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.
Are rising interest rates beginning to have an effect on economic momentum in the US? Two data-points seem to suggest so – indicators that there’s a buildup of inventories and weak PMI survey data. This gives equity investors food for thought as we enter the Q2 earnings season, when particular attention will be paid to company reports and the outlook for the rest of the year.
Watch time: 5 minutes 23 seconds
View transcript
Hello, this is Jeremy Richardson from the RBC Global Equity team here with another monthly update. And what an interesting month June was. I think it was a month when the market really changed its stance. Worries at the beginning of the month between the tension between inflation and interest rates, particularly in respect of the US. Towards the end of the month, the fears of economic recession. And the catalyst for that was a couple of interesting data points we had mid-month, the first of which was a profit warning by Target, the significant US retailer, indicating that there were excess inventories and calling out that there were difficulties in clearing that excess inventory. Perhaps, a read out there for the strength of demand of the US consumer. And then secondly, weak PMI survey data, which is a tell really on the strength of US industrial demand.
Those two data points I think indicated that perhaps the rising interest rates that we're seeing in the US are beginning to have an effect and weakening economic momentum. And with that we can get economic momentum, naturally, the market has moved away from worrying about inflation to actually worrying now about the depth and extent of possible recession, particularly in the United States.
For equity investors, this comes at a really interesting, delicate moment because we now, as we are reporting this on the very cusp of the Q2 earnings season. I think investors will be paying particular attention to what companies are going to be reporting on as a guide to what the outlook for profits could be towards the end of the calendar year.
There's two things in particular that I would say that they're focusing on in the main. So, the first of which is around what the effect might be on profits of a stronger US dollar. Now, because we've got recessionary fears, naturally there is a higher degree of uncertainty in the market and to an extent investors have been favouring the US dollar as a so-called perceived safe haven, attracted by high US interest rates, certainly compared to those available in other international markets. That's great if you’re owning the US dollar, but if you're a US company doing business overseas, when those overseas profits are reported back and brought back into the US and reported in US dollars, the value of those is worth proportionately less. That's going to be a headwind particularly for those overseas earnings companies.
The second thing that investors are paying attention to, obviously, is the potential impact in terms of guidance of what companies expect to be generating in terms of profits for the second half of the calendar year, given these recessionary fears. I think that we just don't know, as we said, as we sit here, about how deep or long this recession could be if it happens, and what the guidance of companies is going to be. But we can take some comfort, perhaps, from the fact that the market has already reflected a lot of these fears. I would note that when Target reported its profits warning, the stock only fell 2% on the day, just reflecting the fact that some of this diminished outlook was already being reflected in the share price.
Where we go though from here for equity investors seems to be somewhat uncertain at the moment. I just want to highlight two things that we're seeing presently, which perhaps gives an indication of how the market is sort of positioned. The first of which is that there does seem to be a more defensive field for many investors. You see that in terms of the relative performance of multiple defensive sectors, the less economically sensitive sectors, and those companies with less market sensitivity have been doing comparatively well in increasing in terms of their valuation.
The second thing that we've been seeing is that you remember the whole narrative I'm sure, particularly at the beginning of the calendar year in the debate between growth and value is investment styles where there's lots of different types of value available. What we've seen more recently is that value has become more closely associated with energy and health, obviously by rising oil prices.
Now those oil prices seem to have rolled over, partly in response to expectations of lower demand as a result of these recessionary fears. It's interesting to see that in June, energy as a sector actually underperformed in the market. That's led to a much more balanced mix in terms of investment styles within the market. I think for equity investors that many will find themselves surprised by that data point because that contrasts with the strong narratives that many people talk about in terms of investment styles at the beginning of the calendar year.
For us, managing a global equity portfolio, we want the companies to be the heroes of the portfolio. We try and suppress and manage these sorts of extraneous inputs in terms of investment styles, geopolitics and so on, and the relative importance of that, I think it's never been more apparent given these of these volatilities.
We should be paying close attention to what we hear in terms of the earnings season, but for the moment at least, the portfolios seem to be very much well positioned in terms of the risks that it's facing off to. And we've been sort of reassured by the relative performance over the short term during this period of volatility. I hope that's been of interest and I look forward to catching up with you again soon.
Disclosure
This website and its contents (the “Site”) has been 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.
In Canada, this Site is provided by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this Site is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe, this Site is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this Site is provided by RBC Global Asset Management (Asia) Limited to professional, institutional investors and wholesale clients only and not to the retail public. RBC Global Asset Management (Asia) Limited is registered with the Securities and Futures Commission in Hong Kong.
RBC GAM is the asset management division of Royal Bank of Canada (“RBC”) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Global Asset Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate, but affiliated subsidiaries of RBC.
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. This Site is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when produced. The information, including layout, of this Site, may be wholly or partially suspended, withdrawn or changed at any time. We also reserve the right at any time to immediately suspend the provision of all or any part of this Site to you and/or block your access to this Site.
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, reliability or correctness. The views and opinions expressed herein are those of RBC GAM and are subject to change without notice.
Any investment processes described in this Site may change over time. The characteristics set forth in this Site are intended as a general illustration of some of the criteria considered in selecting securities for client portfolios. Not all investments in a client portfolio will meet such criteria.
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. Interest rates, exchange rates and market conditions are subject to change.
The Site may contain forward-looking statements about general economic factors which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.
Certain names, words, titles, phrases, logos, icons, graphics or designs or other content in the pages of the Site are trade names or trade-marks owned by RBC or its subsidiaries, or trade names or trade-marks licensed to them. The trademarks are distinguished from one another and accompanied, at first-time use, with the appropriate trademark symbol: ®/TM. These symbols are keyed to their respective legend which describes the owner or licensee of the trade-mark. The display of trademarks and trade names on pages of the Site does not imply that a license of any kind has been granted to anyone else. The information is for your personal use only. Any unauthorized downloading, re-transmission, or other copying or modification of trademarks and/or the contents of the Site may be a violation of any federal or other law that may apply to trademarks and/or copyrights and could subject the copier to legal action. The information is protected under the copyright laws of Canada and other countries. Unless otherwise specified, no one has permission to copy, redistribute, reproduce, republish, store in any medium, re-transmit, modify or make public or commercial use of, in any form, the information.
