Firm Updates

PH&N Institutional Assets Under Management

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After more than 16 successful years with RBC Global Asset Management (RBC GAM), Bruce Geddes, President of PH&N Institutional, has decided to leave the firm. We are grateful for his dedication to our clients and to our business, and for the exceptional impact he has had over his long tenure. Bruce is succeeded by Erick Zanker. An institutional portfolio manager and long-standing member of the PH&N Institutional management team, Erick has also been instrumental in developing the RBC GAM alternative investments platform and solution set. Bruce remains with the firm until mid-April to help ensure a smooth leadership transition.

Chris Beer and Brahm Spilfogel, portfolio managers on the RBC North American Equity team, retired in March. Of relevance to Canadian institutional clients, Chris and Brahm managed the gold & precious metals sleeve of a number of our Vancouver-based Canadian equity strategies. Their responsibilities have been assumed by existing members of the RBC North American Equity team.

After 27 years with the firm, Robert Menning, Vice President and Senior Quant Analyst with the Quantitative Research Group left the firm in February. Rob had been instrumental in supporting the development of BondLab, our fixed income portfolio management and modelling system. His responsibilities have been assumed by the team.

Recent developments

For the 10th consecutive year, PH&N Institutional was honoured to receive the Greenwich Quality Leader Award in Canadian Institutional Investment Management Service, recognizing the top Canadian asset managers for “delivering superior levels of client service that help institutional investors achieve their investment goals and objectives.” We are especially humbled to be the only manager to have received this honour each year since the award’s inception, and moreover, to be the only manager to receive the award this year (it has historically been shared among three).

In late May, the Canadian and U.S. securities industries will move to shorten the settlement cycle for equities and for most debt and mutual funds from the current standard of two days to a single day after the trade is placed (i.e., T+1 settlement). The T+1 settlement will apply to subscriptions and redemptions of all Canadian-domiciled RBC, Phillips, Hager & North (PH&N), and BlueBay investment funds, with only the below exceptions. Please refer to each fund’s Offering Memorandum or Simplified Prospectus for details or contact your institutional portfolio manager to discuss the implications for your organization’s portfolio. Canada will move to T+1 settlement on Monday, May 27, 2024, a day earlier than the U.S. due to the American Memorial Day holiday.

• PH&N Institutional S.T.I.F. (remains T+0)
• RBC Canadian Core Real Estate Fund
• RBC Global Infrastructure Fund LP
• BlueBay Event Driven Credit Fund
• RBC Multi-Strategy Alpha Fund
• Most PH&N mortgage-only funds

As anticipated in our Q4 2021 Firm Update, jurisdictions worldwide – including Canada and led by the U.S. and the U.K. – have begun the transition away from interbank offered rates (IBORs) to nearly risk-free rates (RFRs) as shorter-term benchmarks for derivatives, loans, bonds, and other floating rate instruments. The U.S. Dollar London IBOR, for example, ceased publication after June 30, 2023, and was replaced with secured overnight financing rate (SOFR) benchmarks. In Canada, the Canadian dollar offered rate (CDOR) will cease publication after June 28, 2024, and will be replaced with the Canadian overnight repo rate average (CORRA) as the primary interest rate benchmark for derivatives, bonds, and loans. CORRA is a more robust, secured funding rate benchmark based on observable transactions in the market rather than dealer-based surveys. As a result of the transition away from CDOR, the market for banker’s acceptances (BAs), a short-term money market security issued by Canadian banks, will also wind down by the end of June 2024. A gradual and orderly reduction of BA issuance has begun in the Canadian money market, with investors turning to a range of existing and potential money market instruments as replacement assets. Although these IBOR transitions affect only a small portion of the institutional assets we manage, our IBOR Working Group – with representation from our Investment, Legal, Operations, Client-facing, Risk, and Compliance teams – actively monitors global regulatory guidance and reform proposals in order to assess potential implications for our investment funds and our clients’ portfolios, and mitigate any identified risks and concerns.

Market updates

Indices Performance Comparison as of March 31, 2024 (%)

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

Equity Markets hit all-time highs as recession fears dissipate

Global equity markets witnessed a powerful rally in the first quarter, with many major indices reaching record highs. The rally in stocks, which began in late-October 2023, was initially led by a handful of U.S. mega-cap technology stocks but ultimately broadened to include more areas. Nevertheless, Info Tech remained the best-performing sector over the period. The sector’s performance is congruent with the increased probability of an economic soft landing. Going forward, the likelihood of recession, the trajectory of inflation, and the extent of rate cuts will be key factors influencing future performance.

Major indices' price change in USD 2023 and YTD 2024

Note: As of March 31, 2024. Magnificent 7 includes Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. Source: Bloomberg, RBC GAM.

In terms of economic activity, the likelihood of a soft landing – that is, the economy continuing to grow in the face of adversity – continues to mount. Contrary to market expectations at the end of 2023, economic data has remained resilient and several historically compelling recession signals have begun to reverse. With a soft landing now probable, our base case growth forecasts have increased. Instead of a recession in the first half of 2024, we now expect modest growth. That said, there are a variety of risks to our base case outlook for the global economy. The Ukraine-Russia conflict continues, with Russia managing incremental gains and international support for Ukraine wearing, which could impact the European economy and global energy prices; the Middle East remains in turmoil; U.S.-China relations continue to be frosty; and uncertainty prevails around the U.S. election in November.

Amidst this global turbulence, the U.S. economy has continued to perform admirably, partly due to lower interest rate sensitivity and partly because of particularly strong consumer spending and fiscal support. That said, these growth drivers may become less helpful over 2024, with some households already beginning to struggle under the weight of higher rates.

Also, both the IMF and the OECD project a fiscal drag for the U.S. in 2024, although U.S. election year considerations could induce further fiscal support.

Thus far, the Canadian economy has underperformed the U.S. while managing to outperform the U.K. and the eurozone slightly. Genuine economic weakness is visible in several quarters of stagnant GDP and in weak business expectations, and home prices are likely to remain roughly flat over the next few years as fixed-rate mortgages continue to roll into higher rates. The drivers of rapid immigration have probably peaked, especially with the government now capping the number of temporary visas, resulting in rapid but slowing population growth in 2024 and merely robust growth thereafter. This population expansion has added to Canada’s overall economic growth rate via increased demand but adverse consequences include diminished productivity (GDP per capita) and more problematic housing shortages.

We assign a 35% probability of recession over the next year in the U.S. A variety of classic recession signals continue to point in that direction, though they constitute a shrinking fraction of the total. The prognosis for other developed markets has also improved but remains less promising than for the U.S., with a recession probability in the realm of 50% over the coming year.

Recession signals significant but declining

Note: As at 04/05/2024. Analysis for U.S. economy. Source: RBC GAM. For illustrative purposes only. There is no assurance that any of the trends depicted or described herein will continue.

Global inflation down but still elevated

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

Inflation has fallen significantly from its multi-decade peak in mid-2022, as three of the four main contributors to inflation have subsided. The commodity shock has faded, supply chains have resolved their pandemic-era problems, and central banks have removed their extraordinary stimulus. The one inflation driver that has not yet fully reversed is fiscal policy: some governments – the U.S. prominently among them – are still running large deficits that do not aid the goal of lower inflation. The improvement in the rate of inflation has slowed and become much choppier over the past few quarters. In the U.S., some of this relates to the economy’s resilience – a complication that will persist if the soft-landing scenario continues to play out. The journey for U.S. inflation from the present range of 2.75%–3.50% to the 2.00% target will be more difficult: slower, bumpier, and ultimately less certain. Known lagged effects, especially in areas such as services and shelter, remain and are likely to impede this path of recovery.

Central bank rate hikes appear to have come to an end last year, with a small but growing number of central banks now beginning the process of removing that restraint. So far, rates have fallen exclusively in emerging markets –where inflation, exchange rates, and capital flows tend to be more volatile. But the trend is worth watching, as it was emerging market central banks that led the way upward during the period of monetary tightening. The U.S. Federal Reserve has communicated its intention to cut rates more forcefully than many peers, though if U.S. economic data remains robust, rate cuts may take longer to arrive and be more incremental in their magnitude than the market imagines. We budget for up to five rate cuts of 25 basis points (bps) in the U.S. over the next year. Of course, if a recession arrives, central banks can move much more aggressively, with several hundred percentage points of easing possible.

Developed equity markets finish strong, while emerging markets lag behind

Global equity markets recorded strong returns in many geographies over the three-month period, with several indexes soaring to all-time highs. The performance was driven by declining inflation, decreased chances of recession, and increasing optimism around rate cuts.

The MSCI World Net Index posted strong positive performance, finishing the first quarter with a return of 11.74%, as leading economic indicators of global growth began turning up after a year of consolidation. Optimism over the economy and interest rate cuts combined with excitement about the business opportunity in artificial intelligence drove the broader market gains. However, after all of the "Magnificent Seven" tech and growth stocks posted huge gains in 2023, the first quarter has seen them diverge. Nvidia and Meta were among the winners, while Apple and Tesla tumbled. In fact, the “Magnificent Seven” accounted for only ~40% of the S&P 500 Index's first quarter performance, compared with more than 60% last year¹.

The Canadian equity market ended the quarter in positive territory, with the S&P/TSX Composite Index returning 6.62% but underperforming the U.S. market. The stock market’s performance was supported by resilient economic data and expectations that corporate earnings growth will regain momentum. The Industrials sector led the S&P/TSX Composite Index to start this year, as economic resilience improved the growth outlook. Energy and Health Care were among the other top contributors, while the Utilities and Communications Services sectors underperformed. Going forward, equity returns will depend on the path of interest rates, any economic downturn that materializes, and its impact on earnings growth.

In emerging markets (EM), the MSCI Emerging Markets Net Index posted positive returns during the quarter but underperformed developed markets. Outside China, EM equities largely performed well, with Taiwan and India posting strong returns. Within China, the intensifying threat of deflation, weak GDP growth, and subdued lending have hurt property sales. Other risks in China are demographic and debt related, with the working-age population steadily declining since peaking in 2012, and non-performing loans soaring into the trillions of renminbi. Meanwhile, many Western investors are leaving China, with foreign direct investment falling for the first time since 1998 amid overcapacity in most sectors and a Sino-U.S. trade war. The importance of countries beyond China to the world economy and the index is becoming clearer. Recent gains from oil producers in the Middle East and exporters in Southeast Asia will be bolstered by Vietnam and other Latin countries. We feel, therefore, that there are enough supportive factors for EM stocks to maintain performance as China’s influence on the index recedes.

Bond yields trend upwards as near-term rate cuts look less likely

Global fixed income markets were mixed in the latest quarter. In terms of the Canadian fixed income market, the yield of the FTSE Canada Universe Bond Index ended the period at 4.2%, up 0.3%. Yields continued to exhibit heightened volatility over the quarter, oscillating within a 52 bps range, with 18 days where yields on the FTSE Canada Universe Bond Index changed by over 5 bps. The upward trend in yields and negative returns over the quarter are largely a reflection of the expectation for near-term rates cuts being pushed back into the second half of the year. The Bank of Canada (BoC) held its policy rate at 5% at its January and March meetings, citing concerns about risks to the inflation outlook, particularly the persistence in underlying inflation.²

FTSE Canada Bond Index Sector Returns Q1 2024

Source: RBC GAM, FTSE Russell

Canadian headline inflation fell from 2.9% in January to 2.8% in February – below expectations for the second consecutive month. For the first time since early 2021, inflation was within the BoC’s target range of 1–3% for two months in a row, providing further evidence that higher rates are having their intended impact. This also supports the market’s expectations for rate cuts that are likely to begin in the summer.

Looking forward, the bond market is pricing in a meaningful decline in short-term yields over the next 12 months, while long-term yields are expected to fall relatively less. Heading into the year, markets were pricing in a significant amount of rate cuts for 2024, with the first anticipated as early as March. While that enthusiasm has since diminished, most major central banks deem some degree of cutting appropriate over the short term, but it will be highly dependent on economic data evolving in line with their projections.

Asset mix

Within our multi-asset and balanced portfolios, we made one change to our asset mix positioning, which resulted in the elimination of our underweight to bonds and a return to our neutral asset class targets. Equity markets have rallied significantly since last fall, with the S&P 500 hitting an all-time high to start the year. Fixed income markets ended 2023 strong but have been weaker in 2024 so far, as continued strong U.S. economic data has pushed back market expectations for rate cuts. Inflation is also proving stickier the closer it gets to central bank targets. Against this backdrop, the PH&N Asset Mix Committee is cautious that the markets may be pricing in too much optimism and expects more volatility and potentially less downward pressure on rates through 2024 than what is currently anticipated. As such, we believe it prudent to move to a neutral stance at this juncture, with the view to capitalize on volatility when it arrives.

Recent publications

¹RBC GAM, S&P.
²RBC GAM, FTSE Russell.