Firm Updates

PH&N Institutional Assets Under Management

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Tim Wood, vice president and institutional portfolio manager, retired at the end of July after more than 23 successful years with the organization. We thank him for his many contributions to our team and our business over the years and wish him all the best in retirement.

Frederick Auger-Morin, a portfolio engineer on the PH&N Canadian Equity team, left the firm in May to pursue another opportunity, and his responsibilities have since been reallocated internally.

Steven Zhao, analyst on the PH&N Fixed Income team, left the firm in April and his responsibilities have since been reallocated internally.

Recent developments

During the quarter, the RBC Global Infrastructure Fund LP committed to a new investment, Utilities Trust of Australia (UTA). UTA encompasses a diversified portfolio of core and core+ regulated assets operating in highly rated developed markets. With this, the fund has deployed the majority of initial investor commitments from the first close in April 2023. Accordingly, it has been re-opened for further commitments, as several additional near-term investment opportunities are being assessed.

The Canadian dollar offered rate (CDOR) ceased publication after June 28, 2024, and has been 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 this transition, the market for banker’s acceptances (BAs), a short-term money market security issued by Canadian banks, 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 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 to assess potential implications for our investment funds and our clients’ portfolios, and to mitigate any identified risks and concerns.

In May, the Canadian and U.S. securities industries moved to shorten the settlement cycle for equities and for most debt and mutual funds from the earlier 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 moved 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 (Canada)
• RBC Multi-Strategy Alpha Fund
• Most PH&N mortgage-only funds

The PH&N Long Private Placement Corporate Debt Fund launched in late 2023 made its first investment in April 2024.

Market updates

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

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

Equity markets climb higher as AI & tech companies continue to outperform

Global equity markets continued to build on the successess of the first quarter and posted positive returns. However, these returns were concentrated in larger companies, while rate-sensitive small-cap stocks and REITS suffered from an increased expectation by market participants that rates could remain higher for longer. Companies involved in artificial intelligence continued to outperform other areas of the market, and a strong earnings season for U.S. tech companies meant global growth stocks were once again the top-performing asset class.

Markets largely positive in Q2

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

In terms of economic activity, the global economy has managed to withstand higher interest rates and continues to grow, reinforcing our view that a recession can be avoided over the year ahead. We now assign a 65% likelihood that the U.S. economy manages a soft landing versus just a 35% risk of a hard landing. A number of recession signals that had been blinking red last year have reversed, including now-easing lending standards, newly rising profit margins, and reviving global trade. That said, downside risks cannot be ignored, highlighting why a hard landing remains a possibility. Interest-rate-related pain continues to mount in some corners of the economy and may worsen still. Moreover, the risk remains that inflation coUld become stuck at elevated levels. Geopolitical risks are also higher than normal: the November U.S. election, Middle East conflict, China-U.S. tensions, and the war in Ukraine together pose challenges for continued global stability and low inflation.

U.S. economic growth is enduring despIte concerns around a handful of softening indicators, and if consumers will be able to weather rate-related pressures. The economy was strong for much of 2023, enjoying the fruits of robust consumer spending, stronger-than-expected fiscal stimulus, and population growth. But that U.S. economic exceptionalism appears to be fading in 2024, in part as fiscal outlays stabilize. In addition, there is evidence of pain mounting in some quarters, with household-loan delinquencies in the U.S. rising significantly. Nevertheless, a more holistic assessment of American consumers indicates that they are mostly fine, with few job losses, rising wages, and increasing wealth via the advancing stock market.

Consistent with most of its peers, the Canadian economy struggled in 2023. But in line with those same peers, it now appears to be righting itself in 2024. Despite the economy’s sensitivity to interest rates due to high household debt levels, poor housing affordability, and elevated mortgage rates, the increase in household loan delinquency rates has been surprisingly tame and is below comparable U.S. levels. That said, household debt distress should nevertheless continue to mount for some time, with a large fraction of the country’s mortgages resetting at higher rates over the next few years. We forecast modest but acceptable economic growth for Canada over the next year, followed by a slight acceleration in the latter half of 2025 as the effect of lower interest rates starts to permeate the economy. After witnessing explosive gains in 2023, we expect population growth in 2024 to be somewhat less extreme, as the government has targeted a materially reduced inflow of temporary residents. The influx in subsequent years should moderate further as these restrictions bite. This period of faster-than-normal population growth should help to support Canada’s rate of economic growth but may result in diminished productivity (GDP per capita) and more problematic housing shortages.

Overall, the short-term economic outlook remains reasonably favourable, with a soft landing the most likely outcome. Central banks appear well placed to undertake interest rate cuts, reducing the degree of rate-related pain throughout the global economy.

Global inflation has declined but remains sticky

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

Inflation has proved somewhat more stubborn over the first half of 2024 after impressive progress between the middle of 2022 and the end of 2023. Stickier prices resulted from higher gasoline costs, still-robust service-sector inflation, and – in the U.S. – some seasonal distortions in the first quarter. After this recent progress, it is undeniably a more difficult path downward for inflation if economies manage to avoid recession, as they have so far done. Although labour markets remain tight, wage growth is gradually decelerating from robust rates. The largest single driver of inflation – shelter costs – has room to continue slowing as lengthy lags play out. Non-shelter inflation can probably ease somewhat as insurance inflation peaks. There is evidence that consumers are starting to erode corporate pricing power, with the result that retail-level price cuts are becoming more common: this trend is another support for declining inflation in the coming months. We expect inflation to remain somewhat high in 2024 given recent upside inflation surprises, but for it to trend downward for the remainder of the year and into 2025. We expect to be well into next year before inflation falls to central bankers’ 2% targets. Canadian headline inflation rate edged up to 2.9% in May from 2.7% in April mostly due to higher prices for services, forcing markets to trim hopes of another rate cut in July to below 50%. The Bank of Canada (BoC) has cautioned that risks to the inflation outlook remain, and it is closely watching the evolution of core inflation, with focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.

Interest rates remain high by the standards of the past decade and a half, but with inflation declining, central banks are beginning to ease policy rates, with the BoC the first among advanced economies to cut rates, followed by some other economies. The Bank of England could begin easing as soon as August after the U.K.’s national elections take place, and the U.S. will likely begin the rate cutting this fall. This pivot by central banks is meaningful, as high interest rates were the main threat to the global economy. The ultimate trajectory to lower rates will be paced by incoming economic and inflation data and, in our view, this rate-cutting cycle should be more gradual than past periods of easing in the absence of an imminent recession catalyst.

Global markets post positive returns while Canada lags behind

Global equity markets recorded positive returns in many geographies over the three-month period. The MSCI World Net Index performed well during the second quarter, finishing the period with a return of 3.78% on the back of increasing odds of a soft landing and progress in the fight against inflation. One key trend continuing from 2023 and the first quarter of 2024 was the strong performance of stocks benefitting from products tied to artificial intelligence. Megacap tech stocks continued to drive market gains, with Nvidia, Apple, Microsoft, and Alphabet among the largest contributors.

The Canadian equity market mostly treaded water in the second quarter, and the S&P/TSX Composite Index returned -0.53% over the period. Materials stocks helped the Canadian stock market stay afloat, followed by Consumer Staples, while Information Technology and Health Care were among the weakest-performing sectors. The greatest headwind facing Canadian markets right now may be the idea that the BoC’s pace of rate cuts may be slower than expected due to sticky inflation at home or next door in the U.S. Going forward, equity returns will depend on the path of interest rates, inflation trajectory, 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, catalyzed by an early-2024 rebound in Chinese equities. Since the start of the year, Chinese stock valuations have fallen mainly in fast-growing technology-related issues and private companies, while state-owned enterprises and more cyclical areas have done better. So far in 2024, concerns about China’s big-picture challenges have taken a back seat to investors wanting exposure to a market that may be undervalued from a long-term perspective. Outside China, the Indian economy is forecast to expand 7% this year, ranking it among Asia’s fastest growing, as urban consumption, investment, and exports have been resilient, while inflation has been benign.

Bond yields volatile as rate cut uncertainty reemerges

Global fixed income markets endured another quarter of negative performance, with global investment grade bonds delivering returns of -1.1%. In terms of the Canadian fixed income market, returns were positive at 0.86% while the yield of the FTSE Canada Universe Bond Index ended the second quarter at 4.2%, broadly in line with where it began. However , yields remained volatile during the period, rising as high as 4.6% in April largely due to the sell-off experienced in the U.S., as the market’s expectations for U.S. Federal Reserve (Fed) policy rate cuts were pushed out later into the year. Yields subsequently trended lower, as lacklustre Canadian economic data supported a June rate cut. After holding its policy rate unchanged since last summer, the BoC delivered its first rate cut in June, lowering its policy rate by 0.25% to 4.75%, citing that monetary policy no longer needs to be as restrictive given evidence of easing inflation.

FTSE Canada Bond Index Sector Returns Q2 2024

Source: RBC GAM, FTSE Russell

Looking forward, macroeconomic and geopolitical developments will be the focus of the bond market in the coming quarters. There is still uncertainty among bond market participants regarding the timeline for further cuts. There could be some stress points as the impact of still-elevated rates continues to make its way through the economy. Investors can expect the run-up to November’s U.S. presidential election to result in market volatility. A notable risk is the imposition of tariffs and other trade restrictions in areas where China has been ramping up exports, regardless of whether Biden or Trump wins.

Asset mix

Within our multi-asset and balanced portfolios, we made one change to our asset mix positioning, bringing our underweight to emerging market equities back up to its neutral target, sourced from global equities. Equity markets continued to rally over the quarter, but the gains remained narrowly focused. Fixed income markets remained volatile, with easing cycles starting in Canada and the EU, while strong economic data and sticky inflation continued to weigh on U.S. rate cut expectations. Against this backdrop, the PH&N Asset Mix Committee remains cautious and is maintaining neutral positioning across all asset classes.

Recent publications

In June, we recorded our first-ever podcast. In Interest rate expectations, Haley Hopwood, PH&N Institutional portfolio manager, addresses the ongoing volatility in bond yields and their medium-term outlook for interest rates with senior members of the PH&N Fixed Income team, Kristian Sawkins and Matt Dubras. Their discussion includes the BoC’s June rate cut and expectations for the year ahead, the implications of Fed decisions, and the potential for a higher-for-longer rate environment.