% 16.7%

U.S. Equities 10% 0-15% 11.1%

International Equities 10% 0-15% 12.7% 13.6%

0% 0% 0.0% 0.0%

Total Equities 35% 20-50% 41.3% 41.4%

CONSERVATIVEConservative investors will pursue

modest income and capital growth with

reasonable capital preservation, and be

in the value of their investments. The

income securities, with some equities, to

achieve more consistent performance andprovide a reasonable amount of safety.

plan to hold their investment over the

seven years).

RETURN VOLATILITY

35-Year Average 7.1%

Last 12 Months 4.3% 6.7%

New Year 2016





LASTQUARTER

CURRENT

RECOMMENDATION


Fixed Income 5-40% 20.3% 21.4%

Total Cash & F ixed Income 30% 15-45% 22.3% 22.4%

Canadian Equities 23% 15-35% 25.0%

U.S. Equities 25% 15-35% 27.0% 26.3%

International Equities 16% 10-30%

6% 0-12%

Total Equities 70% 77.7% 77.6%

GROWTHInvestors Growth

preservation and regular income, and

be comfortable with considerable

investments. This portfolio primarily

and global equities and is suitable forinvestors who plan to invest for the long

term (minimum seven to

ten years).RETURN VOLATILITY


Last 12 Months 6.3%


LASTQUARTER

CURRENT

RECOMMENDATION


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

Total Cash & Fixed Income 2% 0-20% 1.0% 1.0%

Canadian Equities 32.5% 20-45% 32.4% 32.4%

U.S. Equities 35.0% 20-50% 35.1% 34.3%

International Equities 21.5% 10-35% 22.5% 23.3%

0-15%

Total Equities

AGGRESSIVE GROWTH

RETURN VOLATILITY


Last 12 Months 7.4%

Aggressive Growth

maximum long-term growth over capital

preservation and regular income, and are

in the value of their investments. The

portfolio is almost entirely invested in

is suitable only for investors with a high

investments for the long term (minimum

seven to ten years).

THE GLOBAL INVESTMENT OUTLOOK N ew Year 2016




The U.S. dollar rose against all major

currencies between September

1, 2015, and November 30, 2015.

pound, and 1.5% against both

the yen and the Canadian dollar.Over the 12-month period ended

November 30, 2015, the U.S. dollar

sterling and 3.7% versus the yen.

modestly in the U.S. during the

three-month period, but currency

depreciation contributed to bond

losses elsewhere. The Barclays

Capital Aggregate Bond Index,

income performance, climbed 0.4%.

European bonds fell 3.0% in U.S.

dollar terms as measured by the

Citigroup WGBI – Europe Index.

The FTSE TMX Canada Universe

Milos Vukovic, MBA, CFA

Vice President & Head of Investment Policy


10 I TH E GLOBAL INVESTMENT OUTLOOK New Year 2016

CAPITAL MARKETS PERFORMANCE

Japanese bonds, as measured bythe Citigroup Japanese Government

Bond Index, decreased 0.7%.

during the latest three-month period,

amid further drops in commodity

prices. The S&P 500 climbed 6.1%,

followed by a 1.6% rise for the MSCI

Japan and a 0.3% gain for the MSCI

Europe. Within Europe, the MSCI

gained 0.2%. Over the 12-month

and the MSCI Japan gained 7.7%.

However, the MSCI U.K. lost 6.4%,

followed by a 3.7% drop in the MSCI

France. The S&P/TSX Composite

Index lost 3.5% in U.S. dollar terms

during the three months, versus the

3.6% drop for the large-cap S&P/TSX60 Index and a 5.7% decline in the

S&P/TSX Small Cap Index. The MSCI

during the three-month period and

dropped 17.0% over the 12-month

period.

The S&P 400 Index, a measure of

in the latest three months and rose

the S&P 600 Index, a gauge of small-

cap performance, gained 5.1% in the

the 12 months. The Russell 3000

quarter versus a 4.7% increase for

the Russell 3000 Value Index. Over

the 12 months, the Russell 3000

Growth Index rose 6.1%, while the

Russell 3000 Value Index lost 1.0%.

Seven of the 10 global equity sectors

climbed during the quarter ended

November 30, 2015. The best-

performing sector was Information

followed by Consumer Staples

with a rise of 5.4%, and Consumer

The worst-performing sectors over

the past three months were Health

Care, which lost 1.1%; Materials,

which lost 0.6%; and Utilities, with

period, the best-performing sectors

Information Technology and

Consumer Staples, and the worst-

performing were Energy, Materials

and Utilities.



CANADA

Periods ending November 30, 2015

USD CAD

Equity Markets: Total Return3 months

(%) (%)

1 year(%)

3 years(%)

5 years(%)

3 months(%)

1 year(%)

3 years(%)

S&P/TSX Composite (3.47) (17.72) (3.60) (1.55) (2.02) 6.40

S&P/TSX 60 (3.55) (1.01) (2.10) (5.43) 7.26

S&P/TSX Small Cap (5.72) (11.01) (4.30) (12.22)

U.S.


USD CAD


(%) (%)

1 year(%)

3 years(%)

5 years(%)

3 months(%)

1 year(%)

3 years(%)

S&P 500 6.07 3.01 2.75 14.40 7.67

S&P 400 3.62 13.05 20.15 27.14

S&P 600 5.13 16.70 14.25 6.71 23.63

Russell 3000 Value 4.71 (1.77) (1.01) 14.51 13.23 15.57

Russell 3000 Growth 6.14 17.37 7.53

N Index 6.62 24.47 31.65

EXCHANGE RATES


Current 3 months(%) (%) 1 year(%) 3 years(%) 5 years(%)

1.3355 1.51 16.75 10.37 5.41

6.21 14.53 17.77 7.17 4.21

0.6640 0.65

USD–JPY 123.1000 1.54 2.77 3.73

Source: Bloomberg/MSCI

CANADA


USD CAD

Fixed Income Markets: Total Return3 months

(%) (%)

1 year(%)

3 years(%)

5 years(%)

3 months(%)

1 year(%)

3 years(%)

FTSE TMX Canada Univ. Bond Index (6.51) (0.77) (0.43)

U.S.


USD CAD

Fixed Income Markets: Total Return3 months

(%) (%)

1 year(%)

3 years(%)

5 years(%)

3 months(%)

1 year(%)

3 years(%)

Citigroup U.S. Government 1.13 2.52 1.60 11.36

Barclays Capital Agg. Bond Index 0.43 1.50 12.03

GLOBAL


USD CAD

Fixed Income Markets: Total Retur n3 months

(%) (%)

1 year(%)

3 years(%)

5 years(%)

3 months(%)

1 year(%)

3 years(%)

Citigroup WGBI (1.15) (4.46) (1.75) 1.12 0.34 11.54 Citigroup European Government (3.03) (10.32) (0.70) (1.56) 4.70

Citigroup Japanese Government (0.73) (2.21) (10.42) 0.77 (1.13)

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


USD CAD


(%) (%)

1 year(%)

3 years(%)

5 years(%)

3 months(%)

1 year(%)

3 years(%)

MSCI World* 3.43 (0.72) 3.52 22.36

MSCI EAFE* 0.75 0.54 6.60 5.52 13.35 17.54

MSCI Europe* (4.57) 6.40 6.12 0.37 11.45 17.32

MSCI 1.74 2.02 0.15 4.51

MSCI UK* 0.17 5.77 0.25 14.55

MSCI France* 3.34 5.21 14.61 17.76

MSCI Germany* (3.67) 6.37 12.50

MSCI Japan* 7.65 1.67 25.72 23.45

MSCI Emerging M (0.14) (4.55) (3.05) (0.06) (3.05) 5.24

Source: Bloomberg/MSCI

GLOBAL EQUITY SECTORS Periods ending November 30, 2015

USD CAD

Sector: Total Return3 months

(%) (%)

1 year(%)

3 years(%)

5 years(%)

3 months(%)

1 year(%)

3 years(%)

Energy 1.70 (14.62) (15.51) (3.50) 0.02 (1.33) 6.40

Materials (0.62) (11.66) (13.55) (3.26) (0.53) 6.67

Industrials 5.23 0 .50 (0.67) 11.25 5.33 16.00 22.67

Consumer 5.34 7.44 14.15 5.43

Consumer Staples 5.40 5.36 3.07 10.62 12.15 20.37

Health Care (1.13) 5.00 2.34 (1.04) 31.50

F inancials (1.63) (3.03) 10.50 13.25

Information Technology 7.22 5.55 17.21 13.41 23.27

T elecommunication Services 0.07 0.16

Utilities (0.06) 6.56 4.26 0.03 7.40 17.50

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




Girding for rate hikes and geopolitical risks

The world remains enmeshed in a

challenging environment of sluggish

(Exhibit 1).

continue to deliver growth below

their historical norms, and a bit

worse than a quarter ago

(Exhibit 2). Fortunately, no outright

collapse is evident, and there iseven a tentative signal of growth

bottoming out among emerging

economies. Meanwhile, although

recently stabilized and it continues

to defy hard-landing fears.

higher in the future as commodity

prices cease to fall and developed-

a particular emphasis on debt

China (Exhibit 3). The prospect

of tighter U.S. monetary policy

is assigned a high relevance by

events are also becoming more

GLOBAL INVESTMENT OUTLOOK


Exhibit 1: A tricky investing environment

1 2 3

Sluggishgrowth

Substantialrisks

Marketdispleasure

Exhibit 2: Unusually slow growth in most countries

0

5

10

15

20

25

<=10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 >90

F r a c t i o n o f c o u n t r i e s i n t h e

d e c i l e ( % )

Growth decile

Note: Q2 2015 year-over-year real GDP growth of a country relative to its historical growthfrom 2001 to 2014. A sample of 55 countries used. Source: Havre Analytics, RBC GAM

Over 70% of countries aregrowing at below historically

normal rates

Eric Lascelles

Chief Economist


Eric Savoie, MBA, CFASenior Analyst, Investment StrategyRBC Global Asset Management Inc.



Exhibit 3: Substantial downside risks

Debt hot spots

EM slowdownResource shock

Deflation

China

Middle-East turmoil

Hawkish Asian militaries

EU politics

Russia (Ukraine, Oil, Syria)

Humanitarian crisis

Source: RBC GAM

Source: RBC GAM




Exhibit 4: Financial-market hit has faded

-40

-30

-20

-10

0

10

20

30

40

-40

-30

-20

-10

0

10

20

30

40

Commodities TSX S&P500

EMcurrencies

U.S.10yr yield

IG creditspread

Y i e l d / s p r e a d c h a n g e

( b a s i s p o i n t s )

P r i c e c h a n g e ( % )

Latest ExtremeNote: Percentage change of S&P Goldman Sachs Commodity Index, TSX, S&P 500 andJP Morgan EM Currency Index since 6/30/2015. Basis point change of U.S. 10-year yield andinvestment-grade credit spread since 6/30/2015. Source: Haver Analytics, RBC GAM

Exhibit 5: High-yield credit spreads send cautious signal

0

400

800

1200

1600

2000

2006 2009 2012 2015

C r e d i t s p r e a

d ( b a s i s p o i n t s )

Note: Credit spread is spread to worst over government. Source: Haver Analytics, RBC GAM

Spreads have gone upnearly 200 bps since

May 2015

consequential given the broadeningof the war with ISIS, European

political complexities and China’s

expanding military might.

below the levels of last summer,

but have nevertheless staged a

months of the year (Exhibit 4).

With the possibility of stabilizing

economic growth in much ofthe world and the U.S. Federal

Reserve (Fed) on the cusp of

raising rates, it seems logical that

bond yields will start transitioning

continues to emit a more cautious

message (Exhibit 5). The business

cycle is also growing longer in the

tooth, and the way forward may be

less uniformly sunny for investors.

Slower, but no collapse

Global economic growth has

unquestionably slowed over the past

year, with some pundits concerned

that the process is accelerating into

a more severe correction. We fail to

From a breadth perspective, only

slightly more than half of national

leading indicators are trending lower(Exhibit 6). More serious downturns,

tended to be associated with a far

more broad-based decline.

interpretation, the one-year

a relatively even split between

Exhibit 6: Economic deceleration is not unprecedented

0

10

20

30

40

50

60

70

8090

100

2001 2003 2005 2007 2009 2011 2013 2015

C o u n t r i e s w i t h r i s i n g P M I ( %

)

Note: Number of countries with positive 3-month change in Manufacturing PMI as percentageof total number of countries included in the sample. Source: Haver Analytics, RBC GAM

M o r e c o u n t r i e s

w i t h f a l l i n g P M I

M o r e c o u n t r i e s

w i t h r i s i n g P M

I




Exhibit 7: Some consensus forecasts fall, but others rise

-2.9-1.0

-0.6-0.5-0.5-0.5

-0.4-0.3-0.3

-0.2-0.2

-0.1-0.10.0

0.00.1

0.10.20.20.2

0.30.40.4

0.81.3

1.9

-4.0 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

GreeceBrazil

Indonesia Australia

South AfricaTurkeyMexico

ChinaU.S.

CanadaU.K.India

GermanyJapan

PortugalEurozone

FinlandSwedenFrance Austria

SpainNetherlands

ItalyIrelandCyprusRussia

Change in consensus GDP forecast over past six months (ppt)

Note: Change in rolling 1-year out consensus GDP forecast (percentage points) from April 2015 toOctober 2015. Source: Consensus Forecasts, RBC GAM

Exhibit 8: Global industrial production holding together ok

-20

-15-10

-5

0

5

10

15

2007 2008 2009 2010 2011 2012 2013 2014 2015

I n d u

s t r i a l p r o d u c t i o n

( Y

o Y % c

h a n g e )

Global Emerging markets Developed markets

Note: Country weights based on country PPP share of world total. Countries include Canada,France, Germany, Italy, Japan, Netherlands, Spain, U.K., U.S., Brazil, China, India, Indonesia,Korea, Mexico, Poland, Russia, Turkey. Source: Haver Analytics, RBC GAM

countries for which forecasts arebeing upgraded versus those that

are being downgraded (Exhibit 7).

the global economy is not truly

crumbling.

calculate that global industrial-

production growth remains fairly

global trade is not actually in freefall

Finally, the latest batch of leading

indicators has tentatively pushed

is necessary to ensure that the

turn is real, but the uniformity

of the October increase in the

global manufacturing and service

indicators, and in both emerging-

leaves ample room for optimism(Exhibit 10). Whether this initial

step higher proves prescient or not,

current levels remain inconsistent

with a global recession.

Forecast update

our growth forecasts this quarter,

nudging them slightly lower in

combined with the tailwinds from

low commodity prices, low interest

rates and currencies that are falling

against the U.S. dollar (Exhibit 11).

may not be quite as potent as

Exhibit 9: Global trade is not collapsing

-40

-30

-20

-10

0

10

20

30

40

2001 2003 2005 2007 2009 2011 2013 2015 W o r l d e x p o r t s ( Y o Y % c h a n g e )

Nominal exports Real exports

Note: Year-over-year % change of 3-month moving average of world exports. Nominalexports in U.S. dollars. Source: IMF, Credit Suisse, Haver Analytics, RBC GAM




Exhibit 10: Global PMIs turn tentatively higher

47

48

49

50

51

52

53

54

55

Feb-12 Jan-13 Dec-13 Nov-14 Oct-15

M a n u f a c t u r i n g P M I

JP Morgan Global PMI Developed markets PMI Emerging markets PMI

Note: PMI refers to Purchasing Managers Index for manufacturing sector, a measure foreconomic activity. Source: Haver Analytics, RBC GAM

Contraction

Expansion

Exhibit 11: Sources of economic stimulus

Lowresource

prices

Lowinterest rates

Lowexchange

rates

Effect Economic boost Economic boost Economic boost

Shiftingimportance

Becoming lesshelpful on

secular basis

Unchangedimportance

Unchangedimportance

in past cycles given a decliningresource reliance over time as

countries become more oriented

toward services, but it still lends an

important helping hand.

for above-consensus growth in

Japan and the Eurozone, consensus

growth for the U.S. and U.K.,

and below-consensus growth for

Canada (Exhibit 12). For emerging

economies, we anticipate below-consensus growth in China, roughly

consensus growth in India, Brazil

and South Korea, and slightly above-

consensus growth for Mexico and

Russia (Exhibit 13).

Fractured geopolitics

The geopolitical environment has

uncertainty for quite some time, and

this is only increasing. The mostsalient recent developments relate

to ISIS, but there are also long-

term trends brewing with regard

to the polarization of developed-

world politics, Russia’s increased

aggression and China’s growing

global clout.

and elsewhere reveal a new strategy

for the organization. Whereas it was

once content to carve out sovereignterritory within Syria and Iraq, it is

now also pursuing the classic Al

its adversaries outside of the

Middle East.

Framed from an economic

perspective, this new strategy

imposes a temporary cost on the

Exhibit 12: RBC GAM GDP forecast for developed markets

2.50% 2.50%

1.50%

1.00%

0.75%

2.50% 2.50%

2.00%

1.50% 1.50%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

U.S. U.K. Eurozone Canada Japan

A n n u a l G D P g r o w t h ( %

)

2015 2016

Source: RBC GAM

Source: RBC GAM



HE GLOBAL INVESTMENT OUTLOOK New Year 2016 I 17

targeted countries via lost tourism,

aversion. But the consequences are

usually not lasting. By far, the greater

challenge is political as voters and

by tilting even further toward far-

left and far-right political agendas

that result in a sub-optimal policy

mix of diminished immigration,

less free trade and fewer individual

liberties. Particularly in Europe,

provide another catalyst, voters are

increasingly inclined in this direction.

remains complicated. The multi-

faceted battle between ISIS, the

Syrian government, the Iraqi

government, non-ISIS Syrian

rebels, Kurdish forces, Russia and

the U.S. and its allies remains the

most troubling situation. Given the

reluctance of Western nations toengage in another ground war in

support of local forces and logistical

efforts to undermine ISIS’s oil sales,

combatants.

There also remain serious

disagreements along Sunni-Shia

lines even between established

regional powers, as demonstratedby the ongoing proxy war in Yemen

between Saudi Arabia and Iran.

countries managing any sort of

material progress toward democracy

or greater stability.

Russia continues to merit close

examination given its recent military

aggressions: the earlier annexation

its new involvement in Syria. One

can hope that the latest round of

cooperation between Russia and the

other Western powers in Syria, asthis maximizes the odds of reducing

the world.

Whereas Russia remains globally

relevant from a military perspective,

it has ceased to be a global

economic power. China is the mirror

image of this: an ascending global

economic power with only regional

an increasingly aggressive stancein both the East China and South

China seas, but has never in its long

to expand its military reach beyond

From an economic perspective,

however, China is indisputably

relevant. Historically, global trade

and global growth appear to thrive

during hegemonic eras – when

one country effectively rules the

world – a position helmed by the

U.S. for the better part of the last

intuitive sense as the world is not

divided into competing factions.

However, with China’s ascensionit would appear we are now

transitioning toward a more multi-

polar world. This could act as one

of several factors constraining the

further progress of globalization.

There are already tentative signs

of consequences, such as the new

(TPP) trade deal that excludes China,

contrasted against China’s recent

efforts to develop its own regional

trade bloc.

There are a few common

conclusions that emerge from

these observations. Geopolitical

uncertainty promises to be unusually

high in the future due to the

East, the increased possibility of

Exhibit 13: RBC GAM GDP forecast for emerging markets

7.25%6.75%

2.50% 2.25%

-2.75% -2.75%

7.75%

6.00%

3.00% 3.00%

-0.75%

0.25%

-4

-2

0

2

4

6

8

India China South Korea Mexico Brazil Russia

A n n u a l G D P g r o w t h ( % )

2015 2016

Source: RBC GAM



New Year 2016

Exhibit 14: Hegemonies are good for global trade

0

5

10

15

20

25

30

35

1791 1828 1865 1902 1939 1976 2013 T r a d e G l o b a l i z a t i o n I n d i c a t o r

Note: Measured as average of imports as % of GDP weighted by population. 148 countriesused for 1791 to 1995, 126 countries after 1995. Source: Chase-Dunn, C., Kawano, Y.,Brewer, B., "Trade Globalization Since 1975: Waves of Integration in the World System," American Sociological Review, 2000, Haver Analytics, RBC GAM

U.K.hegemony

U.S.hegemony

Multipolar world

re urn omultipolarity?

Multipolar world

Exhibit 15: Four Chinese complications, two overrated

China worries

Newcurrency

regime

Stockmarket

bubble

Slowing

economy

Debt

excesses

from-centre governments, Russia’sincreased military aggression, the

shift toward a multi-polar world

and the uncertainty regarding U.S.

foreign policy beyond the 2016

presidential election. Global military

higher over time for many of

these reasons.

Economic growth is also set to be

challenged by these developments.

A focus on military expenditures may

result in less attention to, and fewer

resources directed toward, domestic

growth. A multi-polar world has not

historically been good for economic

growth and political polarization

presents a similar threat. To be fair,

these geopolitical drags are merely

one among dozens of relevant inputs

but it is undeniable that they

constitute a drag.

concerns

particular subjects of interest: a new

bubble, some credit excesses and

decelerating economic growth

(Exhibit 15).

As we argued last quarter, China’s

consequential or problematic as

will now theoretically exert a greater

force on the country’s exchange

rate, in practice the currency has

barely moved and the notion that the

Source: RBC GAM

Exhibit 16: Chinese stocks below recent peak

0

500

1000

1500

2000

25003000

3500

0

1000

2000

3000

4000

50006000

7000

2005 2007 2009 2011 2013 2015Shenzhen Stock Exchange Composite (RHS)Shanghai Stock Exchange Composite (LHS)

Source: CNBS, Bloomberg, Haver Analytics, RBC GAM

Bubble fueled byreforms and

stimulus

S h a n g h a i S t o c k E x c h a n

g e

C o m p o s i t e I n d e x

S h e n z h e n S t o c k E x c h a n

g e

C o m p o s i t e I n d e x

Free fall



THE GLOBAL INVESTMENT OUTLOOK New Year

Exhibit 17: China especially vulnerable to a debt crisis

Exhibit 18: Non-performing loans in China rising

0

1

2

3

4

5

6

7

-70-60-50-40-30-20-10

010203040

5060

Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 N o n - p e r f o r m i n g l o a n s r a t i o

( % )

N o n - p e r f o r m i n g l o a n s

( Y o Y % c

h a n g e )

NPLs YoY % change (LHS) NPLs ratio (RHS)

Note: Non-performing loans (NPLs) of commercial banks. Source: China BankingRegulatory Commission, Haver Analytics, RBC GAM

its peers via a competitivedevaluation seems unfounded given

the government’s active defense of

the yuan. China’s imminent addition

to the International Monetary Fund’s

consequential than it seems, as only

a tiny fraction of the world’s currency

reserves are actually invested in

are both highly symbolic and will

help in China’s eventual ascension

toward a more central role in the

don’t move the needle very much in

the short term. Our bias is that the

Chinese currency may decline only

modestly over the next year given

several months. The earlier decline

in equities was less consequentialthan it seems given that the

country’s equity indices are still

higher than they were a year ago,

and furthermore given the relatively

Chinese credit concerns

In contrast, China’s credit challenges

International Settlements testsdesigned to highlight the potential

for future credit distress put China at

the top of the list (Exhibit 17).

manifestation of these credit

experiencing non-performing-loan

growth of almost 60% per year

Credit-to-GDPrisk

Debtservicing risk

Debt servicingstress test risk

China High Moderate High

Brazil High Moderate High

High Moderate Moderate

Asia High Low Moderate

Netherlands Low Low High

Canada Moderate Low Moderate

France Moderate Low Moderate

Switzerland Moderate Low Low

Mexico Moderate Low Low

Japan Moderate Low Low

Korea Moderate Low Low

Nordic countries Low Low Moderate

India Low Low Low

Germany Low Low Low

Italy Low Low Low

U.S. Low Low Low

U.K. Low Low Low

Spain Low Low Low

Note: Calculations by BIS of deviation from normal credit metrics as predictor of future credit and Japan. Stress test assumes 250bps increase in r ates. Source: BIS, RBC GAM




Exhibit 19: Chinese private credit growth slowing

10

15

20

25

30

35

40

2007 2008 2009 2010 2011 2012 2013 2014 2015

T o t a l s o c i a l f i n a n c i n g

( Y o Y % c h a n g e )

Source: Haver Analytics, RBC GAM

Downward trend tolowest growth rate

sincepre-crisis

Exhibit 20: Chinese home prices rebound

-6

-4

-2

0

2

4

6

8

10

12

Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15

1 0 0 - c i t y a v e

r a g e h o m e p r i c e s

( Y o Y

% c h a n g e )

Source: China Index Academy/Soufun, Haver Analytics, RBC GAM

tame – with just 1.5% of all loans

in default – seems heartening,

but more credible estimates put

actually relate to China’s slowing

heavy-industry base, not to the

maligned housing sector. This

challenges are possible.

to this less favourable credit

environment is already well

underway as the country’s credit

growth rate has slowed materially

For now, at least, Chinese housing

has ceased to be an immediate

revived it via interest-rate cuts

and more favourable terms for

homebuyers. Home sales and pricesare ascending once more, though we

remain concerned that these trends

are not sustainable (Exhibit 20).

Meanwhile, although there are

legitimate corporate-debt concerns

two tempering forces. First, the

most levered of China’s companies

are state-owned, meaning they are

Second, China has a long historywith debt bubbles that seem to

arrive roughly once a decade, but

just as importantly there is also

a long history of the government

stepping in and providing relief.

Already, the government has bailed

out local government borrowers. As

a result, China’s credit excesses – to

the extent that they arrive – are far

0

40

80

120

160

200

240

280320

360

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

L e v e r a g e r a t i o ( % )

Note: Measured as median and 90th percentile of total-liabilities-to-total-equity ratio of listedcorporations in China. SOEs refers to state-owned enterprises. Source: IMF GFSR, RBC GAM

SOEs

Private firms

SOEs

Private firms

SOEs havehigher

leverage thanprivate firms atboth median

and 90th

percentile

90th percentile:

Median:




Exhibit 22: China rebalancing to slower growth

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

1995 1999 2003 2007 2011 2015

E c o n o m i c A c t i v i t y I n d e x

( s t a n d a r d d e v i a t i o n s f r o m

h i s t o r i c a l n o r m )

C h i n a G D P g r o w t h

( Y o Y % c h a n g 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

-100

-50

0

50

2008 2009 2010 2011 2012 2013 2014 2015 C h a n g e i n c e n t r a l b a n k p o l i c y r a t e s

( % r a i s i n g

/ c u t t i n g i n m o n t h )

% of central banks tightening % of central banks easing

Net % of banks easingNote: Based on policy rate for 30 countries. Source: Haver Analytics, RBC GAM

Widespread easingin reaction tofinancial crisis

Emergingmarket ledtightening

Persistentlyaccomodative policy

Tightening

Easing

economic growth than to manifest

the world.

Decelerating Chinese growth

The Chinese economy has

decelerated for a number of years,

and is now expanding at just

under a 7% annual pace. Given the

diminished competitiveness, growth

growth target of 6.5% per annum,

down from the prior 7.0% goal. We

suspect actual growth may come

in even a little below the newly

diminished target.

the Chinese economy is actually

metric broadly agrees with the

pessimistic interpretations tend to

focus on heavy-industry metrics

such as electricity consumption and

rail shipments. Heavy industry is

indeed struggling, but consumer-

oriented and service sectors are

underweighted in such measures,

China has slowed but not collapsed.

Divergent monetary policy

set to become even more apparent

in the near future. Whereas the Fed

wishes to tighten rates imminently,

the vast majority of the world’s major

in monetary-easing mode (Exhibit

23). China and India both recently

cut their policy rates again, the

Japan (BOJ) contemplates additional

stimulus as well.

entertaining the delivery of more

stimulus, the rationale generally

developed world and decelerating

extent that this additional monetary

stimulus helps to spur growth in

an otherwise sluggish economic

environment, it is welcome. Since the

a country’s currency.

At the other monetary policy

extreme, the world’s bellwether

begin raising rates (Exhibit 24). Most




Exhibit 25: Complexity need not be paralyzing

Stronger exchange rate

Lower commodity prices

Bond sell-off

Lower stocks

Higher borrowing cost

Possible debt problems

Lower profit

Lower wagesRate hike

+ 25 bpsrate hike

-0.1 to -0.4 ppt

GDP growth

Yes, the world is complicated, but the collective effect is modest:

=

Exhibit 26: Post-supercyle era for commodities

0

100

200

300

400

500

600

700800

900

2005 2007 2009 2011 2013 2015

S & P G o l d m a n S a c h s

C o m m o d i t y I n d e x

Note: Historical low since July 2005. Source: Haver Analytics, RBC GAM

Initial commodity

rout

Second wave andhovering near lowHistorical

low

economic factors provide strong

new tightening cycle in 11 years, and

the Fed has been signaling as much.

for this outcome – and the Fed has

emphasized its desire to proceed

with extreme caution – this should

not be overly problematic. History

able to continue advancing after a

new tightening cycle has begun.

participants is whether the Fed is

growth trajectory. Moreover,

while raising the policy rate

inevitably elicits a domino-effect of

consequences, their cumulative hit

should be fairly mild (Exhibit 25).

The end of the commodity

supercycle has exerted a powerful

few years (Exhibit 26). However, we

believe the downward pressures on

Part of this perspective revolves

around our belief that resource

prices have largely completed their

swoon, with the potential for modestgains in certain commodities in the

years ahead. Even if this assessment

were incorrect, commodity prices

would need to continue falling at

low as it is today.

Another part of our view rests on the

the developed world will continue

Source: RBC GAM

Exhibit 24: U.S. fed funds rateEquilibrium range

-202468

1012141618202224

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last plot: 0.12% Current range: -1.43% - 0.76% (Mid: -0.33%)

Source: Federal Reserve, RBC GAM




Exhibit 27: RBC GAM CPI forecast for developed markets

1.00%

0.50%

0.00% 0.00% 0.00%

1.75%

1.50% 1.50% 1.50%

1.00%

0.0

0.5

1.0

1.5

2.0

Canada Japan U.K. U.S. Eurozone

Y o Y C P I c h a n g e ( % )

2015 2016

Source: RBC GAM

Exhibit 28: Outlook for world oil demand more optimistic

84

86

8890

92

94

96

98

2010 2011 2012 2013 2014 2015 2016

W o r l d c r u d e o i l d e m a n d

( m i l l i o n b b l / d a y )

World demand (historical) Jan April Sept Oct

October

Forecast

Note: Shaded area represents EIA forecast. Source: OECD,EIA, Haver Analytics, RBC GAM

to ebb over the coming years.

readings should rise by as much

as 0.5 to 1.0 percentage point over

the next few months as the extreme

the annual equation. Finally, the

effect of El Nino on weather patterns

seems set to push food prices higher

due to poorer growing conditions in

much of the world (though it may

simultaneously limit the increase in

energy costs).

threat remains limited. We can

so low today, and those pressures

are inherently temporary. What of

other more persistent downward

pressures, such as the seeming

population? One cannot deny that

arguably the result of policy errors

more than demographic inevitability.

In fact, one can mount a serious

theoretical argument that an aging

population should actually increase

After all, while retirees do tend

to consume somewhat less than

perspective is that they produce

far, far less. Thus, their economic

demand exceeds their supply.

recover partially in 2016, but not all

the way to a normal level (Exhibit

27). Furthermore, we suspect the

revival will be a tad more gradual

Oil toils in the murky depthsOil prices remain extraordinarily

low, having collapsed over the past

declining importance – a multi-year

surge in U.S. shale-oil production,

OPEC’s abandonment of its “swing

producer” role and decelerating

Ultra-low oil prices won’t last forever.

improving supply and demand.

Global demand for oil is now growing

robustly, and expectations have,

in fact, been repeatedly ratcheted

equilibrium.




Exhibit 29: U.S. crude-oil production off its peak

9.0

9.1

9.2

9.3

9.4

9.5

9.6

Jan-2015 Apr-2015 Jul-2015 Nov-2015

U . S . c r u d e p r o d u c t i o n


Source: EIA, Haver Analytics, RBC GAM

Exhibit 30: World oil-supply forecast revised upwards

84

86

8890

92

94

96

98

2010 2011 2012 2013 2014 2015 2016

W o r l d c r

u d e o i l s u p p l y


World production (historical) Jan April Sept Oct

October

Forecast

Note: Shaded area represents EIA forecast. Source: OECD, EIA, Haver Analytics, RBC GAM

Exhibit 31: Bearish scenario for oil still revolves around inventories

Max=343Min=322

Max=362

Min=330

300

320

340

360

380

400

420

440

460

480

500

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

C o m m e r c i a l c r u d e i n v e n t o

r y

( m i l l i o n b a r r e l s )

Weekly average (2005-2014) Weekly average (1983-2014)Source: EIA, RBC GAM

In particular, the long-awaited

appeared, with U.S. oil production

down by nearly half a million barrels

per day from the summer (Exhibit

remains smaller than expected, and

has recently stalled. Simultaneously,

oil supply elsewhere in the world

has actually increased, with Iran in

particular set to substantially raise

production in 2016 on diminished

sanctions. As a result, while the

global oil supply is no longer

expected to grow, prior hopes that

it would fall outright have had to be

This latter trend delays but does not

Barring further unforeseen

normalize by 2017, permitting a

gradual increase in the price of oil.

of the U.S. dollar mean that the

“normal” price of oil has arguably

to below US$70.

extend in both directions. To the

downside, oil-inventory levels are

extremely high and rising (Exhibit

31). Were storage limits to be hit,

prices would have to fall sharply.On the other hand, OPEC production

is running unusually close to its

maximum, leaving little ability to

higher on short notice.




Exhibit 32: U.S. job market improving

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2001 2003 2005 2007 2009 2011 2013 2015

J o b o p e n i n g s t o u n e m p l o y m e n t

r a t i o

Source: BLS, Haver Analytics, RBC GAM

Back to pre-crisis peak

Exhibit 33: U.S. real personal income rising briskly

-6

-4

-2

0

2

4

6

8

1999 2001 2003 2005 2007 2009 2011 2013 2015

U . S . r e a l p e r s o n a l i n c o m e

( Y o Y %

c h a n g e )


of outsized importance, for two

reasons. First, oil- and gas-producing

companies have roughly tripled their

indebtedness since 2006, creating

a basic vulnerability now that oil

prices have fallen. Historically, such

debt problems mount materially after

oil prices have been low for a year,

may continue to increase.

Second, low oil prices createenormous winners and losers. Most

countries – and indeed the world

in aggregate – view low oil as a

growth-enhancing tax cut. However,

oil-producing nations suffer

intensely. These divergent prospects

are very much in effect.

U.S. split personality

The U.S. remains an economy with a

is robust, whereas foreign demand

for U.S. products is anemic.

as demonstrated by a rising ratio of

32). This metric argues that the

healthier today than it was at the

top of the last economic cycle. When

partnered with decent real wage

real personal income across the U.S.

is now expanding at an impressive

rate of 4% per year (Exhibit 33).

Providing further evidence of an

improved domestic environment,

household formation continues to

rise at a strong rate, demonstrating

signaling a need for more homes,

furnishings and cars.

While income-inequality concerns

remain relevant and arguably

impose a slight drag on long-term

economic growth in the developed

world, it is nevertheless heartening

U.S. consumers has increased

dramatically, easily exceeding the

coin is that the strong dollar has

weighed materially on exports

remain underwhelming over the next

year as the U.S. dollar continues to

rise. Fortunately, the U.S. is betterpositioned than almost any other

country to handle this adversity

given its healthy domestic side,

its insular economic structure and

its high value-added exports. That

feel differently given that their

orientation to foreign demand is far

higher than the average.



26 I THE GLOBAL INVESTMENT OUTLOOK New Year 2016

Exhibit 35: Mighty dollar hurts U.S. trade

-30

-20

-10

0

10

20

30

2005 2007 2009 2011 2013 2015

U . S . r e a l t r a d e i n g o o d s

( Y o Y

% c

h a n g e )

Exports Imports


6.8%

-2.5%

Exhibit 36: Eurozone money-supply growth has picked up

-2

0

2

4

6

8

10

12

14

2005 2007 2009 2011 2013 2015

E u r o a r e a M 3 ( Y o Y %

c h a n g e )

Source: ECB, Haver Analytics, RBC GAM

Combining the strong domesticenvironment and weak foreign one,

U.S. growth should remain decent at

a 2.5% clip in 2016. In the near term,

it is worth remembering that first-

quarter U.S. economic growth has

tended to be weak in recent years,

though some of the past statistical

distortions were recently addressed,

and El Nino may have a mild positive

effect. While we don’t see any

immediate signs of recession, a

number of indicators suggest that the

business cycle is maturing, and we

know that all economic expansions

eventually come to an end.

Eurozone to surmount

challenges

The Eurozone recovery remains

fragile after two recessions in short

order, and the region is grappling

with a number of fresh concerns

related to the Volkswagen crisis,the sudden influx of Middle East

refugees, terrorism and polarizing

politics.

Despite this, the region’s prospects

are generally improving. It has

now achieved consistent economic

growth for well over a year. Low

resource prices, low borrowing costs

and a weak euro remain central

features. We expect more of this in

the future thanks to a likely uptickin ECB stimulus and a probable

further decline in the euro. The

region’s money-supply growth has

been a reliable signal of economic

conditions, and this has improved

nicely (Exhibit 36). Credit conditions

also continue to improve, if slightly

less quickly than in prior quarters

(Exhibit 37). Growth has broadened

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

Exhibit 34: Low-income households are optimistic about the future

80

90

100

110

120

130

140

150

1980 1985 1990 1995 2000 2005 2010 2015Note: Shaded area represents recession. Source: University of Michigan Surveys ofConsumers, RBC GAM

Surpassed pre-crisis high

E x p

e c

t e d c

h a n g e

i n f i n a n c

i a l s

i t u a

t i o n

i n a y e a r

f o r

h o u s e

h o

l d s

i n f i r s t

i n c o m e

t e r c

i l e ( i n d e x

l e v e

l )




to include past laggards such asIreland, Spain and Portugal.

European economic data continues

to pleasantly exceed expectations

and our models point to a further

slight acceleration in activity. As

What of the region’s problems?We have already addressed the

temporary nature of the fallout

certainly relevant given Germany’s

auto-manufacturing base, but beyond

the corporate -level implications

the greatest message is that the

European bet on diesel technology

as an environmental panacea seems

many years for the region to pivottoward other green technologies. In

the meantime, credible estimates

put the Eurozone economic hit at

0.25 percentage point per year – a

notable, but manageable blow.

German leading indicators are

holding up reasonably well.

Europe due to the war in Syria is no

trivial matter, with almost 1 million

additional immigrants expectedto arrive in Germany in 2016, and

This presents challenges in that

government resources will be

taxed, Europe has a poor record of

integrating past waves of immigrants

and the migrants have language and

cultural obstacles to overcome, not

to mention a generally low level of

education.

Exhibit 37: Demand and supply of credit improving in the Eurozone

-40

-20

0

20

40

60-60

-40

-20

0

20

40

2003 2005 2007 2009 2011 2013 2015

C r e d i t a v a i l a b i l i t y

( n e t p e r c e n t b a l a n c e )

C r e d i t d e m a n d

( n e t p e r c e n t b a l a n c e )

Credit demand (LHS) Credit availability (RHS)

Source: European Central Bank, Haver Analytics, RBC GAM

Improving creditconditions

Deteriorating creditconditions

Exhibit 38: Robust U.K. economy still hiring though at slower pace

-3

-2

-1

0

1

2

3

-6

-4

-2

0

2

4

6

2005 2007 2009 2011 2013 2015

U . K . e m p l o y m e n t

( Y o Y % c h a n g e )

U . K . r e a l G D P ( Y o Y % c h a n g e )

GDP (LHS) Employment (RHS)

Source: Office for National Statistics, Haver Analytics, RBC GAM

However, it isn’t all negative. The

resulting European government

spending is well-timed given an

Mathematically, the additionalconstruction and government

spending should add as much as

0.5 percentage point to Eurozone

growth. The sheer number of

migrants is not unreasonable for a

continent of Europe’s size to absorb,

is not entirely out of German hands

as the country has opted to reject

so-called “economic migrants” who

do not have a serious refugee claim.

Over the long run, these refugees

present a potential partial solutionto Europe’s demographic woes.

Finally, Eurozone politics remain

complicated. Some of the most acute

revolving around Greece – but others

persist, such as Portugal’s new

far-left coalition and the separatist

demands of Spain’s Catalonia region



New Year 2016

regard to legitimacy and legality).

European politics will continue to

drift further from centre as hot-

button issues such as bailouts,

continue to push voters in a more

populist direction.

U.K. steady

The British economy continues to

trundle along at a reasonable rate ofgrowth, providing one of the more

stable economic environments in

the world. Economic growth and job

creation are both adequate, if a bit

less zippy than in the recent past

Anecdotes from the ground

remain fairly good, though leading

indicators have softened a touch.

austerity, achieved greater political

Conservative government and is not

yet staring at a promised referendum

on EU membership in the face.

British economy no longer has much

success, but also brings the reality

of higher wages and the prospect of

seriously contemplating tightening

monetary policy (Exhibit 40). We

the Fed.

continued steady and roughly

consensus economic growth of

around 2.5%. A reviving Eurozone

economy is helpful, as is the recent

Japanese silver linings

It is easy to be sour on Japan.

demographics and high public debt

Prime Minister Abe’s three-year-old

“Abenomics,” has been a failure.

However, in our opinion, this grim

perspective misses some important

victories.

As an opening observation,

the country’s recent economic

performance is not quite as poor as

it seems. Much of the latest quarterly

decline in output related to inventory

has also continued to shift higher,

Exhibit 39: U.K. wage growth accelerates

-3

-2

-1

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015

T o t a l p r i v a t e s e c t o r p a y

( Y o Y % c h a n g e )

Note: 6-month moving average of year-over-year % change of private sector pay.Source: Office for National Statistics, Haver Analytics, RBC GAM

Exhibit 40: U.K. base rate equilibrium range

-2

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last plot: 0.50% Current range: -1.87% - 0.71% (Mid: -0.58%)

Source: RBC GAM, RBC CM



THE GLOBAL INVESTMENT OUTLOOK New Year 2016

credit are thawing (Exhibit 41).

performance is not quite as grim as

expectations are materially higher

than a few years ago, portending

an important change in economic

readings of total and core CPI are

quite low, a better measure of core –

one that excludes both food andenergy, and the temporary effects

of sales-tax changes – argues that

has been climbing steadily for

several years, and now exceeds

1.0% (Exhibit 43). While wage

growth sends only a mixed message

about such matters, the BOJ has

statistics are failing to capture

wages. The Japanese economy

suggesting further pressure on

A common criticism of Japan

has been that the roughly 40%

depreciation in its exchange rate

has failed to revive exports. Strictly

Japanese trade over a much longer

timeframe than most other nations.

the sharp increase in the country’s

44). Rather than increasing sales

by passing along lower prices to

left their prices unchanged and

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2003 2005 2007 2009 2011 2013 2015

B a n k l e n d i n g t o p r i v a t e s e c t o r

( Y o Y % c h a n g e )

Source: Bank of Japan, Haver Analytics, RBC GAM

Exhibit 41: Japanese bank lending gradually growing

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

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

J a p a n ' s e x p e c t e d i n f l a t i o n ( % )

Source: Consumer Confidence Survey, Cabinet Office of Japan, Haver Analytics, RBC GAM

-2.0

-1.0

0.0

1.0

2.03.0

4.0

2010 2011 2012 2013 2014 2015

C P I ( Y o Y % c h a n g e )

CPI CPI ex food and energy

Note: CPI adjusted for sales tax hike based on assumption for full pass-through to consumersand BoJ estimates of weights of items affected. Source: BoJ, Ministry of Internal Affairs andCommunication, Haver Analytics, RBC GAM

Core CPI adjusted for April 2014

sales tax hike




the yen to soften slightly further,and see a reasonable chance that

the BOJ delivers additional monetary

stimulus.

principle in October, must still be

Inevitably, trade deals have both

winners and losers, but the net effect

is usually positive. Japan stands to

TPP as it is more protective than most

to begin with (Exhibit 45). The trade

deal is part of a broader effort by

Japan to structurally boost its growth

(Exhibit 46).

Canada drags

The Canadian economy remains

troubled by low resource prices.

second half of 2015, our leadingindicator signals the persistence

(Exhibit 47). A few more sporadic

materially.

The Canadian economy feels even

the price of resource exports fall

and the cost of imports rise. Given

in the oil patch, we are lowering our

2016 growth forecast to 1.5% from

an already modest 1.75%.

Of course, not all parts of the

country are suffering. Canada is

divided between oil-exporting

provinces and those that import

0

2

4

6

8

10

12

14

16

18

0

20

40

60

80

100

120

1980 1985 1990 1995 2000 2005 2010 2015

J a p a n ' s c o r p o r a t e p r o f i t s

( %

o f G D P )

J P Y n o m i n a l e f f e c t i v e e x c h a n g e

r a t e ( 2 0 1 0 = 1 0 0 )

Exchange rate (LHS) Corporate profits (RHS)

Source: JP Morgan, Ministry of Finace Japan, Haver Analytics, RBC GAM

Exhibit 45: TPP trade-deal consequences

-0.7-0.3-0.3-0.2

0.40.5

0.60.91.0

1.42.0

2.22.2

6.113.6

-2 0 2 4 6 11 13 15Thailand

ChinaPhilippinesIndonesia

U.S.Canada

AustraliaChile

MexicoPeru

SingaporeNew Zealand

JapanMalaysiaVietnam

Cumulative increase in level of GDP after ten years (ppt)

Big winners

Modest winners

Modest losers

Source: Peterson Institute for International Economics, RBC GAM Within TPP Outside TPP

≈

≈

Exhibit 46: Japan reforms offer some promise

Labour Efforts underway to reduce two-tier nature of

being tapped

Governance directors on boards

Shareholder activism comes to Japan

Trade

Source: RBC GAM




Exhibit 47: Canadian economy still adjusting to oil shock fuels. Alberta and the other oilexporters continue to experience

recessionary conditions, whereas

The new Liberal majority

government casts a moderate

given a less friendly atmosphere

for the resource sector alongside

an expected reduction in the tax-exempt investment limit and a

the new government’s economic

policy should provide a boost to

economic growth on the order of a

few tenths of a percentage point over

the next few years given aggressive

infrastructure spending plans and

additional immigration.

remains mysteriously resilient

national economy has not truly

experienced a recession, though it

also sends a less friendly message

that Canadian productivity growth

has been quite poor. Consistent with

potential rate of economic growth

in Canada over the next few years is

below 1.5%.

Given the challenging environment,

dollar to shed a few more cents

and for the BOC to welcome further

50). The country’s biggest question

export-sensitive sectors are enjoying

-5

-4

-3

-2

-1

0

1

2

2001 2003 2005 2007 2009 2011 2013 2015

C a n a d i a n E c o n o m i c C o m p o s i t e

( s t a n d a r d d e v i a t i o n s f r o m

h i s t o r i c a l n o r m )

Note: Composite constructed using four leading indicators from surveys on Canadianbusinesses. Source: CFIB, Haver Analytics, RBC GAM

Exhibit 48: Ontario trumps Alberta

-8

-6

-4-2

0

2

4

6

8

2001 2006 2011 M o n t h l y G D

P ( Y o Y %

c h a n g e )

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

2015

Ontario unusuallygood

Alberta unusuallyweak

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2003 2005 2007 2009 2011 2013 2015

C a n a d i a n e m p l o y m e n t

( 6 - m o n t h % c h a n g e a n n u a l i z e d )

Note: Employment change adjusted by full-time and part-time employment data.Source: Statistics Canada, Haver Analytics, RBC GAM




growth, but aggregate trade remainsdistinctly underwhelming given the

over the past few years.

Emerging-market debt worries

to a disproportionate share of the

world’s debt worries and capital

class (Exhibit 51).

This is a timely subject as several

catalysts for debt distress have

engine has decelerated

The Fed may trigger an increase

in global borrowing costs

dollar-denominated debt more

expensive

The decline in resource prices

challenges resource-oriented

A granular examination of emerging-

the portion vulnerable to distress or

outright default has risen steadily,

and is now at an unusually high level

(Exhibit 52).

debt sums are both quite large.

with each is a bit smaller than it

crisis has been fully matched by the

economies. As a result, the external

Exhibit 50: Canada overnight rate equilibrium range

0

4

8

12

16

20

24

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last plot: 0.48% Current range: -0.06% - 1.88% (Mid: 0.91%)


0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 S h a r e o f E M c o r p o r a t e l i a b i l i t i e s

( % )

2<=ICR 1<=ICR<2 ICR<1Note: Share of liablities held by listed companies in emerging market countries according to theirinterest coverage ratio (ICR), measured as ratio of earnings before interest and taxes to interestexpenses. Source: IMF, RBC GAM

Higher

than2008

100

Exhibit 51: Emerging-market bond fund exodus continues

-6

-5

-4

-3-2

-1

0

1

2

3

2010 2011 2012 2013 2014 2015

W e e k l y E M b o n d f u n d n e t f l o w s

( U S $ b i l l i o n s )

Source: EPFR, RBC GAM

Inflow

Outflow

Taper tantrum

Renewedoutflows




Exhibit 53: Emerging-market external debt tame relative to GDP

0

10

20

30

40

50

60

70

80

90

100

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 E x t e r n a l l i a b i l i t i e s ( %

o f G D P )

Global Emerging marketsNote: Measured as external debt securities and loans of all reporting countries.Source: BIS, IMF, Haver Analytics, RBC GAM

before the crisis (Exhibit 53). This

given the strengthening U.S. dollar

and rising borrowing costs, but it

puts it into perspective.

corporate debt has undeniably

outgrown its host economies

(Exhibit 54). Fortunately, much of the

sovereign (Exhibit 55). Furthermore,concerns about what will happen

when the Fed raises rates may be

beside the point given that credit

spreads have already widened far

themselves.

threats are both real and elevated,

but not as screamingly high as they

Seeking an emerging-market

bottom

In a world of sluggish economic

growth, it is important to recognize

has been centered in emerging

has slowed, whereas the developed

world has actually accelerated

slightly (Exhibit 56).

There are many reasons for this

(Exhibit 57). Common drags include

more sluggish global demand

(though there is a circularity to this

argument), the aforementioned debt

slowing productivity growth and

worsening demographics.

Exhibit 54: Some emerging markets pile on debt

-10 10 30 50 70 90 110

IndiaSouth Africa

IndonesiaHungary

MexicoRussiaPoland

BrazilTurkey

ThailandMalaysia

SingaporeChina

Hong Kong

Change in indebtedness from 2007 to 2014 (ppt)

Household Nonfinancial corporate GovernmentNote: Debt expressed in % of GDP. Change for Malaysia from 2008 to 2014.Source: BIS, Morgan Stanley, IMF, RBC GAM

Exhibit 55: Emerging-market corporate-debt risk smaller than it looks

51%

22%

27%

Pure corporate

Quasi

Partial quasi

Note: Quasi is fully state-backed corporation. Partial quasi is partially state-backed corporation.Source: J.P. Morgan, RBC GAM

government-backed= less risk




Exhibit 56: Steady global growth masks divergent trends

-6

-4

-2

0

2

4

6

8

10

2004 2006 2008 2010 2012 2014 2016 2018 2020

R e a l G D P ( a n n u a l % c h a n g e )

Emerging markets Developed markets

IMF forecast

Source: IMF, Haver Analytics, RBC GAM

have stopped investing in capital,

Rather, they are seemingly achieving

less total-factor productivity (TFP)

growth – the creation and diffusion

of new technologies and processes

and unavoidable consequence of

countries becoming wealthier, so

we cannot realistically expect most

this is something that countries

can address.

growth prospects are highly varied,

had extended too much credit, and

whether it is turning its attention

reforms.

We cannot claim to see a clear

has bottomed, though there may

be the beginning of an argument.

On the positive side, the currency

depreciation that has occurred

in many countries should prove

useful in securing additional room

for future growth. On the negativeside, the El Nino effect may prove a

hindrance for several Asian countries

such as India, Indonesia and the

Philippines.

Rate reversal

Interest rates remain astonishingly

low and have proven adept at

defying widespread forecasts over

Exhibit 57: Review of EM drivers

Exhibit 58: EM productivity growth slows for one key reason

2002 2004 2006 2008 2010 2012 2014-10123456789

10

C o n t r i b u t i o n t o G D P g r o w t h

( p p t )

Total factor productivity (TFP) Labour Capital

Lost TFP growth explains

all of productivityslowdown

Note: 3-year moving average of contribution to GDP growth of six major EM countries. Labour includeslabour quality and labour quantity. Source: The Conference Board Total Economy Database, RBC GAM

CYCLICAL STRUCTURAL

COMMON

Sluggish global demand

Slowing globalization

Slower productivity gains

Worsening demographics

INDIVIDUAL

Commodity decline(Exporter/Importers)

Credit slowdown(China, Brazil, etc./Others)

New reform era(India, Mexico, China, Indo.)

Shifting competitiveness(China/Mexico, frontier

Source: RBC GAM




Exhibit 59: Koenig Taylor rule and the fed funds rate

-10-8-6-4-202468

1012

1990 1995 2000 2005 2010 2015

%

Fed Funds Rate Predicted Fed Funds Rate (Koenig Taylor Rule)

Source: Federal Reserve Bank of Dallas, RBC GAM

the past several years that theywould rise. There is thus a distinct

especially given the downward

pressure that comes from ultra-

Some of these conditions seem more

vulnerable to reversal than they

have been in some time. First among

a round of tightening which appears

economy, employment and expected

in the Taylor rule, which reinforces

a view that now is an appropriate

short-term interest rates should

nudge bond yields higher, but given

the path to higher rates is expectedto be gradual and well telegraphed.

Sovereign-bond risks

moderate

U.S. bond yields traded in a narrow

range over the past quarter, but

have moved above levels of earlier

this year and are now above our

estimate of fair value. To determine

the equilibrium yield for sovereign

premium with the real rate of

these two components for 10-year

embedded in bonds is low, but

appears to have stopped falling. We

over the next year but to stay low by

historical standards, so the impact

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 2020

%

Real T-Bond Yield Real 10-Year Time Weighted Yield


+1 SD

-1 SD Average: 2.2%

Last Plot: 1.4%

12-Month Forecast: 1.27%-4

-2

0

2

4

6

8

10

12

14

16

1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 2020

%

36-month Centred CPI Inflation

Actual Monthly CPI Inflation


Last Plot: 0.8%

12-Month Forecast: 1.0%

36-month Centred CPI

Exhibit 60: Fair-value estimate composition

0

2

4

6

8

10

1214

16

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot : 2.22% Current Range: 0.88% - 2.67% (Mid: 1.77%)


United States

United States

Real 10-year T-bond yield

U.S. 10-year T-bond yield

Equilibrium range

+




to 2.50% over the coming year even

as the fed funds rate starts to rise.

There are several other factors that

may limit the rise in U.S. yields.

Treasury bonds appear attractive

to global investors (Exhibit 62). The

resulting demand for Treasuries

should cap how far yields on

these instruments can rise in the

short term. A prime example is

shows that yields rise only slightly

funds rate. In cases where tightening

led to a recession, bond yields rose

meaningfully, but then ultimately fellas the economy began to contract. In

non-recessionary cycles, yields tend

to decline following the start of a

of the adjustment in yields occurs in

the period leading up to the initial

that yields will climb only modestly

be small.

The other component of the model –

the real rate of interest – continues

to lie below its long-term norm and

was even negative from late 2011 to

early 2013. Negative or ultra-low real

rates of interest are unsustainable as

investors ultimately need to be paid

to defer access to their capital. That

said, the longer that interest rates

stay low, the more they will cometo feel normal. The persistence of

anchored investor mindsets to a

low level of rates going forward.

Our equilibrium models embed this

concept of “adaptive expectations”,

reducing the expected level of

nominal interest rates in the near

term and lowering the trajectory of

their climb through the longer term.

rate of interest has pushed it a bit

above our modeled level, reducing

the threat that was apparent in

nominal bond yields a couple of

years ago.

As the Fed is about to start a round

of tightening, investors are rightly

action on longer-term interest

rates. History shows that bond

yields do not necessarily rise afterthe Fed begins to increase short-

term interest rates. We analyzed

the trajectory of bond yields over

through the 12 months leading up

to the initiation of a tightening cycle

and the 24 months after (Exhibit 61).

The median outcome of all scenarios

Exhibit 61: U.S. 10-year bond yield and the fed funds rate hike

5060708090

100110120130140150

-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 M e d i a n B o n d Y i e l d a s a % o f

L e v e l a t D a t e o f I n i t i a l R a t e H i k e

Months Prior to & Following Fed Fund Rate Hike

Median of All Cycles Recession Cycles No Recession CyclesWorst (1994) Current Cycle

Source: RBC GAM

Assume first hike: December 2015

Exhibit 62: Global bond yields10-year government bonds

2.22

1.83

1.57 1.521.42

0.470.31

0.0

0.5

1.0

1.5

2.0

2.5

U.S. U.K. Canada Spain Italy Germany Japan

%

Source: Bloomberg, RBC GAM




Exhibit 64: High-yield bond spreadFrequency distribution

0

20

40

60

80

100

120

<=300 300 -400

400 -500

500 -600

600 -700

700 -800

800 -900

900 -1000

>=1000

N u

m b e r o f m o n t h s

Credit spread range (basis points)Note: Data is based on monthly closing values for the CS High Yield Index II (formerly DLJ HighYield Index) Spread to Worst, dating back to January 1986. Source: Credit Suisse, RBC GAM

Latest: 680bps

Exhibit 63: European government bonds

01020304050607080

S w i t z e r l a n d

G e r m a n y

F i n l a n d

F r a n c e

N e t h e r l a n d s

S l o v a k i a

A u s t r i a

B e l g i u m

D e n m a r k

S w e d e n

L

u x e m b o u r g

L i t h u a n i a

I r e l a n d

I t a l y

S p a i n

S l o v e n i a

L a t v i a

M a l t a

P o r t u g a l

C y p r u s

T o t a l

Note: the total value of outstanding European government bonds is 7.6 trillion euros and, ofthose, 3.0 trillion euros worth of European government bonds are t rading below a 0% yield.Source: Deutsche Bank Research

program is contributing to extremelylow yields. In fact, Exhibit 63 shows

that 40% of outstanding European

government bonds are trading at

sub-zero yields!

Early signs of strain in

credit markets

The recent widening in high-yield

credit spreads is concerning. Under

bonds typically trade at a spreadof 300 to 400 basis points. Recent

basis points. While spreads are

wider than normal, the frequency

distribution of high-yield credit

spreads in Exhibit 64 suggests

that they can get a lot wider still.

initially isolated to energy, but other

sectors are now also being affected

as well (Exhibit 65). Credit spreads

usually comes a little before or at

the same time as equities correct

(Exhibit 66). In this instance, though,

the spread widening has occurred

an all-time high. It is unusual for this

divergence to persist for an extended

period. At some point, the situation

Equities: a look back at 2015

Expanding valuations have been

was gradually restored. Exhibit 67

shows the year-by-year contribution

growth and multiple expansion.

Exhibit 65: High-yield bond spreadOption-adjusted spread

300

400

500

600

700

800

900

1000

1100

1200

Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15

B a s i s p o i n t s ( b p s )

HY Index HY Energy HY ex Energy

Source: BofAML, RBC GAM



New Year 2016

Exhibit 66: Corporate bond spread (inverted) vs. S&P 500 earnings

-80

-60

-40

-20

0

20

40

60

800

100

200

300

400

500

600

7001980 1985 1990 1995 2000 2005 2010 2015

Y oY % C h an g e

B a s i s P o i n t s

Baa Corporate Yield Minus 10-Year T-Bond Yield (inverted, LHS)S&P 500 Earnings (RHS)

Source: RBC CM, RBC GAM

volatility in 2015, but the S&P 500

Index remains almost unchanged

from the start of the year. Rising

valuations offset the decline in

earnings that began late last year.

version of our equilibrium P/E

model. The midpoint is the result

of 12 equations combining interest

0.5, 1 and 2 standard deviations

from equilibrium. The latest bull

with the price-to-earnings ratio

at two standard deviations below

equilibrium. Valuations have been

moving gradually higher since

then and are now at 0.5 standard

deviations above equilibrium. While

P/Es are not unusually stretched at

these levels, they do not provide

investors enjoyed through the initial

recovery from the crisis period.

If valuations are to be less

going forward, then earnings growth

at the end of 2014 and have been

declining gradually throughout 2015.

While the declines have been mostly

related to the collapse in energyprices and the impact of a rapidly

past earnings cycles suggests that

we are at a point where earnings

growth frequently begins to fade.

earnings cycles, anchoring the start

preceding a recession. The median

Exhibit 68: S&P 500 Index Normalized (equilibrium) price/earnings ratio

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

EQ

+1SD

-1SD

-½SD

+½SD

+2SD

-2 SD


Exhibit 67: S&P 500 return decompositionReturn contribution of earnings growth and multiple expansion

-60%

-40%

-20%

0%

20%

40%

60%

'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15(YTD)

Multiple Expansion Earnings Growth S&P500 Price Return





Exhibit 70: S&P 500 Composite Index Consensus earnings estimates

90

100

110120

130

140

150

160

2009 2010 2011 2012 2013 2014 2015 2016 C o n s e n s u s e a r n i n g s e s t i m a t e s

( $ U S )

2012 2013 2014 2015 2016 2017Source: Thomson Reuters, Bloomberg

duration for a cycle, measured from

we assume that the current cycle

current levels in 2016 and 2017,

earnings estimates have undergone

constant negative adjustment since

the end of 2014 (Exhibit 70). It will

progress higher without positive

earnings momentum.

Gauging the opportunity

in stocks

While some of our indicators

increased caution in today’s

investing environment, the balance

of our signals suggests that these

issues will ultimately be resolved.

If our base case materializes,compelling upside potential for

possible outcomes for the S&P 500

based on various combinations of

earnings and valuations. Assuming

the current top-down consensus

earnings of $120.04 for the S&P

500 is delivered and a multiple of

the index would reach 2,170.51 by

year-end, or 4% above its current

level at the time of writing. For 2016,

the same multiple applied to today’s

2016 top-down consensus earnings

a total return of 14% over the next

13 months, in line with our forecast.

Exhibit 69: S&P 500 recurring earnings

20

40

60

80

100

120

140

160

180

-6 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102 E a r n i n g s L e v e l a s % o f C y c l e

P e a k E a r n i n g s L e v e l

Months Prior to & Following Peak in Earnings

Current Cycle Best (1973-1975) Worst (2001) Median of All Cycles

Median Months: Earnings Peak to Earnings Trough:19 months(Current Period since July '07 Earnings Peak: 100 months)


Exhibit 71: Earnings estimates & alternative scenarios for valuations andoutcomes for the S&P 500 Index

CONSENSUS

2015Top down 2015Bottom up 2016Top down 2016Bottom up

P/E $120.0

22.2 2670.4

20.2 2420.4

Equilibrium 2170.5 2136.2

16.0 2060.1

1670.6 1644.2

Source: RBC GAM




Exhibit 72: U.S. yield curve and monetary policy10-year minus 2-year bond yield vs. fed funds rate

0%

2%

4%

6%

8%

10%

12%

14%

16%

-300

-200

-100

0

100

200

300

1977 1982 1987 1992 1997 2002 2007 2012 2017

F e d f u n d s r a t e

B a s i s p o i n t s

Periods of tightening monetary policy 10-year minus 2-year bond yield (RHS)

Fed funds rate (RHS)

Source: Haver Analytics, RBC CM, RBC GAM

Volatility likely to persistin 2016

As always, the path to higher equity

prices is not expected to be smooth.

A tightening of monetary policy

yield curve, typically foreshadowing

the yield curve (i.e. 10-year yields

minus 2-year yields) steepens as

the Fed cuts short-term interestrates to stimulate the economy

(Exhibit 72). The opposite is true

during periods of tightening. Notice

that there is an inverse relationship

between the Volatility Index (VIX)

and the steepness of the yield curve,

advanced by 30 months (Exhibit

73). Beginning in 2014, the yield

alleviated downward pressure on

short-term yields. Should the past

relationship between the yieldcurve and the VIX hold, be prepared

for a continued rise in volatility

during 2016.

What’s in style?

With economic growth at uninspiring

levels, investors have favoured

have demonstrated the ability to

increase their earnings without

much reliance on a solid advance in

has dominated during the past

A swing away from growth and

toward value can be expected when

investors grow more positive on the

the economy.

Exhibit 74: Growth to value relative performanceS&P 500 Growth Index / S&P 500 Value Index

0%

1%

2%

3%

4%

5%

6%

7%

8%9%

10%

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

C u m u l a t i v e r e l a t i v e p e r f o r m a n

c e


Exhibit 73: U.S. yield curve vs. VIX volatility

0

10

20

30

40

50

60

70-2%

-1%

0%

1%

2%

3%1990 1994 1998 2002 2006 2010 2014 2018

I n d e x l e v e l

Recession periods U.S. 10yr-2yr spread (LHS, Inv, Adv 30 months) VIX (RHS)


VIX last plot: 15.8




our underweight position in the

asset class, particularly sovereign

bonds. However, bonds typically

offer stability through periodsof higher volatility and, as yields

gradually rise, we expect to increase

following positive U.S. employment

data in early November, adding one

weighting, sourced from cash.

investments. The capital loss from

a mere 23-basis-point rise in the

U.S. 10-year T-bond yield will offset

coupon income, resulting in a 0%

total return over the following12 months (Exhibit 76).

Exhibit 77 shows a table of

prospective returns for various asset

classes based on the assumption

our estimate of “equilibrium” or

fair value over a variety of time

investors become more defensive,

size preference toward larger-cap

companies. Small- and mid-cap

but mega caps have outperformed

in the second half (Exhibit 75). The

of the S&P 500, so their strong

performance has boosted the overall

be an additional sign of growing

recovered slightly near the end of

November and, while encouraging,

it is still too early to tell if the trend

has turned.

Asset Mix

Without question, the domestic and

since then have focused on the

ongoing normalization in bond yields

and equity valuations. We recognize

that the dialogue is now shifting

somewhat. We continue to expect

moderate economic growth, but

warning signs are accumulating for

investors, namely in the yield curve

suggest that the U.S. business cyclemay be maturing.

in nearly a decade, we expect bond

yields to rise, albeit at a gradual

pace. That said, even a modest

rise in yields from the current low

Exhibit 75: Relative strength to S&P 500 Index Rebased to 100 as of Jan. 1, 2015

98

99

100

101

102

103

104

105

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16S&P 100 Mega Cap Index S&P 600 Small Cap IndexS&P 400 Mid Cap Index


Exhibit 76: U.S. 10-year Treasury

10

15

20

25

30

35

40

45

50

2009 2010 2011 2012 2013 2014 2015 2016

B a s i s P o i n t s ( b p s )


Last Plot: 23



42 I THE GLOBAL INVESTMENT OUTLOOK New Year 2016

back some of our overweight in

stocks in the months and quarters

ahead. For a balanced, global

investor, we currently recommend an

asset mix of 62% equities (strategic

neutral position: 55%), and 37%

fi

xed income (strategic neutralposition: 43%), with the balance in

cash.

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

EXHIBIT 77: Asset-class forward returns

Asset classCurrentreturn1

1-year forwardreturn

2-year*forwardreturn






U.S. Treasury Bill 0.12%

U.S. 10 Year Treasury Bond 4.16% 3.90% 0.83% 0.86% 1.15% 1.42%

Canada 10 Year Government Bond (6.69%) (6.32%) (3.69%) (2.29%) (1.01%) 0.00%

U.S. Investment Grade Bond** 4.62% 6.17% 2.96% 2.88% 3.06% 3.28%

Canada Investment Grade Bond** (3.29%) (1.28%) (0.21%) 0.63% 1.45% 2.14%

U.S. High Yield Bond*** 10.24% 17.51% 11.37% 10.23% 9.57% 9.21%

U.S. Stocks (S&P 500) Total Return 6.15% 26.09% 18.20% 14.44% 11.94% 10.27% 9.67% 9.35%

Canadian Stocks (TSX) Total Return 26.86% 32.31% 19.38% 15.18% 12.66% 10.61% 9.88% 9.50%

1If market moves to equilibrium. *Annualized returns **Bank of America ML Indexes, assuming long-term reversion to normal spread to T-bond, evenly through to end dateSource: RBC GAM, Bloomberg

Our models continue to indicate that

equities are likely to outperform

bonds, and we remain overweight

stocks. Nevertheless, we are also

cognizant of the need to focus even

more on downside protection in the

current environment. Should our

stress indicators continue to worsen,

it may be prudent to begin scaling






“The persistence of low rates

crisis has almost certainly

anchored investor mindsets to a

low level of rates going forward.”

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: 0.83%Current Range: 1.03% - 2.20% (Mid: 1.62%)


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

%

Last Plot: 2.22%

Current Range: 0.88% - 2.67% (Mid: 1.77%)


Canada 10-Year Bond YieldEquilibrium range

0

2

46

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 1.57%



Japan 10-Year Bond YieldEquilibrium range

0

2

4

6

8

10

12

14

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 0.31%



U.K. 10-Year Gilt

Equilibrium range

0

2

4

6

8

10

1214

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020

%

Last Plot: 1.83%






GLOBAL EQUITY MARKETS

S&P/TSX Composite EquilibriumNormalized earnings and valuations

400

1600

6400

25600

1960 1970 1980 1990 2000 2010 2020

Source: RBC GAM

Nov. '15 Range: 13271 - 19839 (Mid: 16555)

Nov. '16 Range: 13905 - 20788 (Mid: 17346)

Current (30-November-15): 13470

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. '15 Range: 1620 - 2707 (Mid: 2164)

Nov. '16 Range: 1926 - 3219 (Mid: 2573)


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

Nov. '15 Range: 1702 - 3639 (Mid: 2670)

Nov. '16 Range: 1795 - 3838 (Mid: 2817)


Japan Datastream Index Normalized earnings and valuations

65

130

260

520

1040

1980 1985 1990 1995 2000 2005 2010 2015 2020


Nov. '15 Range: 279 - 808 (Mid: 544)

Nov. '16 Range: 272 - 786 (Mid: 529)


Emerging Market Datastream Index Normalized earnings and valuations

20

40

80

160

320

640

1995 2000 2005 2010 2015 2020

Source: Datastream, RBC GAM

Nov. '15 Range: 239 - 429 (Mid: 334)

Nov. '16 Range: 251 - 450 (Mid: 351)


U.K. Datastream Index Normalized earnings and valuations

210

420

840

1680

3360

6720

13440

26880

1980 1985 1990 1995 2000 2005 2010 2015 2020


Nov. '15 Range: 5856 - 11127 (Mid: 8491)

Nov. '16 Range: 6891 - 13093 (Mid: 9992)




Soo Boo Cheah, CFA

Senior Portfolio Manager

RBC Global Asset Management (UK) Limited

Suzanne Gaynor

V.P. & Senior Portfolio Manager



Market view

It has been more than 13 months

since the U.S. Federal Reserve (Fed)

to quantitative easing. Janet Yellen’s

on October 27, 2014, at which

time the Fed chief predicted that

interest-rate increases would soon

be on the way. And still we wait.

While there is little reason to doubt

the Fed’s intention to close the

chapter on zero-interest-rate policy

at its next policy announcement on

to doubt that such a move will have a

rates. That’s because monetary

including the European Central

historically low. In this article, we

will lay out how continued Treasury

purchases by the private sector,

and the consequences of the global

continue exerting downward pressure

on bond yields.

for higher bond yields, investors have

GLOBAL FIXED INCOME MARKETS

speed at which they expect interest

rates to rise, and this view may be

partially responsible for the 10-year

Treasury yield trading at the lower

end of the range established sincethe Fed cut its policy rate to 0.25%

(Exhibit 1). Our 12-month forecast

for the yield on the 10-year Treasury

bond is 2.50%, which is the mid-

point of the 1.50%-3.50% range in

Some may argue that a 2.50% yield

target is too conservative at a time

are selling Treasuries, especially

China’s. We would point out that the

motivation of these foreign central

to meet the currency-redemption

demands of the private sector.

Exhibit 2 illustrates this relationship,

valued at US$167 billion over the

past 12 months while foreign private

purchasing Treasuries. Emerging-

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2007 2009 2011 2013 2015

%

U.S. Treasury 10-year Yield Fed Fund Rate

Average2.55%

Source: Bloomberg

-200

-100

0

100

200

300

400

Jul-2012 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015

F o r e i g n p u

r c h a s e s o f U . S .

T r e a s u r y

( 1 2 - m o n t h

r o l l i n g s u m $ b i l . )

Official Private

Source: Bloomberg

Exhibit 2: Foreign central banks facilitate private-sector demand forsafe-haven Treasuries

Exhibit 1: 10-year Treasury yield stays low while investors await theFed’s decision




toward lower potential economic

growth. Why is this? We believe that

enabled the private sector to avoid

resulted in capital being directed

to less productive areas of the

economy. This misallocation of

capital, combined with the effect of

wealth inequality, will tend to limit

the long-term growth potential of the

economy – and hold down Treasury

and Japan in particular, will continue

to experiment with ultra-low interest

rates, and may try negative lending

an environment where people are

actually losing money on cash,

higher-quality bonds will start to

The onset of negative interest rates

and competition among central

again unless warranted by economic

conditions, as well as a commitment

that it will not begin/expand the

use of its other tools for tightening

policy. These tools include pruning

the Fed’s balance sheet by selling

bonds and/or boosting the use of

reverse repos (RRP), whereby it

that investment funds and other

to the Fed. As a result, some of the

sheets are removed, lowering the

amount of money available for loans.

The Fed has been largely mute on

balance-sheet reduction and RRP,

and we suspect this will continue as

engaging in either while rates are

or maintain the assets on their

balance sheets, low bond yields

will persist. It is no coincidence

are entrenched across the globe,

handing the proceeds of Treasurysales to the private sector, which is

haven Treasuries.

While much discussion of monetary

tightening is centered on the Fed

raising the policy rate, it is potential

changes in the composition of the

Fed’s balance sheet that would

have a bigger effect on prices for

reserves held by U.S. commercial

typical amount under US$100 billion.

US$2.7 trillion is funding investment-

of money at historical lows. We are

now concerned that any move by the

Fed to reduce its reliance on excess

reserves as funding for assetspurchased over the past seven

years could trigger an unwinding

of derivatives trades and raise

investing costs, possibly leading

to a near-term disruption in money

felt is that investors have started

demanding extra compensation for

cross-border borrowing (Exhibit 3).

associated with any unwinding are

Treasury yields.

The best outcome investors could

hope for following an initial rate

that it does not intend to raise rates

-80

-70

-60

-50

-40

-30

-20

-10

0

Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2015 Jul-2015 Oct-2015 E U R a n d J P Y f l o a t - t o - f l o a t

b a s i s ( b p s )

USD-JPY 2-year Xccy Basis USD-EUR 2-year Xccy Basis

Negative basis means EUR and JPY ischeaper to fund than the US$

Source: Bloomberg

Exhibit 3: Investors have started demanding extra compensation forcross-border borrowing



New Year 2016

U.S. – We expect the Fed to deliver

the long-anticipated policy-rate

while assuring investors that the

size of its balance sheet will remain

unchanged. Our view is that the Fed

to facilitate further tightening over

the next 12 months. We expect this

adjustment to result in volatility for

forecast a 1.00% fed funds rate by

the end of 2016.

To derive our 2.50% forecast for the

10-year Treasury, we assume a slow

and gradual tightening cycle and use

the 2-year point of the yield curveto express this view. Our model

suggests a 2-year yield of 1.50% by

spread of 100 basis points between

yields on the 2-year and the 10-year

Treasury bonds (Exhibit 4), we get a

2.50% yield for the 10-year bond in a

year’s time.

planned asset purchases and further

cut the policy rate into negative

territory. In Japan, the direction

of yields on Japanese government

bonds (JGBs) will depend largely on

(BOJ) and the speed of investors’

shift away from holding JGBs. We

expect Government of Canada bonds

with intermediate to long maturities

interest rate unchanged.

The Fed is preparing investors for

upstream against many other major

Our belief that the pace of interest-

that this tightening cycle will be less

least in the early stages. However,

opposite directions, the impact of

changes in policy-rate differentials

previous ones. Using unorthodox

trying to outdo each other in this race

to the bottom. Even the Fed, which

policy amid modest domestic growth,

will be limited by how fast it can raise

rates given slowing global growth,

plummeting trade and increased

asset-price volatility. In this monetaryenvironment, bond investors can

pretty much ignore any single action

by the Fed to get policy rates up, and

should instead focus on whether the

Fed will be able to continue boosting

improvement in global economic

conditions, the pace of tightening by

and global bond yields are expected

to move sideways within the band

Direction of rates

We are trimming our bond-yield

forecasts and continue to expect

shorter-maturity yields to rise faster

than yields on longer-term securities.

We forecast that bond yields will be

little changed over the next year,

meaning a global bond portfolio

should produce a small positive

return of 1.5%, not the typical 3% to

5% loss in years after the Fed begins

a tightening cycle. We expect the

that the Fed’s move has been

we expect the ECB to extend its

-50

0

50

100

150

200

250

0 1 2 3 4 5 6

U . S . Y i e l d c u r v e 1 0 - y e a r v s

2 - y e a r ( b p s )

Fed Fund Rate

2004 Cycle

This Cycle?

Source: Bloomberg

Exhibit 4: Our model suggests 1% fed funds rate could narrow yield gapbetween 2-year and 10-year Treasuries




Canada – Lower prices for oil and

other commodities led the BOC

at its October meeting to reduce

domestic growth forecasts for 2016

overheating economy before mid-

2017. The statement also alluded

to concerns about household debt,

but the concerns do not seem as

pronounced as they did during the

tenure of Governor Carney. The

become more stimulative under

the new Liberal government, and

proposed new spending could

transform a projected $1.4 billion

We do not expect the BOC to raiserates next year unless the ramp-up

economy to a degree that boosts

several times while the BOC stays

on hold, the extra yield offered by

boost economic growth over the

intermediate term. We expect the

latest reforms and spending plans

(targeted at newborns and the

elderly) to boost economic growth

and to supply further monetary

easing if deemed necessary. Japan

has shown the world that the

malaise following a long period of

vicious cycle, with the government

delivering productivity-boosting

reforms. Although it is still early

days, Abe and BOJ Governor Kuroda

are off to a good start. Perhaps

Japan can show the world there is a

In line with the direction of global

rates, we are decreasing our yield

forecast for the 10-year JGB to

0.50%, 10 basis points lower than

our previous forecast. We are

unchanged at 0%.

Germany – Yields on bunds should

subdued (Exhibit 5) and the ECB

has hinted at policy rates going

into negative territory. With the Fed

tightening and the ECB pursuing a

looser monetary policy, the interest-

rate differential between 10-year

bunds and Treasuries should rise

to 200 basis points in favour of

Treasuries from 175. Bunds will

continue to be supported by ECB

in Germany, which does not have

to issue net new debt. While we

Paris on November 13 will have a

negligible effect on the economy, the

Eurozone recovery to date remains

the ECB to loosen policy. We are

reducing our policy-rate forecast to

-0.10% from 0% as the ECB delivers

further easing measures to boost

yield drops to 0.50% from 1.00%.

Japan – Nothing has changed over

the past year regarding our view of

JGBs: valuations remain unattractive.

have produced negative returns

period during which the 10-year

Also on a positive note, much

needed domestic reforms are slowly

being enacted, and joining the

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

2.8

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012 2013 2014 2015

E u r o i n f l a t i o n s w a p f o r w a r d

5 Y 5 Y ( % )

E u r o - a r e a C P I y - o - y ( % )

Euro-area CPI

Inflation expectation (rhs)

Source: Bloomberg

expectations




U.S.

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

return (local)

Base 1.00% 1.50% 2.00% 2.50% 3.10% 1.01%

Change to prev. quarter 0.00% (0.25%) (0.40%) (0.25%) (0.25%)

High 1.50% 2.20% 2.75% 3.00% 3.65%

Low 0.13% 0.30% 1.00% 1.50% 2.25% 6.43%

Expected Total Return US$ hedged: 1.24%

GERMANY


return (local)

Base (0.10%) 0.01% 0.10% 0.50% 1.15% 1.47%

Change to prev. quarter (0.15%) (0.34%) (0.45%) (0.50%) (0.50%)

High 0.05% 0.50% 1.25% 1.70% (4.25%)

Low (0.50%) (0.50%) (0.25%) 0.10% 0.60%

JAPAN


return (local)

Base 0.05% 0.10% 0.15% 0.50% 1.50% (0.27%)

Change to prev. quarter 0.00% (0.05%) (0.10%) (0.10%) (0.20%)High 0.05% 0.30% 0.50% 1.00% 1.75% (3.52%)

Low (0.10%) (0.10%) 0.00% 0.00% 0.75%


return (local)

Base 0.50% 1.20% 1.75% 2.50% 0.46%

Change to prev. quarter 0.00% 0.10% 0.00% 0.00% 0.00%

High 1.00% 1.50% 2.00% 2.50% 3.00%

Low 0.00% 0.00% 0.20% 0.75% 1.60%

Expected Total Return US$ hedged: 0.03%

U.K.


return (local)

Base 1.00% 1.40% 2.00% 2.40% (0.55%)

Change to prev. quarter (0.25%) (0.20%) (0.50%) (0.35%) (0.10%)

High 1.50% 2.60% 3.00% 3.00% (3.73%)

Low 0.50% 0.50% 1.00% 1.50% 2.25% 7.25%

INTEREST RATE FORECAST: 12-MONTH HORIZON

Source: RBC GAM

Treasuries relative to Government ofCanada bonds should increase along

the entire yield curve. As a result,

Canadian bonds should hold their

own, if not outperform Treasuries,

in the moderately rising yield

environment that we expect over the

next 12 months.

Canada policy rate and 10-year

government-bond yield to remain

unchanged at 50 basis points and

1.75%, respectively.

U.K.

for November 2016, although a

move could come earlier should a

until policy rates reach at least 2%.

Gilts will receive additional support

over the next 12 months.

The possibility that Britain exits the

EU in a referendum slated for as

soon as the second quarter could

Any indication that Britons will

vote to pull out would tend to pushyields lower because of concern that

withdrawal would lead to safe-haven

demand, at least initially, as well as

slower economic growth.

We are reducing our 12-month

forecast for the 10-year gilt to

2.45%, 35 basis points lower than

the previous quarter. Our policy-rate




points to 1.00%.

Regional preferences

We expect global bond yields to

increase marginally from current

levels driven by higher Fed policy

rates. In our view, short-maturity

rates will rise more than thoseon longer maturities, which are

anchored by uncertainty related

funding costs continue to rise.

We recommend a 5% overweight

in German bunds and a similarunderweight in JGBs.



CURRENCY MARKETS

The U.S. dollar cycle still

strong

As 2015 draws to a close, the U.S.dollar appears poised for another

has outperformed practically every

other currency in the world (Exhibit

1), and that’s without the U.S.

to raise interest rates. Most of the

U.S. dollar’s strength this year has

easing monetary policy. The catalyst

for further appreciation was setafter decent U.S. economic strength

(ECB) extended its quantitative-

easing program and investors

of Japan (BOJ) would ease next year.

Neither the ECB nor the BOJ would

currencies against the U.S. dollar.

of U.S. dollar strength, we wonder

about the longevity of this trend

(Exhibit 2). While stronger growth,

a tightening Fed, smaller current-

continue, there are at least two

Dagmara Fijalkowski, MBA, CFA

Head, Global Fixed Income & Currencies

(Toronto & London)RBC Global Asset Management Inc.

Daniel Mitchell, CFA

Portfolio Manager


reasons to be cautious. First, the

U.S. dollar is now above its fair

value, so the valuation tailwind is

absent. Second, bullish dollar views

are well subscribed and, to someextent, positioned for. Consequently,

we continue to expect further U.S.

these two potential constraints and

favour a more cautious approach,

size of our bullish positions.

A weaker euro may be the

most acceptable policy tool

At this stage of the U.S. dollar

cycle, we pay little attention to

purchasing-power-parity valuations

(PPP), for while the euro is slightly

undervalued on a PPP basis, this

currencies are not trading at the

extremes.


Exhibit 1: Currency returns versus the U.S. dollar (since January 1, 2015)

I L S

H K D

U S D

C H F

J P Y

C N Y

G B P

T W D

C N H

P H P I N R

S G D

K R W

T H B

C Z K

S E K

H U F

R O N

E U R

D K K I D R

A U D

P L N

R U B

P E N

M X N

N O K

A R S

C A D

C L P

N Z D

M Y R

T R Y

Z A R

C

O P

B R L

-35%-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

Source: Bloomberg

Exhibit 2: Long-term U.S. dollar cycles

65

75

85

95

105

115

125

135

145

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

8 yrs-26%

6 yrs+67%

10 yrs-47%

7 yrs+43%

9 yrs-40%

5 yrs+39%





Exhibit 3: The euro and its purchasing power parity valuation

0.60

0.80

1.00

1.20

1.40

1.60

1973 1979 1985 1991 1997 2003 2009 2015PPP 20% Bands EURUSD

Source: Deutschebank, Bloomberg

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2012 2013 2014 2015 2016 2017

September 2013Forecast

September 2014

Forecast

September 2015Forecast

Source: European Central Bank

| |

Our experience tells us that theperiods of valuation extremes

present great opportunities when

they occur, but now is not one

of those times (Exhibit 3).

For now, we focus on capital

currencies. While improvement

in the credit and economic cycles

has somewhat buoyed the euro

over the past quarter, the theme

of divergent monetary policies has

Signals for further easing from the

ECB should exert further downward

pressure on the single currency. To

wit, the October press conference

the table for further easing, which

After explicitly ruling out a cut in

short-term policy rates earlier in the

to have been emboldened by the

by other European economies in

which rates are even more negative,

such as Switzerland, Sweden and

October that: “we consider other

nonstandard monetary policy

measures, one of which is the

negative rate on the deposit facility...

1

Our expectations for the ECB

to continue on its easing path

1 Malta, October 22, 2015

fragile and ECB staff forecasts don’t

envision a return to the central

(Exhibit 4). One caveat is that the

forecasts, does not anticipate a

sharp recovery in commodity prices.

Easier monetary policies outside

the U.S. will be a meaningful

aftermath of the euro crisis, the

Eurozone’s trade balance led to a

large current-account surplus due

fundamental argument in favour of

euro strength. However, portfolio-

investments are now fully recycling

this surplus (Exhibit 5) given ECB

quantitative easing and negative

interest rates. We can see the




Exhibit 5: Eurozone basic balance of payments4-quarter rolling sum, % of

-5%

-3%

-1%

1%

3%

5%

2002 2004 2006 2008 2010 2012 2014 2016

Portfolio Investment Direct InvestmentC/A Balance Basic Balance of Payments

Source: Eurostat

-600

-300

0

300

2002 2004 2006 2008 2010 2012 2014 2016

E U R b n

Foreign Investors European Investors Net Flows

Outflows fromthe Eurozone

Inflows to theEurozone

Source: Eurostat

Exhibit 7: European equity investors have increased appetite foreuro-hedged ETFs

0%

10%

20%

30%

40%

50%

2012 2013 2014 2015 2016 H e d g e d S h a r e o f E u r o p e a n

E q u i t y E T F s

Hedged ETFs

Source: Bloomberg

foreign and European investor

activity. Foreigners’ appetite for

European assets has waned, while

Europeans, spurred by the paltry

rates offered by government bonds,

have started investing elsewhere,

negative territory (Exhibit 6).

are necessarily inconsistent with

strong European equities. Equity

Eurozone – it is demand for Eurozone

bonds that has really started to

wane. The story is much the same

the strong demand for European

equities will not have much effecton the euro as the ECB’s renewed

commitment to negative rates and

investors to place currency hedges

on their purchases (Exhibit 7).

The odds that divergent monetary

policies will send the euro-dollar

exchange rate lower are fairly

additional easing before the end of

the year and the Fed appears quite

table for this month. We continue to

expect parity within our 12-month

forecast horizon, but are convinced

that this will not be the end of the

euro’s underperformance. Even if

the turn of the calendar leads to a

bout of euro strength caused by

| |




Japanese monetary policy, leaving

room for an outsized reaction to

any surprise policy change.

the yen than they were a few years

ago. For one thing, the decline in

global commodity prices has caused

Japan’s current-account balance to

cautious re-start of nuclear-energy

production has stirred expectations

Another difference lies in the BOJ’s

probability of further quantitative

easing, BOJ Governor Kuroda has

goals without resorting to further

paid attention, with a huge decline

in investor willingness to short the

yen. However, opinions remain

divided on the future course of

sell the fact” sentiment, we would

re-establish shorts before the next

driver emerges to push the euro

toward more extreme levels of

undervaluation during this cycle.

The weaker yen may not

be palatable, but few other

policy choices

The yen’s circumstances are

not all that different from the

euro’s in that they involve some

expectations of continued monetary

The critical difference lies in

yen is extremely cheap whether

measure of real effective exchange

rates, which shows the yen near

stable versus the U.S. dollar over

the past several months, the yen

has strengthened somewhat relative

On a trade-weighted basis, the yen

returned to levels similar to the fall

quantitative-easing program.

What contributed to this

the currencies of Asian trading

partners other than China, which

Chinese growth or competitive

pressure from the renminbi. Japan,

for example, has smaller trade ties

with China than does South Korea.

| |

Exhibit 8: Japanese yen real effective exchange rate

60

80

100

120

140

160

1984 1988 1992 1996 2000 2004 2008 2012 2016Long-term Average

Source: Bank of Japan

Exhibit 9: Japan’s current-account balanceTrillions of Japanese yen

-2

-1

0

12

3

4

5

6

7

8

1999 2003 2007 2011 2015

Current Account Balance

Source: Bank of Japan, Ministry of Finance




Exhibit 10: Japan’s basic balance of payments

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

10%

1999 2003 2007 2011 2015


Source: Bank of Japan, Ministry of Finance

Exhibit 11: Estimated rebalancing to foreign assets

USD211bn USD419bn USD86bn

0

100

200

300

400

500

600

700

800

Baseline High Case Low CasePrivate Pensions Insurance Cos Public Pensions Completed GPIFSource: IMF, RBC GAM

of further improvement. Just asin Europe, however, the surplus

from this development has been

fully offset by portfolio and

merger-and-acquisition (M&A)

in 2014 and accelerated this year

as Japan’s Government Pension

Investment Fund (GPIF) invested

more overseas as part of investment-

policy changes under which the

US$1.1 trillion fund is moving money

out of the country. While the GPIF

rebalancing is mostly complete,

the impact will continue as other

pension funds and insurance

companies adjust their asset

mixes in a similar way. There are

seven other public pension funds

that collectively manage assets

amounting to about a third of those

held by the GPIF, and most of theseare expected to follow the GPIF’s

lead, as are private pension funds.

to raise foreign holdings, partly in

response to regulatory changes

lowering capital charges on foreign

bonds and removing ownership

limits on foreign securities, as

well as the need to secure higher

returns to fund policy liabilities.

The IMF estimates these collective

billion,2 but potentially much larger

(Exhibit 11). Such an amount would

2 Paper: “Port folio Rebalancing in Japan: Easing”, August 2015

| |

Another potential negative for

hedging costs will rise. We have

previously highlighted that Japanese

investors could achieve superiorbond returns versus JGBs by

the cost of hedging currency

12), leading to hedge unwinds

that would have a potentially

negative impact on the yen.

potential in Japan, necessitating

corporate investment abroad.

Moreover, corporate-governance

reforms that are part of

Abe’s three arrows could be




Exhibit 12: The cost of hedging U.S. dollars is rising for Japanese investors

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2010 2011 2012 2013 2014 2015 Annual Cost

Source: Bloomberg

convincing corporate boards to

investments and projects.

leads us to expect further yen

attractive valuations. We are also

not persuaded that the BOJ is

Kuroda has been denying that

additional bond purchases are in

be right for further quantitative

easing aimed at boosting investor

House elections in July 2016.

The pound follows in the

dollar’s footsteps

Among major currencies, the

pound most resembles the U.S.

dollar in terms of valuations and

the effect of monetary policies.

overvalued on PPP. However, the

overvaluation is not at extreme

levels so we can’t rely on valuations

much in determining near-term

currency movements (Exhibit 13).

on a trade-weighted basis. These

economic upswings that have been

of England (BOE) to move closer

to normalizing monetary policy.

for the BOE and the potential for the

from other parts of Europe. Trade-

weighted sterling has appreciated

2014. The currency’s strength,coupled with much lower oil prices,

uncompetitive have allowed the

BOE’s Monetary Policy Committee

(MPC) to avoid raising rates even

as wage growth accelerated and

expectations. According to a speech

by MPC member Kristin Forbes in

September, “currency movements

hold, despite the solid recovery and

overshooting our 2% target.”3

3 Speech on September 11, 2015: “Much adoabout something important: How do e xchange

| |

Exhibit 13: The pound and its purchasing power parity valuation

1.0

1.5

2.0

2.5

3.0

3.5

1973 1979 1985 1991 1997 2003 2009 2015PPP 20% Bands GBPUSD




New Year 2016

Exhibit 14: U.K. basic balance of payments

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2002 2004 2006 2008 2010 2012 2014 2016


Source: Office for National Statistics

Exhibit 15: A weaker currency helps with a lag

0.90

1.05

1.20

1.35

1.50

1.65

1,600

1,700

1,8001,900

2,000

2,100

2,200

2,300

1976 1981 1986 1991 1996 2001 2006 2011 2016

Manufacturing Employment, SA 000s 2yr Lag (LHS) USDCAD (RHS)

Source: Statistics Canada, Bloomberg

from lower energy prices fades,

2016, which in our view may be too

dovish. However, we don’t expect

the pound to rise materially against

the U.S. dollar since the central

be raising rates over the next year.

Over the longer term, funding needs

for the U.K.’s large current-account

sterling. For now, the current account

related in part to quantitative easing

and negative rates on the continent,

as well as inward direct investment,

funded (Exhibit 14).

An interesting development has

the U.K. current account. Historically,

the income portion of the current-

account balance has been positive

and helped offset a persistently

negative trade balance. However,

the income ledger is deteriorating as

the U.K. now pays out more interest

and dividends to foreigners than it

receives on assets owned abroad.

we expect that the current-account

the Eurozone and therefore expect

the pound to hold its own against

the U.S. dollar, while outperforming

the euro, the yen and the Canadian

dollar. Should funding for the

| |

The weaker loonie – a poster-

(BOC) is a long way behind the Fed

next two years. Barring a sustained

recovery in global commodity

on hold while relying on the sharp

depreciation of the loonie to revive

Canadian manufacturing (Exhibit 15).

Investors are therefore awaitingevidence of a revival in the non-

energy manufacturing sector, which

suffered a much deeper downturn

in volume terms than implied

by levels of economic activity in

Canada’s biggest trading partner,

the U.S. Unfortunately, non-

energy manufacturing continued

to contract in Canada even after



THE GLOBAL INVESTMENT OUTLOOK New Year

Exhibit 16: Canada basic balance of payments

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1999 2003 2007 2011 2015

Portfolio Investment Direct Investment

C/A Balance Basic Balance of Payments

Source: Statistics Canada

Exhibit 17: USDCAD and its purchasing power parity valuation

0.9

1.0

1.11.2

1.3

1.4

1.5

1.6

1.7

1973 1979 1985 1991 1997 2003 2009 2015

PPP 20% Bands USDCAD


-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2000 2003 2006 2009 2012 2015

% c h g . y - o - y

Headline Inflation Core Inflation Target Band

Source: Bank of Canada

U.S. import volumes startedrecovering. Research by the BOC

suggests that prolonged strength

in the Canadian dollar between

2007 and 2012 and the economic

downturn not only depressed,

but destroyed manufacturing

capacity in some sectors, hurting

Canada’s competitiveness abroad.

competitiveness, but with a lag, and

to attract opportunistic investment

through the economy, Canada’s

basic balance-of-payments situation

is not encouraging. The current-

(Exhibit 16). The depreciation of

the Canadian dollar to date has not

assets attractive to longer-term

foreign investors. Based on PPP, the

loonie is cheap but not extremely so

(Exhibit 17).

In the meantime, a relatively benign

to the lower end of the BOC’s

target band, two notions have

remained relatively stable, sitting

just above the 2% target.

| |




Naturally, a sustained recoveryin global commodity demand

and prices would change this

assessment, but for now such a

recovery is far from our base case

scenario. We expect the U.S. dollar

to appreciate above C$1.40 in the

next 12 months. We place a higher

beyond that point than we do on

strength from higher oil prices.

To conclude

While it may be tempting to fade the

continued strength of the U.S. dollar,

given its duration and magnitude

as well as consensus about it, we

believe it’s too early to do so.

| |

to seven years. As for magnitude,

would require another 10% move

in overvaluation to reach a point

that we consider extreme. Finally,

while the consensus view may be

for the U.S. dollar to go higher, we

don’t believe that positions are

consensus. However, with the U.S.

dollar no longer deeply undervalued

and the prospect of volatility rising,

our positions and willingness to

For now, the ECB appears to be awilling participant in the “currency

wars” and the BOJ may be dragged

into battle. Meanwhile, the BOC

can stay above the fray, aided by a

energy and other commodities. We

expect the euro, the yen and the

versus the U.S. dollar. On the other

stance will offset the negativeimpact of the pound’s modest

overvaluation until a more dominant

theme emerges, leaving the pound

little changed in our forecasts.



To quote Simon Potter, the Fed

going to happen.” With Fed Chair

Janet Yellen and most of the FOMC

signaling they consider the time to

begin normalizing monetary policy

to be at hand, we examine how they

are going to achieve this, why this

time is so different, and the dilemma

the Fed is facing.

New tools, new target range

Let’s start with the new tools in

the Fed’s toolbox – interest on

excess reserves (IOER) and reverse

repurchase agreements (RRPs).

Both of these instruments were

born of the necessity imposed by

the massive expansion of the Fed’s

balance sheet and the concomitant

creation of substantial excess

(Exhibit 1). Before introducing these

tools, however, we should highlight

what the Fed’s modus operandi was

“This time is different.”

It’s one of the most

overwrought phrases in

Federal Reserve is concerned,this time is different. For one

thing, the Fed’s substantial

balance sheet presents novel

challenges for the control of

short-term interest rates as

traditionally practiced. As the

Fed begins to raise interest

rates, it will be relying on tools

that either did not exist orwere not previously used for

policy implementation, such

as interest on excess reserves

and reverse repurchase

agreements. Moreover,

Committee’s (FOMC) most

important policy signal in

recent history, the fed fundsrate, will be moved upwards

within a target range, rather

than set at a target level.

Taylor Self, MBA

AnalystRBC Global Asset Management


WHY THIS TIME IS DIFFERENT

tries to control.

Fed implemented monetary policy

by setting a target level for the fed

funds rate. This is the interest rate

to one another in order to meet theirreserve requirements. What the

fed funds rate represented was the

its reserves, and thus new lending.

total balances, the fed funds rate

could be controlled with small

purchases and sales by the Fed.

target fed funds rate very closely and

these small interventions by the Fedwere routine.

Enter the IOER

the authorization to begin paying

interest on excess reserves. With

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1960 1970 1980 1990 2000 2010

T r i l l i o n s o f U . S . D o l l a r s

Total Reserves of Depository Institutions Required Reserves of Depository Institutions

E x c e s s r e s er v e s

Source: The Federal Reserve System

Exhibit 1: Required versus total reserves




Why this time is different | Taylor Self, MBA

arbitrage activities. Other researchconcurs with this assessment that

somewhere within the target range.1

Do you want the price or

the quantity?

The use of RRPs as a policy tool is

not uncontroversial for the Fed. One

issue that arises is the fact that it will

dramatically increase the footprint

of the Fed in short-term funding

directly. Currently, the Fed’s stated

limit for the RRP facility’s size is $300

billion per day. However, considering

the amount of excess reserves in the

system and the degree to which IOER

fed funds upwards, the size of the

RRP facility may need to be much

larger. Indeed, the Fed has indicated

that it will offer unlimited amounts ofRRPs initially.

to the Fed, RRPs are effectively the

asset. Important sources of short-

funds, could gravitate towards

placing their money directly with the

Fed and erode the proper functioning

More than that, the draining of a

large amount of excess liquidity

unintended consequences for other

limited to a perceived tightening

1 Zoltan Pozsar, Credit Suisse

The shadow policy rate – RRP

impact short-term interest rates,

the Fed has had to consider other

tools. Namely, it needs a method to

impose some measure of control on

the fed funds rate, while leaving the

size of its balance sheet unchanged.

to succeed and has thus chosen

to employ is reverse repurchase

agreements (RRPs).

In essence, a RRP boils down to

being able to lend to the Fed, much

a RRP, it removes reserves from the

the size of its balance sheet.

The reason that RRPs will be more

beneath short-term interest rates is

institutions with access to the RRP

facility will be much larger than

those with access to IOER. Indeed,

in the list of counterparties eligible

for RRPs. The expectation is that

the RRP rate will be set below IOER,

most probably by 25 basis points.

move both the IOER and RRP rates

funds will end up somewhere in

between, as it is both pushed

up from below by the RRP facility

being offered directly to short-term

a much larger balance sheet, theFOMC faced the prospect that these

rising reserves would limit its ability

to control the fed funds rate. This

is what the IOER was intended to

address.

Effectively, the IOER rate (currently

held at 0.25%) represents the

to the Fed. Theoretically, this should

set a minimum interest rate in the

have no incentive to lend to other

rate lower than the one they can

Since its implementation, however,

fed funds rate, even as the size of the

Fed’s balance sheet has remained

large. This is due to a variety of

factors, not least of which is that

participate in and depend on the

to the IOER, which is restricted to

High levels of excess liquidity in

limited access to IOER, means that

been both consistently below the

IOER rate set by the Fed, as wellas highly variable. This inability to

control the fed funds rate explains

why the FOMC has changed from

a target level to a target range,

currently set at 0.00% to 0.25%.




Overall, considering the

prospects for a clear and successful

articulation of the RRP facility’s

longevity and eventual retirement

that the RRP facility becomes a

permanent feature of short-term

substantial excess reserves in the

Conclusion

The above concerns are what have

driven the Fed to revise its plans

for using IOER and RRPs and,

consequently, has increased the

level of uncertainty surrounding

just how the Fed is going to be

term interest rates when the FOMC

the FOMC is one in which, having

decided to raise interest rates

due to the RRP facility.

The Fed has tried to mitigate these

concerns, which have been raised

its plan for normalizing policy. With

regard to RRPs, the Fed has said

facility is meant to be temporary, and

Another mitigating action by the

Fed has been to discuss limiting the

amount of RRPs it is willing to offer,

thereby ensuring that providers

of short-term funds are forced to

engage with the normal avenues

limited offering of RRPs, and thus

the RRP interest rate, could handicap

the Fed’s ability to control short-terminterest rates.

by moving the IOER-RRP corridorupwards, the fed funds rate fails to

respond in a commensurate way.

Overall, we have to return to

Mr. Potter’s appraisal of the

situation – while we can reasonably

to a limited extent what direct

impact the Fed’s new tools will have,

or what forms the manifestation of

secondary and tertiary effects will

efforts to both minimize its footprint

ensure control of the Fed Funds rate

while its balance sheet remains very

large. Moreover, considering the

position globally, the uncertainty

surrounding the implementation and

beyond those simply concerned with

short-term interest rates.

Why this time is different | Taylor Self, MBA




Ray Mawhinney

Senior V.P. & Senior Portfolio Manager


Brad Willock, CFAV.P. & Senior Portfolio Manager


REGIONAL OUTLOOK – U.S.

UNITED STATES RECOMMENDED SECTOR WEIGHTS

RBC INVESTMENTSTRATEGY COMMITTEE

November 2015

BENCHMARKS&P 500

November 2015

Energy 7.0% 7.1%

Materials

Industrials 10.3% 10.1%

13.5% 13.1%

Consumer Staples

Health Care 15.5% 14.6%

Financials 16.5% 16.6%Information Technology 22.4%

Telecommunication Services 1.5% 2.3%

Utilities 2.0%

Source: RBC GAM

most of the losses suffered during

the sharp sell-off at the end of the

summer, rising almost 6% in thepast three months and bringing the

total return for the S&P 500 Index

over the past 12 months to about

3%. Recent returns have been driven

by tentative signs of stabilization

improvement in a number of global

business-activity indexes and the

slow but steady improvement of

remain anxious about the trajectory

of short-term U.S. interest rates,

the health of many emerging-

muted level of economic growth

experienced in the developed

world over the past several years.

It would appear that the waiting is

almost over for those who want the

U.S. Federal Reserve (Fed) to raise

short-term interest rates. Followingrecent comments by various Fed

governors and the robust October

priced in a probability exceeding

meeting later this month. Provided

that the November payroll data

employment and wage growth, we

move as bond yields have moved

up, yield-sensitive areas of the

degree and the U.S. dollar has

remained strong against almost

all major currencies. At this point,

the big surprise would be if the Fed

left rates unchanged. While the

Fed has made its intentions quite

expect the Fed to begin increasing

rates and to communicate its

intention to continue raising themover an extended period as long as

economic data is strong enough.

the Fed raises rates with the goal of

returning them to “normal,” versus

the typical motivation of cooling an

overheated economy. Importantly,

S&P 500 EQUILIBRIUMNormalized earnings and valuations

40

80

160

320

640

1280

2560

5120

1960 1970 1980 1990 2000 2010 2020Source: RBC GAM

Nov. '15 Range: 1620 - 2707 (Mid: 2164)

Nov. '16 Range: 1926 - 3219 (Mid: 2573)





led to some concerns. For example,the U.S. dollar is up about 5% in

the past three months against a

and over 13% in the past year.

One concern is that emerging-

harder to service that debt as their

currencies fall in value. This concern

is particularly relevant to companies

that produce commodities, sincethe demand for oil and metals

has declined as China’s economy

slows. The second concern is that

further hits to earnings as foreign

dollars. This is no small effect. In

the most recent quarter, S&P 500

earnings were reduced by over

effect. Keep in mind, however, that

consumers and some companies

including manufacturers that import

commodities or parts/assemblies

from international suppliers.

Another concern that has persisted

for several years is that slow

economic growth could lead to

disappointing earnings. Up to this

point, operating leverage has beenimpressive, and has supported

excluding the Energy sector has

come in at 2% to 4%, but earnings

10%. In the third quarter, revenue

Energy was just over 1% but

earnings growth was 6% as eachnew dollar of sales generated over

growth in capital spending has been

less than the growth in earnings

throughout this cycle. In general,

and increase dividends. This trend

should help support equities.

For the U.S. economy, fundamentals

appear somewhat mixed.

Employment is improving as the

number of people applying for

unemployment insurance recently

dropped to a 15-year low and the

number of jobs available reached

a 14-year high. The unemployment

rate has fallen to 5% as 11 million

jobs have been created since the

number of job openings is higherthan it has been in 15 years and the

a person has lost one is at a cycle

low. As one would expect, this has

led to a solid recovery in the housing

sale are low, new homes under

construction are at a seven-year

high, and prices of existing homes

have gained roughly 5% in the past

year. In addition, a recent survey ofhome builders measuring buying

interest reached a 10-year year high

rates below 4% and improved

access to credit. In contrast to the

employment and housing data, retail

sales have been underwhelming,

inventories are uncomfortably

high and industrial production has

retail store sales can be attributed

to a shift to on-line retailers and

away from goods such as clothing

to services such as health care and

travel. Overall, the U.S. consumer

is in good shape. Savings and net

worth are up and debt loads down.

The economy is muddling along with

growth between 2%-3% as it has

each year over the past 10 years

outside the crisis. We expect muchthe same in the year ahead.

economy continues to decelerate,

Brazil remains in recession as

stagnant growth, and Russia is

in deep recession. Currencies of

many of the emerging economies

China slows, commodity prices

U.S. dollar and a falling oil price

have combined to reduce S&P 500

earnings by over 10%. We expect

the U.S. dollar to move higher in the

near term and gains in the oil price

to be limited, with neither creating

near its all-time high, valuations

are neither expensive nor cheap at

roughly 16.5 times forward earnings

estimates. These levels suggest

investors should expect long-term

returns in the mid-single digits.




The S&P/TSX Composite Index

declined in the latest three months

and lagged the returns of both the

S&P 500 and MSCI World Index. This

underperformance was compounded

by a further 2% decline in the

Canadian dollar during the quarter.While many of the same trends

persisted for the broad S&P/TSX, the

was the abrupt reversal of Valeant

Pharmaceuticals. After challenging

for the top spot on the S&P/TSX in

summer, the shares fell 60% during

the three-month period. Headwinds

for the energy and basic materials

offset somewhat by the steadying

and positive performance of the

Financials sector.

In the commodity sectors, the

solution to low prices will be low

prices, as supply and demand

will re-balance and prices will

move towards the marginal cost of

production. So far, unfortunately,

this process has been drawn-out and

challenging. After a period of littlechange in September and October,

prices for oil and natural gas prices

November period down about 15%.

In the case of natural gas, high

inventories and worries about a

weather pattern hit the price hard.

Stuart Kedwell, CFA

Senior V.P. & Senior Portfolio ManagerRBC Global Asset Management Inc.

CANADA RECOMMENDED SECTOR WEIGHTS


November 2015

BENCHMARKS&P/TSX COMPOSITE

November 2015

Energy

Materials

Industrials

7.0% 7.1%

Consumer Staples 5.0% 4.4%


Financials Information Technology 4.0% 3.0%


Utilities 2.0% 2.2%

Source: RBC GAM

REGIONAL OUTLOOK – CANADA

Our economic growth forecast

continues to slip in Canada and we

2016. This compares to our forecast

of 2.5% in the U.S. We believe that

remain subdued, as the economic-

growth gap persists between

Canada and the U.S. and concerns

remain about the impact of energy

housing activity. Our forecast for

remained high and, with little sign

of OPEC action, the rebalancing

so, there has been some progress

the quarter, Alberta announced new

carbon-emission targets which, on

the surface, appear manageable

for the Energy sector. However,

challenging for the province’s coal-

power industry.

S&P/TSX COMPOSITE EQUILIBRIUMNormalized earnings and valuations

400

1600

6400

25600

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: RBC GAM

Nov. '15 Range: 13271 - 19839 (Mid: 16555)

Nov. '16 Range: 13905 - 20788 (Mid: 17346)





the Canadian dollar stays at $1.40.

rate later this month. While a U.S.

and drawn-out, it should lead

any similar move in Canada by a

considerable period.

The aggregate 2016 earnings

estimate for the S&P/TSX Composite

continues to decline and now sits

sizable growth from 2015 and

year growth in the Energy sector.

The S&P/TSX has dropped to the

low end of our fair-value band and

attractive. Nevertheless, the case

for outperformance rests on an

gas prices.

2016 earnings forecasts, valuations

longer-term averages. In 2015,

about falling energy prices and a

consumers. Restructuring charges

were also a theme in 2015, as

businesses amid slowing economic

growth and the need to invest

in digitization to both improve

customer experience and simplify

processes. Provisions for credit will

rise next year on early indications

that consumer credit in Alberta

exposure to the energy patch hasproven more manageable than many

investors would have predicted,

although 2016 will continue to be

current valuations and dividend

yields, coupled with modest dividend

attractive area of the S&P/TSX.

interesting, particularly if longer-

term interest rates drift upwards.Sunlife and Manulife recently

outlined earnings-growth targets

in the high single digits to low

double digits. These targets,

combined with rising returns on

equity, increasing dividends and a

focus on wealth management and

lead to share gains. Elsewhere,

we continue to believe that asset-

well over the intermediate term.

Both of Canada’s major railways

are managing through a period of

combination of price increases and

has made headlines recently with

Southern, which operates in the U.S.

Southeast. While the acquisitionwould face hurdles, we see a

management approach to create

shareholders.

in many cases equal to or greater

than those of similar companies in

the U.S. as Canadian capital has

funneled into these companies at

In the slow growth, low-interest-

rate environment, many companies

have either grown via acquisition

we therefore remain selective. While

some companies should be able to

compound earnings at attractive

rates going forward, others may

struggle as investor focus moves

from P/E ratios to balance-sheet

valuation metrics such as enterprise-

value-to-sales and enterprise-

cases are elevated.

in the short run, and it nowappears that prices will be lower

on average and more volatile than

we have seen in the recent past.

Longer-term discussions about

carbon emissions and electric cars

complicate investor appetite for a

on a valuation basis. On the positive

side, a declining Canadian dollar

aids Canadian producers to some

degree as it reduces costs. The large

long-life reserve companies that are

well-capitalized are set to deliver

attractive levels of free cash when

crude prices bounce, even toward

the marginal cost which we estimate

to be in the $65-$70 level.



New Year 2016

EUROPE RECOMMENDED SECTOR WEIGHTS


November 2015

BENCHMARKMSCI EUROPE

November 2015

Energy 6.0% 6.7%

Materials 6.0% 6.7%


12.4% 11.6%

Consumer Staples


Financials 21.6% 22.6%Information Technology 5.0%

Telecommunication Services 5.1%

Utilities 3.0%

Source: RBC GAM

EUROZONE DATASTREAM INDEX EQUILIBRIUMNormalized earnings and valuations

90

180

360

720

1440

2880

5760

1980 1985 1990 1995 2000 2005 2010 2015 2020


Nov. '15 Range: 1702 - 3639 (Mid: 2670)

Nov. '16 Range: 1795 - 3838 (Mid: 2817)


positively. The money-supply leading

indicator, which is correlated with

economic expansion, also suggests

activity will remain resilient. The most

notable of all metrics is probably

recently hit a 15-year high.

The implications of the current level

REGIONAL OUTLOOK – EUROPE

appears tied somewhat to emerging-

the possible adverse effects of

European exports – which could in

turn weigh on domestic demand. As

he will review the “size, composition

and duration” of the ECB monetary

stimulus program if needed. This

willingness to act should provide

comfort and ultimately more

underpinning for European equity

to monetary stimulus would also

prevent the euro from strengthening

too much, and it is the euro’s

earnings recovery.

At the company level, the slowdown

has been well telegraphed and is

expectations. Third-quarter earningsshowed signs of stabilization in this

area, and future gains will be viewed

positively.

Eurozone credit is expanding again,

relax standards on business loans,

economy, and demand for loans from

companies and households increased

in the third quarter from the previous

three months. Three credit drivers –

demand for loans, the supply of

credit and the falling price of credit –

all continue to be supportive of

economic growth.

European economic indicators

continue to be robust and are

broadening out. The latest Purchasing

Managers Indexes (PMIs) and IFO,

David Lambert

Senior Portfolio Manager

RBC Global Asset Management (UK) Limited




in excess of 2% and double-digitearnings growth. It is clear that

growth exceeding 1% has typically

been associated with strong margin

expansion in Europe.

These developments increase the

will rise closer to those in U.S

earnings relative to the U.S. has never

been as depressed as it was over

the past year. The return-on-equity

differential between the two regions

is at the top of its historical range,

and should start to narrow.

Based on P/E valuations, European

past three months. Earnings have

continued to climb, but share prices

have fallen similar to other global

including small and mid caps, have

been gaining momentum since

the beginning of 2015, as leading

indicators climbed in Europe. This

was to be expected as we could see

some macroeconomic indicators

beginning to stabilize/improve in

2014 given the benign economic

indicator and purchasing power

indexes have all improved over the

course of 2015.

Style cycles typically last nine to

12 months. The improvement in the

composite indicator is moderating

somewhat, and this means we expect

franchises with improving operations.

that can expand their asset bases

over time as they generate the best

opportunities for shareholders over

time. For example, the consumer and

Health Care sectors are high-return

areas with good capital growth,

whereas the Energy and Materials

sectors have experienced constant

declines in their returns over time andscore poorly on cost of capital due to

the capital-intensive nature of their

operations.

still appeals to us, particularly the

media and gaming areas. We remain

committed to media companies that

the operating environment, especially

those that have reduced their capital

intensity and broadened theirexposure online. Our auto-related

exposure is extremely limited, with

just one auto-equipment supplier in

the portfolio. These manufacturers

are typically capital-intensive and

offer low returns. The scandal at

avoided owing to the company’s

chequered corporate-governance

history and its low-margin/return

business model.The Consumer Staples sector contains

many high-quality companies. We

remain focused on beverages, food

ingredients and household goods

because these areas offer the best

mix of growth and valuation. They are

appealing in part because they allow

investors to capitalize on the growing

In the Energy sector, we have hadconcerns over the rising cost of

production-growth expectations.

Valuations are at almost

unprecedentedly low levels, both in

absolute and relative terms, but are

not low enough to completely offset

oil companies high levels of capex

mean that these costs are only just

sheets in the oil-services industry

may come under stress.

of late in line with macroeconomic

data, and has begun to run with

the implementation of quantitative

returns above their cost of equity.

underperformed, ceding the growth

valuations acquired over a decade-

long run. They are now valued more

average. In the Materials sector, our

preference is for speciality chemicals

as well as the niche areas of enzymes

we see high barriers to entry and

good growth and returns.




REGIONAL OUTLOOK – ASIA

appeared to have found a bottom in

September, as the Chinese equity

crash was countered with aggressive

policy intervention including state-

selling bans and a raft of other

measures aimed at resuscitating

fundamentals in the region have

also been met with increasingly

accommodative policies by Asian

somewhat beginning in October.

momentum as investors increased

progress that has been made in

achieving Prime Minister Narendra

Further dampening the optimism

is the defeat suffered by the ruling

BJP party in Bihar state elections.

The loss somewhat damages Modi’s

credibility and boosts the perception

pushing through his economic

underperformed amid ongoing

concerns about softening investment

demand from China and lower

commodity prices. Japanese equities

than-expected corporate earnings

ASIA RECOMMENDED SECTOR WEIGHTS


November 2015

BENCHMARKMSCI PACIFIC

November 2015

Energy 2.5%

Materials 5.3%


14.5% 13.6%

Consumer Staples 6.7%

Health Care 5.4%

Financials Information Technology 14.5% 14.3%


Utilities 3.0% 3.2%

Source: RBC GAM

Mayur Nallamala

Head & Senior Portfolio ManagerRBC Investment Management (Asia) Limited

JAPAN DATASTREAM INDEX EQUILIBRIUMNormalized earnings and valuations

65

130

260

520

1040

1980 1985 1990 1995 2000 2005 2010 2015 2020


Nov. '15 Range: 279 - 808 (Mid: 544)

Nov. '16 Range: 272 - 786 (Mid: 529)


Minister Abe to a second three-yearterm as party leader. He continued

to push his economic revitalization

to drive a recovery in growth. While

he continues to push for aggressive

policy measures that should be

the medium term.

outperformed over the past three

years is partly attributable to laws

aimed at improving corporate

governance and shareholder returns.

in the short term, quality companies

improvement in areas ranging from




balance-sheet management tocorporate governance will continue to

provide shareholder returns.

Getting a precise view on what’s

happening inside China’s economy

marginally beat expectations but

was the slowest pace in six years.

traditional, industrial-based

economic engine is slumping, while

the country’s services sector is

investment and industrial production

indicate that growth in China is

set to continue to slow over the

medium to longer term as it pivots

to a consumption-driven economy.

Meanwhile, an oversupply of unsold

apartments has resulted in sharply

decelerating new construction and

property investments. While theannouncement by the Chinese

requirements to 25% from 30%

will provide a short-term boost to

property – and we have already

seen prices begin to recover in major

believe there remains a structural

stabilized in recent months following

a 40% decline from its June

highs, with overall margin lending

bottoming out after contracting

sharply from record levels.

eased monetary policies in efforts to

stimulate the economy. Additionally,

and September, pointing to efforts

beyond the monetary front. We are

now approaching the traditionally

stronger seasonal period into the

Chinese new year, and expect the

data will remain reasonable in the

coming months.

reform have still not materialized

for after Modi’s election last year.

surprised investors by reducing its

points to 6.75%, a move that should

boost investment. We note that

monthly indicators in the past three

months have turned positive after

investment expectations fell short

increasingly leave little margin for

error in the near term.

in the recent state elections has

negative implications for the prime

minister’s reform agenda, as hopes

for a co-operative parliament have

dimmed considerably. Over the

longer haul it seems that the election

result, by itself, won’t change Modi’s

plans for economic reform.

Equities in South Korea outperformed

won, stronger-than-expected

September exports and the impact

in Chinese visitors and domestic

drivers for South Korea’s consumer

Samsung Electronics, which has

been under pressure this year given

industry dynamics, surprised with

strong results. Also positive was

management’s decision to return

more capital to shareholders, helping

levels. Hopefully, this is the start

of a trend, with smaller companies

and other chaebols (South Korean

conglomerates) following Samsung’s

lead in pursuing more-shareholder-

friendly policies.

Australian equities were punished

in the most recent quarter, as

further declines in oil prices. In theMaterials sector, the most notable

development was a rebound in iron-

ore prices amid supply disruptions

in Brazil. Given China’s rapidly

declining production of steel and

cars, however, the current rally

should be temporary. In the political

arena, Malcolm Turnbull replaced

Tony Abbott as prime minister after

winning a leadership contest in

The change has provided a short-

which has been hurt by the end of

the commodity boom and its impact

on the broader economy, as well as

the potential effect of an end to the

house price boom/bubble in Sydney

and Melbourne.




REGIONAL OUTLOOK – EMERGING MARKETS

Clearly there is overcapacity in the

to imminently abate. However, China

is doing as it should in moving

away from investment-led growth

to a focus on consumption andservices. The problem is that as

China transfers to a new economic

on August 11, when the central

action triggered the single biggest

the Chinese currency.

The renminbi has since recovered

a long way. While the currency’sstrength has been doubtlessly

in some Asian currencies after

increase later this month.

rebound from the lows in emerging-

China caused a huge sell-off across

valuations and currencies are

cheap, and there is room for

monetary stimulus. Fears of

a hard landing in China are

largely overblown as longer-term

demographic trends such as agrowing middle class continue to

support our domestic bias.

this period of underperformance

has been the longest in our

appear to be in the midst of a near-

perfect storm of falling commodity

prices, stalling Chinese growth,renminbi devaluation, a strong U.S.

dollar, oversupplies of both oil and

industrial commodities and concerns

about the effect of what will

nearly nine years.

the Indian rupee, Brazilian real and

South African rand, the declines

have exceeded those experienced

a repeat of the Asian crisis. It does

has an extreme current-account

appear to be high only in China

and Malaysia. Gross external debt

to foreign-exchange reserves are

currencies put in their bottom.

Indeed, exchange rates are the

critical variable for returns. Roughly

equity returns in U.S. dollar terms

have come from exchange-rate

moves over the past 15 years, and

same direction.

EMERGING MARKET DATASTREAM INDEX EQUILIBRIUMNormalized earnings and valuations

20

40

80

160

320

640

1995 2000 2005 2010 2015 2020

Source: Datastream, RBC GAM

Nov. '15 Ran e: 239 - 429 Mid: 334

Nov. '16 Range: 251 - 450 (Mid: 351)


Veronique Erb

Portfolio ManagerRBC Global Asset Management (UK) Limited




For the renminbi, however, thereduced speculative pressures

on the Chinese currency are also

decelerated in September after

foreign-exchange reserves fell

by US$43.3 billion in September,

billion decline in August. The fact

September is somewhat encouraging

since it suggests that Beijing

has gained some control over

Besides currency effects, one

increasingly important change in

China’s economy is the growth in

the services sector. China is now the

world’s third-largest service economy

after the U.S. and the Eurozone, and

services became the largest sectorof the Chinese economy in 2012.

The services sector has expanded

at a compound annual growth rate

of 17% over the past decade –

faster than the manufacturing and

agriculture sectors.

According to the third-quarter

account for more than 50% of the

Chinese economy. It appears to us

that the old measures of capital-

and manufacturing PMIs – are now

progress.

We note that services and

consumption have supplanted

investment sectors as the two

This is important as the services

sector is the single biggest creator

of jobs in China and has been the

largest collective employer since

2011. Tourism is a bright spot,

creating a multiplier effect on wealth

elsewhere in Asia. It is widely

tourism. China’s new economic

model is characterized by robust

passengers and civil aviation.

As China’s economy shifts towards

services from manufacturing

and consumption, the country’s

consumption data is changing.

Rising incomes mean that purchases

of basic goods such as food

and clothing become a smaller

part of household budgets, with

marginal disposable income being

spent on services. Therefore, we

expect health care, education,

entertainment, transportation and

telecommunication services to be the

major growth drivers of consumption.

devices nearly doubled and the

number of high-speed-rail passenger

passes sold rose 10%, while freight-

rail numbers were down 11%.

This highlights the increasingly

consumption-led nature of the

economy and the fact that positive

economic conditions on the ground

are increasingly divorced from the

of room for monetary stimulus. Many

rates of growth so there is room

to cut interest rates. China and

India have both cut rates in recent

months.

The quality of growth is also

move away from commodities and

toward consumption. Consumption

now represents a greater share of

resources, and we expect the shift

to continue. The shift away from the

investment-led model is negative for

the Materials sector worldwide.





Chief Investment OfficerRBC Global Asset Management

Chair, RBC Investment Strategy Committee

Dan Chornous is Chief Investment Officer of RBC Global Asset Management Inc., which has total assets under management of $380 billion. Mr. Chornous isresponsible for the overall direction of investment policy and fund management. In addition, he chairs the RBC Investment Strategy Committee, the group responsiblefor global asset-mix recommendations and global-fixed income and equity portfolio construction for use in RBC Wealth Management’s key client groups includingretail mutual funds, International Wealth Management, RBC Dominion Securities Inc. and RBC Phillips, Hager & North Investment Counsel Inc. He also serves on theBoard of Directors of the Canadian Coalition for Good Governance and is Chair of its Public Policy Committee. Prior to joining RBC Asset Management in November2002, 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 quantitativeresearch teams.

Stephen is a fixed-income portfolio manager and Head of the QuantitativeResearch Group, the internal team that develops quantitative researchsolutions 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 hiscareer were spent at an investment-counselling firm where he quickly rose tobecome a partner and fixed-income portfolio manager. He then took two yearsaway from the industry to begin his Ph.D. in Finance and completed it overanother three years while serving as a fixed-income portfolio manager for amutual-fund company. Stephen became a CFA charterholder in 1994.

As Head of Global Fixed Income & Currencies at RBC Global AssetManagement, Dagmara oversees 15 investment professionals in Torontoand London, with more than $40 billion in assets under management. In

her duties as a portfolio manager, Dagmara looks after foreign-exchangehedging and active currency-management programs for fixed-income andequity funds, and co-manages several of the firm's bond portfolios. Dagmarachairs the RBC Fixed Income & Currencies Committee. She is also a memberof the RBC Investment Policy Committee, which determines the asset mix forRBC balanced products, and the RBC Investment Strategy Committee, whichestablishes global strategy for the firm.

Members

RBC INVESTMENT STRATEGY COMMITTEE

Stu began his career with RBC Dominion Securities in the firm’s Generalistprogram and completed rotations in the Fixed Income, Equity Research,Corporate Finance and Private Client divisions. Following this program, hejoined the RBC Investments Portfolio Advisory Group and was a member of theRBC DS Strategy and Stock Selection committees. He later joined RBC GlobalAsset Management as a senior portfolio manager and now manages the RBCCanadian Dividend Fund, RBC North American Value Fund and a number ofother mandates. He is co-head of RBC Global Asset Management’s CanadianEquity 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 andgenerating macroeconomic research. He is also a member of the InvestmentStrategy Committee, the group responsible for the firm’s global asset-mixrecommendations. Eric is a frequent media commentator and makes regularpresentations both within and outside RBC GAM. Prior to joining RBC GAM inearly 2011, Eric spent six years at a large Canadian securities firm, the lastfour as the Chief Economics and Rates Strategist. His previous experienceincludes positions as economist at a large Canadian bank and researcheconomist 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 ManagerRBC Global Asset Management

Stuart Kedwell, CFA

Senior Vice President and Senior Portfolio Manager






Sarah Riopelle, CFA

Vice President andSenior Portfolio ManagerRBC Global Asset Management

Martin Paleczny, who has been in the investment industry since 1994, beganhis career at Royal Bank Investment Management, where he developed anexpertise in derivatives management and created a policy and process for the

products. He also specializes in technical analysis and uses this backgroundto 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 advisorfor technical analysis to the RBC 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 TargetEducation Funds and RBC Managed Payout Solutions. Sarah is a member of

the RBC Investment Strategy Committee, which sets global strategy for thefirm, and the RBC Investment Policy Committee, which is responsible for theinvestment strategy and tactical asset allocation for RBC Funds’ balancedproducts and portfolio solutions. In addition to her fund management role,she works closely with the firm’s Chief Investment Officer on a variety ofprojects, as well as co-manages the Global Equity Analyst team.

Martin Paleczny, CFA

Vice President andSenior Portfolio ManagerRBC Global Asset Management

William E. (Bill) Tilford

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

Ray Mawhinney

Senior Vice President andSenior Portfolio ManagerRBC Global Asset Management

Hanif Mamdani is Head of both Corporate Bond Investments and AlternativeInvestments. He is responsible for the portfolio strategy and trading executionof all investment-grade and high-yield corporate bonds. Hanif is Lead Managerof the PH&N High Yield Bond Fund and the PH&N Absolute Return Fund (amulti-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 globalinvestment banks working in a variety of roles in Corporate Finance, Capital

Markets and Proprietary Trading. Hanif holds a master's degree from HarvardUniversity 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 tohis role, having specialized in U.S. equities since 1984. He joined the firm in1992 and is involved in managing several of the firm's U.S. equity funds. Rayis also a member of the RBC Investment Policy Committee, which determinesasset mix for balanced products, and the RBC Investment Strategy Committee,which establishes a global asset mix covering mutual funds, as well asportfolios for institutions and high-net-worth private clients. Ray graduated

from the University of Manitoba with a bachelor's of commerce degree infinance, with honours.

Hanif Mamdani

Head of Alternative InvestmentsRBC Global Asset Management





> Paul Johnson

V.P. & Senior Port folio Manager,

Global Equities


> Philippe Langham

Senior Portfolio Manager,

RBC Global Asset Management (UK)Limited

> Ray Mawhinney

Senior V.P. & Senior Portfolio Manager,

U.S. & Global Equities


> Mayur Nallamala

Head & Senior V.P., Asian Equities

RBC Investment Management (Asia)

Limited

> Dominic Wallington

RBC Global Asset Management (UK)

Limited

> Stuart Morrow, CFA

Portfolio Manager, U.S. Equities &

Vice President Global Equity Research


> Martin Paleczny, CFA

V.P. & Senior Portfolio Manager,

RBC Global Asset Management Inc

> Hakim Ben Aissa, CFA

Senior Analyst, Global Equities (Energy)


> Rob Cavallo, CFA

Senior Analyst, Global Equities

(Health Care)


> Kent Crosland, CFA

Analyst, Global Equities (Semis/Tech

Hardware, Commercial Services)


> Sean Davey, CFA

Analyst, Global Equities

(Consumer Staples)RBC Global Asset Management Inc.

> Matt Gowing, CFA

Analyst, Global Equities

(Telecommunications, Software,

Utilities)


> John Richards, CFA


> Joe Turnbull, CFA

Analyst , Global Equities

(Industrials ex Commercial Services,

Building Products)RBC Global Asset Management Inc.

> Angelica Uruena

Analyst , Global Equities


> Dagmara Fijalkowski, MBA, CFA

Head, Global Fixed Income & Currencies

(Toronto and London)


> Soo Boo Cheah, MBA, CFA

Senior Port folio Manager,

Global Fixed Income & Currencies

RBC Global Asset Management (UK)

Limited

> Suzanne Gaynor

V.P. & Senior Port folio Manager, Global

Fixed Income & Currencies


GLOBAL EQUITY HEADS

GLOBAL EQUITY ADVISORY COMMITTEE

GLOBAL FIXED INCOME & CURRENCIES ADVISORY COMMITTEE

> Eric Lascelles

Chief Economist




This report has been provided by RBC Global Asset Management Inc. (RBC GAM Inc.) for informational purposes only and maynot be reproduced, distributed or published without the written consent of RBC GAM Inc. In the United States, this report isprovided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser founded in 1983. In Europeand the Middle East, this report is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulatedby the Financial Conduct Authority. RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bankof Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC GlobalAsset Management (UK) Limited, RBC Alternative Asset Management Inc., and BlueBay Asset Management LLP, which are

not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliableinformation, and believes the information to be so when printed. Due to the possibility of human and mechanical error as wellas other factors, including but not limited to technical or other inaccuracies or typographical errors or omissions, RBC GAM isnot responsible for any errors or omissions contained herein. RBC GAM reserves the right at any time and without notice tochange, amend or cease publication of the information.

Any investment and economic outlook information contained in this report has been compiled by RBC GAM from varioussources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or

All opinions and estimates contained in this report constitute our judgment as of the indicated date of the information, are

subject to change without notice and are provided in good faith but without legal responsibility. To the full extent permitted consequential loss arising from any use of the outlook information contained herein. Interest rates and market conditions aresubject to change.

A note on forward-looking statements

This report may contain forward-looking statements about future performance, strategies or prospects, and possible futureaction. 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 anduncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-lookingstatements will not be achieved. We caution you not to place undue reliance on these statements as a number of importantfactors could cause actual events or results to differ materially from those expressed or implied in any forward-lookingstatement made. These factors include, but are not limited to, general economic, political and market factors in Canada, theUnited 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 catastrophicevents. The above list of important factors that may affect future results is not exhaustive. Before making any investmentdecisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statementsare subject to change without notice and are provided in good faith but without legal responsibility.

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Global Investment Outlook