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Thao Le joined the RBC GAM Private Markets Global Infrastructure Investment team in August as a senior analyst supporting investment execution and management of the RBC Global Infrastructure Fund LP.

Edward Freeman joined the PH&N Fixed Income team in August as an analyst focused on sovereign and provincial rates.

Jacob Dubé joined the Quantitative Research Group at RBC Global Asset Management (RBC GAM) as a quantitative analyst focused on developing and renovating applications within the group's fixed income portfolio analytics and model research platforms.

Justin Jewell, head of European High Yield within the BlueBay Fixed Income team (BlueBay), left RBC Global Asset Management (UK) Limited in July. He was also a named portfolio manager for the BlueBay $U.S. Global High Yield Bond Fund (Canada). Following his departure, Sid Chhabra, head of Securitized Credit & Collateralized Loan Obligations (CLO) Management, has assumed leadership of European High Yield and Tim van der Weyden assumed Justin’s responsibilities with respect to BlueBay’s Global High Yield Strategies.

After 10 years at RBC Global Asset Management (UK) Limited and 17 years with the RBC Global Equity team, Marcus Lun is departing to take a career break. His official last day with the firm will be December 31, 2024. He will be replaced as Energy and Materials analyst by Ya (Anne) Xue, who has worked alongside him since joining the team almost three years ago.

Recent developments

In September, after careful capacity analysis in light of market and portfolio developments, we lifted the soft close that had been in place since 2021 on a number of global equity strategies managed by our London-based RBC Global Equity team, including their flagship RBC Global Equity Focus Fund.

In July, RBC Global Asset Management Inc. completed the second closing of the RBC Global Infrastructure Fund LP, raising over C$850 million in commitments and bringing the fund’s total investments plus commitments to over C$1.5 billion. The fund provides qualified investors with access to an underlying portfolio of directly held infrastructure assets, with the aim of delivering attractive risk-adjusted returns.

Market updates

Indices Performance Comparison as of September 30, 2024 (%)

Source: RBC GAM, FTSE Russell, S&P, MSCI

Equity markets rise after long anticipated U.S. rate cuts

Global equity markets witnessed a roller-coaster rally in the third quarter, ending the period with strong returns despite several bouts of volatility. Weaker U.S. economic data, a rate hike from the Bank of Japan, and thin summer liquidity battered stocks in early August. However, the long-anticipated start of the U.S. Federal Reserve’s rate cutting cycle in September and new stimulus in China soothed investor concerns and drove stocks higher into the end of the period.

Markets extend gains

Price index normalized to 100 at the start of the chart

Note: as of August 31, 2024. Source: Bloomberg, RBC GAM.

In terms of economic activity, the global economy largely continued to decelerate; while a mild recession is possible given deterioration in labour markets, we think the most likely scenario is of economic expansion over our forecast horizon. Slowing economic growth, diminishing consumer-price pressures, and falling interest rates should lead to a macroeconomic environment in a few years that is more in line with historical norms. Our base case is one where developed-world economies expand at a modest pace over the next few quarters, accelerating slightly into 2025 helped by the lagged benefit of rate cuts. We expect emerging markets to follow a similar trajectory, though growth is likely to be faster in India and China. Our outlook is subject to a variety of risks, and the key sources of uncertainty include geopolitical tensions in the Middle East, Ukraine, and China, as well as the U.S. election in November.

Soft landing still most likely, but losing some conviction as economy slows

As of 09/25/2024 Source: RBC GAM

U.S. economic growth remained strong, expanding at a healthy 3% annual pace from April through June versus 1.6% in the previous quarter, driven by consumer spending and investment. Despite the surge in borrowing rates, the economy kept growing and employers kept hiring. However, the job market has shown signs of weakness in recent months. From June through August, employers in the U.S. added an average of just 116,000 jobs a month, the lowest three-month average since mid-2020. The unemployment rate ticked up from a half-century low of 3.4% last year to 4.2% in August, though it remains relatively low. The U.S. presidential election on November 5 is set to be impactful, in part due to the yawning policy divide between the two presidential platforms and in part due to the high degree of uncertainty over who will win. That said, given that neither of the two presidential candidates appears to be very focused on the large U.S. fiscal deficit, an imminent fiscal drag – whether from large tax hikes or sharp spending cuts – is unlikely. Of course, which party controls the Senate and the House of Representatives will play a large part in how much of a president’s agenda may be enacted. Overall, the election remains too close to call, and its subsequent impact on the economy and markets is difficult to forecast with certainty.

The Canadian economy continued to disappoint, growing a mere 0.2% in July. Businesses are cautious, the unemployment rate has increased significantly, and youth unemployment is now historically high. In fact, the economy very likely would have shrunk in 2023 were it not for unprecedented immigration propping up demand. While the additional population has cushioned the blow for government and business revenues, the average Canadian is producing and earning less, and is confronted with elevated housing costs due in part to the higher population. Immigration rules are now being tightened, which should slow the rate of population growth and hopefully stabilize unemployment and restore some measure of productivity growth. The Canadian economy can probably continue to grow over the next six quarters given that declining interest rates are providing relief in a country with especially high levels of household debt.

Inflation continued its gradual descent toward normality and is becoming less of a concern. U.S. headline consumer-price inflation fell to 2.5% in August from a high of 9.1% in mid-2022, and a variety of other inflation measures have also eased meaningfully. Moreover, key inflation drivers provide encouraging signals about the future. The U.S. economy is no longer overheating, wage growth continues to slow, and corporations are less inclined to raise prices. Inflation expectations remain well anchored as a result. Shelter inflation, which measures the cost of housing, remains among the more elevated inflation components, but it too is gradually diminishing. As such, we forecast a further gradual deceleration in inflation, with figures that look increasingly normal in 2025. The risks to this base-case inflation forecast revolve primarily around scenarios in which the economy is stronger or weaker than anticipated, with the result that inflation might deviate moderately in the same direction. A more acute if temporary risk is the possibility of an upward inflation shock, likely via the price of oil, in the event of an escalation of geopolitical turmoil.

Global inflation is declining

Note: As of Aug 2024. Source: Haver Analytics, Macrobond, RBC GAM

With interest rates starting from elevated levels and inflation falling toward 2%, rate cuts are now justified to provide relief for consumers and businesses. Many of the world’s major central banks have already started lowering rates, including the European Central Bank, the Bank of Canada, and the Bank of England. The U.S. Federal Reserve (Fed), which had been sitting on sidelines for the longest, also undertook its first rate cut in four years, slashing its benchmark interest rate by an unusually large half-point in September. While central banks may not manage to lower rates all the way back to neutral over our one-year forecast horizon, significant progress in that direction is likely. The actual magnitude and speed of easing will ultimately depend on the economy’s trajectory.

Canadian equities perform strongly while Asian stocks rally into quarter end

Global equity markets rallied across geographies over the three-month period. The MSCI World Net Index performed well during the third quarter, finishing the period with a return of 5.01% on the back of increasing odds of a soft landing, progress in the fight against inflation, and the Fed’s long-awaited reduction in interest rates. Notably, the quarter showed sings of “broadening out” of returns, with the beginning of a rotation out of technology stocks into market segments that had fallen by the wayside. As tech stocks struggled, other segments of the market came to the fore in the third quarter, including small-cap stocks.

The Canadian equity market performed strongly in the third quarter and outperformed the U.S., with the S&P/TSX Composite Index returning 10.54% over the period. The performance was driven by the Financials, Information Technology, and Materials sectors; Energy and Industrials were among the weakest-performing sectors. The case for equities to extend their gains will likely require further monetary easing and the avoidance of a hard landing.

In emerging markets (EM), the MSCI Emerging Markets Net Index posted positive returns during the three-month period ending September. Having treaded water for much of the quarter, Asian stocks rallied strongly toward the end of September after Chinese policymakers announced a raft of new stimulus measures. Outside China, we expect GDP for emerging market economies to improve heading into year-end and in 2025, particularly in Taiwan and India, driven by steady domestic demand and the benefits for Asian exporters from solid global demand for consumer goods.

Bond yields fall as future rate cuts are priced in

Global fixed income markets saw strong performance during the third quarter, buoyed by the growing likelihood of lower rates. In terms of the Canadian fixed income market¹, returns were positive at 4.7%, while the yield of the FTSE Canada Universe Bond Index ended the third quarter at 3.5%, down 0.6% from where it began the quarter. Yields remained volatile over the quarter, with 14 days where the yield of the index changed by more than 5 bps (one standard deviation event). Yields ultimately ended the quarter lower, largely a result of persistent softening in economic data and the bond market’s expectation of further policy rate cuts. Following its first cut in early June, the Bank of Canada (BoC) further lowered its policy rate by 0.25% at each of its subsequent two meetings during the third quarter, with the policy rate now at 4.25%.

FTSE Canada Bond Index Sector Returns Q3 2024

Source: RBC GAM, FTSE Russell

Looking ahead, the Canadian bond market continues to price meaningfully lower short-term yields over the next 12 months in conjunction with expectations for further policy rate cuts, while long-term yields are expected to remain relatively unchanged, near 3% for Government of Canada bonds. We observe that yield volatility exhibits some relationship with policy rate moves and the market’s expectations of those moves, and we also recognize that downside risks to the “soft-landing” scenario remain a possibility. As such, we expect volatility in yields to remain a theme in the short term and we will continue to look for opportunities to be tactical while remaining prudent in our interest rate positioning.

Asset Mix

Within our multi-asset and balanced portfolios, we made one change to our asset mix positioning, which was to increase our tactical exposure to equities. The near-term outlook for equities looks attractive, supported by the start of a global easing cycle in interest rates, slowing inflation, still fairly robust economic growth, and a broadening out of leadership across the board (geography, sectors, and companies). Recession risks also look muted, with most key indicators, including credit spreads and defaults, not showing any signs of pending stress. In contrast, fixed income markets appear somewhat stretched following a very sharp rally over the summer. Against this backdrop, the Asset Mix Committee decided to establish a 1% tactical overweight position in equities, funded from fixed income.

Recent Publications

In July, we published Emerging Market Equities: Ready to Re-Emerge? This paper considers the reasons behind shrinking allocations to EM equities among Canadian institutional investors over the past decade, and argues that the outlook for EM equities from today’s starting point is attractive relative to their global developed market counterparts. You can read the paper here.

In September, we aired the podcast, Breaking down ESG in Fixed Income. In it, host Haley Hopwood, a PH&N Institutional portfolio manager, and Anna Temple, a portfolio manager on the PH&N Fixed Income team, discuss the team’s approach to incorporating ESG analysis into investment grade corporate credit decision-making and monitoring. You can listen to the podcast here.