You are currently viewing the United States website Institutional website. You can change your location here or visit other RBC GAM websites.

Welcome to the RBC Global Asset Management site for Institutional Investors

In order to proceed to the site, please accept our Terms & Conditions.

This RBC Global Asset Management (U.S.) Website is intended for institutional investors only.

For purposes of this Website, the term "Institutional" includes but is not limited to sophisticated non-retail investors such as investment companies, banks, insurance companies, investment advisers, plan sponsors, endowments, government entities, high net worth individuals and those acting on behalf of institutional investors. The Website contains information, material and content about RBC Global Asset Management (collectively, the “Information”).

The Website and the Information are provided for information purposes only and do not constitute an offer, solicitation or invitation to buy or sell a security, any other product or service, or to participate in any particular trading strategy. The Website and the Information are not directed at or intended for use by any person resident or located in any jurisdiction where (1) the distribution of such information or functionality is contrary to the laws of such jurisdiction or (2) such distribution is prohibited without obtaining the necessary licenses and such authorizations have not been obtained. Investment strategies may not be eligible for sale or available to residents of certain countries or certain categories of investors.

The Information is provided without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not constitute investment, tax, accounting or legal advice. Recipients are strongly advised to make an independent review with an investment professional and reach their own conclusions regarding the investment merits and risks, legal, credit, tax and accounting aspects of any transactions.

Accept Decline
by  E.Savoie, CFA, CMT, D.E. Chornous, CFA Mar 22, 2024

Economic data has been resilient, recession risks have diminished, and inflation has cooled sufficiently for central banks to consider cutting policy rates at some point this year. In this environment, sovereign bonds are appealing, and while stocks have surged as investors embraced the improved odds of an economic soft landing, demanding valuations in U.S. large-cap stocks may limit upside potential.

Upgrading our economic outlook

A variety of factors have motivated us to upgrade the likelihood of a soft landing for the U.S. economy to 60% from 40% last quarter, and we now look for modest growth in the first half of 2024 instead of recession. We have also boosted our 2024 forecast for real U.S. GDP growth to 2.4% from 0.3% and project further moderate growth in 2025 that could be even stronger if central-bank rate cuts unfold. Our 2024 growth forecasts are now roughly in line with the consensus for most countries, and even slightly above for the U.S. and Canada. For emerging markets, our growth forecasts have also been raised slightly to reflect the positive effect of healthier developed-world economies. Although the soft-landing scenario is now the most probable outcome, we recognize that a recession remains possible given that higher rates represent an economic headwind, mostly affecting regions outside of the U.S., and several important recession signals remain in place.

Further improvement on inflation will likely be slower

Inflation has fallen significantly from its 2022 peak as the commodity shock faded, supply-chain challenges were resolved, and extraordinary central-bank stimulus was removed. While there has been tremendous progress so far, the journey from the current range of 2.75%-3.50% down to the 2.00% level targeted by most major central banks will be more difficult. Consumer prices could be supported by elevated fiscal deficits and the economy’s general resilience. Given that our base case forecast no longer incorporates a recession, we have increased inflation forecasts from last quarter, and these forecasts are no longer below the consensus. We still believe that inflation is more likely to fall than rise over the next year, as wage pressures gradually abate, goods inflation subsides and service inflation, which is still too high, declines. Shelter costs, the largest driver of inflation today, may also be set to decline, and the range of products and services affected by high inflation is narrowing.

U.S. dollar continues to face longer-term challenges

We remain bearish on the U.S. dollar, with our outlook premised on long-term headwinds. A combination of major factors should cause the dollar to decline over the next several years: the currency’s overvaluation, a reversal of capital inflows and the erosion of U.S. fiscal credibility. We expect the early beneficiaries of such dollar weakness to be the euro and the Canadian dollar, while the yen and British pound will likely lag. Emerging-market currencies may initially be held back by central-bank rate cuts, but will eventually be buoyed by widespread weakness in the greenback.

Central banks signal likelihood of rate cuts ahead

The period of aggressive central-bank rate hikes ended last year, with a small but growing number of central banks, all of them in emerging markets, starting to ease monetary conditions. Major developed-world central banks are now in a position to do so for several reasons. Inflation has dropped significantly and most major economies have recorded uncomfortably slow growth over the past year. We forecast five 25-basis-point policy-rate cuts in the U.S. over the next year, although we recognize that the timing and pace of monetary-policy adjustments will ultimately be guided by the path of the economy and inflation.

Bonds are close to their most appealing levels in nearly two decades

Bonds are near their most attractive levels in two decades after selling off from a state of overvaluation that had not been seen in 150 years. The fixed-income bear market of 2020-2023 rapidly pulled yields above 5% for the first time since 2007 and erased all of the overvaluation that had built up since the 1980s, which was accentuated by the pandemic. While the U.S. 10-year yield has declined from its October 2023 peak, at 4.25% it remains near the upper end of the historical range excluding the 1970s and 1980s, a period that featured extreme inflation. Our models confirm that sovereign bonds are attractive, with yields well above their equilibrium levels in major markets excluding Japan, where interest rates are still subject to central-bank efforts to suppress yields. Taking everything together, our models suggest that the appropriate level for bond yields is lower, as long as inflation continues to fall as we expect. In addition to the positive fundamental backdrop, there are a variety of bullish technical measures that suggest a solid outlook for bonds. Our own forecast is for a 4.00% yield on the U.S. 10-year bond a year from now, which would result in mid-to high single-digit returns over the year ahead and, importantly, with little valuation risk.

Stocks extend gains to new records, valuations are increasingly demanding

Global equities have enjoyed a powerful rally in the past quarter, with many major markets reaching record highs. Most of the recent gains, however, have been delivered by a narrow set of mega-cap technology stocks. The “Magnificent 7” in the U.S. was up 82% last year and has risen another 10% so far this year. The equal-weighted S&P 500 Index, which neutralizes the impact of these seven stocks, was up only 11.6% in 2023 and 3% this year, which is more consistent with returns in the rest of the world. Given more moderate returns, most major equity markets outside of the U.S. are trading at attractive levels relative to our modelled fair value. With respect to the U.S., many investors are concerned that the “Magnificent 7” is in a bubble given the group’s extraordinary gains. We note that these stocks are benefiting from trends in artificial intelligence and are not necessarily overpriced, as long as their earnings can continue to grow at a fast pace. Our work suggests that the “Magnificent 7” would have to grow their aggregate earnings by 23% each year for the next 15 years to justify their current valuation premium versus the rest of the market. Elevated valuations in U.S. large-cap stocks in general means that achieving decent returns on the S&P 500 will now require that solid earnings growth and heightened investor confidence be sustained.

Asset mix – maintaining asset mix close to neutral, with a bias to fixed income

Balancing the risks and rewards, we are maintaining an asset mix close to our neutral allocation, with a bias to fixed income. Our base case expectation is for the U.S. economy to continue to expand at a moderate pace and for inflation to continue falling at a rate that will allow central banks to cut interest rates at some point this year. Falling interest rates should be supportive of fixed-income assets and, importantly, at higher yield levels, bonds provide greater ballast against equity-market volatility within a balanced portfolio. For these reasons, we have added to our fixed-income allocation over the past several quarters as yields rose, closing our prior underweight position and ultimately moving to a slight overweight as the U.S. 10-year yield approached 5% in the fall of 2023. While we remain constructive on stocks over the longer term, we recognize that in the near term, sentiment is extremely optimistic and valuations are demanding such that investors are not being sufficiently compensated for the risk of an adverse outcome. As a result, we are maintaining a neutral allocation to stocks. For a balanced global investor, we currently recommend an asset mix of 60.0 percent equities (strategic neutral position: 60.0 percent) and 38.5 percent fixed income (strategic neutral position: 38.0 percent), with the balance in cash.

Recommended asset mix

RBC GAM Investment Strategy Committee
Recommended asset mix  <h5>RBC GAM Investment Strategy Committee</h5>

Note: As of February 29, 2024. Source: RBC GAM

Get the latest insights from RBC Global Asset Management.

Disclosure

This material is provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC GAM or its affiliated entities listed herein. This material does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. This material is not available for distribution to investors in jurisdictions where such distribution would be prohibited.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc. (RBC GAM Inc.), RBC Global Asset Management (U.S.) Inc. (RBC GAM-US), RBC Global Asset Management (UK) Limited (RBC GAM-UK), RBC Global Asset Management (Asia) Limited (RBC GAM-Asia) and RBC Indigo Asset Management Inc. (RBC Indigo), which are separate, but affiliated subsidiaries of RBC.

In Canada, this material is provided by RBC GAM Inc. (including PH&N Institutional) and/or RBC Indigo, each of which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this material is provided by RBC GAM-US, a federally registered investment adviser. In Europe this material is provided by RBC GAM-UK, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this material is provided by RBC GAM-Asia, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

Additional information about RBC GAM may be found at www.rbcgam.com.

This material has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate and permissible, be distributed by the above-listed entities in their respective jurisdictions.

Any investment and economic outlook information contained in this material has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions in such information.

Opinions contained herein reflect the judgment and thought leadership of RBC GAM and are subject to change at any time. Such opinions are for informational purposes only and are not intended to be investment or financial advice and should not be relied or acted upon for providing such advice. RBC GAM does not undertake any obligation or responsibility to update such opinions.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this material may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.

® / TM Trademark(s) of Royal Bank of Canada. Used under licence.

© RBC Global Asset Management Inc., 2024
document.addEventListener("DOMContentLoaded", function() { let wrapper = document.querySelector('div[data-location="inst-insight-article-additional-resources"]'); if (wrapper) { let liElements = wrapper.querySelectorAll('.link-card-item'); liElements.forEach(function(liElement) { liElement.classList.remove('col-xl-3'); liElement.classList.add('col-xl-4'); }); } })