Summer Report RBC

The Global
Investment Outlook
RBC GAM Investment Strategy Committee
SUMMER 2024
The RBC GAM Investment Strategy Committee
Dan Chornous, CFA Soo Boo Dagmara Stu Kedwell, CFA Eric Lascelles Scott Lysakowski, CFA Hanif Mamdani
(Chair) Cheah, MBA, CFA Fijalkowski, MBA, CFA Managing Director, Managing Director & Managing Director & Managing Director &
Chief Investment Officer Managing Director & Managing Director, Senior Portfolio Manager & Chief Economist Senior Portfolio Manager, Head of Alternative
Senior Portfolio Manager, Senior Portfolio Manager & Co-Head of North American Head of Canadian Equities Investments
Global Fixed Income & Head of Global Fixed Income & Equities (Vancouver)
Currencies Currencies
Bryan Mascoe, CFA Sarah Riopelle, CFA Martin Paleczny, CFA Kristian Sawkins, CFA Jaco Van der Walt, DCom Milos Vukovic, CFA Brad Willock, CFA
Managing Director & Managing Director & Managing Director & Managing Director & Managing Director & Managing Director & Managing Director &
Senior Portfolio Manager, Senior Portfolio Manager, Senior Portfolio Manager, Senior Portfolio Manager, Global Head of Quantitative Head of Investment Policy Senior Portfolio Manager,
Fixed Income (Vancouver) Investment Solutions Asset Allocation & Derivatives Fixed Income (Vancouver) Research & Investment North American Equities
The RBC GAM Investment Strategy Committee consists of The Committee’s view includes an assessment of global
senior investment professionals drawn from all areas of fiscal and monetary conditions, projected economic
RBC Global Asset Management. The Committee regularly growth and inflation, as well as the expected course of
receives economic and capital markets related input interest rates, major currencies, corporate profits and
from internal and external sources. Important guidance stock prices.
is provided by the Committee’s regional equity advisors
From this global forecast, the RBC GAM Investment
(North America, Europe, Asia, Emerging Markets)
Strategy Committee develops specific guidelines that
and from the Global Fixed Income & Currencies sub-
can be used to manage portfolios.
committee. From this, the Committee builds a detailed
global investment forecast looking one year forward.
These include:
%
The recommended The recommended The optimal The suggested The preferred
mix of cash, fixed global exposure of term structure sector and geographic exposure to
income instruments, fixed income and for fixed income make-up within major currencies.
and equities. equity portfolios. investments. equity portfolios.
Results of the Committee’s deliberations are published quarterly in The Global Investment Outlook.
Contents
2 Executive summary 51 Currency markets
The Global Investment Outlook Dollar’s underwhelming rally hints at longer-term
Eric Savoie, MBA, CFA, CMT – Investment Strategist, headwinds
RBC Global Asset Management Inc. Dagmara Fijalkowski, MBA, CFA – Managing Director &
Head, Global Fixed Income and Currencies,
Daniel E. Chornous, CFA – Chief Investment Officer,
RBC Global Asset Management Inc.
Daniel Mitchell, CFA – Managing Director &
Senior Portfolio Manager,
5 Economic & capital markets forecasts RBC Global Asset Management Inc.
Regional equity market outlook
6 Recommended asset mix
59 United States
Brad Willock, CFA – Managing Director &
11 Capital markets performance RBC Global Asset Management Inc.
Milos Vukovic, MBA, CFA – Managing Director &
Head of Investment Policy, 62 Canada
Sarah Neilson, CFA – Managing Director &
Aaron Ma, MBA, CFA – Senior Analyst, Senior Portfolio Manager,
Investment Strategy, RBC Global Asset Management Inc.
Irene Fernando, CFA – Managing Director &
Global Investment Outlook RBC Global Asset Management Inc.
15 Economic outlook 65 Europe

Falling inflation tees up rate cuts David Lambert – Managing Director &
Eric Lascelles – Managing Director & Senior Portfolio Manager,
Chief Economist, Head of European Equities,
RBC Global Asset Management Inc. RBC Global Asset Management (UK) Limited
28 Market outlook 68 Asia

Optimism swells on brighter outlook Chris Lai – Portfolio Manager,
Eric Savoie, MBA, CFA, CMT – Investment Strategist, RBC Investment Management (Asia) Limited
71 Emerging markets
Daniel E. Chornous, CFA – Chief Investment Officer,
Laurence Bensafi – Managing Director & Portfolio Manager,
Deputy Head of Emerging Market Equities,
RBC Global Asset Management (UK) Limited
44 Global fixed income markets
Soo Boo Cheah, MBA, CFA – Managing Director & 74 RBC GAM Investment Strategy Committee
Joanne Lee, MFin, CFA – Senior Portfolio Manager,

Taylor Self, MBA, CFA – Portfolio Manager,

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 1

Executive summary
Eric Savoie, MBA, CFA, CMT Daniel E. Chornous, CFA
Investment Strategist Chief Investment Officer
RBC Global Asset Management Inc. RBC Global Asset Management Inc.
Economies have demonstrated resilience in the face of restrictive monetary conditions and inflation has now
cooled sufficiently to prompt central-bank rate cuts. Investors have embraced this favourable backdrop, with
stocks climbing to record levels. Valuations, however, are at a point where further gains are becoming increasingly
dependent on lofty expectations being achieved and heightened investor confidence being sustained.
Economies to grow at modest pace

The global economy has managed to withstand higher ago and is approximately in line with the consensus. In
interest rates and continue to grow, reinforcing our view emerging markets, our 2024 growth outlook has improved
that a recession can be avoided over the year ahead. slightly and is ahead of the consensus due to superior
We place the odds at 65% that economies manage a expectations for growth in China and India, but we expect
soft landing, with potentially two to five years of further growth to decelerate somewhat into 2025. While our outlook
expansion based on our business-cycle analysis. U.S. is relatively benign, downside risks highlight why a hard
economic strength coming out of the pandemic was helped landing remains possible. High interest rates continue
by robust consumer spending, bigger-than-expected fiscal to weigh on economic activity and there is a chance that
stimulus and population growth, but now appears to be inflation remains stuck at elevated levels. Geopolitical risks
moderating while growth in other regions is accelerating. are also higher than normal with the U.S. election, conflict in
We forecast annualized growth rates of just under 2% the Middle East, China-U.S. tensions and the war in Ukraine
across most developed regions and our growth forecasts all posing sources of uncertainty for economic growth as
are mostly a bit above the consensus outlook. For 2025, well as inflation.
our growth outlook remains largely the same as a quarter
Inflation has been sticky, but continues to moderate gradually

After impressive progress between the middle of 2022 improved in April and May and is moderating once again,
and the end of 2023, inflation proved somewhat more if gradually. More-conservative consumers are starting to
stubborn over the first several months of 2024. Stickier erode corporate pricing power and retail-level price cuts
prices resulted from higher gasoline costs, still-robust are becoming more common. We expect inflation to remain
service-sector inflation and – in the U.S. – some seasonal high in 2024 given recent upside inflation surprises, but for
distortions in the first quarter. It is undeniably a more it to trend downward for the remainder of the year and into
difficult path downward for inflation if economies manage 2025. We expect to be well into next year before inflation
to avoid recession, as they have so far done. But the data falls to central bankers’ 2% targets.
2 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024

Executive summary | Eric Savoie, MBA, CFA, CMT | Daniel E. Chornous, CFA
U.S. dollar resilience is set to fade

We’ve argued for some time that the U.S. dollar is at the for currency traders this year, and so the dollar’s descent
beginning of a longer-term decline that could continue for is less likely to occur without a drop in interest rates.
several years. The currency’s persistent overvaluation, As government spending is exhausted and as inflation
relentless U.S. fiscal spending and the threats posed by a moderates, we expect that the U.S. Federal Reserve will start
second Trump presidency seem to support this longer-term cutting rates later this year. In this context, any gains in the
outlook. However, the impact of fiscal spending on short- U.S. dollar from an overvalued starting point are likely to be
term growth and inflation means that the Fed is likely to keep limited. Over the course of our 12-month forecast horizon, we
interest rates elevated. The U.S. interest-rate advantage over think the dollar will be pulled lower by a slowdown in fiscal
other regions has been the most important consideration spending, rate cuts and rich valuations.
Central-bank rate cuts have begun

Interest rates are now extremely high by the standards of national elections take place. The Fed is patiently waiting
the past decade and a half, but with inflation declining, given that inflation is higher in the U.S. than elsewhere, but
central banks are beginning to ease policy rates. A variety it is likely that the U.S. joins the rate-cutting parade this fall.
of emerging-market central banks have already begun This pivot by central banks is meaningful, as high interest
monetary easing and a mounting number of developed-world rates were the main threat to the global economy. The
central banks including the European Central Bank, the Bank ultimate trajectory to lower rates will be paced by incoming
of Canada, the Swiss National Bank and Sweden’s Riksbank economic and inflation data and, in our view, this rate-
have also begun their rate-cutting journey. The Bank of cutting cycle should be more gradual than past periods of
England could begin easing as soon as August after the UK’s easing in the absence of an imminent recession catalyst.
Sovereign bonds offer decent return potential, minimal valuation risk

Bond yields have risen slightly in the past quarter as the U.S. 10-year yield is more or less appropriately priced
investors weighed the possibility that central banks may for a gradual decline over the years ahead as inflation
ease policy at a more gradual pace than previously expected. moderates toward the 2% target from just over 3% currently.
At around 4.50%, the U.S. 10-year yield is situated well above We continue to evaluate how our modeling impacts our
the 2.50% level deemed appropriate by our model. But we assessment of the bond market’s attractiveness, but we find
recognize that our models could be understating the level it difficult to come up with assumptions that would make the
of real interest rates because they are still picking up the bond market look particularly expensive. As a result, our view
deeply negative real rates experienced during the pandemic. is that fixed income markets offer decent return potential in
Tighter monetary conditions and rising fiscal deficits suggest the mid single digits and with only modest valuation risk over
that real interest rates may settle at a higher level on a the year ahead, especially in an environment where central
sustained basis. If we assume a 1% real interest rate instead banks are actively cutting rates.
of one near-zero or slightly negative, we could conclude that
Stocks extend gains, led by U.S. mega-cap technology

Equity markets climbed to new highs in the past quarter, to one standard deviation above our modelled estimate
although the biggest gains have been highly concentrated of fair value, other major indices in Europe, Canada, the
in a small group of mega-cap technology stocks that UK and emerging markets are close to or more than one
have benefited from trends in artificial intelligence. The standard deviation below their own fair values. As a result,
Magnificent 7 were up 24.6% from the beginning of the year global equity markets could offer attractive returns should
to the end of May, helping lift the market-cap-weighted S&P economic and corporate-profit growth remain positive. A
500 by 10.6% over the same period. But the equal-weighted lot of the good news is already priced into the U.S. large-
version of the S&P 500, which represents the performance cap equity market and expectations are high. The current
of the average stock, is up slightly less than half that at combination of strong nominal earnings growth, continued
4.8%. Other areas underperformed the S&P 500, especially expansion in profit margins and elevated investor confidence
emerging markets, Canadian equities and U.S. small-cap is becoming increasingly critical to sustaining the bull
stocks, all of which have delivered low single-digit returns so market.
far this year in U.S.-dollar terms. While the S&P 500 is close

Executive summary | Eric Savoie, MBA, CFA, CMT | Daniel E. Chornous, CFA
Asset mix – maintaining positioning near strategic neutral, with slight tilt to fixed income
After considering the risks and opportunities, we have left demanding valuations in stocks, as well as the wide range of
our recommended asset allocation for balanced investors potential outcomes for the economy and markets, we feel it
very close to a neutral setting this quarter, with a slight is appropriate to maintain an asset allocation close to our
tilt to bonds. Our base case scenario has the economy neutral setting, with a slight tilt in bonds. We would consider
experiencing a soft landing, inflation falling gradually increasing our exposure to stocks should the equity-risk
toward central bankers’ 2% targets and central banks premium widen, or if we saw a broadening in the equity-
delivering modest monetary easing. Against this backdrop, market rally beyond mega-cap technology and themes other
prospective returns for fixed income appear pretty good, than artificial intelligence. For a balanced global investor, we
in the mid single digits with potential for further upside currently recommend an asset mix of 60.0 percent equities
should the economy falter. Stocks still offer superior return (strategic neutral position: 60.0 percent) and 38.5 percent
potential versus bonds but the upside has been reduced fixed income (strategic neutral position: 38.0 percent), with
as a result of the latest rally and the equity-risk premium is the balance in cash.
narrow. Recognizing the improved outlook for bonds and
Recommended asset mix

Equities Fixed income Cash
60.0% 38.5% 1.5%
Strategic neutral position: Strategic neutral position: Strategic neutral position:

60 percent 38 percent 2 percent
Note: As of May 31, 2024. Source: RBC GAM

Economic & capital markets forecasts
Economic forecast (RBC GAM Investment Strategy Committee)
United United Emerging
States Canada Europe Kingdom Japan China markets*
Change Change Change Change Change Change Change
from from from from from from from
Summer Spring Summer Spring Summer Spring Summer Spring Summer Spring Summer Spring Summer Spring
2024 2024 2024 2024 2024 2024 2024 2024 2024 2024 2024 2024 2024 2024
Real GDP
2023A 2.54% 1.07% 0.53% 0.10% 1.91% 5.52% 5.48%
2024E 2.40% N/C 1.30% 0.40 0.80% 0.50 0.90% 0.80 0.20% (0.20) 5.20% 0.60 5.00% 0.40
2025E 1.80% 0.10 1.60% (0.20) 1.70% (0.10) 1.70% (0.10) 1.50% 0.10 4.20% 0.10 4.30% N/C
CPI
2023A 4.12% 3.88% 5.42% 7.30% 3.25% 3.27% 2.59%
2024E 3.40% 0.60 2.50% N/C 2.50% 0.20 2.70% N/C 2.20% (0.20) 0.30% N/C 2.30% (0.10)
2025E 2.60% 0.30 2.40% 0.10 2.30% 0.10 2.50% 0.10 1.80% 0.30 1.70% (0.10) 2.90% (0.10)
A = Actual E = Estimate *GDP Weighted Average of China, India, Brazil, Mexico and Russia.
Targets (RBC GAM Investment Strategy Committee)

May Forecast Change from 1-year total return
2024 May 2025 Spring 2024 estimate* (%)
Currency markets against USD
CAD (USD–CAD) 1.36 1.27 N/C 6.7
EUR (EUR–USD) 1.08 1.21 N/C 9.6
JPY (USD–JPY) 157.31 140.00 5.00 7.0
GBP (GBP–USD) 1.27 1.31 N/C 2.6
Fixed income markets
U.S. Fed Funds Rate (upper bound) 5.50 4.75 0.50
U.S. 10-Year Bond 4.50 4.50 0.50 4.5
Canada Overnight Rate** 5.00 4.00 N/C
Canada 10-Year Bond 3.63 3.50 N/C 4.7
Eurozone Deposit Facility Rate** 4.00 2.50 0.25
Germany 10-Year Bund 2.66 2.40 0.05 5.0
U.K. Base Rate 5.25 4.25 N/C
U.K. 10-Year Gilt 4.32 4.10 0.10 6.1
Japan Overnight Call Rate 0.08 0.20 0.10
Japan 10-Year Bond 1.07 1.25 0.25 (0.6)
Equity markets
S&P 500 5278 5450 250 4.7
S&P/TSX Composite 22269 23175 1175 7.3
MSCI Europe 174 181 6 7.5
FTSE 100 8275 8600 675 7.8
Nikkei 38488 41550 100 9.7
MSCI Emerging Markets 1049 1160 75 13.5
** The Bank of Canada and European Central Bank each cut interest rates by 25-basis-points to 4.75% on June 5, 2024 and to 3.75% on June 6, 2024, respectively.
Total returns are expressed in local currencies with the exception of MSCI Emerging Markets whose return is expressed in USD. Source: RBC GAM

Asset mix – the allocation within portfolios to stocks, bonds view of the economy and return expectations for the major
and cash – should include both strategic and tactical asset classes. These weights are further divided into
elements. Strategic asset mix addresses the blend of the recommended exposures to the variety of global fixed income
major asset classes offering the risk/return tradeoff best and equity markets. Our recommendation is targeted at the
suited to an investor’s profile. It can be considered to be the Balanced profile where the benchmark (strategic neutral)
benchmark investment plan that anchors a portfolio through setting is 60% equities, 38% fixed income, and 2% cash.
many business and investment cycles, independent of a
near-term view of the prospects for the economy and related A tactical range of +/- 15% around the benchmark position
expectations for capital markets. Tactical asset allocation allows us to raise or lower exposure to specific asset classes
refers to fine tuning around the strategic setting in an effort with a goal of tilting portfolios toward those markets that
to add value by taking advantage of shorter-term fluctuations offer comparatively attractive near-term prospects.
in markets.
This tactical recommendation for the Balanced profile can
Every individual has differing return expectations and serve as a guide for movement within the ranges allowed for
tolerances for volatility, so there is no “one size fits all” all other profiles.
strategic asset mix. Based on a 40-year study of historical
The value-added of tactical strategies is, of course,
returns1 and the volatility2 of returns (the range around the
dependent on the degree to which the expected scenario
average return within which shorter-term results tend to
unfolds.
fall), we have developed five broad profiles and assigned a
benchmark strategic asset mix for each. These profiles range Regular reviews of portfolio weights are essential to the
from very conservative through balanced to aggressive ultimate success of an investment plan as they ensure current
growth. It goes without saying that as investors accept exposures are aligned with levels of long-term returns and
increasing levels of volatility, and therefore greater risk that risk tolerances best suited to individual investors.
the actual experience will depart from the longer-term norm,
the potential for returns rises. The five profiles presented Anchoring portfolios with a suitable strategic asset mix, and
below may assist investors in selecting a strategic asset mix placing boundaries defining the allowed range for tactical
best aligned to their investment goals. positioning, imposes discipline that can limit damage caused
by swings in emotion that inevitably accompany both bull and
Each quarter, the RBC GAM Investment Strategy Committee bear markets.
publishes a recommended asset mix based on our current
Average return: The average total return produced by the asset class over the period 1984 – 2024, based on monthly results.
1
Volatility: The standard deviation of returns. Standard deviation is a statistical measure that indicates the range around the average return
2
within which 2/3 of results will fall into, assuming a normal distribution around the long-term average.

Global asset mix

Benchmark Allowable Summer Fall New Year Spring Summer
policy range 2023 2023 2024 2024 2024
Cash 2.0% 0.0% – 15.0% 2.0% 2.0% 1.5% 1.5% 1.5%
Bonds 38.0% 23.0% – 53.0% 38.0% 38.0% 38.5% 38.5% 38.5%
Stocks 60.0% 45.0% – 75.0% 60.0% 60.0% 60.0% 60.0% 60.0%

Note: Effective June 1, 2020, we reset our strategic neutral positions to reflect long–lasting changes in economy and capital markets’ dynamics. Boosting
strategic neutral equity exposure by 5% and reducing fixed income by same amount in our reference balanced portfolio.
Regional allocation
WGBI* Allowable Summer Fall New Year Spring Summer
Global bonds May 2024 range 2023 2023 2024 2024 2024
North America 44.5% 34.5% – 54.5% 42.7% 40.3% 47.7% 47.0% 44.5%
Europe 34.0% 24.0% – 44.0% 37.1% 39.8% 34.4% 34.6% 34.0%
Asia 21.4% 11.4% – 31.4% 20.3% 20.0% 18.0% 18.4% 21.4%
MSCI** Allowable Summer Fall New Year Spring Summer

Global equities May 2024 range 2023 2023 2024 2024 2024
North America 71.0% 61.0% – 81.0% 67.7% 69.3% 69.8% 70.6% 70.6%
Europe 13.7% 3.7% – 23.7% 15.8% 14.5% 14.1% 13.8% 13.7%
Asia 7.1% 0.0% – 17.1% 8.4% 8.2% 8.1% 7.5% 7.5%
Emerging markets 8.3% 0.0% – 18.3% 8.1% 8.1% 8.1% 8.1% 8.3%
Our asset mix is reported as at the end of each quarter. The mix is fluid and may be adjusted within each quarter, although we do not always report on shifts as
they occur. The weights in the table should be considered a snapshot of our asset mix at the date of release of the Global Investment Outlook.
Global equity sector allocation
MSCI** RBC GAM ISC RBC GAM ISC Change from Weight vs.
May 2024 Spring 2024 Summer 2024 Spring 2024 benchmark
Energy 4.54% 4.29% 4.54% 0.25 100.0%
Materials 3.91% 2.23% 5.41% 3.18 138.4%
Industrials 11.26% 12.94% 13.26% 0.32 117.8%
Consumer discretionary 10.66% 10.75% 9.36% (1.39) 87.8%
Consumer staples 6.60% 5.17% 4.70% (0.47) 71.2%
Health care 11.83% 13.66% 10.23% (3.43) 86.5%
Financials 15.25% 14.97% 15.55% 0.59 102.0%
Information technology 23.55% 25.92% 24.95% (0.97) 105.9%
Communication services 7.64% 7.61% 7.64% 0.02 100.0%
Utilities 2.56% 1.15% 3.16% 2.01 123.4%
Real estate 2.21% 1.31% 1.21% (0.11) 54.7%
*FTSE World Government Bond Index. **MSCI World Index. Source: RBC GAM Investment Strategy Committee

At RBC GAM, we have a team dedicated to setting and

reviewing the strategic asset mix for all of our multi-asset
solutions. With an emphasis on consistency of returns, risk
management and capital preservation, we have developed a
strategic asset allocation framework for five client risk profiles
that correspond to broad investor objectives and risk preferences.
These five profiles range from Very Conservative through
Balanced to Aggressive Growth.
Very Conservative
Very Conservative investors will
Bench- Last Current
Asset class mark Range quarter recommendation seek income with maximum capital
Cash & Cash Equivalents 2% 0-15% 1.5% 1.5% preservation and the potential for modest
Fixed Income 73% 68-88% 73.5% 73.5% capital growth, and be comfortable with
Total Cash & Fixed Income 75% 60-90% 75.0% 75.0% small fluctuations in the value of their
Canadian Equities 10% 0-20% 10.0% 10.0% investments. This portfolio will invest
U.S. Equities 8% 0-18% 7.8% 7.9% primarily in fixed-income securities, and
International Equities 7% 0-17% 7.2% 7.1%
a small amount of equities, to generate
Emerging Markets 0% 0%
income while providing some protection
0.0% 0.0%
against inflation. Investors who fit this
Total Equities 25% 10-40% 25.0% 25.0%
profile generally plan to hold their
Return Volatility investment for the medium to long term.
40-year average 7.6% 4.9%
Last 12 months 7.1% 7.0%

Conservative
Conservative investors will pursue
Bench- Last Current
Asset class mark Range quarter recommendation modest income and capital growth with
Cash & Cash Equivalents 2% 0-15% 1.5% 1.5% reasonable capital preservation, and be
Fixed Income 58% 43-83% 58.5% 58.5% comfortable with moderate fluctuations
Total Cash & Fixed Income 60% 45-75% 60.0% 60.0% in the value of their investments. The
Canadian Equities 13% 3-23% 13.0% 13.0% portfolio will invest primarily in fixed-
U.S. Equities 15% 5-25% 14.8% 14.9% income securities, with some equities, to
achieve more consistent performance and
Emerging Markets 0% 0% 0.0% 0.0%
provide a reasonable amount of safety.
The profile is suitable for investors who
Total Equities 40% 25-55% 40.0% 40.0%
plan to hold their investment over the
Return Volatility medium to long term.
Balanced
The Balanced portfolio is appropriate
Bench- Last Current
Asset class mark Range quarter recommendation for investors seeking balance between
Cash & Cash Equivalents 2% 0-15% 1.5% 1.5% long-term capital growth and capital
Fixed Income 38% 23-53% 38.5% 38.5% preservation, with a secondary focus on
Total Cash & Fixed Income 40% 25-55% 40.0% 40.0% modest income, and who are comfortable
Canadian Equities 15% 5-25% 15.0% 15.0% with moderate fluctuations in the value
U.S. Equities 25% 15-35% 24.7% 24.8%
of their investments. More than half
the portfolio will usually be invested in
a diversified mix of Canadian, U.S. and
Emerging Markets 5% 0-15% 4.9% 5.0%
global equities. This profile is suitable
Total Equities 60% 45-75% 60.0% 60.0%
for investors who plan to hold their
Return Volatility investment for the medium to long term.

Growth
Investors who fit the Growth profile
Bench- Last Current
Asset class mark Range quarter recommendation will seek long-term growth over capital
Cash & Cash Equivalents 2% 0-15% 1.5% 1.5% preservation and regular income, and
Fixed Income 23% 8-38% 23.5% 23.5% be comfortable with considerable
Total Cash & Fixed Income 25% 10-40% 25.0% 25.0% fluctuations in the value of their
Canadian Equities 18% 8-28% 18.0% 18.0% investments. This portfolio primarily
U.S. Equities 30% 20-40% 29.6% 29.7% holds a diversified mix of Canadian, U.S.
and global equities and is suitable for
investors who plan to invest for the
long term.
Total Equities 75% 60-90% 75.0% 75.0%
Return Volatility
Last 12 months 11.6% 10.4%
Aggressive Growth
Aggressive Growth investors seek
Bench- Last Current
Asset class mark Range quarter recommendation maximum long-term growth over capital
Cash & Cash Equivalents 2% 0-15% 2.0% 2.0% preservation and regular income, and are
Fixed Income 0% 0-15% 0.0% 0.0% comfortable with significant fluctuations
Total Cash & Fixed Income 2% 0-17% 2.0% 2.0% in the value of their investments. The
Canadian Equities 29% 19-39% 29.0% 29.0% portfolio is almost entirely invested in
U.S. Equities 38% 28-48% 37.5% 37.6% stocks and emphasizes exposure to
global equities. This investment profile
is suitable only for investors with a high
risk tolerance and who plan to hold their
Total Equities 98% 83-100% 98.0% 98.0%
investments for the long term.
Return Volatility
Last 12 months 14.3% 12.3%

Capital markets performance
Milos Vukovic, MBA, CFA Aaron Ma, MBA, CFA

Managing Director & Senior Analyst, Investment Strategy
Head of Investment Policy RBC Global Asset Management Inc.
The U.S. dollar appreciated against the Japanese yen but Global fixed income posted declines in most regions in the
was little changed against other major currencies during the latest quarter as yields rose with the deferral of expected rate
three months ended May 31, 2024. The greenback was up 4.9% cuts. At the start of 2024, investors had anticipated six rate
against the yen and 0.4% against the Canadian dollar, but cuts by the Fed over the year, but those expectations have
down 0.4% versus the euro and 0.9% versus the British pound. since been tapered down to one or two because inflation
The postponement of expected interest-rate cuts by the U.S. has stalled above the Fed’s 2% target and the labour market
Federal Reserve (Fed) because of economic strength and remains tight. The yield on the U.S. 10-year bond ended the
persistent inflation supported the greenback, outweighing period at 4.50%, up from 4.25% a quarter ago, but is still
concerns about its overvaluation, high government spending below the 4.93% level reached in October of last year. U.S.
and political risks related to the presidential election. bonds outperformed, with the FTSE U.S. Government Bond
Index essentially flat. Losses were largest for European and
The especially wide policy-rate differential between the Japanese bonds. The FTSE European Government Bond Index
U.S. and Japan is expected to remain in place for longer dropped 8.7% and the FTSE Japanese Government Bond Index
and pressure the yen as Japanese investors seek superior fell 8.6%. Over the 12-month period, the FTSE Canada Universe
returns abroad. The slower pace of inflation in Canada and Bond Index performed best, up 2.2%, compared with declines
a stagnant economy have allowed the Bank of Canada to of 18.1% for the FTSE Japanese Government Bond Index
begin cutting interest rates. In Europe, the economy appears and 17.8% for the FTSE European Government Bond Index,
to have turned the corner while inflation has cooperatively measured in U.S.-dollar terms.
come down closer to target. Sterling has held up owing to
the expectation that interest-rate cuts will come later than Most major stock markets registered solid gains in the latest
in some other developed markets, offsetting concern about quarter, with many equity indexes establishing new highs.
inflation that is among the highest in developed markets. The S&P 500 Index reached above 5300 in May for the first
Over the one-year period, the U.S. dollar was up 12.9% against time, and record highs were also made in European, Canadian
the yen and 0.4% against the loonie, but down 1.5% against and Japanese equity markets. Stock-market gains have been
the euro and 2.4% against the pound. reasonably broad-based this quarter as most indexes posted

Capital markets performance | Milos Vukovic, MBA, CFA | Aaron Ma, MBA, CFA
gains in the low to high single digits. Performance ranged

from a 0.7% loss for the MSCI Japan Index to a 10.3% gain
for the MSCI UK Index in U.S.-dollar terms. The small loss on
Japanese equities would have been a solid gain if not for the
yen’s depreciation against the dollar. Relatively attractive
valuations for UK stocks on a price-to-earnings and cash-
yield basis drew investors back to the market after it lagged
other regions last year. Equities were exceptionally strong
over the one-year period, ranging from a 12.4% return in U.S.
dollars for the MSCI Emerging Markets Index to 28.2% for the
S&P 500.
Stocks of U.S. companies of all sizes delivered respectable

returns in the latest quarter, led by the 3.9% gain for the
large-cap S&P 500, which outperformed the small-cap index
by 1.5 percentage points. The Russell 3000 Value Index’s 3.6%
gain edged the Russell 3000 Growth Index’s 3.1% advance as
the investment boom in artificial intelligence (AI) broadened
to include companies that fall into the value category.
Utilities, a defensive area containing many value companies,
was the best performing sector with a 14.7% return. Investors
believe that growing demand for power required to run AI
data centres will be a boon to the sector. On the other end of
the spectrum, the Consumer Discretionary sector sank 3.7%
amid concerns about weakening household balance sheets.
Over the 12-month time frame, Communication Services was
the best performing sector with a 35.4% return, and Consumer
Staples ranked last with a 6.8% gain.

Exchange rates
Periods ending May 31, 2024
Current 3 months YTD 1 year 3 years 5 years
USD (%) (%) (%) (%) (%)
USD–CAD 1.3630 0.43 2.86 0.40 4.13 0.17
USD–EUR 0.9216 (0.39) 1.74 (1.49) 4.07 0.58
USD–GBP 0.7848 (0.94) 0.03 (2.38) 3.69 (0.16)
USD–JPY 157.2650 4.90 11.54 12.88 12.83 7.73
Note: all changes above are expressed in US dollar terms
Canada fixed income markets
USD CAD
3 months YTD 1 year 3 years 5 years 3 months 1 year 3 years
Fixed income markets: Total return (%) (%) (%) (%) (%) (%) (%) (%)
FTSE Canada Univ. Bond Index TR (0.20) (4.23) 2.16 (5.73) (0.26) 0.22 2.57 (1.83)
U.S. fixed income markets
USD CAD
FTSE U.S. Government TR 0.04 (1.64) 1.36 (3.15) (0.17) 0.41 1.72 0.83
BBg U.S. Agg. Bond Index TR 1
0.04 (1.64) 1.31 (3.10) (0.17) 0.42 1.66 0.89
Global fixed income markets

USD CAD
FTSE WGBI TR (0.45) (2.98) 1.26 (5.92) (1.73) (0.08) 1.62 (2.05)
FTSE European Government TR (8.70) (14.47) (17.77) (17.41) (8.32) (8.31) (17.44) (15.01)
FTSE Japanese Government TR (8.62) (14.52) (18.07) (15.22) (9.87) (8.23) (17.74) (12.79)
Canada equity markets
USD CAD
Equity markets: Total return (%) (%) (%) (%) (%) (%) (%) (%)
S&P/TSX Composite 4.63 4.59 17.08 3.09 9.96 5.07 17.55 7.36
S&P/TSX 60 3.75 3.82 16.76 3.29 10.09 4.19 17.23 7.56
S&P/TSX Small Cap 10.06 7.89 16.90 (1.95) 9.23 10.53 17.37 2.11
U.S. equity markets
USD CAD
S&P 500 TR 3.91 11.30 28.19 9.57 15.80 4.30 28.63 14.08
S&P 400 TR 3.60 7.87 25.97 4.67 12.26 3.98 26.41 8.96
S&P 600 TR 2.36 1.59 20.34 0.62 10.13 2.80 20.82 3.03
Russell 3000 Value TR 3.62 7.23 21.71 5.10 10.62 4.01 22.14 9.40
Russell 3000 Growth TR 3.12 12.66 32.82 10.24 18.66 3.51 33.29 14.75
NASDAQ Composite Index TR 4.19 11.82 30.37 7.61 18.54 4.58 30.82 12.04
1
Note: All rates of return presented for periods longer than 1 year are annualized. Bloomberg U.S. Agg. Bond Index TR. Source: RBC GAM

Global equity markets

USD CAD
MSCI World TR * 3.82 9.52 24.92 6.67 12.76 4.34 25.27 11.05
MSCI EAFE TR * 4.54 7.07 18.53 3.06 8.05 5.07 18.86 7.30
MSCI Europe TR * 6.70 8.24 19.71 4.19 9.03 7.24 20.05 8.47
MSCI Pacific TR * 0.64 4.80 16.08 1.00 6.26 1.14 16.41 5.15
MSCI UK TR * 10.26 8.82 18.91 6.69 7.13 10.82 19.25 11.07
MSCI France TR * 3.13 5.92 15.85 4.69 9.89 3.65 16.17 8.99
MSCI Germany TR * 4.23 7.47 18.05 (0.89) 6.42 4.75 18.38 3.18
MSCI Japan TR * (0.67) 7.03 18.63 2.43 7.56 (0.17) 18.96 6.64
MSCI Emerging Markets TR * 3.52 3.41 12.39 (6.23) 3.55 4.04 12.71 (2.38)
Global equity sectors

USD CAD
Sector: Total return (%) (%) (%) (%) (%) (%) (%) (%)
Energy TR * 9.79 10.42 25.46 21.69 10.93 10.34 25.81 26.69
Materials TR * 6.93 3.77 21.54 2.13 11.53 7.47 21.88 6.32
Industrials TR * 3.57 9.35 28.53 6.13 11.75 4.09 28.90 10.49
Consumer discretionary TR * (3.71) 1.97 18.14 0.14 11.29 (3.23) 18.48 4.25
Consumer staples TR * 3.95 4.98 6.78 2.61 6.45 4.47 7.08 6.82
Health care TR * 0.93 5.98 12.59 5.30 11.14 1.44 12.90 9.63
Financials TR * 5.95 11.51 33.58 5.99 10.83 6.48 33.96 10.34
Information technology TR * 4.18 15.03 34.79 14.41 23.60 4.70 35.17 19.11
Communication services TR* 7.52 17.20 35.37 2.58 11.46 8.06 35.75 6.79
Utilities TR * 14.73 9.81 12.92 3.92 6.36 15.30 13.24 8.19
Real estate TR * (1.33) (4.34) 8.18 (3.99) 0.68 (0.84) 8.49 (0.04)
* Net of taxes. Note: all rates of return presented for periods longer than 1 year are annualized. Source: Bloomberg/MSCI

Economic outlook
Falling inflation tees up rate cuts
Eric Lascelles
Managing Director & Chief Economist
The global economy has again demonstrated its impressive resilience by surviving another quarter of elevated
interest rates. This reinforces our opinion that a recession can be avoided over the year ahead. We now assign a
65% likelihood that the economy manages a soft landing versus just a 35% risk of a hard landing – another term for
a recession (Exhibit 1). The business cycle appears to be in the mid- to late-cycle phase, consistent with about two
to five years of further economic growth.
After inflation staged an unwelcome revival in early 2024, In turn, while interest-rate-cut expectations have been
it is heartening that the latest data (Exhibit 2) points to the delayed relative to expectations at the beginning of the year,
resumption of the prior downward trend. Inflation is still too several central banks have already begun their monetary
high, but it is becoming incrementally less so. easing, and most of the rest are in a position to cut rates later
in the year. The pace of rate cutting should be only gradual
Exhibit 1: Soft landing still most likely for the U.S., but Exhibit 2: U.S. CPI monthly trend is decelerating again
not certain
1.25
65% 1.00
U.S. CPI (MoM % change)
0.75
Soft landing
0.50
0.25
0.00
-0.25
-0.50
35 % -0.75
Hard landing -1.00

2019 2020 2021 2022 2023 2024
All items All items less food & energy
Source: RBC GAM Note: As of May 2024. Shaded area represents recession. Source: BLS,
Macrobond, RBC GAM

Economic outlook | Eric Lascelles
given the resilience demonstrated by the economy and

Exhibit 3: U.S. manufacturing is wobbling
inflation, but it nevertheless promises to significantly
75
reduce the main headwind blowing against economic
70
growth over time.
ISM Manufacturing Index

65
60
U.S. growth is enduring despite concerns around a handful of
55
softening indicators (Exhibit 3). The consumer should be able
50
to weather rate-related pressures. Granted, the U.S. economy
45
is looking less exceptional in the context of its peers than it 40
did in 2023. This is in part due to a modest deceleration in the 35
U.S., and in part because much of the rest of the developed 30
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024
world has managed a slight acceleration. Manufacturing PMI New Orders Index
Note: As of May 2024. Shaded area represents recession. Source: ISM, Macrobond, RBC
Downside risks cannot be ignored, highlighting why a hard Note: As of May 2024. Shaded area represents recession. Source: ISM,
landing remains a possibility. Interest-rate-related pain Macrobond, RBC GAM
continues to mount in some corners of the economy and it

may worsen still. Moreover, the risk remains that inflation Exhibit 4: Beige Book Sentiment Indicator shows a
will become stuck at elevated levels. Geopolitical risks are revival
also higher than normal: the November U.S. election, Middle 40
East conflict, China-U.S. tensions and the war in Ukraine 30

Beige Book Sentiment Indicator
together pose challenges for continued global stability and 20
10
low inflation.
(index level)
-10
For markets, every major asset class has a measure of allure
-20
right now. Cash offers its highest yield in over a decade,
-30
though this is now beginning to ebb. Fixed income similarly -40
operates with coupons near their highest in a decade, offers -50
the potential for small capital gains as central banks cut -60
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
rates and serves as portfolio protection should the economy
stumble. Equities, meanwhile, normally provide moderate Note: As of May 2024. The indicator quantifies the sentiment of local contacts
returns at this point in the business cycle. Valuations are by assigning different weights to a spectrum of positive and negative words
used to describe overall economic conditions in the Fed Beige Book. Source:
somewhat stretched in the U.S., but reasonable elsewhere. U.S. Federal Reserve, RBC GAM
The fact that the risk premium between stocks and bonds
is smaller than normal makes the case for our slight bond Exhibit 5: Twitter Economic Sentiment in the U.S.
overweight relative to equities. suggests more optimism ahead
Economy continues to advance 2.0
1.5
Economic activity continues to advance, a welcome
1.0
development given lingering fears of a recession and the 0.5
persistence of high interest rates. This progress is visible
Z-scores
0.0
across a wide range of indicators, from first-quarter GDP -0.5
figures that were reliably positive across the developed -1.0

-1.5
world; to descriptive surveys like the Fed’s Beige Book,
-2.0
which confirms growth in the U.S. (Exhibit 4); to real-time -2.5
2018 2019 2020 2021 2022 2023 2024
alternative indicators such as the favourable signal emitted
GS Twitter Economic Sentiment Index (7-day average)
by an X (formerly Twitter) -based economic sentiment index University of Michigan Consumer Sentiment Index
(Exhibit 5). Note: Twitter Economic Sentiment Index as of 05/29/2024, University of

Michigan Consumer Sentiment as of May 2024. Source: Goldman Sachs Global
Investment Research, University of Michigan, Macrobond, RBC GAM

Our economic modelling indicates that growth should be

sustained over the year ahead. A number of the recession Exhibit 6: U.S. business-lending standards are
signals that had been blinking red last year have reversed, reversing helpfully
including now-easing lending standards (Exhibit 6), newly
standards for commercial & industrial

Net percent of banks tightening credit
80
rising profit margins and reviving global trade (Exhibit 7).
Tightening
60
References to the word “recession” in S&P 500 Index company
transcripts have continued to fall and are now at their lowest 40
loans
level in two years (Exhibit 8). These developments articulate 20
the case for a soft landing over a hard landing.

0
The U.S. economy was strong for much of 2023, enjoying the -20
Easing
fruits of robust consumer spending, stronger-than-expected -40
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024
fiscal stimulus and population growth (Exhibit 9). Meanwhile, Recession Large & medium firms Small firms
most of the rest of the developed world effectively stagnated
during that period (Exhibit 10). Note: April 2024 Senior Loan Officer Opinion Survey on Bank Lending
Practices. Source: Federal Reserve Board, Macrobond, RBC GAM
Exhibit 7: Global trade is reviving Exhibit 8: Mentions of “recession” in S&P 500

company transcripts have fallen steadily
60
50 3,500
World trade (YoY % change)
40 3,000
30
2,500
20
Mentions
10 2,000
0
1,500
-10
1,000
-20
-30 500
-40
1992 1996 2000 2004 2008 2012 2016 2020 2024 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Nominal Real 2019 2020 2021 2022 2023 2024
Note: As of Mar 2024. Shaded area represents U.S. recession. Source: CPB Note: As of Q2 2024 (partial data used for the quarter). Includes transcripts
Netherlands Bureau for Economic Policy Analysis, Macrobond, RBC GAM from all investor calls, investor days and capital markets days for S&P 500
companies. Source: Bloomberg, RBC GAM
Exhibit 9: U.S. population boom driven by Exhibit 10: U.S. growth exceptionalism
undocumented immigrants
2.2
5.0
2.0 4.1
4.0
U.S. population (YoY % change)
1.8
Real GDP growth, H2 2023
1.6 3.0
(% change annualized)
1.4
2.0
1.2
0.9
1.0 1.0
0.2 0.4
0.8 0.0
0.6
-1.0 -0.7
0.4 -0.9
0.2 -2.0 -1.8

0.0 -3.0
1949 1956 1963 1970 1977 1984 1991 1998 2005 2012 2019 2026 Japan U.K. Germany Canada France Italy U.S.
Projections
Note: Data for 2022-2027 estimated based on RBC GAM assumptions. Source: Macrobond, RBC GAM
Source: U.S. Census Bureau, Congressional Budget Office, Macrobond,
RBC GAM

But that U.S. economic exceptionalism appears to be fading

in 2024, in part as fiscal outlays stabilize. At the same time,
Exhibit 11: Global economic surprise gap reverses
other developed economies have accelerated from effective 90
stagnation to a moderate clip. The eurozone, the UK and 70

Positive surprises
Citigroup Economic Surprise Index

Canada all recorded improved GDP growth in the first quarter 50
of 2024, alongside an assortment of other upgraded economic 30
(1 std dev=100)
10
indicators. This convergence can perhaps best be conveyed
-10
by the fact that global economic surprises are no longer more
-30
negative than in the U.S. (Exhibit 11).
-50 Negative surprises
-70
Updated growth forecasts -90
Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23 Jan-24 May-24
You wouldn’t think that economic growth has materially U.S. Global
converged between the U.S. and several other developed
Note: As of 06/03/2024. Source: Citigroup, Bloomberg, RBC GAM
countries simply by looking at their respective 2024 GDP
forecasts. The U.S. is still anticipated to significantly outpace
the rest, with 2.4% growth versus 1.3% in Canada, and just Exhibit 12: RBC GAM GDP forecast for developed
0.9% in the UK and 0.8% in the eurozone. markets
3.0
But those figures exaggerate the divide, as the U.S. managed 2.6%
such extraordinary growth in late 2023 (and the others 2.5 2.4%
Annual GDP growth (%)
experienced such pitiful stagnation) that the economic 2.0 1.8% 1.8% 1.7% 1.7%
handoff into 2024 relatively flatters U.S. growth this year. In 1.6%
1.5%
1.5 1.3%
actuality, we anticipate quite a similar growth rate of just
0.9%
under 2% annualized per quarter across the entire set of 1.0 0.8%
countries. 0.5
0.2%
0.0
Providing further context, the 2024 U.S. growth outlook South Korea U.S. Canada U.K. Eurozone Japan
2024 2025
remains unchanged from a quarter ago while the rest of the
developed world enjoyed an approximately half-percentage-
Note: As of 05/30/2024. Source: RBC GAM
point forecast upgrade.
Our growth forecasts are mostly a bit above the consensus

Exhibit 13: RBC GAM GDP forecast for emerging
outlook, informed by the view that a recession can be
markets
avoided, that inflation can likely descend somewhat further,
and that interest-rate cuts can provide some assistance to 8
7.2%
the economy (Exhibit 12). 7
6.9%
6
Annual GDP growth (%)
For 2025, the economic outlook remains largely the same as 5

5.2%
a quarter ago and is approximately on consensus. Modest 4

4.2%
growth stabilizes unemployment rates at healthy but not 3 2.8%
rock-bottom levels, allowing inflation to fall further. There is 2 1.6% 1.7%

2.0%
1.4%
scope for growth to pick up somewhat over the latter part of 1
1.1%
the year as interest rates continue their descent. 0

India China Russia Mexico Brazil
2024 2025
In emerging markets, the 2024 growth outlook has improved
slightly and is ahead of the consensus by virtue of superior Note: As of 05/30/2024. Source: RBC GAM
expectations for Chinese and Indian growth (Exhibit 13).
Growth should then decelerate somewhat into 2025.

Inflation begins to settle, again inflation numbers have improved, and real-time inflation data
After impressive progress between the middle of 2022 and the suggests that future months should also manage incremental
end of 2023, inflation proved somewhat stickier over the first improvements (Exhibit 15).
several months of 2024 (Exhibit 14). This was especially true
Although labour markets remain tight, wage growth is
in the U.S., but also visible in other markets.
gradually decelerating from robust rates (Exhibit 16). The
Inflation’s flare resulted from higher gasoline prices, still- largest single driver of inflation – shelter costs – has room
robust service-sector inflation and – in the U.S. – some to continue slowing as lengthy lags play out. Non-shelter
seasonal distortions in the first quarter. It is undeniably inflation can probably ease somewhat as insurance inflation
a more difficult path downward for inflation if economies peaks – a view motivated by the component’s historically
manage to avoid recession, as they have so far done. lagged relationship to broader price pressures, and by the
reversal of some of the acute factors that recently drove
The good news is that, since that unwelcome spurt, inflation insurance costs so high (Exhibit 17).
has tentatively begun to decline again. The April and May
Exhibit 14: Global inflation has declined but remains Exhibit 15: Real-time inflation continues to fall
sticky
1.5
10 1.2
8 0.9
MoM % change
0.6
CPI (YoY % change)
6
0.3
4
0.0
2 -0.3
-0.6
0
-0.9
2019 2020 2021 2022 2023 2024
-2
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 U.S. Daily PriceStats Inflation Index CPI
World Advanced economies EM economies
Note: As of Apr 2024. Source: Haver Analytics, Macrobond, RBC GAM Note: PriceStats Inflation Index as of 05/31/2024, CPI as of May 2024.
Source: State Street Global Markets Research, RBC GAM
Exhibit 16: Wage pressure in U.S. is easing Exhibit 17: Shelter and core services are now the
drivers of inflation in U.S.
4 8
(# of standard deviations from normal)
7
Wage Growth Tracker (YoY % change)
Contributions to YoY% change in Core
3 7
U.S. Wage Pressure Composite
6
2
6
5
1
5
0 4
CPI (ppt)
4
-1 3
3
-2 2
2
-3 1
-4 1
0
-5 0 -1
1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23 Sep-23 Jan-24 May-24
Expectations (LHS) Wage Growth Tracker (RHS) Core goods Core services ex shelter Shelter
Note: Atlanta Fed Wage Growth Tracker as of Mar 2024, wage expectations as Note: As of May 2024. Source: BLS, Haver Analytics, Macrobond, RBC GAM
of May 2024. Wage Pressure Composite constructed using business intentions
to raise wages. Shaded area represents recession. Source: Macrobond,
RBC GAM

There is evidence that more conservative consumers are

starting to erode corporate pricing power, with the result
Exhibit 18: RBC GAM CPI forecast for developed
that retail-level price cuts are becoming more common: This
markets
trend is another aid for inflation in the coming months, if less 4.0
celebrated in C-suites. 3.5 3.4%
3.0
2.6% 2.7%
CPI (YoY % change)

2.6%
Our 2024 inflation forecast has increased for the U.S. given 2.5
2.5% 2.5%
2.4% 2.5%
2.3% 2.2%
2.1%
recent upside inflation surprises, but it remains largely 1.8%
2.0
unchanged elsewhere. This is to say: Inflation should
1.5
remain too high in 2024, but on a downward trend across the
1.0
remainder of the year (Exhibit 18). We further assume that it
0.5
takes a significant part of 2025 to bring inflation sustainably
0.0
down to the realm of central banks’ 2.0% targets. U.S. U.K. South Korea Canada Eurozone Japan
2024 2025
Note that the lower inflation numbers recently achieved in
Note: As of 05/30/2024. Source: RBC GAM
the UK and eurozone versus North America largely reflect
differences in how inflation is defined. The critical difference
is that the U.S. and Canada include shelter costs in their Exhibit 19: Central banks are pivoting to rate cuts
inflation indexes, whereas the European nations do not.
80
Tightening Inflation
Central banks easing / tightening
fight
Central banks start cutting 60
Persistently
40 accomodative policy
Policy rates are extremely high by the standards of the past 20
(% of total)
decade and a half, and with good reason given the recent 0
inflation shock. But now, with inflation declining, central -20
banks are beginning to ease policy rates. -40
-60 Widespread
easing in COVID-19
reaction to stimulus Easing
A number of emerging-market central banks have already -80 financial crisis
-100
begun the downward journey. This is an important 2008 2010 2012 2014 2016 2018 2020 2022 2024
development, as they were a helpful leading indicator on the % of central banks tightening % of central banks easing Net % of banks tightening
way up. A mounting number of developed-world central banks

Note: As of 05/31/2024. Based on policy rates for 30 countries. Source: Haver
including the European Central Bank, the Bank of Canada, the Analytics, RBC GAM
Swiss National Bank and Sweden’s Riksbank have also begun
their rate-cutting journey (Exhibit 19).
Exhibit 20: Market shaves off a number of rate cuts
The Bank of England could begin easing as soon as August in 2024
after the UK’s national elections take place. The U.S. Federal
5.5
Reserve (Fed) is dragging its heels given that inflation is
5.0
Expected fed funds rate (%)
higher there than elsewhere, but it is nevertheless plausibly

on track for some exploratory rate cutting this fall, possibly 4.5
as early as in September (Exhibit 20). 4.0

Rate cut expectations
pared back as economy
3.5
This broadly based pivot is momentous, as it is high interest remains resilient and
inflation remains sticky
rates that have constituted the primary threat to the global 3.0
economy. Beginning the process of removing that threat is 2.5

Nov-23 Apr-24 Sep-24 Feb-25 Jul-25 Dec-25 May-26 Oct-26 Mar-27
therefore quite helpful, despite a lag until the full benefit is
06/03/2024 01/12/2024
felt.
Note: As of 06/03/2024. Source: Bloomberg, RBC GAM

Two caveats are in order.
First, it would be foolish to suggest that the trajectory for

central banks can be mapped out far in advance. There have
already been major revisions to expectations just this year,
with far less easing anticipated today than at the beginning
of 2024. Stubborn inflation and resilient growth have led to
delays. There will certainly be more plot twists on the way
to lower policy rates. But, as a general idea, central banks
credibly want to make interest rates lower and believe they
can begin to do so over the remainder of 2024.
Second, contrary to the usual rate-cutting experience, this

cycle should be gradual. There isn’t the traditional catalyst
of a recession forcing central banks into emergency rate
cuts, and inflation remains too high at the moment. Central
banks are therefore likely to ease in limited 25-basis-point
increments, and not at every meeting. It is possible that
extended pauses could be interspersed across the cycle.
Amid this uncertainty and imprecision, it is worth keeping

in mind that a “neutral” policy rate is likely considerably
lower than current levels. Unavoidably, the exact level is also
uncertain. In our view, a neutral North American policy rate
might be as low as 2.00% or as high as 3.50%. But, either way,
there should be scope for multiple percentage points of rate
cutting from here. That should deliver relief for borrowers and
a capital gain for bondholders.
It should be noted that very little of what has been written so

far applies to Japan, which is on a very different trajectory.
Inflation in Japan rose with a considerable lag, and interest
rates are therefore still in the process of reviving from an
exceedingly low starting point. That journey continues, with
the country’s 10-year bond yield only recently rising above
1.00% for the first time in more than a decade.
High uncertainty persists

It remains a time of high macroeconomic uncertainty. Part
of this relates to the possibility that inflation and/or growth
could simply follow a path that differs from our base case
scenario, even absent an exogenous shock. Much of the
remaining risk relates to geopolitical uncertainty – i.e. the
possibility of an exogenous shock causing the economy to
deviate from its trend.

On the pure forecasting uncertainty side, there remains from an investment standpoint it is large businesses that
the risk – thankfully diminishing – of a recession. Interest make up most of the stock market.
rates remain restrictive (Exhibit 21), and these impact the
Certain recession signals continue to flash red, most
economy with long and variable lags. There is evidence
prominently the fact that the U.S. yield curve remains inverted.
of pain mounting in some quarters, with household-loan
But many other signals are no longer pointing to a recession,
delinquencies in the U.S. rising significantly (Exhibit 22).
or now waffle on the subject. All told, we figure the risk of a
Fortunately, a more holistic assessment of American
U.S. recession over the coming year is down to about 35% –
consumers indicates that they are mostly fine, with few job
two to three times higher than normal, but nevertheless an
losses (Exhibit 23), rising wages and rising wealth via the
unlikely outcome.
advancing stock market.
On the inflation front, there remains a risk that inflation gets
The fact that U.S. small-business owners are less optimistic
stuck at an elevated level. We ultimately view this as unlikely
about their prospects is a possible sign of trouble brewing
given signs that inflation is declining again, and due to various
(Exhibit 24). But a counterpoint is that small businesses have
favourable forces that were discussed earlier. But there isn’t
long expressed more pessimism than larger businesses, and
Exhibit 21: Bond yields rise on rate-cut delay as Exhibit 22: U.S. consumer-loan delinquency is now
inflation proves to be sticky rising
5.0 14
consumer loans (% of current balance)
U.S. newly delinquent (30+ days)
4.5
12
U.S. 10-year Treasury yield (%)
4.0
10
3.5
3.0 8
2.5
6
2.0
4
1.5
1.0 2
0.5
0
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
0.0
Jan-20 Jun-20 Nov-20 Apr-21 Sep-21 Feb-22 Jul-22 Dec-22 May-23 Oct-23 Mar-24 Total Mortgage Auto Credit card Student loan
Note: As of 05/31/2024. Shaded area represents recession. Source: U.S. Note: As of Q1 2024. Shaded area represents recession. Source: FRBNY,
Treasury, Macrobond, RBC GAM Macrobond, RBC GAM
Exhibit 23: U.S. jobless claims remain low Exhibit 24: Poor sales have started to worry small
businesses
450
35
U.S. unemployment insurance initial
Single most important problem: poor
400 30
sales (% of firms reporting)
claims (thousands)
350 25
300 20
15
250
10
200
5
150
Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 0
Initial claims Initial claims, 4-week moving average 1989 1994 1999 2004 2009 2014 2019 2024
Note: As of the week ending 05/25/2024. Source: DOL, Macrobond, RBC GAM Note: As of Apr 2024. Shaded area represents recession. Source: NFIB Small
Business Economic Survey, Macrobond, RBC GAM

much precision to the analysis, and it must be conceded that • Finally, the U.S. election contest between President Joe
the first-quarter inflation revival wasn’t entirely anticipated, Biden and former President Donald Trump is fewer than
either. There are thus scenarios in which inflation remains too five months away. The race remains a close one, according
high and interest rates must also remain elevated, with the to polls and betting markets, with Trump leading slightly
possibility that the economy suffers for it. (Exhibit 25). We continue to think that a Trump win might
be preferred by the stock market given a platform that
Turning to geopolitical risks, we see a familiar set of issues: includes corporate-tax cuts and deregulation. However, his
proposal for major new tariffs and reduced immigration
• The war in Ukraine is still unresolved and so grinds on. The
could have the opposite effect on the economy, with tariffs
fate of the global price of oil, natural gas and agricultural
potentially increasing inflation as well.
products lies partially in the balance.
• China-U.S. relations remain challenging, and probably Housing obscures Chinese recovery
will for years. The White House recently levied further The Chinese economy remains burdened by continued
tariffs on Chinese imports, with a particular focus on housing-market problems. After a period of overbuilding and
strategic green industries. We see no obvious end in excessive speculation, the property market is now very weak.
sight to these economic frictions (and the possibility of Home sales are falling, home prices are in decline and many
a further deterioration depending on the outcome of the builders are technically insolvent.
upcoming U.S. election), with the result that global growth
Chinese policymakers continue to grapple with the sector’s
may be incrementally dimmed and global inflation may be
woes. The latest initiative is a 500 billion renminbi (US$69
incrementally higher than otherwise.
billion) program for local governments to absorb a fraction
• The Middle East remains conflict-ridden, with economic of the country’s completed but unsold housing inventory.
consequences that include a higher risk premium Even with this, it is unlikely that the Chinese property market
embedded within oil prices and trade-impeding missile will be rocking any time soon given projections for declining
strikes in the Red Sea, with the result that supply-chain demand over the coming decade and still-poor housing
problems have again mounted – with implications for affordability (Exhibit 26). But stabilization is a feasible goal.
inflation. A further escalation in tensions could increase
these effects.
Exhibit 25: 2024 U.S. presidential election: Exhibit 26: China’s home price-to-income ratio is
Biden vs. Trump among the highest in the world
60 35
30
Home price-to-income ratio
50
25
40
20
30 15
%
10
20
5
10 0
Spain
Arabia
China
South Korea
Sweden
Hong Kong
India
Singapore
France
Italy
U.K.
U.S.
Canada
Japan
Australia
Germany
Netherlands
Saudi
0
RealClearPolitics Predictit oddschecker 538
Biden Trump
Note: RealClearPolitics (RCP) (06/03/2024) poll averages for Biden vs. Trump Note: As of 2024. Source: Numbeo, Macrobond, RBC GAM
matchups only. Others acknowledge possibility of other candidates contesting
the election. Predictit (06/03/2024) probability of winning derived from
prediction markets data. oddschecker (06/03/2024) probability of winning
derived from median daily betting odds. 538 (06/03/2024) weighted averages of
national presidential polls. Source: ABC News, FiveThirtyEight, oddschecker,
Predictit, RCP, Macrobond, RBC GAM

Even with the real estate drag, the Chinese economy is set to continue slowing as the country becomes wealthier, is still
to expand more than 5% this year, as consumer spending moving deceptively quickly and can drive further prosperity
rises moderately and capital investment and exports are gains (Exhibit 29).
advancing fairly quickly (Exhibit 27). Stories of China’s
economic demise are considerably exaggerated. The Canadian distortions to fade
possibility of a trade war with the U.S. admittedly constitutes Consistent with most of its peers, the Canadian economy
a downside risk to this view. struggled in 2023. This was despite a theoretical tailwind from
rapid population growth. Fortunately, and in line with those
Looking further out, we continue to anticipate a general same peers, Canada now appears to be righting itself in 2024.
deceleration in Chinese GDP growth, to a trend of 3% to
4% per year. China’s demographics are quite poor, with First-quarter economic growth was the best quarterly
plummeting fertility rates increasingly making the case for advance in a year, if not especially impressive in the context
the United Nation’s low-fertility scenario in which China’s of still-strong population growth. Canada’s real-time business
population falls from 1.4 billion today to fewer than 500 conditions index continues to trend higher, confirming that
million people at the end of the century (Exhibit 28). However, growth continues into the middle of the year (Exhibit 30).
the country’s productivity-growth rate, while slowing and set
Exhibit 27: China’s economic recovery is weighed Exhibit 28: China’s population to shrink under
down by housing different scenarios
170 1.6
1.4
150
China's population (billions)
1.2
130
2019 average = 100
1.0
110
0.8
90 0.6
0.4
70
0.2
UN projections
50
0.0
1950 1980 2010 2040 2070 2100
30
Dec-19 Jul-20 Feb-21 Sep-21 Apr-22 Nov-22 Jun-23 Jan-24 Actual Low-fertility variant
Constant-fertility variant Medium-fertility variant
Exports Retail sales Property sales High-fertility variant
Note: As of Apr 2024. Average of 2019 levels indexed to 100. Source: Haver Note: Data based on World Population Prospects 2022. Source: United
Analytics, RBC GAM Nations, Macrobond, RBC GAM
Exhibit 29: China’s productivity has been on a Exhibit 30: Business conditions in Canada look fine
downward trajectory over the past decade
21 450
18
Real-time Local Business Conditions
400
Index (Week of Aug 10, 2020 = 100)
15
350
12
YoY % change
9 300
6
250
3
200
0
-3 150
-6 100
-9
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 50
Aug-20 Jan-21 Jun-21 Nov-21 Apr-22 Sep-22 Feb-23 Jul-23 Dec-23 May-24
GDP per capita GDP per capita trend
Note: As of the week of 05/27/2024. Equal-weighted average of Business Conditions Index of
Note: As of Q1 2024. Trend estimated using Hodrick-Prescott filter. Note: As of the week of 05/27/2024. Equal-weighted average of Business
Source: China National Bureau of Statistics, Macrobond, RBC GAM Conditions Index of Calgary, Edmonton, Montreal, Ottawa-Gatineau, Toronto,
Vancouver and Winnipeg. Source: Statistics Canada, Macrobond, RBC GAM

The Canadian economy is especially sensitive to interest

rates due to high household debt levels, poor housing
Exhibit 31: Financial stress for Canadians is up, but
affordability and the short-term orientation of mortgages
only moderately
themselves. Even so, the increase in household loan- 2.5
delinquency rates has been surprisingly tame (Exhibit 31)

2.0
and is actually below comparable U.S. levels. We posit that
Delinquency rate (%)

mortgage stress-testing regulations paired with deep client- 1.5
bank relationships have combined to limit the pain in Canada.

1.0
But household debt distress should nevertheless continue to
mount for some time, with a large fraction of the country’s 0.5
mortgages resetting at higher rates over the next few years.

0.0
In turn, the pressure is on the Bank of Canada to continue 2007 2009 2011 2013 2015 2017 2019 2021 2023
easing rates, threading the needle between minimizing Mortgage Auto Credit card Line of credit
economic pain and achieving its inflation target. Note: As of Q4 2023. Share of the number of accounts 90 days or more past
due over the previous three months. Source: Equifax, CMHC, RBC GAM
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
Exhibit 32: Canada’s record population growth fueled
starts to permeate the economy.
by immigration
1.4
Canada’s population leapt again in the first quarter of 2024, 1.2

signaling that the explosive gains of 2023 are not quite
(YoY change, millions)
1.0
Canada's population
complete (Exhibit 32). Still, we expect population growth

0.8
in 2024 to be somewhat less extreme than in 2023 as the
government has targeted a materially reduced inflow of 0.6
temporary residents. The influx in subsequent years should 0.4
moderate further as the restrictions bite. This period of 0.2

faster-than-normal population growth should help to support
0.0
Canada’s rate of economic growth. 1947 1954 1961 1968 1975 1982 1989 1996 2003 2010 2017 2024
But the population does not increase in a vacuum. The Note: As of Q1 2024. Source: Statistics Canada, Macrobond, RBC GAM
incredibly rapid clip at which people have entered the
country and the focus on low-skilled temporary labour have
conspired to reduce Canada’s level of productivity (Exhibit Exhibit 33: Canadian GDP per capita has been
33). This concern should ease as the rate of population shrinking
growth slows and the recent influx of new residents are 2.5 62
2.4
integrated into the economy. But even setting this force 60
(chained 2012 CA$, thousands)
(chained 2012 CA$, trillions)
Canadian GDP per capita
2.3
aside, Canada’s longer-term productivity growth has 58
2.2
Canadian GDP
been uninspiring, with more fundamental issues including 2.1 56
insufficient capital expenditures and intellectual-property 2.0 54
development. 1.9
52
1.8
50
The Canadian housing market is buffeted by opposing 1.7
1.6 48
forces. From a price perspective, booming population growth 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
argues for higher prices, whereas poor affordability and GDP (LHS) GDP per capita (RHS) GDP per capita, 2024 Q1 (RHS)
the process of mortgage holders rolling into higher rates

Note: As of Q1 2024. Source: Statistics Canada, Macrobond, RBC GAM

act as a depressant on home prices. We split the difference,

anticipating a period of home-price stagnation over the next Exhibit 34: U.S. business-cycle score
few years – similar to the experience of Canada’s last housing
bust in the early 1990s. 35 3) It is most likely that
the cycle has simply
bought a few years of
2) Still a chance additional life, putting 1) Weakening
30 that a new cycle is
The story is somewhat different from a construction beginning
it here argument that
recession is
coming
25
standpoint. Canada has a housing shortage, and this is set to
Allocation (%)
get worse. But builders are not in a position to respond given 20
the elevated cost of financing new projects, a skilled-labour 15
shortage and uncertainty over the ability of households to 10
afford new properties. We believe it will take a few years for 5

these challenges to fade, and for government supply-side
0
restrictions to ease, at which point construction can properly Start of cycle Early cycle Mid cycle Late cycle End of cycle Recession
Current quarter Previous quarter
ramp up. Note: As at 05/03/2024. Calculated via scorecard technique by RBC GAM.
Note: As at 05/03/2024. Calculated via scorecard technique by RBC GAM.

Longer-term forces Source: RBC GAM
If economies do manage to continue growing over the coming
years, it will mark the continuation of the existing cycle as Exhibit 35: Significant structural fiscal deficits
opposed to the beginning of something new. Accordingly, our persist
business-cycle scorecard argues that this is probably a mid-
balance, 2024 (% of potential GDP)
2
cycle or late-cycle moment (Exhibit 34). Traditionally, stock-
General government structural
0
market returns are moderate during this part of the cycle.
-2
-4
Don’t be too alarmed by inclusion of the word “late” in the
-6
cycle assessment. That doesn’t mean the cycle is destined to
-8
end in the near future. Instead, we think the expansion can
-10
run another two to five years.
-12
France
India
Russia
Australia
South Africa
Italy
Spain
Canada
Norway
Japan
China
U.K.
U.S.
Greece
Germany
Mexico
Sweden
Portugal
Ireland
Indonesia
Brazil
Euro area
Switzerland
Netherlands
South Korea
Looking out over those next several years, we continue
to bang the drum about fiscal excesses. Many countries
Note: IMF projections for year 2024. Source: IMF WEO, April 2024, Macrobond, RBC
continue to operate enormous fiscal deficits that will
Note: IMF projections for year 2024. Source: IMF WEO, April 2024, Macrobond,
increasingly demand remedies as government debt resets
RBC GAM
at today’s higher interest rates (Exhibit 35). This backdrop
suggests a period of more constrained economic growth as
Exhibit 36: Global trade restrictions ballooned in
the necessary fiscal austerity plays out. While the U.S. is
recent years
among the more egregious offenders, it is concerning that
neither presidential candidate has much time for the issue. 3000
Number of trade restrictions imposed
The U.S. is likely to be given more rope than most other 2500
countries given its status as the world’s reserve currency, but
annually worldwide
2000
that could simply spell more pain later.
1500
Gazing further into the future, there remain a number of long-
1000
term headwinds, including challenging global demographics,
the effects of climate change (both the direct consequences 500
and the economic drag associated with remedying it) and the 0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
impact of de-globalization (Exhibit 36). Goods Services Investment
Note: As of 2022. Source: Global Trade Alert, IMF, fDi Intelligence, RBC GAM

The question is whether these adverse forces can be offset Finally, we remain optimists on the promise of new
by some potentially positive long-term trends. The first is the technologies (Exhibit 38). Generative artificial intelligence
promise of superior emerging-market growth as a driver of may indeed prove to be the next general-purpose technology
global demand (Exhibit 37). Even as China slows, its economy that sends economy-wide productivity catapulting forward
has become so large that it can still generate around a over a period of a decade or longer. Among a range of other
quarter of global growth each year. India’s economy has now potentially important developments, there is the chance
achieved sufficient scale and moreover continues to grow that the new generation of weight-loss drugs prove not
rapidly, representing another major positive force. Indonesia just successful in reducing obesity, but in reducing weight-
is not as large, but it is also set to contribute importantly to associated ailments, unleashing a healthier and more
global growth. All told, emerging-market economies are in a productive populace. While we have already upgraded our
position to deliver more than four-fifths of economic growth long-term productivity-growth assumptions modestly, there
over the coming five years. This should prove quite helpful, is an upside scenario in which productivity growth surges
even if developed-world economies are advancing more well beyond our expectations in the years ahead.
slowly.
Exhibit 37: China to remain the top driver of world Exhibit 38: Excitement about artificial intelligence
growth swells
25 100
90
Share of world GDP growth
20
Google search volume index
from 2023 to 2028 (%)
80
15 70
60
10
50
5
40
0 30
20
Jun-19 Dec-19 Jun-20 Dec-20 Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Dec-23 Jun-24
Note: Based on IMF forecast from 2024 to 2028. Source: IMF World Economic Note: As of the week ending 06/08/2024 (partial data used for the week). The
Outlook, Apr 2024, Macrobond, RBC GAM weekly number of Google web searches for the topic relative to the total
number of searches on Google over time is scaled and normalized to arrive at
the search interest over time. Source: Google Trends, RBC GAM
Bottom line
In conclusion, the short-term economic outlook remains reasonably favourable, with a soft landing more
likely than a hard landing. Inflation has shown inclinations to be sticky, but it is again descending gradually.
In turn, central banks are well placed to undertake exploratory interest-rate cuts, reducing the degree of rate-
related pain the economy is subjected to. This is not the perfect time to be an investor, but neither is it at a
bad one with moderate returns likely available in the stock market and decent coupons offered by the bond
market.

Market outlook
Optimism swells on brighter outlook
Eric Savoie, MBA, CFA, CMT Daniel E. Chornous, CFA

Investment Strategist Chief Investment Officer
Inflation is moderating in a sign that the tighter monetary conditions in place since 2022 have addressed one of
the biggest threats to the current expansion (Exhibit 1). As consumer-price pressures subside, the need for highly
restrictive monetary policy is becoming less evident and the conditions for highly anticipated rate cuts are being
established. Some of the world’s major central banks have already begun cutting interest rates given a higher
sensitivity to borrowing costs in certain regions outside the U.S., recognizing that changes in monetary policy affect
activity on a lagged basis. So far, though, economies have held up reasonably well, and leading indicators of global
growth have been trending higher since late 2022 (Exhibit 2). These developments are consistent with increasing
odds of a soft landing which, along with the assumption that central banks are leaning toward a less restrictive
policy stance, has boosted investor optimism and propelled stock prices to new highs.
Exhibit 1: U.S. Consumer Price Inflation Exhibit 2: Global equities and economic leading
CPI Index Y/Y % change indicators
10 June 2022 peak: 9.1%
9 3,500 60
8 3,300 58
7 3,100 56
6 2,900 54
YoY change (%)
5 2,700 52
4 Last: 3.40% 2,500 50
3 2,300 48
2024
2 forecast: 2,100 46
2025
3.40% forecast:
1 1,900 44
2.60%
0 1,700 42
-1 1,500 40
2019 2020 2021 2022 2023 2024 2025
-2 MSCI World Index (last: 3,445) (LHS) JPMorgan Global Manufacturing PMI (last: 50.9) (RHS)
2002 2005 2008 2011 2014 2017 2020 2023 2026
Note: CPI data as of April 30, 2024. RBC GAM forecasts as of May 31, 2024. Note: MSCI World Index in U.S. dollars. As of May 31, 2024. Source: Bloomberg,
Source: Bloomberg, RBC GAM RBC GAM

Market outlook | Eric Savoie, MBA, CFA, CMT | Daniel E. Chornous, CFA
Against this backdrop, we believe sovereign bonds offer

attractive value with yields near their highest levels in Exhibit 3: S&P 500 equilibrium
almost two decades. The risk of substantially higher yields Normalized earnings & valuations
is minimal as long as inflation continues to fall as we expect,
10240 May. '24 Range: 3176 - 5655 (mid: 4415)
which means bond investors will likely be able to keep their May. '25 Range: 3426 - 6102 (mid: 4764)
5120 Current (31-May-24): 5278
coupon and potentially benefit from capital gains should
2560
yields decline from current levels. As a result, we expect fixed
income markets to deliver mid to high single-digit gains over 1280
the year ahead and, importantly, for bonds to act as a ballast 640
against volatility in equities if the economy were to falter. 320
160
Stocks have continued their upward march to record
80
levels, but equity-market leadership has been increasingly
40
concentrated in a small group of U.S. mega-cap technology 1960 1970 1980 1990 2000 2010 2020
stocks. The Magnificent 7 have benefited from trends in
artificial intelligence (AI), and investors are increasingly Note: As of May 31, 2024. Source: RBC GAM
optimistic about the future, which is reflected in analysts’
earnings upgrades. However, with the S&P 500 Index trading
around one standard deviation above fair value (Exhibit 3), a Exhibit 4: Luxury stocks
sustained bull market will require companies to achieve lofty S&P Global Luxury Index relative to S&P 500 Index
earnings projections and to sustain investor confidence. 1.7
1.6
We have left our recommended asset allocation for balanced 1.5
investors very close to a neutral setting this quarter, with 1.4
a slight tilt to bonds. The key risk to our benign outlook for 1.3
Index level
the economy is that inflation could be more stubborn than 1.2
anticipated, which would likely limit the degree of easing 1.1
central banks can deliver. Should interest rates remain higher 1.0
0.9
for longer, borrowing costs would weigh further on economic
0.8
activity. Other headwinds and sources of uncertainty include
0.7
the U.S. election in November, persistent tensions in the 2006 2009 2012 2015 2018 2021 2024
Middle East, war in Ukraine and China’s growth challenges.

Note: As of May 31, 2024. Source: Standard & Poor’s, Bloomberg, RBC GAM
Our asset mix stance reflects elevated macroeconomic
uncertainty, a favourable outlook for bonds and a somewhat
cautious view on stocks given demanding valuations in U.S. economy is slowing amid higher interest rates. For example,
large-cap equities especially. For a balanced global investor, luxury-goods stocks have been severely underperforming
our current recommended asset mix is 60.0% equities the S&P 500 since early 2023, an indication, perhaps, that
(strategic: “neutral”: 60.0%), 38.5% bonds (strategic “neutral”: consumers of high-end goods are dialing back their spending
38.0%) and 1.5% cash. (Exhibit 4). Delinquency rates for auto loans, mortgages
and credit cards have all been rising gradually since early
Evidence that higher rates are starting to bite 2022, and while not necessarily at alarming levels, the trend
Following the powerful recovery from the global pandemic,
fueled by immense stimulus, there are signs that the

suggests debt-related challenges are intensifying (Exhibit suggest the tightening of monetary policy since early 2022
5). Small businesses are also struggling in this environment is having real consequences. But to the extent recession is
as evidenced by owner optimism near the lowest levels in avoided, the decelerating trend in so many indicators may
the past two decades, and profits for this slice of corporate extend the cycle as inflation is progressively reduced.
America are falling (Exhibit 6). Taken together, these signs
Exhibit 5: U.S. consumer-loan delinquency rate Exhibit 6: U.S. small-business survey

Optimism index
14 115
consumer loans (% of current balance)
30
12 110
U.S. newly delinquent (30+ days)
20
10 105
10
8 100 0
% balance
6 -10
95
-20
4
90
-30
2
85
-40
0
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 80 -50
1975 1985 1995 2005 2015 2025
Total Mortgage Auto Credit card Student loan
NFIB small business optimism index (LHS) Actual earnings change (RHS)
Note: As of Q1 2024. Shaded area represents recession. Source: FRBNY, Note: As of April 30, 2024. Source: NFIB, BCA Research, Bloomberg, RBC GAM
Macrobond, RBC GAM
Inflation expectations gravitate toward 2% target ended up at over 8% triggering the massive tightening of
After the extreme and largely unexpected inflation spike in global monetary policy since then. Following that epic miss,
2022, economists and investors are increasingly confident forecasting accuracy improved in 2023 as inflation gradually
that inflation is following a path toward the 2% level subsided. For 2024 and 2025, economists look for much more
targeted by major central banks. Exhibit 7 plots the range of manageable inflation levels around 2%-3%. This view is
economists’ inflation forecasts year by year for the past two consistent with inflation-linked bond prices, which signal that
decades, and the diamond represents where inflation ended inflation will ultimately fall back to around 2% in Canada, the
up in any given year. The record for 2022 stands apart from all U.S. and Europe (Exhibit 8).
the rest, as estimates began the year around 2%, but inflation
Exhibit 7: United States Exhibit 8: Implied long-term inflation premium

Inflation estimate dispersion Breakeven inflation rate: nominal vs 10-year real return
10
bond
Highest estimate for year 3.5
Ranges as at May 2024
Lowest estimate for year
8 Current high/low estimates
3.0
Actual Y/Y % change in CPI
6
2.5
4 2.0
%
2 1.5
0 1.0
Federal Reserve
Inflation Target:
2.00% 0.5
-2
0.0
-4 2004 2007 2010 2013 2016 2019 2022 2025
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25
U.S. (last plot: 2.30%) Canada (last plot: 1.84%) Eurozone (last plot: 2.07%)
Source: Consensus Economics, RBC GAM Note: As of May 2024. Eurozone represents GDP-weighted breakeven inflation
of Germany, France and Italy. Source: Bloomberg, RBC CM, RBC GAM

A variety of other indicators support the idea that inflation U.S. Federal Reserve’s (Fed) 2% target, the labour market is
is headed in the right direction. Increases in the money showing signs of cooling as well. Until recently, the Fed was
supply, used-car prices and residential rents helped explain able to focus its monetary efforts exclusively on inflation
the surge in inflation during the pandemic (exhibits 9 to as the labour market was in solid shape. In the past several
11). But these indicators and many others have cooled quarters, though, the unemployment rate has started rising
significantly. As a result, we have growing confidence in our and wage growth has slowed (exhibits 12 and 13). The jobs
view that inflation pressures are likely to continue subsiding market still appears to be healthy, but signs of overheating
over our forecast horizon. have faded, reducing the need for highly restrictive monetary
policy and opening the door to potential easing over the
Macro environment justifies less restrictive months and quarters ahead.
central-bank policy
Higher interest rates have been successful in taming price
pressures and, although inflation hasn’t quite fallen to the
Exhibit 9: U.S. inflation and money Exhibit 10: Manheim Used Vehicle Exhibit 11: U.S. Zillow Rent Index
supply – Year-over-year changes in Value YoY Index All homes year-over-year % change
CPI and M2 60 18
30
16
10 50
25
Manheim Used Vehicle Value Index
14
40
U.S. CPI (year-over-year % change)
Year-over-year change (%)

8
M2 (year-over-year % change)
20 12
30
(YoY % change)
6 10
15
20
8
4
10 10
6
2 Last: 3.7%
5 0
4
0 -10 2
0
-20 0
-2 -5 1996 2001 2006 2011 2016 2021 2026 2015 2017 2019 2021 2023 2025
2014 2016 2018 2020 2022 2024
U.S. CPI (LHS) M2 (16m lead, RHS)
Note: As of May 2024. Shaded area represents Note: As of Apr 30, 2024. Source: Zillow Inc.,
Note: As of Apr 30, 2024. Source: Bloomberg, recession. Source: Manheim Consulting, Bloomberg, RBC GAM
RBC GAM Bloomberg, RBC GAM
Exhibit 12: U.S. unemployment rate Exhibit 13: U.S. average hourly earnings
15 8.0
14 7.5
13 7.0
12 6.5
6.0
YoY % change
11
5.5
10
5.0
9 4.5
%
Last plot: 4.17%

8 4.0
Last Plot: 4.0%
7 3.5
3.0
6
2.5
5
2.0
4 1.5
3 1.0
1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 1985 1990 1995 2000 2005 2010 2015 2020 2025
Note: As of May 2024. Source: Bloomberg, RBC GAM Note: As of May 2024. Source: Bureau of Labor Statistics, Haver Analytics,
RBC GAM

Our models suggest that U.S. short-term interest rates are other central banks have already started to cut rates. Both
highly restrictive and that rate cuts are now appropriate the Bank of Canada and European Central Bank reduced
(Exhibit 14). But the Fed has been waiting patiently for their policy rates by 25 basis points in the first week of June.
greater evidence that the 2% inflation target will be reached Futures pricing suggests that the widening gap between U.S.
and can be sustained. While the macroeconomic backdrop rates and those in other major markets will be short-lived
has softened, we haven’t quite seen conditions warranting as the Fed is expected to kick off rate cuts later in the year
aggressive policy-rate cuts. (Exhibit 16).
Investors that were looking for substantial rate cuts have Rate-cut road maps
so far been disappointed, as expectations for reductions A shift from tighter to looser monetary conditions has
kept getting pushed back as the year has progressed. The important implications for capital markets, and a look at
number of U.S. rate cuts for 2024 as suggested by pricing past cycles of rate cuts can help provide guidance as to
in the futures market has been dialed back to no more than what is likely to take place over the coming easing of rates.
two from six at the start of the 2024 (Exhibit 15). But some Exhibits 17 to 19 plot road maps for the fed funds rate, the
Exhibit 14: U.S. fed funds rate Exhibit 15: Fed funds implied expectations rate based
Equilibrium range on futures – Based on 12-month futures contracts
24 Date 25bps cuts pricedin for 2024 U.S. 10-yr yield

Last plot: 5.33%
22
Current range: 1.45% - 3.39% (Mid: 2.42%) 31-Jul-2023 4.5 cuts 3.96%
20 May '25 range: 1.20% - 3.14% (Mid: 2.17%)
31-Aug-2023 4.4 cuts 4.11%
18 May '29 range: 1.99% - 3.93% (Mid: 2.96%)
16
30-Sep-2023 2.8 cuts 4.57%
14 31-Oct-2023 2.6 cuts 4.93%
12 30-Nov-2023 4.5 cuts 4.33%
10
“Powell pivot”
%
8
31-Dec-2023 6.3 cuts 3.88%
Dec. 13, 2023
6
31-Jan-2024 5.8 cuts 3.91%
4
29-Feb-2024 3.4 cuts 4.25%
2
31-Mar-2024 2.7 cuts 4.20%
0
30-Apr-2024 1.1 cuts 4.68%
-2
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 31-May-2024 1.4 cuts 4.50%
Note: As of May 31, 2024. Source: Federal Reserve, RBC GAM Note: As of May 31, 2024. Source: Bloomberg, RBC GAM
Exhibit 16: Central bank policy interest rates Exhibit 17: Path of the fed funds rate
7
Implications for current cycle, following first rate cut
6 200
First cut
from the level at date of initial rate cut
Median change in the Fed funds rate
5 100
0
4
-100
3
%
(bps)
-200
2
-300
1 -400
0 -500
-1 -600
2000 2005 2010 2015 2020 2025 -24 -20 -16 -12 -8 -4 0 4 8 12 16 20 24 28 32 36
Months prior to & following Fed funds rate cut
U.S. Federal funds rate (mid) Canada overnight rate ECB deposit facility rate Current cycle Median of all cycles Recession cycles
No recession cycles Financial crisis (2007)
Note: Forecasts, shown as dotted lines, are based on futures for the U.S. and Note: As of May 31, 2024. Source: RBC GAM
OIS forwards for other regions. As of Jun 7, 2024. Source: Bloomberg, RBC GAM

U.S. 10-year bond yield and the S&P 500, where t=0 on each
chart represents the date of the first rate cut in a period of Exhibit 18: U.S. 10-year bond yield and the fed funds
monetary easing. The charts capture 16 cycles of rate cuts rate cut – Implications for current cycle, following first
back to the 1950s. We’ve also plotted lines for the median of rate cut
all cycles as well as the median for recessions, no-recession 150
First cut
Median bond yield as a % of level at

140
outcomes and economic soft landings. Instances where the 130
date of initial rate cut

120
economy enjoyed a soft landing typically featured relatively 110
few rate cuts, a short-lived decline in bond yields and a 100

90
continuation of rising stock prices after a bit of volatility 80
70
around the initial shift in policy stance. In outcomes where 60
the economy fell into recession, though, central banks 50

40
typically cut interest rates more aggressively, declines in -12 -8 -4 0 4 8 12 16 20
Months prior to & following Fed funds rate cut
24 28 32 36
bond yields were sustained, and stocks struggled for a Current cycle Median of all cycles Recession cycles
No recession cycles Financial crisis (2007)
median of eight to 12 months before resuming an upward
trajectory. Every cycle is unique and the range of outcomes Note: As of May 31, 2024. Source: RBC GAM
is wide. But we find that tracking the progress of the current
cycle on these charts can help identify the kind of economic
outcome investors are pricing in. In our view, the performance Exhibit 19: S&P 500 and the fed funds rate cut
of capital markets through the current cycle conforms most Implications for current cycle, following last rate hike
closely to a scenario where recession is avoided. 160
First cut
Median index level as a % of level at
150
140
Sovereign-bond models suggest decent return
date of initial rate cut
130
potential, minimal valuation risk 120

110
Global bond yields rose across most major regions in the 100
90
past quarter, as investors switched to fearing that interest 80
rates may not decline much in an environment where 70
60
economies continued to grow and inflation remained on a 50
-24 -20 -16 -12 -8 -4 0 4 8 12 16 20 24 28 32 36
gradual downward trajectory. Yields rose anywhere from Months prior to & following Fed funds rate cut
Current cycle Median of all cycles Recession cycles
10 to 40 basis points depending on the region, with Japanese No recession cycles Financial crisis (2007)
government bonds underperforming given that the


Exhibit 20: U.S. 10-year bond yield

Fair-value estimate composition
United States
United States Real 10-Year T-Bond yield
16
CPI inflation 12
14 36-month Centred CPI 10
Last Plot: 3.6%
12 12-Month Forecast: 3.0% 8
+
10
6
8 +1 SD
4
6 Last Plot: 0.9%
%
%
2
4 Average: 1.8%
0
2
-1 SD
-2
0
-2 -4
12-Month Forecast: -0.78%
-4 -6
1960 1970 1980 1990 2000 2010 2020 2030 1960 1970 1980 1990 2000 2010 2020 2030
36-month Centred CPI Inflation Actual CPI Inflation (y/y % change) Real T-Bond Yield Real 10-Year Time Weighted Yield
U.S. 10-year T-Bond yield

Equilibrium range
16 Last Plot: 4.50%
Current Range: 1.91% - 3.17% (Mid: 2.54%)
14 Current Range with 1% real rate: 3.95% - 5.21% (Mid: 4.58%)
May. '25 range with 1% real rate: 3.34% - 4.60% (Mid: 3.97%)
May. '29 range with 1% real rate: 2.85% - 4.12% (Mid: 3.48%)
12
10
8
%
0
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Bank of Japan, unlike its peers, has just begun tightening. In back toward more normal levels. To establish a reasonable
our view, sovereign bonds look appealing at current levels in level for real interest rates going forward, we use a time-
all major regions except Japan, where yields are still below weighted moving average of real interest rates through the
our band estimating equilibrium or appropriate levels, past decade. As a result, the deeply negative real interest
representing heightened valuation risk (Page 42). rates experienced during the pandemic will take many years
to roll out of the modelled estimate. Currently, the model
Current sovereign-bond yields are well above the levels combines an inflation premium of about 3% with a modelled
deemed appropriate by our equilibrium models and the real rate of around negative 0.5% to suggest an appropriate
reason for the gap is largely to do with how we forecast level for the nominal U.S. 10-year bond yield closer to 2.5%
real interest rates. Exhibit 20 plots the components of our versus the actual yield of 4.5% at the time of this writing.
U.S. 10-year bond model, which is made up of an inflation
premium and a real interest rate. These two factors combine However, if we consider that the extremely negative real rates
to generate the orange equilibrium band on bottom chart in experienced during pandemic were due to truly extraordinary
Exhibit 20 of nominal bond yields. This band has undergone circumstances that are unlikely to be repeated, the model
extreme fluctuations since the COVID-19 pandemic due in may be understating the appropriate level for real interest
large part to the surge and subsequent calming in inflation rates going forward. The combination of tighter monetary

conditions and rising fiscal deficits suggests that real interest

rates may settle at a higher level on a sustained basis. Rather
Exhibit 21: U.S. 10-year T-bond yields
than assuming a near-zero or slightly negative real rate of
Rate of change
interest, adjusting the real rate immediately to 1% in the 200 Oversold
model to account for these factors produces the blue band on 160
the U.S. 10-year bond chart. Interestingly the current 10-year
120
yield sits right in the centre of this new band. Under this new
YoY % change
Last plot: 23.5%
80
assumption, we could conclude that the U.S. 10-year yield is
40
more or less appropriately priced and that, importantly, the
downward slope in the band is more gradual than the one in 0
the original model. -40 Current yield: 4.50%

Overbought
-80
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
We continue to evaluate these potential tweaks to our model
as conditions evolve and, while market assessments can
change, we struggle to find a scenario that makes the bond Note: As of May 31, 2024. Source: Bloomberg, RBC GAM
market look particularly expensive. As a result, our view is

that the fixed income markets offer decent return potential in
Exhibit 22: U.S. 10-year T-bond bullish consensus
the mid single digits and with only modest valuation risk over
the year ahead, especially in an environment where central 100 Too many
banks are actively cutting rates. bulls
80
60
% bullish
“Investor sentiment toward bonds

remains near extreme pessimism, 40
Last plot: 31% bulls
and our long-term price momentum 20
indicator suggests a downward bias Too many
bears
to yields going forward.” 0

1995 2000 2005 2010 2015 2020 2025
Note: As of Jun 2, 2024. Source: Market Vane, RBC GAM
Technical bond indicators

In addition to an attractive fundamental backdrop, there Exhibit 23: U.S. 10-year T-bond yield
are a variety of technical indicators that currently support Long-term price (yield) momentum
sovereign bonds. The year-over-year change in the U.S. 5.0 3.0
4.5 2.5
10-year yield has provided reliable buy and sell signals in the
4.0 2.0
past when crossing below +20% from an oversold condition, 3.5 1.5
or crossing above (-20%) from an overbought condition 3.0 1.0
(Exhibit 21). This indicator triggered a buy signal in late 2023 2.5 0.5
%
%
2.0 0.0
and moved back to an oversold condition this spring, nearing
1.5 -0.5
another buy trigger if it again drops below the 20% threshold. 1.0 -1.0
Moreover, investor sentiment toward bonds remains near 0.5 -1.5
extreme pessimism, and our long-term price momentum 0.0

2009 2011 2013 2015 2017 2019 2021 2023 2025
-2.0
indicator suggests a downward bias to yields going forward U.S. 10-year T-bond yield (LHS) Coppock curve (RHS)
(exhibits 22 and 23). These indicators suggest a compelling Note: Coppock curve based on monthly data. As of May 31, 2024.
environment for adding duration exposure. Source: Bloomberg, RBC GAM

Hardly any sign of stress in capital markets

Exhibit 24: ICE BofA US HY spread and VIX Index
Riskier assets have been relatively stable, and some priced
for perfection, consistent with a benign macroeconomic 2500 90
ICE BofA US HY option-adjusted spread

80
backdrop. Both the VIX (volatility index), commonly referred
2000 70
to as the fear index, and the yield gap between government
60
bonds and high-yield corporate debt are near historic lows 1500
VIX Index
50
(bps)
(Exhibit 24), reflecting a relative lack of concern among 40
1000
investors that they will suffer major losses. Moreover, a 30
Bank of America financial-stress index capturing a variety of 500 20
market-based measures of liquidity indicates stress in capital 10
markets is lower than normal (exhibit 25). Taking these signals 0

1997 2001 2005 2009 2013 2017 2021
0
2025
together, one can conclude that the outlook for the economy VIX (RHS) ICE BofA US HY OAS (LHS)
and corporate profits is sound. But another interpretation is

Note: As of May 31, 2024. Source: Bloomberg, RBC GAM
that investors could be complacent and too willing to accept
the risks associated with seeking higher returns.
Exhibit 25: BAML Global Financial Stress Index
Stocks climb to record levels, led by U.S. mega-cap
technology 3.0
More financial stress
The increasing odds of a soft landing and progress in the fight 2.5 than normal
against inflation helped push equity markets to new highs in 2.0
the past quarter, although the biggest gains have been highly 1.5
concentrated. A small group of mega-cap technology stocks 1.0
(i.e. the Magnificent 7) that have benefited from trends in AI 0.5

was up 24.6% from the beginning of the year to the end of 0.0
May, helping lift the market-cap-weighted S&P 500 by 10.6% -0.5 Last plot: -0.20
Less financial stress
over the same period (Exhibit 26). But the equal-weighted than normal
-1.0
version of the S&P 500, which represents the performance 2000 2004 2008 2012 2016 2020 2024
of the average stock, is up slightly less than half that at

Note: As of May 31, 2024. Source: Bloomberg, RBC GAM
4.8%. Other areas underperformed the S&P 500, especially
emerging markets, Canadian equities and U.S. small-cap
stocks, all of which have delivered low single-digit returns so Exhibit 26: Major indices’ price change in USD
far this year in U.S. dollar terms. 2023 and YTD 2024
Equity markets outside the U.S. large-cap space have not 90 81.9
80
enjoyed the same massive gains, and in many cases remain
Percent change (%)
70
60
reasonably valued. Our global stock-market composite is 50 43.4
40
situated within just one percentage point of fair value, and 30 24.6
30.8
24.5 24.2 24.0 21.8 19.3
20 16.4
global stocks register at 14% below fair value excluding U.S. 10
11.5 12.8
9.9 10.6 9.5 8.7
3.1
6.0
15.1 15.0
5.3
14.4
7.2
13.9 11.6
4.8
10.8
2.9
9.5
6.7
7.0
2.5
2.1 0.9
equities and their high-PE technology cohort (Exhibit 27). 0

Magnificent 7
Nasdaq Composite
Russell 1000
MSCI World
Nikkei
S&P 500 Equal
FTSE 100
MSCI EM
MSCI EAFE
S&P 400 Midcap
S&P 600 Smallcap

Russell 2000
S&P 100 Megacap
S&P 500 Largecap
Russell 3000
MSCI Europe
S&P/TSX Composite
Weighted
While the S&P 500 is close to one standard deviation above

our modelled estimate of fair value, other major indices in
Europe, Canada, the UK and emerging markets are close to
or more than one standard deviation below their own fair 2023 2024 year-to-date
values (page 43). As a result, global equity markets could

Note: As of May 31, 2024. Magnificent 7 includes Apple, Microsoft, Alphabet,
offer attractive returns should economic and corporate-profit Amazon, Nvidia, Meta and Tesla. Source: Bloomberg, RBC GAM
growth remain positive.

Exhibit 27: Global stock-market composite Exhibit 28: S&P 500 Index
Equity-market indexes relative to equilibrium Consensus earnings estimates
100 320
Last plot (global): 0.9%
Consensus earnings estimates ($US)

Last plot (global ex-USA): -13.9%
80 300
Cycle high (global, Dec 2021): 35.6%
% above/below fair value
60 280
40 260
20 240
0 220
200
-20
180
-40
160
-60 2020 2021 2022 2023 2024 2025
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Global Global (ex-U.S.) 2022 2023 2024 2025 2026
Note: As of May 31, 2024. Source: RBC GAM Note: As of May 31, 2024. Source: Bloomberg, RBC GAM
U.S. earnings outlook improves, mostly due to for earnings in the broader market is not as optimistic.
Magnificent-7 Exhibit 29 plots the progression of the S&P 500’s earnings
One of the reasons the S&P 500 is so expensive is that estimate for 2024, separating out the Magnificent 7 as well
investors appear willing to pay a full price for rapid earnings as the remaining 493 companies in the Index. Note that the
growth they believe lies ahead. As the year has progressed, earnings estimate for the Magnificent 7 has risen 7.3% while
the earnings outlook stabilized as the odds of a soft landing the remaining 493 companies actually underwent a 5.2%
improved. Earnings estimates for 2025 and 2026 have been downgrade. Moreover, while profits of smaller companies
gradually revised higher (Exhibit 28). The prospect of outperformed in the post-pandemic recovery, reported
double-digit earnings growth over the next several years earnings for the S&P 600 Small Cap and S&P 400 Mid Cap
has investors willing to pay a premium for those expected indices have actually been declining since late 2022 (Exhibit
profits today. 30). It’s clear that the rapidly rising earnings of U.S. large-cap
stocks, and the Magnificent 7 in particular, have been leading
It is worth noting that much of the improved earnings outlook indices higher.
is being driven by the Magnificent 7, and that the outlook
Exhibit 29: EPS estimate revisions for the S&P 500 Exhibit 30: U.S. equity earnings-growth comparison
and Magnificent-7 stocks in 2024 by cap size – Year-over-year % change, monthly data
110 100
80
Earnings per share YoY % change
108 Magnificent 7
60
106 7.3%
40
104 20
0
102
-20
100
S&P 500 -40
98 -0.7%
-60
96 -80
S&P 500 ex. Mag-7 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024
-5.2%
S&P 500 large cap (last: 2.3%, CAGR: 7.6%) S&P 400 mid cap (last: -10.9%, CAGR: 9.3%)
94
Sep '23 Oct '23 Nov '23 Dec '23 Jan '24 Feb '24 Mar '24 Apr '24 S&P 600 small cap (last: -9.8%, CAGR: 9.1%)
Note: As of May 30, 2024. Source: Bloomberg, RBC GAM Note: As of May 31, 2024. CAGR = compound annual growth rate.
Source: Bloomberg, RBC GAM

Higher margins are needed to achieve lofty earnings

estimates Exhibit 31: United States
S&P 500 revenue and nominal GDP
Consensus earnings estimates, in our view, are highly
optimistic given our modest expectations for economic 25% 20
RBC GAM Nominal GDP
growth. That causes us to question whether the profit 20% Estimates
15
projections that are baked into market expectations are 15%
achievable. Analysts are looking for a 10% rise in aggregate 10% 10
YoY % change
2024: 5.8%
YoY % change
S&P 500 profit growth in 2024 and a further 14% gain in 5%
5
0%
2025. In our own analysis, we think of earnings growth as 2025: 4.4%
-5% 0
a function of revenue growth and profit margins. This is
-10% Long-term average
a helpful framework to forecast profits because revenue Revenue growth: 4.5% -5
-15%
growth tends to be highly correlated to economic growth,
-20% -10
leaving margins as the variable that bridges the equation. 1995 2000 2005 2010 2015 2020 2025
S&P 500 revenue (LHS) Nominal GDP (RHS) Nominal GDP forecast
Our forecasts for 5.8% and 4.4% nominal GDP growth for 2024
and 2025, respectively, suggest S&P 500 revenues will rise by Note: As of May 31, 2024. Source: RBC CM, RBC GAM
roughly those same rates over the next two years (Exhibit 31).
If we take this to be true, the only way to generate double-
Exhibit 32: S&P 500
digit profit growth is for profit margins to expand. Margins
Net margin
contracted in 2022 and into 2023 as higher interest rates and
16
other costs weighed on profitability, but they are starting to
widen again so far this year (Exhibit 32). The grid in Exhibit 14
33 outlines a variety of combinations that could work out 12
to achieve the consensus earnings estimates. Based on our 10

%
math and estimates for nominal GDP, margins would need 8
to expand 70 to 100 basis points both this year and next to 6
achieve the double-digit earnings growth rates reflected in 4

the consensus. Such an increase would lift profit margins to a
2
new record, requiring the economy to achieve a soft landing 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024
Linear trendline
and for inflation to remain under control.
Note: As of May 31, 2024. Source : Bloomberg, RBC GAM
Scenario analysis suggests limited upside for U.S.
equities
Assuming that the optimistic earnings projections evident in valuations can remain at one-half to a full standard deviation
the consensus are realized, elevated valuations would need above equilibrium into 2025 and 2026, with EPS reaching the
to be sustained to generate attractive returns for U.S. large- US$280 and US$315 estimates for those years, respectively,
cap stocks. Exhibit 34 outlines a variety of scenarios for the then the S&P 500 can generate mid-single digit to low-double
S&P 500 based on combinations of price-to-earnings ratios digit annualized gains from here. That said, stocks would
(P/Es) and the consensus of analysts’ earnings estimates be vulnerable to disappointment given that that a lot of the
for 2024, 2025 and 2026. The equilibrium P/E is the level our good news is already priced in and expectations are high.
models deem appropriate based on current interest rates, Demanding valuations mean that meeting those optimistic
inflation, and corporate profitability. If the stock market earnings estimates, as well as maintaining elevated investor
traded at a P/E of one standard deviation above our modelled confidence, are becoming increasingly critical to sustaining
estimate of equilibrium and earnings reached US$244.70 the bull market. Moreover, inflation would have to continue
this year, then the S&P 500 would be roughly flat through falling, allowing central banks to ease financial conditions
to the end of the year – an unfavourable outcome. But if while the economic expansion persists.

Exhibit 33: S&P 500 EPS scenario analysis based on revenue and net profit margin
2024 2024
Jan 2024 RBC GAM FOMC
Current Projection Projection
S&P 500 revenue per share and growth
-3% -2% -1% 0% 1% 2% 3% 4% 5%

$ 1,731 $ 1,749 $ 1,766 $ 1,784 $ 1,802 $ 1,820 $ 1,838 $ 1,856 $ 1,873
11.2% $ 193.84 $ 195.83 $ 197.83 $ 199.83 $ 201.83 $ 203.83 $ 205.83 $ 207.82 $ 209.82
11.5% $ 199.03 $ 201.08 $ 203.13 $ 205.18 $ 207.23 $ 209.29 $ 211.34 $ 213.39 $ 215.44
11.8% $ 204.22 $ 206.33 $ 208.43 $ 210.54 $ 212.64 $ 214.75 $ 216.85 $ 218.96 $ 221.06
Net margin trendline 12.1% $ 209.41 $ 211.57 $ 213.73 $ 215.89 $ 218.05 $ 220.21 $ 222.37 $ 224.52 $ 226.68
Net profit margin
Jan 2024 current 12.4% $ 214.60 $ 216.82 $ 219.03 $ 221.24 $ 223.45 $ 225.67 $ 227.88 $ 230.09 $ 232.30
12.7% $ 219.80 $ 222.06 $ 224.33 $ 226.59 $ 228.86 $ 231.13 $ 233.39 $ 235.66 $ 237.92
13.0% $ 224.99 $ 227.31 $ 229.63 $ 231.95 $ 234.27 $ 236.59 $ 238.90 $ 241.22 $ 243.54
13.3% $ 230.18 $ 232.55 $ 234.93 $ 237.30 $ 239.67 $ 242.04 $ 244.42 $ 246.79 $ 249.16
13.7% net margin
cycle peak 13.6% $ 235.37 $ 237.80 $ 240.22 $ 242.65 $ 245.08 $ 247.50 $ 249.93 $ 252.36 $ 254.78
13.9% $ 240.56 $ 243.04 $ 245.52 $ 248.00 $ 250.48 $ 252.96 $ 255.44 $ 257.92 $ 260.40
14.2% $ 245.76 $ 248.29 $ 250.82 $ 253.36 $ 255.89 $ 258.42 $ 260.96 $ 263.49 $ 266.02
14.5% $ 250.95 $ 253.54 $ 256.12 $ 258.71 $ 261.30 $ 263.88 $ 266.47 $ 269.06 $ 271.64
14.8% $ 256.14 $ 258.78 $ 261.42 $ 264.06 $ 266.70 $ 269.34 $ 271.98 $ 274.62 $ 277.26
15.1% $ 261.33 $ 264.03 $ 266.72 $ 269.41 $ 272.11 $ 274.80 $ 277.50 $ 280.19 $ 282.89
Current S&P 500 12-m trailing EPS is $221.24

Consensus S&P 500 EPS estimate for year-end 2024 is $243
Consensus S&P 500 EPS estimate for year-end 2025 is $273
Note: RBC GAM projection based Summer 2024 forecasts for U.S. real GDP of 2.4% and inflation of 3.4%. Based on regressions translates to 5.1% revenue growth.
FOMC projection based on June 2024 summary of economic projections published by the Fed for 2.1% real GDP growth and 2.6% inflation in 2024.
As of May 31, 2024. Source: Bloomberg, RBC GAM
Exhibit 34: Earnings estimates and alternative scenarios for valuations and outcomes for the S&P 500
Consensus Total Return Consensus Total Return Consensus Total Return
2024 2024 2025 2025 2026 2026

P/E $244.7 P/E $279.7 P/E $314.8
+1 Standard Deviation 21.7 5321.4 2% 22.2 6197.4 12% 22.2 6976.1 13%
+0.5 Standard Deviation 19.5 4778.8 -9% 19.9 5565.5 5% 19.9 6264.8 8%
Equilibrium 17.3 4236.2 -19% 17.6 4933.5 -3% 17.6 5553.4 3%
-0.5 Standard Deviation 15.1 3693.6 -29% 15.4 4301.6 -11% 15.4 4842.1 -2%
-1 Standard Deviation 12.9 3151.0 -39% 13.1 3669.7 -19% 13.1 4130.8 -7%
Note: As of May 31, 2024. Total returns for 2025 and 2026 are annualized. Source: LSEG I/B/E/S, RBC GAM

Monitoring for signs of shifting leadership – amid a strengthening U.S. dollar (exhibit 37 and 38). These
nothing so far trends are consistent with a sluggish economic backdrop.
Market leadership across styles, market capitalization Our confidence in a durable bull market going forward would
and geography has been stuck in U.S. large-cap growth improve it we were to see a broadening of leadership away
stocks almost without interruption over the past decade. from U.S. large-cap growth and AI-related names, to value,
Value stocks have underperformed growth stocks by 18 small caps, international and emerging-market stocks.
percentage points since the start of 2023, extending the
underperformance to nearly 40 percentage points over the
Maintaining near strategic neutral asset allocation,
with slight tilt to fixed income
past decade (Exhibit 35). U.S. small-cap stocks have fallen to
their lowest point relative to large caps in 22-years (Exhibit Our base case scenario has the economy experiencing
36). International equities as proxied by the MSCI EAFE a soft landing, inflation falling gradually toward central
Index have fallen near a record relative-strength low, and bankers’ 2% targets and central banks delivering modest
emerging-market equities have nearly fully reversed their monetary easing. We recognize there are a wide range of
gains relative to developed markets since the early 2000s potential outcomes around the base case. The risks centre on
Exhibit 35: Value to growth relative performance Exhibit 36: U.S. small caps versus large caps
S&P 500 Value Index / S&P 500 Growth Index Russell 2000 Index / S&P 500 Index
0.65
40%
20% 0.60
0% 0.55
+2 Std. Dev.
-20% 0.50
+1 Std. Dev.
-40% 0.45
Average
-60% 0.40
-1 Std. Dev. Lowest reading in 22 years
-80% 0.35
-2 Std. Dev.
-100% 0.30
-120% 0.25
1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 1990 1995 2000 2005 2010 2015 2020 2025
Note: As of May 31, 2024. Source: Bloomberg, RBC GAM Note: As of May 31, 2024. Source: Bloomberg, RBC GAM
Exhibit 37: Relative performance Exhibit 38: Relative performance

MSFI EAFE TR USD vs S&P 500 TR USD MSCI World versus MSCI Emerging Markets
40% 1.8 140
1.6 130
20%
Index to 1.0 at start of chart
120
1.4
0%
+2 Std. Dev. 110
1.2
-20%
100
+1 Std. Dev. 1.0
-40% 90
Average 0.8
-60% 80
0.6
-1 Std. Dev. 70
-80%
0.4 60
-2 Std. Dev.
-100%
0.2 50
1990 1995 2000 2005 2010 2015 2020 2025
-120%
1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 MSCI World / MSCI EM (LHS) U.S. Dollar Index (RHS)
Note: As of May 31, 2024. Source: Bloomberg, RBC GAM Note: As of May 31, 2024. Source: MSCI, Bloomberg, RBC GAM

inflation being more stubborn than expected, but include the

upcoming U.S. election, geopolitical tensions and questions
Exhibit 39: U.S. 10-year Treasury note and returns
around China’s economic growth.
18
Against this backdrop, prospective returns for fixed income 16

14
appear pretty good. The U.S. 10-year yield is hovering not
12
far below its highest level since just before the 2008-2009 10
global financial crisis and offers attractive return potential. 8
%
6
The current yield to maturity offers a good indication of
4
what investors will earn on a sovereign bond over the next 2
Correlation: 0.96
decade (Exhibit 39). The relationship in the chart suggests 0
-2
that investing in U.S. 10-year Treasury bonds at a 4.5% yield 1910 1930 1950 1970 1990 2010 2030
10-year U.S. Treasury yields, advanced 10 years
will produce a 4.5% annualized return over the next decade. Subsequent realized 10 year compound annual nominal returns
Investors could well earn more than that in the shorter term
should economic difficulty prompt a bid for safe-haven
Note: As of May 31, 2024. Source: Deutsche Bank, Macrobond, RBC GAM
assets. We look for mid-single-digit to high-single-digit
returns for sovereign bonds over the year ahead.
Exhibit 40: Shiller’s CAPE
Stocks still offer superior return potential to bonds but the Real S&P 500 Index / 10-year average of real EPS
upside has been reduced significantly as a result of the latest 50x -6%
-4%
45x
rally. A reliable tool for forecasting S&P 500 returns over the -2%
40x 0%
next decade has been Shiller’s Cyclically Adjusted P/E (CAPE) Last plot: 28.1 2%
35x
(Exhibit 40). This chart suggested return possibilities of as 30x
4%
6%
much as a 9% annualized for a decade, measured from the 25x Long-term average: 8%
19.8 10%
late 2022 bottom of the last bear market. However after the 20x
12%
15x
nearly 50% rally since then, the return outlook has been 14%
10x 16%
reduced to 6%, which is still higher than the expectation for 18%
5x
20%
sovereign bonds but the gap has narrowed meaningfully. In 0x 22%
1966 1975 1984 1993 2002 2011 2020 2029
fact, the equity-risk premium, as measured by the S&P 500 CAPE (Advanced 10 years, LHS)
earnings yield minus the U.S. 10-year yield is effectively nil as Subsequent realized 10-year annualized S&P 500 returns (RHS, inverted)
a result of both rising equity valuations and rising bond yields Note: As of May 31, 2024. Source: Macrobond, Bloomberg, RBC GAM
since the pandemic, suggesting limited appeal in stocks
versus bonds (Exhibit 41). Exhibit 41: S&P 500 earnings yield
Recognizing the improved outlook for bonds and demanding
12-month trailing earnings/index level
valuations in stocks, as well as the wide range of potential 16
14
outcomes for the economy and markets, we feel it is 12
appropriate to maintain an asset allocation close to our 10
8
neutral setting, with a slight tilt in bonds. We would consider
6
increasing our exposure to stocks should the equity-risk 4
%
premium widen, or if we saw a broadening in the equity- 2

0
market rally beyond mega-cap technology and themes other -2
than artificial intelligence. For a balanced global investor, our -4
current recommended asset mix is 60.0% equities (strategic: -6

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
S&P 500 earnings yield to UST yield spread (last plot: -0.18%)
“neutral”: 60.0%), 38.5% bonds (strategic “neutral”: 38.0%) S&P 500 earnings yield (last plot: 4.32%)
U.S. 10-year Treasury yield (last plot: 4.50%)
and 1.5% cash.

U.S. 10-Year T-Bond Yield Eurozone 10-Year Bond Yield

Equilibrium range Equilibrium range
16 18
14 16
14
12
12
10
10
8 8
%
%
6 6
4
4
2
2
0
0 -2
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Last Plot: 4.50% Current Range: 1.91% - 3.17% (Mid: 2.54%) Last Plot: 3.17% Current Range: 1.40% - 2.33% (Mid: 1.86%)
Note: As of May 31, 2024. Source: RBC GAM Note: As of May 31, 2024. Source: RBC GAM
Japan 10-Year Bond Yield Canada 10-Year Bond Yield

Equilibrium range Equilibrium range
18
14
16
12
14
10
12
8
10
6
%
8
%
4
6
2
4
0
2
-2
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 0
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Last Plot: 1.07% Current Range: 1.15% - 1.94% (Mid: 1.54%)
U.K. 10-Year Gilt

Equilibrium range
18
16
14
“In our view, sovereign bonds look
12 appealing at current levels in all
10
8
major regions except Japan, where
%
6 yields are still below the band and

4 represent heightened valuation risk.”
2
0
-2
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Global equity markets
S&P 500 Equilibrium S&P/TSX Composite Equilibrium

Normalized earnings and valuations Normalized earnings and valuations
10240 May. '24 Range: 3176 – 5655 (mid: 4415) 51200 May. '24 Range: 21379 – 30992 (mid: 26186)
May. '25 Range: 3426 – 6102 (mid: 4764) May. '25 Range: 22261 – 32272 (mid: 27266)
5120 Current (31-May-24): 5278 Current (31-May-24): 22269
25600
2560
12800
1280
6400
640
3200
320
1600
160
80 800
40 400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
MSCI Japan Index MSCI Europe Index

4096 May. '24 Range: 1071 – 1800 (mid: 1435)
448 May. '24 Range: 164 – 294 (mid: 229)
May. '25 Range: 1174 – 1974 (mid: 1574)
May. '25 Range: 169 – 302 (mid: 236)
Current (31-May-24): 1713 448
224 Current (31-May-24): 174
2048
224
112
1024 112
56 56
512
28
256
14
128 7
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
MSCI UK Index MSCI Emerging Markets Index

8192 May. '24 Range: 2850 – 4551 (mid: 3700) 4096 May. '24 Range: 1222 – 2216 (mid: 1719)
May. '25 Range: 2942 – 4697 (mid: 3819) May. '25 Range: 1242 – 2253 (mid: 1747)
Current (31-May-24): 2365 Current (31-May-24): 1049
4096
2048
2048
1024
1024
512
512
256
256
128 128
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 1995 2000 2005 2010 2015 2020 2025
Note: The fair value estimates are for illustrative purposes only. Corrections are always a possibility and valuations will not limit the risk of damage from
systemic shocks. It is not possible to invest directly in an unmanaged index.

Soo Boo Cheah, MBA, CFA Joanne Lee, MFin, CFA Taylor Self, MBA, CFA
Managing Director & Senior Portfolio Manager Portfolio Manager
Senior Portfolio Manager RBC Global Asset RBC Global Asset
RBC Global Asset Management Inc. Management Inc.
Management (UK) Limited
Global government-bond yields have risen since the last edition of the Global Investment Outlook, reflecting
tempered investor expectations for central banks to cut interest rates. In the U.S., too-high inflation has been more
persistent than expected and economic growth in the first half of 2024 better than forecast. Because of rising yields,
government bonds in all major markets have posted losses so far this year (Exhibit 1).
Does this portend another year of negative total returns

Exhibit 1: Global government bonds have had a for bonds? We don’t believe so. Some of this year’s poor
poor start to 2024 – Year-to-date returns for select performance is due to timing: Bond yields fell sharply just
government-bond markets before the turn of the year and have since risen. Since last
October, when yields reached multi-year highs, bonds have
0%
recorded positive returns as yields are now lower. Higher
-1%
and more volatile yields mean simply that bond returns
have become more variable than investors have grown
-2% -1.8% accustomed to since the financial crisis. However, higher
-2.1%
-2.5% yields also provide investors with higher expected bond
-3%
-3.0% returns. Over the long run, a bond’s current yield to maturity
-4% is a good guide for future returns (Exhibit 2), so investors can
expect returns of around 4.50% per year on the U.S. 10-year
-5% -4.6%
government bond if held to maturity. Over the next 12 months,
-6% we forecast that bond returns will likely be better than that as
U.K. Germany Japan U.S. Canada
we expect most central banks to cut interest rates.
Note: As of May 31, 2024. All returns are expressed in currency-hedged terms
to Canadian dollars. Source: FTSE Russsell

Global fixed income markets | Soo Boo Cheah, MBA, CFA | Joanne Lee, MFin, CFA | Taylor Self, MBA,CFA
Exhibit 2: U.S. 10-year Treasury note and returns Exhibit 3: Global inflation remains above target
everywhere except Canada
16
14%
14
12%
12
10%
Annual change in prices

10
8 8%
6 6%
4
4%
2
2%
-
(2) 0%
1910 1930 1950 1970 1990 2010 2030
10-year U.S. Treasury yields, advanced 10 years -2%
2015 2017 2019 2021 2023 2025
Subsequent realized 10-year compound annual nominal returns
Canada U.S. Germany Japan U.K. 2% target
Note: As of May 31, 2024. Source: Deutsche Bank, Macrobond, RBC GAM Note: As of April 2024. Source: National statistical agencies, RBC GAM
Policymakers in Europe and Canada have delivered their first risk of recession has receded. RBC GAM no longer expects a
interest-rate cut this cycle while those in the UK should follow recession in the U.S. over the next year, and in the near term
suit before the end of the summer. The U.S. Federal Reserve it doesn’t appear that most economies need substantial help
(Fed) is likely to start lowering rates a little bit later, probably from monetary policy. While inflation has fallen precipitously,
in the fall. Lower inflation means that policymakers can shift it remains above target in all regions even after accounting
their focus toward supporting growth and labour markets, for methodological differences (Exhibit 3). Unemployment
which have softened everywhere. This means rate cuts. has risen, but from levels that were probably too low to be
sustained without generating yet more inflation. Over the
Policymakers tentatively admit that interest rates have likely course of a decade, however, it is almost certain that many
peaked but are reluctant to endorse the suggestion that economies will experience at least one recession and that
substantial easing of monetary policy is in the offing, which central bankers will cut rates more than currently expected.
would be a boon for bond returns. For their part, investors To us, this makes bonds attractive.
expect central bankers to deliver between 75 and 125 basis
points of cuts over the next year in Canada, Europe, the U.S. High expectations for policy rates through the long term
and the UK. Such decreases appear paltry compared with could also be explained by the idea that perhaps the interest
the several hundred basis points of rate hikes delivered over rates that economies would find restrictive have risen since
the past several years. Policy rates priced in forward markets the pandemic. Higher government deficits and greater
two and three years from today are still well above those that investment needs to battle climate change – alongside the
prevailed before the pandemic. Measured against estimates higher debt-servicing costs that accompany those burdens
of so-called neutral rates (the rate of interest at which - can slow rather than accelerate growth. We are not as
monetary policy neither stimulates nor restricts growth), it convinced about higher neutral fed funds rates as the market
appears that investors expect monetary policy will remain in appears to be. We are more convinced that the market should
restrictive territory for the next decade. price in a larger premium to lend over long time frames - the
so-called term premium. Over time, we expect the Treasury
In effect, market expectations imply that there is no risk of yield curve to steepen, with 10-year securities offering
recession or need for easy monetary policy over the next 10 investors higher yields than 2-year bonds, something that
years. This seems unlikely. We can agree that the immediate hasn’t happened since July 2022.

We think that with inflation having slowed at the fastest pace in is more, growth has been picking up in Europe, which has
three decades and unemployment rising, central bankers can experienced particularly sluggish activity, and this trend may
conclude that current policy rates are indeed restrictive. As obviate the need for sharp interest-rate cuts to support the
inflation falls further, we think most central banks will provide economy.
some cuts to markets, pushing down bond yields, particularly
on bonds maturing over the next two to three years. To be sure, we don’t anticipate a return to the pre-COVID
period of exceptionally low interest rates. What we do
The fly in the ointment for this story of restrictive interest expect is a return to more normal conditions, even without
rates, falling inflation and coming rate cuts is the relative a recession. Inflation closer to policymakers’ targets and
success of the U.S. economy in shrugging off sharply higher rising unemployment suggest that at least some monetary
rates. Policymaking at the national level does not happen in a accommodation is appropriate.
vacuum. The recent stickiness of price pressures and above-
trend growth in the U.S. reduces the confidence of other We think most central banks will ease policy as the year
central bankers that price pressures in their own economies progresses. Disinflation should continue in most countries
have abated more quickly due to policy or simply reflect the and, after surprisingly high U.S. inflation to start the year,
waning impact of pandemic-related supply shortages. What inflation has started easing again in the U.S.
Direction of rates
United States
The U.S. economy posted another period of decent growth through the first
three months of the year. Worryingly, inflation also picked up much more than
expected. To be sure, we expect inflation to cool over the balance of 2024 and
into 2025 given our view that the current stance of monetary policy is restrictive.
While not our base case over the next 12 months, rising unemployment and
We expect that Treasury yields cooling demand raise the odds of a recession. Against this backdrop, we expect
will be broadly unchanged, with the Fed to ease policy from current levels. Our base case forecast is that the
the 10-year bond yield trading target range for the fed funds rate will decline over the next 12 months to
around the current 4.50% level between 4.50% and 4.75% from the current 5.25% to 5.50%, with cuts beginning
over the next year. in the second half of 2024. We expect that Treasury yields will be broadly
unchanged, with the 10-year bond yield trading around the current 4.50% level
over the next year.

Eurozone
The eurozone economy, in contrast to the U.S., continues to exhibit disinflation as
the transitory effects from the pandemic and the rise in oil and natural-gas prices
due to the war in Ukraine fade. Economic growth has been weak, suggesting that
monetary policy is tight. Inflation has now slowed more than in the U.S., leading
the European Central Bank (ECB) to lower its policy rate 25 basis points on June 6,
German 10-year government the ECB’s first cut since September 2019.
bond yields already reflect
much of the expected decline The case for easier monetary policy is stronger in Europe considering the starkly
in policy rates, and we expect different backdrop for public spending. Unlike in the U.S., the fiscal largesse that
them to be about the same in has bolstered growth, particularly in Italy and Spain, is likely to subside sharply
a year, at 2.40%. this year. Several nations are likely to be hemmed in by the EU’s requirements
that members maintain fiscal discipline, possibly leading to persistent fiscal
headwinds over several years, barring a recession and subsequent loosening of
restrictions on government spending.
Wage growth in Europe remains too high to generate inflation at 2% or below

when measured versus a year ago but is slowing measurably. We think that
inflation has likely slowed enough for the ECB to confidently lower policy rates.
Wage demands seem to be easing alongside inflation. Ultimately, we think a
cooling economy and slowing inflation will encourage the ECB to continue cutting
rates – with the deposit rate falling from 3.75% now to 2.50% in a year’s time.
German 10-year government bond yields already reflect much of the expected
decline in policy rates, and we expect them to be just slightly lower in a year, at
2.40%.
Japan
Bond yields in Japan continue to rise, reflecting expectations that policy rates
will climb. The 10-year government-bond yield rose above the key psychological
level of 1.00% in late May and we think further increases are likely over the next
year. Japan is experiencing a profound increase in realized and expected inflation
that it has not experienced since the 1990s. Even with a relatively weak economy,
We forecast the benchmark Japanese workers are enjoying the strongest wage growth in the G7 group of
interest rate at 0.20% in a developed nations.
year’s time. Meanwhile, we
expect bond yields to rise, The Bank of Japan (BOJ) has signalled its intention to raise interest rates by
with the yield on the 10-year permitting government bond yields to rise. The BOJ’s policy rate should rise above
Japanese government bond zero for the first time since 2016. We forecast the benchmark interest rate at
reaching 1.25% in the year 0.20% in a year’s time. Meanwhile, we expect bond yields to rise, with the yield on
ahead. the 10-year Japanese government bond reaching 1.25% in the year ahead.

Canada
On June 5, the Bank of Canada (BOC) dropped its policy rate for the first time since
the pandemic, a 25-basis-point reduction to 4.75%. The move by the central bank
reflected a greater degree of comfort that core inflation is waning. Consumer
inflation has slowed for four straight months, with annual inflation easing to a
three-year low of 2.7% in April, and the BOC’s preferred three-month annualized
We expect the BOC policy measures (so-called CPI-median and CPI-trimmed) of core inflation dropped to
rate will fall to 4.00% over the 1.5% and 1.8%, respectively, below the 2% target. These inflation statistics point
next 12 months, and that the to rate cuts starting this summer. The BOC expects to continue shrinking its
Canadian 10-year government balance sheet - a process known as quantitative tightening (QT) - into 2025 (versus
bond will yield 3.50%, down previous guidance of late 2024 or early 2025) and to continue with QT.
from 3.63% at the time of
writing. We expect policy rates in Canada to come down faster than they will in the U.S.,
where growth and inflation are stronger. The two central banks have been as much
as 100 basis points apart on policy rates since 2000, compared with the current
spread of about 60 basis points.
The BOC’s pivot to monetary-policy easing would probably be gradual given the
risk of stoking another bout of faster-than-target inflation. We expect the BOC
policy rate will fall to 4.00% over the next 12 months, and that the Canadian 10-year
government bond will yield 3.50%, down from 3.63% at the time of writing.
United Kingdom
The UK labour market continues to show signs of weakness. Job vacancies are
coming down swiftly, and wage growth is expected to slow from the current high
level. Softening wage growth, especially in services, is expected to help reduce
inflation, taking the edge off an area that has been keeping the inflation rate
above the Bank of England’s (BOE) target. The BOE’s rate-setting monetary-policy
We pencil in four BOE cuts committee recently telegraphed that lower rates are coming when it reduced its
over the next 12 months to forecast for intermediate-term inflation and said the risk of persistent inflation
4.25% from 5.25% and expect is declining. As the first rate cut approaches, the debate will shift to the speed
10-year bonds to trade and size of rate cuts, exerting downward pressure on gilt yields. However, as
around ranges observed in Britons go to the polls in July, the next government faces a challenge related to
recent months, with a forecast its fiscal position, ultimately raising questions about the sustainability of the
of 4.10%. country’s debt. A lack of attention to fiscal discipline could prompt bond investors
to demand higher yields as compensation for factors including slowing growth,
deteriorating public services, falling living standards, high debt-servicing costs
and a poor historical record of controlling inflation. We pencil in four BOE cuts
over the next 12 months to 4.25% from 5.25% and expect 10-year bonds to trade
around ranges observed in recent months, with a forecast of 4.10%.

Regional recommendations
We have no regional
recommendations this
quarter. The global rise
in interest rates and prospect
of policy rate cuts has
increased the attractiveness
of bonds. We recommend
being overweight fixed
income.

Interest-rate forecast: 12-month horizon

Total-return calculation: May 31, 2024 – May 31, 2025
U.S.
Horizon return
3-month 2-year 5-year 10-year 30-year (local)
Base 4.75% 4.50% 4.45% 4.50% 4.70% 4.71%
Change to prev. quarter 0.49% 0.75% 0.65% 0.50% 0.40%
High 6.25% 5.75% 5.20% 5.00% 4.90% 2.26%
Low 3.00% 3.00% 3.25% 3.50% 3.90% 10.19%
Expected Total Return US$ hedged: 5.3%
Germany
Horizon return
Base 2.50% 2.20% 2.25% 2.40% 2.65% 5.12%
High 4.00% 3.60% 3.30% 3.25% 3.25% (1.17%)
Low 1.75% 1.50% 1.75% 2.00% 2.50% 7.00%
Japan
Horizon return
Base 0.20% 0.50% 0.70% 1.25% 2.25% 1.79%
High 0.50% 0.80% 1.00% 1.50% 2.65% (3.15%)
Low 0.05% 0.05% 0.25% 0.50% 1.45% 13.44%
Canada
Horizon return
Base 4.00% 3.75% 3.60% 3.50% 3.50% 4.08%
High 5.50% 5.25% 5.00% 4.75% 4.50% -2.21%
Low 2.50% 2.25% 2.50% 2.75% 2.90% 9.03%
U.K.
Horizon return
Base 4.25% 4.00% 3.90% 4.10% 4.70% 5.72%
High 5.75% 5.50% 5.25% 5.00% 4.85% 1.70%
Low 3.50% 3.25% 3.00% 3.25% 4.25% 11.15%
Source: RBC GAM

Currency markets
Dollar’s underwhelming rally hints at longer-term headwinds
Dagmara Fijalkowski, MBA, CFA Daniel Mitchell, CFA

Managing Director & Head of Managing Director &
Global Fixed Income & Currencies Senior Portfolio Manager
A number of themes have emerged in foreign-exchange markets over the past quarter, and with them some tough
questions still to be answered. Chief among these is whether our longer-term outlook for U.S.-dollar weakness
should be reassessed given the resilient U.S. economy. How does the persistence of inflation globally affect this
calculus? Are there important signals in the rise of gold prices? Can Japanese currency intervention arrest the
greenback’s gains, and what might such action mean for investors aiming to capitalize on the wide gap between
U.S. and Japanese interest rates?
Economic and market developments have been undeniably

Exhibit 1: U.S. dollar still below 2022 peak
U.S. dollar-positive so far this year. The stronger-than-
expected U.S. economy and more persistent inflation than
in other countries have caused investors to expect that the 1350
U.S. Federal Reserve (Fed) will take longer to cut interest

U.S. dollar index (level)
rates, delaying more than 100 basis points of rate reductions 1300 -8%
that were previously expected to materialize before the end

1250
of 2024. The related increase in longer-term bond yields
places the U.S. dollar as one of the highest-yielding among 1200
developed nations – a position further cemented by the
European Central Bank’s (ECB) rate cut in early June. 1150
It’s notable, then, that the dollar has not performed better 1100
Jun-21 Dec-21 Jun-22 Dec-22 Jun-23 Dec-23 Jun-24
than it has. On a trade-weighted basis, the currency has
Note: As at June 4, 2024. Source: Bloomberg, RBC GAM
remained within a relatively tight range for more than a year.
While the dollar is 3% stronger than where it stood in January,
it remains roughly 8% below its 2022 peak (Exhibit 1). Such a
muted performance hardly justifies the level of enthusiasm

Currency markets | Dagmara Fijalkowski, MBA, CFA | Daniel Mitchell, CFA
expressed in the media for “U.S. exceptionalism.” The inability need to finance these larger deficits with increased bond
of the dollar to gain better traction amid strong U.S. economic issuance, traders are paying more heed to weekly debt
data is, we think, due to longer-term negatives that are auctions. Any sign that investors are demanding higher yields
holding back the currency. The greenback may indeed remain to own U.S. government debt would be a concern, especially
elevated, but the extent to which it can gain further ground as some of the largest owners of Treasurys have been
is limited with valuations already so stretched. We have reducing their holdings (Exhibit 3).
often cited that purchasing-power-parity models suggest
that the dollar is more than 20% rich (Exhibit 2), but most A related threat for the greenback comes from concern about
other models – including those that consider a broader set of policies that might be pursued if Republican Donald Trump
economic variables – offer the same assessment. wins November’s U.S. presidential election. Press reports
suggest Trump might demand, among other things, that he be
The reckless pace of fiscal spending is one concern that might consulted on interest-rate moves, explicitly target a lower U.S.
be restraining the dollar’s gains. The U.S. federal debt held dollar and attempt to punish countries that shift away from
by the public has climbed to nearly 100% of GDP from 35% using the U.S. dollar to conduct trade. Such measures would
two decades ago, and the Congressional Budget Office (CBO) likely stoke inflation, jeopardize the Fed’s independence and
expects deficits to continue. According to CBO estimates, net accelerate the trend toward de-dollarization – prompting
interest payments are set to rise to nearly 4% of GDP within investors to demand higher yields in exchange for holding
10 years, nearly three times higher than before the Fed began U.S. assets.
hiking interest rates in 2021. Conscious of the government’s
Exhibit 2: USD – Purchasing Power Parity Valuation Exhibit 3: Change in U.S. Treasury holdings between
150
December 2021 and March 2024
140 150
Change in holdings (billions USD)
130 100
50
120
USD Index (level)
0
110
-50
100
-100
90
-150
80
-200
70 -250
Saudi Arabia
Luxembourg
China
Ireland
Korea
Switzerland
Taiwan
Bermuda
India
France
Brazil
Hong Kong
Singapore
UK
Japan
Norway
Canada
Germany
60
73 77 81 85 90 94 98 02 07 11 15 19 24
US trade-weighted dollar: 97.67 [May 24, 2024] PPP: 79.51 [May-24] 20% Band : [63.61, 95.41]
Note: As at May 24, 2024. Source: U.S. Federal Reserve, Bloomberg, RBC GAM
Note: As at: March 31, 2024. Source:Bloomberg, RBC GAM

We would like to think there are institutional checks on how

far Trump could go with such policies. However, the fact that
Exhibit 4: Long-term cycles in the U.S. trade-
these ideas are even being discussed may signal that the
weighted dollar
dollar could face much more serious risks in coming years 150
than most forecasters appreciate. Gold’s 30% price increase 140

8 yrs
-26%
6 yrs
+67%
10 yrs
-47%
7 yrs
+43%
9 yrs
-40%
12 yrs
+51%
1.5 yrs
-8%
in less than a year is likely due in part to a recognition that 130
U.S. trade weighted dollar

U.S. economic policies are not necessarily consistent with 120
maintaining global leadership over the long term. 110
100
We’ve argued for some time that the dollar is in the beginning
90
of a longer-term decline that could continue for several
80
years (Exhibit 4). The currency’s persistent overvaluation,
70
relentless U.S. fiscal spending and the threats posed by a
60
second Trump presidency seem to support this longer-term 71 75 79 84 88 93 97 01 06 10 15 19 24
outlook. However, the impact of fiscal spending on short-

Note: As at May 17, 2024. Source: Bloomberg, U.S. Federal Reserve, RBC GAM
term growth and inflation means that the Fed is likely to keep
interest rates elevated. The U.S. interest-rate advantage over
other regions has been the most important consideration Exhibit 5: U.S. dollar tightly linked to interest-rate
for currency traders this year (Exhibit 5), and so the dollar’s spreads
descent is less likely to occur without a drop in interest 3.0
rates. As government spending is exhausted and as inflation 1,350
Bloomberg dollar spot index (level)
moderates, we expect that the Fed will start cutting rates

later this year and that it will reduce interest rates three times 1,300 2.3
within our 12-month horizon. In this context, any gains in the
(%)
U.S. dollar from an overvalued starting point are likely to be 1,250
limited. Over the course of our 12-month forecast horizon, we 1.5
think the dollar will be pulled lower by a slowdown in fiscal 1,200
spending, rate cuts and rich valuations.

1,150 0.8
Nov-21 Mar-22 Jul-22 Nov-22 Mar-23 Jul-23 Nov-23 Mar-24
USD index (lhs) 2y yield spread (US - Germany) (rhs)
Note: As at May 28, 2024. Source: Bloomberg, RBC GAM

Exhibit 6: Eurozone trade surplus

The euro
With all the focus on the U.S., it seems as though 30 1.25
developments in the eurozone have been largely ignored. 20

1.20
This is now changing because, just as economic trends begin 10
to soften in the U. S., business sentiment has improved in 1.15
0
Euro (billions)
Europe - particularly in key service sectors. Investors’ focus
EUR-USD
-10 1.10
has been further drawn away from U.S.-centric drivers of
-20
exchange rates by the eurozone’s improving trade balance, 1.05
which has returned to surplus (Exhibit 6) amid a recovery -30

1.00
in Chinese demand and a decline in natural-gas prices. -40
The euro seems so far to have lagged this improvement, -50 0.95
18 19 20 21 22 23 24
as traders remain skeptical about the region’s growth Eurozone trade balance (lhs) EUR-USD (rhs)
prospects and wary of ECB rate cuts that would reduce euro
yields. We know that it will take more than a few months Note: As at May 31, 2024. Source: Bloomberg, Eurostat, RBC GAM
of stronger economic data to convert the community of
euro skeptics, but the improvement has already stoked a Exhibit 7: Portfolio inflows from foreign demand for
newfound appetite for attractively valued European stocks. European equities
Investors outside the eurozone, for instance, have poured
600
approximately 200 billion euros into European equities over
400
the past year (Exhibit 7), and investors within the single-
200
currency bloc have large amounts of overseas assets that
could be repatriated. 0
Euro (billions)
-200
Plotting the euro against other market variables such as
stocks, credit spreads and interest-rate gaps, it appears -400
the single currency may be a bit oversold. Those factors -600
and others suggest the euro should be trading closer to -800

US$1.15-US$1.20 rather than the current exchange rate -1000
08 11 13 15 17 19 21 24
of US$1.08 (exhibits 8 and 9). We forecast that the single
Debt Equity Portfolio flow
currency will reach US$1.21 within 12 months.
Note: 12 month rolling sum. As at March 31, 2024. Source: ECB, RBC GAM
Exhibit 8: European equities point to a higher euro Exhibit 9: Peripheral spreads point to a higher euro
0.90 1.25
5,050 1.16 1.10 1.22
10Y BTP minus bund spread (%)
4,850 1.30 1.19

1.13
EURO STOXX index (level)
4,650 1.16
1.50
1.10
4,450 1.13
1.70
EUR - USD
inverted
EUR- USD
4,250 1.07 1.10

1.90
4,050 1.04 1.07
2.10
3,850 1.04
1.01 2.30
3,650 1.01
0.98 2.50
3,450 0.98
2.70
3,250 0.95 0.95
Jul-22 Jan-23 Jun-23 Nov-23 May-24 Jan-21 Sep-21 May-22 Jan-23 Sep-23 May-24
EURO STOXX (lhs) EUR-USD (rhs) 10Y BTP minus bund spread (lhs) EUR-USD (rhs)
Note: As at May 28, 2024. Source: Bloomberg, RBC GAM Note: As at May 30, 2024. Source: Bloomberg, RBC GAM

Exhibit 10: Policy-rate gap underpins yen weakness
Yen
Japanese authorities have been warning for several months
5
that the yen’s weakness was unwelcome. So it was hardly
a surprise when the Ministry of Finance intervened in 4
Central bank rate (%)

currency markets following the yen’s weakness to 160 per
3
dollar in late April. What was surprising was that the US$63
billion in foreign-exchange spent to prop up the yen had 2
hardly any impact. The yen’s appreciation to 152 per dollar
1
was mostly unwound within a few weeks.
0
The limited impact of Japanese intervention was due, in our 08 08 09 09 10 10 11 12 12 13 13 14 15 15 16 16 17 17 18 19 19 20 20 21 22 22 23 23 24
Fed BOJ
view, to the failure of authorities to align the move with a
supportive shift in monetary policy. In fact, the wide gap
Note: As at June 05, 2024. Source: BOJ, Federal Reserve, RBC GAM
between Japanese policy rates (now at 0%) and those in the
U.S. (5.50%) is the principal reason why the yen is weaker in
the first place (Exhibit 10).
Exhibit 11: Yen is the most undervalued G10 currency
We are now slightly less bullish on the yen, not because
25%
we had been expecting anything more than the miniscule
15%
0.10% incremental shifts in Bank of Japan’s policy rate, but
PPP under / over valuation
because the delay in Fed rate cuts has maintained the gap 5%
in yields between the two currencies. -5%
-15%
Valuation metrics rank the yen as one of the world’s -25%
cheapest currencies based on purchasing power (Exhibit -35%
11). The discount is unlikely to outweigh the yen’s steep -45%
yield disadvantage, but it does set a floor below which
-55%
traders will be reluctant to sell. Our forecast for the yen to
GBP
USTW$
CAD
EUR
CHF
NZD
NOK
AUD
SEK
JPY
strengthen back to 140 hinges on broad weakness in the
U.S. dollar –which we think will begin to materialize this
year alongside Fed rate cuts. Note: As at May 30, 2024. Source:Bloomberg, RBC GAM

Exhibit 12: UK faces largest fiscal headwind among

British pound developed-market peers
Several factors indicate that the pound should weaken
1.0
relative to other developed-market currencies. First, Fiscal
0.5 loosening
economists seem to agree that the UK will be the slowest-
Net fiscal impulse (%GDP)

growing major economy in 2024 and 2025. The roll-off of 0.0
spending measures that are not being renewed amounts -0.5
to a hit to growth of more than 2% of GDP, almost double -1.0

that in other developed-market economies (Exhibit 12). UK
-1.5 Fiscal
inflation is also expected to be higher than peers’ at the tightening
-2.0
end of 2024, which is nothing new given that increases in
UK price levels have been larger than the G10 average for -2.5
SE CH AU NZ EU NO CA US JP UK
decades. Greater inflationary pressure lessens the pound’s 2024 2025
attractiveness at a time when capital inflows are needed
to help plug the country’s balance-of-payments deficits. Note: As at March 2, 2024. Change in cyclically adjusted general government
The UK’s basic balance, which combines outflows in the balance. Source: OECD, RBC Captial Markets, RBC GAM
current account, foreign direct investment and portfolio

investment, sits at a staggering 10% of GDP (Exhibit 13). Exhibit 13: UK balance of payment defict
The pound needs to cheapen in order for the UK to attract
25
capital, though such weakness needs to materialize relative
20
to the currency of its biggest trade and investment partner,
15
the eurozone, rather than against the greenback. We
10
forecast the pound to trade at US$1.31 within the next year.
% of GDP
-5
-10
-15
-20
89 93 98 02 06 10 14 18 23
Net FDI Current account
Net portfolio flows Basic balance of payments
Note: As at December 31, 2023. 4 quarter rolling sum. Source: U.K. ONS,
RBC GAM

Exhibit 14: Persistent foreign direct investment

Canadian dollar
outflows
A negative tone has surrounded the Canadian dollar in 4
recent months, reflecting three economic trends. The 3
first involves Canada’s greater economic sensitivity to
2
elevated mortgage rates and expectations that household
1
discretionary spending may be squeezed as Canadians
% of GDP
0
renew their mortgages. The situation has prompted calls
-1
for the Bank of Canada (BOC) to reduce interest rates
-2
further in order to avoid a more pronounced economic
-3
slowdown. Given that relative shifts in monetary policy
-4
are such a dominant driver of foreign-exchange markets, a
-5
wider divergence in policy between the BOC and Fed could 81 85 88 91 94 98 01 04 07 11 14 17 20 24
result in short-term weakness in the loonie.

Note: As at March 31 2024. 4 quarter rolling sum. Source: Statistics Canada,
The second issue is that the Canadian dollar has for RBC GAM
now lost its link to oil and so isn’t fluctuating alongside

crude prices. The main channel for currency appreciation
from a rally in energy prices is not solely through better
terms of trade but to a greater extent through hiring and
business spending that results from resource exploration
and extraction. Concerns that carbon taxes will crimp
demand and that Canada’s oil-sands reserves are too
“dirty” pose a threat to the domestic oil industry and have
prompted many companies to opt for returning capital
to shareholders instead of reinvesting in shovel-ready
projects that drive Canadian economic growth.
The third major headwind relates to Canadian productivity,

which suffers from low investment in key sectors that
drive innovation. This topic has resurfaced in recent
weeks following a proposed increase in the capital-gains
tax that threatens to deter investment and chase away
companies and entrepreneurs that create intellectual
property. Policies that structurally dent the country’s
competitiveness may be one reason the currency has
remained undervalued. For years, technology workers
have fled to the U.S. and firms have found more attractive
investment opportunities abroad (Exhibit 14). Adding to
this outflow are small deficits in the current account and
in cross-border portfolio investment leading to an overall
basic balance deficit equal to 3% of GDP that frustrates any
sustainable currency strength.

Exhibit 15: Investor positioning bearish on the loonie

We should also remember that the Canadian dollar is 17%
undervalued versus the U.S. dollar based on purchasing
12
power parity and has a host of long-term positives on its
10
side. Canada is well-endowed with natural resources, has a 8
strong banking system, a well-educated workforce, and is 6
CAD (billions)
on better fiscal footing than most of its peers. 4
2
In the shorter term, the Canadian currency has also been 0
supported by this year’s metals rally – which, unlike the oil -2
industry, faces fewer tax and environmental deterrents to -4
investment. Mostly, it is Canada’s proximity to the U.S. and -6
the tight trading relationship between the two countries -8

12 14 16 18 20 22 24
that has distinguished the loonie. During periods of
strong U.S. economic growth, Canadian growth generally
Note: As at May 31, 2024. Source: CFTC, Macrobond, RBC GAM
outperforms most other developed-market economies, a
scenario that often results in the currency outperforming
those of Japan and Europe as the U.S. dollar declines.
In sum, we believe that offsetting tensions affecting

the Canadian dollar augur a stable exchange rate, and
the Canadian dollar has indeed stayed in a relatively
tight trading range of C$1.32 and C$1.40 per U.S. dollar
over the past 18 months. We expect the Canadian dollar
to strengthen beyond the lower end of this range but
acknowledge an outlook for the Canadian dollar that’s
moderately less bullish than before. We’ve tempered
our view over the past few quarters and now expect
the currency to hit C$1.27 per U.S. dollar over the next
12 months. With investors leaning bearish toward the
loonie (Exhibit 15) and additional BOC rate cuts already
anticipated, we think the Canadian dollar is well placed to
benefit from U.S.-dollar weakness.

Regional outlook – United States
Brad Willock, CFA

Managing Director & Senior Portfolio Manager
U.S. stocks, measured by the S&P 500 Index, returned 3.9% pandemic-induced buying binge. Notably, the areas of the
during the three months ended May 31, 2024, driven by better- economy that are home to the AI-related mega-caps posted
than-expected earnings growth, continued excitement over stunning results with an aggregate earnings gain of 33%
artificial intelligence (AI) and a positive outlook for inflation. on top-line growth of 8.5%. Consensus S&P 500 earnings
Five mega-cap AI stocks, Nvidia, Google, Amazon, Meta estimates for all of 2024 imply earnings growth of roughly
and Microsoft accounted for most of the period’s returns, 10%, which seems reasonable given these results and a soft
although banks, insurance, energy and utilities have started landing for the economy remains our base case.
to chip in. The stock market’s surge reflects the consensus
view that the rate of inflation is likely to slow without Next let’s turn to AI, where both investors and companies
significant disruption to the labour market, resulting in a soft remain enthusiastic. The stocks of companies at the centre
landing. With the S&P 500 up 11.3% so far this year through of the AI revolution have rallied significantly so far this year
May, it seems prudent to review recent earnings results, with Nvidia more than doubling, while Meta is up 32%, Google
evaluate the further potential for AI investing and consider 24%, Amazon 19% and Microsoft 12%. These companies are
whether inflation will really come down as fast as many the main beneficiaries of the AI infrastructure buildout.
investors think. Nvidia supplies the semiconductors that the others use to
build models and applications which they use to make their
Let’s begin by looking at the most recent earnings results. own businesses more efficient and to sell to their customers.
In the first quarter, earnings-per-share growth for the S&P Amazon, Microsoft and Google use their enormous cloud
500 came in at 7% year over year (10% excluding the volatile businesses to offer customers access to AI models and
Energy sector) driven by revenue growth of 4%. These applications, while Meta uses AI to better target ads that
results were similar to those posted in the prior quarter users are exposed to on Instagram and Facebook. Meta also
and historically quite typical in that revenue growth often offers AI tools to its advertising clients so they can make
tracks the nominal growth rate of the economy and, thanks better, more engaging ads for use on the company’s platform.
to operational leverage, earnings growth usually comes in Each of these companies is expected to spend US$5 billion
a few percentage points higher. The profitability of 55% of to US$10 billion per quarter over the next several years to
the S&P 500’s non-financial constituents improved as input integrate AI functionality into every part of their businesses.
costs eased and inventories fell to historical levels after a Clearly the big AI players are all-in, but the big question is:

Regional outlook – U.S. | Brad Willock, CFA
United States – Recommended sector weights
S&P
500
Energy 3.7% -0.1%
Materials 2.3% 0.6%
Industrials 8.4% 1.0%
Consumer discretionary 9.9% -1.0%

Consumer staples 6.1% -1.0%
Health care 12.1% -1.0%
Financials 12.7% 0.1%
Information technology 30.9% 0.9%
Communication services 9.3% 0.5%
Utilities 2.4% 0.5%
Real estate 2.2% -0.5%

-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
Underweight Overweight
S&P 500 Equilibrium

Normalized earnings and valuations
10240 May. '24 Range: 3176 – 5655 (mid: 4415)

May. '25 Range: 3426 – 6102 (mid: 4764)
5120 Current (31-May-24): 5278
“ So far in 2024, the performance of 2560
the S&P 500 was driven by six of its 1280
largest members, which together now 640
comprise almost 30% of the market 320
capitalization of the index.” 160
80
40
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Note: The fair value estimates are for illustrative purposes only. Corrections
are always a possibility and valuations will not limit the risk of damage from
Source: RBC GAM

Regional outlook – U.S. | Brad Willock, CFA
What will the ultimate return be following all this investment? weight of the evidence supports an outlook for disinflation
Investors are typically skeptical of big spenders, but going forward.
historically companies that have high margins and generate
a lot of free cash flow receive the benefit of the doubt. As was the case last year and, to a lesser extent, so far in
2024, the performance of the S&P 500 was driven by six of
Finally, let’s turn to the outlook for inflation. We believe that its largest members, which together now comprise almost
the rally in stocks has been supported by the belief that the 30% of the market capitalization of the index. The group’s
rate of inflation will gradually decline back to the Fed’s target collective market value has more than doubled since the
of 2% over the next 18 months. In April, consumer prices beginning of 2023, when ChatGPT was launched. As a group,
excluding food and energy rose 3.6% year over year - still the stocks are relatively expensive, trading at about 29 times
a long way from 2%. Looking closer, however, we see that forward earnings, while the remaining 494 index constituents
there are two major outliers keeping inflation annoyingly in the S&P 500 as a group have gained roughly 36% and
high. While shelter costs rose 5.5% in April, growth in asking trade at roughly 18 times earnings. When we put the pieces
rents slowed to a low single-digit pace. Meanwhile, there are together, the backdrop favours allocating incremental capital
roughly 1 million new apartments under construction and to members of the S&P 500 other than the Big Six given the
the vacancy rate has been rising, which should pressure rent increased odds of a soft landing for the economy helped by
growth in the months ahead. The second outlier is the cost of gradual disinflation. Stable and defensive parts of the market
auto insurance, which rose substantially during the pandemic have underperformed significantly over the past 18 months,
as the accident rate and car-repair costs surged. In May, the and it is now prudent to consider increasing exposure to
average auto-insurance premium was up 23% year over year the Utilities and Consumer Staples sectors in case inflation
but has likely peaked given our belief that repair costs have remains stubbornly high and/or the economy slows down
peaked. In sum, we think the market has it right and that the more than expected.

Regional outlook – Canada
Sarah Neilson, CFA Irene Fernando, CFA

Managing Director & Managing Director &
Senior Portfolio Manager Senior Portfolio Manager
Canada’s stock benchmark, the S&P TSX Composite Index, have been indications that wage pressures are moderating. In
recorded total returns of 5.1% in the three months ended contrast, the U.S. unemployment rate is 4%. The BOC expects
May 31, 2024. In U.S.-dollar terms, the S&P/TSX advanced inflation to remain close to 3% for the first half of the year
4.6%, beating the S&P 500 Index, which advanced 3.9%, and and then gradually fall to 2.5% later this year.
the MSCI World Index, which gained 3.8%. The S&P/TSX has
underperformed, however, so far this year, returning 4.6% in While Canada’s economy accelerated at the start of 2024,
U.S. dollars for the five months ended May versus gains economists expect it to slow for the remainder of the year
of 11.3% and 9.5%, respectively, for the S&P 500 and the as retail sales slow, manufacturing softens and home sales
MSCI World. dwindle. Analysts are anticipating that Canada’s economy
will expand 1.0% in 2024, down from 1.1% growth in 2023.
Both the S&P 500 and the S&P/TSX reached record levels Early expectations are for a stronger economy in 2025, with
in May, and the TSX today sits just 0.9% below that level. GDP growth expected to recover to 1.8%. The BOC, however,
The U.S. and Canadian markets have performed solidly this increased its growth outlook and now expects Canada’s
year supported by resilient economic data, an improved economy to grow by 1.5% in 2024, up from 0.8%, pointing to
earnings outlook and indicators suggesting that inflation rising consumer spending due to population growth as well as
is moderating. higher exports. In early June, the BOC lowered its benchmark
interest rate by 25 basis points, the first change in almost a
Investors have been looking for evidence of lower and stable year and the first time the bank has dropped the rate since
inflation as well as subdued economic results to provide the early days of the pandemic.
indications of the magnitude and pace of monetary-policy
easing. Canada’s inflation rate has eased, with the consumer Canada’s stock market was led by its resource sectors,
price index slowing to 2.7% in April, albeit still above the Bank Energy and Materials, which together make up 30% of the
of Canada’s (BOC) 2% target. Shelter costs, reflected in rising index. The Energy sector, Canada’s second biggest, benefited
mortgage payments and rents, remain the biggest contributor from rising crude-oil prices and optimism about new pipeline
to Canadian inflation. Food-price increases are slowing, capacity and growing demand for Canada’s oil and natural
especially in grocery, while energy prices are ticking higher gas. Energy-company earnings and free cash flows are
reflecting higher gasoline prices. The unemployment rate in growing, supporting shareholder returns and improved
Canada has risen gradually, reaching 6.1% in April, and there valuations. The Materials sector’s performance was boosted

Regional outlook – Canada | Sarah Neilson, CFA | Irene Fernando, CFA
Canada – Recommended sector weights
S&P/TSX
Composite
Energy 18.0% 0.2%
Materials 12.1% 0.4%
Health care 0.3% 0.0%
Information technology 7.7% -0.2%
Communication services 3.3% -0.5%
Utilities 3.9% 0.4%
Real estate 2.0% 0.0%
-1.2% -0.8% -0.4% 0.0% 0.4% 0.8% 1.2%
S&P/TSX Composite Equilibrium

51200 May. '24 Range: 21379 – 30992 (mid: 26186)

May. '25 Range: 22261 – 32272 (mid: 27266)
“S&P/TSX consensus earnings 25600 Current (31-May-24): 22269
estimates have been falling for 12800
18 months, reflecting a moderation 6400

in commodity prices and muted 3200
growth in bank earnings. ”
1600
800
400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Source: RBC GAM

Regional outlook – Canada | Sarah Neilson, CFA | Irene Fernando, CFA
by commodity prices as well. Gold prices surged as high as Canadian bank stocks have returned 3.1% so far this year,
US$2,425 per ounce in May, before settling at about US$2,355 underperforming the S&P/TSX by 4.5 percentage points.
at the end of the month. Gold producers’ equity performance Concerns about a slowing economy and its impact on credit
has mirrored the commodity price move as the stocks begin quality have been the main issues for the group. Higher
to reflect improved operations and cost controls leading to rates decreased demand for loans, but the pressure on costs
stronger margins in the latter half of the year. Copper prices to fund loans has been diminishing. The outlook for net
reached a two-year high as improving economic growth interest margins, the key metric that drives banks’ top-line
supported the outlook for the metal. The Financials sector growth, has been steady and has helped offset slower growth
has lagged the S&P/TSX mainly due to weak bank stocks, in loan assets. Banks’ efforts to cut expenses has also aided
offset somewhat by returns for insurer issues. The Utilities their earnings.
and Real Estate sectors, as well as telecommunications
companies, have been a drag on returns this year, as long- We have seen a divergence in credit trends among banks in
term interest rates moved higher. recently released quarterly results. Some banks have seen
their loan books deteriorate more than expected while
Important to the profitability of the S&P/TSX’s biggest area, others are experiencing less stress in their loan portfolios.
banking, is the condition of the housing market. Higher Most bank managements are telling investors that they
interest rates have increased mortgage rates, significantly should count on increased losses on loan books for the rest
reducing housing affordability. Home prices appear to be of the year.
stabilizing, and central-bank rate cuts could lead to lower
mortgage rates and improve affordability. Analysts see flat earnings for the fiscal year ending
October 2024, followed by 6.5% growth next year. Some
S&P/TSX consensus earnings estimates have been falling analysts are even starting to tentatively raise their
for 18 months, reflecting a moderation in commodity prices earnings estimates, a positive sign in our view. As we move
and muted growth in bank earnings. Current consensus into 2025, one can picture a scenario in which BOC rate
estimates are for S&P/TSX earnings to grow by 6% in 2024 cuts spur demand for loans and ease concerns about credit
and by another 13% in 2025, driven by higher profits in energy, quality. Such a scenario is likely to boost PE ratios from the
materials and financials. The estimates are not factoring in current 10.7.
the possibility of an economic slowdown, which would likely
hurt sectors exposed to the pace of economic growth. The
S&P/TSX currently trades at 14.7 times forward earnings, in
line with its 14.5 long-term average. The S&P/TSX remains at
a significant discount to the S&P 500, which is valued at 20.8
times forward earnings.

Regional outlook – Europe
David Lambert
Managing Director & Senior Portfolio Manager,
Head of European Equities
European equities have started 2024 as one of the stronger confidence, ticked up in April to 51.4, the highest level in a
regions in the context of broadly robust global markets. year and indicative of an expansion. The gain was bigger
Performance has been led by pro-cyclical stocks, and the than investors’ expectations, driven by more robust growth
large-cap index has led the way. in services. An early look at the quarter-over-quarter pace
of growth expected in the second quarter would suggest
Earnings growth remains muted, but we still expect profits an expansion running at 0.2%. While the pace is clearly
to rise 5% this year, excluding commodities. The run-up in not electrifying, it is nonetheless consistent with ECB
European equity markets since October 2023 has been due expectations of a gradual recovery in growth over the course
to an increase in valuations, as a 17% increase in the market of the year.
has been matched by a mere 3% rise in expected earnings
over the next 12 months. The increase in valuations is similar Money-supply growth, a generally reliable indicator of
to what we have seen in major markets with the exception of GDP growth and earnings, is rising, and this bodes well
Japan and China. However, European valuations remain low for earnings growth. Ultimately, low valuations, improving
by historical standards, in contrast to the U.S. leading indicators and the prospect of relatively loose
monetary policy are setting up a positive backdrop for
Higher P/E ratios are, for the most part, being driven by hopes European equities.
of aggressive interest-rate cuts by central banks, coupled with
diminishing expectations of a significant economic downturn The role of buybacks
over the coming year. A big difference in the macroeconomic One thing we have noticed in 2024 is that the number
backdrop between the U.S. and Europe is that inflation has of share-buyback announcements is up notably, led by
come down more in Europe, putting the European Central companies in the Financials sector. But the Energy sector
Bank (ECB) and the Bank of England (BOE) in a position to and cyclical areas such as Consumer Discretionary and
drop rates earlier and faster than the U.S. Federal Reserve. Industrials have also been announcing repurchases. Our
This development should be, on balance, more positive for assumption is that the enthusiasm for buybacks is a sign of
European equities, and especially for companies with steadily growing corporate confidence about prospects for earnings
rising earnings and strong balance sheets. and of balance-sheet strength. Moreover, companies are
buying back a lot more stock than they are issuing: The
Another positive for European stocks is gradual improvement
overall share count is falling at the fastest pace in 20 years.
in leading indicators. Flash PMIs, a measure of business
This imbalance is obviously supportive for equities.

Regional outlook – Europe | David lambert
Europe – Recommended sector weights
MSCI
Europe
Energy 5.3% 0.0%
Materials 6.5% 0.5%
Utilities 4.0% -0.2%
-1.0% -0.5% 0.0% 0.5% 1.0%
MSCI Europe Index Equilibrium

448 May. '24 Range: 164 – 294 (mid: 229)

May. '25 Range: 169 – 302 (mid: 236)
448
224 Current (31-May-24): 174
“In Europe, shareholder returns 224
have historically depended largely on 112

112
dividends, but buybacks are gaining 56 56
in popularity.”
28
14
7
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Source: RBC GAM

Regional outlook – Europe | David lambert
Historically, the U.S. stock market has been the biggest for electricity force power companies to step up the use
beneficiary of buybacks, especially since the 2008 financial of cleaner-burning fuels such as natural gas and boost
crisis. In Europe, shareholder returns have always depended development of renewables.
largely on dividends, but buybacks are gaining in popularity.
In fact, Europe’s buyback yield has caught up and passed Expectations are for muted earnings growth through the rest
that of the U.S. The pick-up in buybacks, coupled with vastly of this year at around 3% (5% excluding Energy), and then for
superior dividend yields, gives a total shareholder return 10% earnings growth in both 2025 and 2026.
of nearly 6%, and we estimate that buybacks could add 2.5
percentage points to EPS growth across the region this year.
Companies executing the biggest buybacks typically trade

at discount valuations. Recently, however, we have seen that
investors are assigning slightly higher valuations to such
companies. Cash on corporate balance sheets is near record
highs and financial leverage is low, so there is plenty of
firepower to maintain these returns.
We know that the long-term compounding effect of buybacks

is powerful in a way that is similar to reinvested dividends,
so it is not too early to speculate about whether this change
could narrow the gap in total shareholder returns versus the
U.S. over the next 20 years.
Going forward…and positioning

We also wonder whether the shift in European equities
away from mature industries such as telecommunications
and banks will lead to higher valuations for some sectors
in Europe. The pandemic and increase in armed conflicts
around the world exposed supply-side vulnerabilities, and
capital expenditures focused on security in energy, food,
infrastructure and defense could justify higher exposure to
the Industrials, Materials and Energy sectors.
We have been recently adding to holdings in the attractive

areas of the Energy and Financials sectors, giving us greater
exposure to value stocks. These positions have been funded
by reducing exposure to the consumer sectors, and Consumer
Staples in particular. We have a dearth of exposure to the
Utilities or Communication Services sectors. However, the
Utilities sector could become more attractive as valuations
are low, and as climate change and skyrocketing demand

Regional outlook – Asia
Chris Lai
Portfolio Manager
RBC Global Asset Management (Asia) Limited
Asian equities gained over the three-month period, its short-term rate to “around zero to 0.1%” from minus
slightly outperforming most other major markets in local 0.1%. At these levels, however, central-bank policy remains
currency but underperforming in U.S.-dollar terms. Notable accommodative.
outperformers in the region included China and Taiwan, while
Thailand, Indonesia and Australia underperformed. China’s We expect BOJ rate hikes totaling 10 basis points by October.
stock market attracted investors amid attractive valuations, A BOJ rate hike is possible next month given rising wages, as
improving macroeconomic indicators and a shift to pro- long as the global economy remains healthy. Complicating
growth government policies. Taiwan was buoyed by large-cap the BOJ’s decision-making is a weak yen, which at 157 is at its
information technology companies such as Hon Hai Precision lowest levels in almost 35 years. A depreciating currency is
and Taiwan Semiconductor on exposure to advances in inflationary given that Japan is an energy importer.
artificial intelligence (AI). Australia underperformed due to
The consensus 2024 forecast for consumer inflation excluding
the poor performance of the Health Care sector and iron- and
fresh food (core inflation) has risen to 2.7% from 2.2% on
steel-related mining companies hurt by weak demand from
expectations that the government will end subsidies that
China’s construction industry. Private consumption continues
had held down prices for electricity. Monthly core inflation is
to be disappointing in Indonesia, where high personal-
forecast to climb to 3% this summer, and then slow to 2% by
debt levels are an issue, and Thailand, where a rebound
the second half of next year.
in tourism has been insufficient to offset falling car sales.
Among sectors, Information Technology and Communication GDP growth forecasts for 2024 remains unchanged at 0.5%.
Services outperformed, while Consumer Staples and Health We continue to expect consumption to recover later this
Care were laggards. year as the trajectory for both wage growth and inflation
shift up. The economy should also get a boost from strong
Japan capital expenditures, which are focused on digitalization,
Japan recently raised interest rates for the first time in 17 decarbonization and robotics. We expect wage growth
years, marking a historic shift away from the aggressive adjusted for inflation to turn positive in the second half of
monetary easing implemented to fight chronic deflation. The this year, supporting consumption.
decision, made in March, ended a policy that had maintained
interest rates below zero, as the Bank of Japan (BOJ) lifted

Regional outlook – Asia | Chris Lai
Asia – Recommended sector weights
MSCI
Pacific
Energy 3.0% 0.1%
Materials 6.4% 0.4%
Consumer discretionary 14.6% 0.0%
Utilities 2.3% 0.2%

-1.0% -0.6% -0.2% 0.2% 0.6% 1.0%
MSCI Japan Index Equilibrium

4096 May. '24 Range: 1071 – 1800 (mid: 1435)

May. '25 Range: 1174 – 1974 (mid: 1574)
Current (31-May-24): 1713
2048
“A BOJ rate hike is possible
next month given rising wages, as 1024
long as the global economy remains

healthy.” 512
256
128
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
Source: RBC GAM

Regional outlook – Asia | Chris Lai
Rest of Asia a coalition government will make it much harder to push

The Chinese economy had a solid start to 2024. GDP growth through large infrastructure projects, and more attention will
hit 5.3% in the first quarter, up from the year-earlier period have to be paid to vested interests before federal initiatives
and beating expectations. Moreover, April indicators were can be enacted.
healthy. The gains came mainly from a push for investment,
The Indian economy is forecast to expand 7% this year,
which gained momentum in both manufacturing and
ranking India among Asia’s fastest growing. Urban
infrastructure on government spending. Consumption
consumption, investment and exports have been resilient.
continued to be the weak link. Sales in consumer services and
The only areas of concern are weak consumption in rural
vehicles slowed, while the picture for property was mixed.
areas and an expected slowdown in government spending.
Sales of home décor and household appliances improved,
Indian inflation is relatively benign as oil companies have
while furniture softened. While recent strengthening in global
lowered gas and petrol prices. We expect inflation of 4.6%
purchasing managers’ indexes have pointed to potential
in the second quarter and expect it to trend lower to 4.5% in
improvements in global demand, we are mindful of the risk
2024. Strong growth and relatively low inflation should enable
presented by U.S. protectionism and are maintaining our 2024
the Reserve Bank of India to begin lowering interest rates in
growth forecast at 5.2%.
September from the current 6.50%.
The Chinese government announced measures in May to
In Australia, growth forecasts for 2024 have been lowered to
stabilize the crisis-hit real estate industry, aiming to clear
1.2% due to falling household spending including a decline in
inventory and boost homebuyer demand. The package
home renovations. Consumption could pick up in the second
includes cutting down-payment requirements and removing
half given a resilient labour market, with the unemployment
the floor for mortgage rates in an effort to entice buyers.
rate now back down to 3.7%. Inflation is forecast at 3.3%
Further measures include giving local governments the power
for 2024, as goods prices come down. However, prices for
to force state-owned firms to purchase unsold apartments
services continue to rise and could climb more if households
and convert them to social housing. China's central bank is
start spending more following personal income-tax cuts
setting up a property-lending facility that could result in as
that take effect July 1. Investors are pricing in one rate cut in
much as 500 billion yuan (US$69 billion) of commercial-bank
November.
financing – equivalent to 0.4 per cent of the country's GDP. We
expect the renminbi to remain weak at the 7.25 per U.S. dollar In South Korea, GDP is forecast to climb 2.2% this year, up
level given Chinese central-bank easing and a focus from 1.4% in 2023, led by strong semiconductor sales. A
on exports. two-speed economy split between strong manufacturing
and trade and weak domestic demand will likely continue.
A surprising election result unfolded in India, where the
We expect inflation to fall to 2.6% in 2024 from 3.6% in 2023.
business-friendly prime minister, Narendra Modi, lost his
Inflation is likely to fall to between 2.0% and 2.5% by the late
parliamentary majority. Our assessment is that India’s
summer, opening up scope for central-bank rate cuts.
economic outlook remains robust, with administrative
reforms having generally survived political fire. However,

Regional outlook – Emerging markets
Laurence Bensafi
Managing Director & Portfolio Manager,
Deputy Head of Emerging Market Equities
Emerging-market equities have started to outperform benchmark has added another 9.5% so far in 2024, triggering
developed markets in a reversal from the trend of the past questions about near-term performance. It seems clear that
few years, catalyzed by an early 2024 rebound in Chinese there is some froth in the small- and mid-cap areas of the
equities. Since China’s stock market touched a multi-year low market, prompting India’s stock-market regulator in February
on January 22, the MSCI Emerging Markets Index has returned to request that local mutual funds address ways to better
about 10% in U.S. dollars, compared with a 9% gain for the protect investors.
MSCI World Index.
India’s business-friendly prime minister, Narendra Modi,
It is likely that emerging-market equities will continue to recently lost his parliamentary majority in elections
narrow the gap with developed markets in the coming months that reflected what some political analysts said was
as emerging-market economies and earnings improve, disgruntlement among the poor over job losses and inflation.
especially since huge valuation differences exist between His political party, the BJP, should in our view be able to
the two. At the end of 2023, the return on equity (ROE) in continue pursuing its policy goals, but will now have trouble
developed markets, as represented by the MSCI World, was enacting proposals that ease land transfers and encourage
16.0%, the highest ever versus emerging markets, whose large-scale farming.
ROE stood at 11.3%. The large difference is due in part to
emerging markets’ lower exposure to technology and a There is no doubt about India’s impressive development
slower economic recovery from the pandemic as government under Modi, who since winning power in 2014 has focused on
stimulus in emerging markets was more limited. We foresee the country’s woeful infrastructure and made it much easier
a rebound this year in emerging-market ROEs, while ROEs in to do business. But it is also clear that India faces many
developed markets should not change much. challenges in the coming years. Education remains a concern,
with half the population quitting school at the age of 10, while
Discounted valuations are also seen on a price-to-book female make up less than 30% of the workforce – one of
basis (PB), where emerging markets trade at the highest the lowest rates in the world. Faster job creation will
discount ever – 50% – versus developed markets. The average be needed to absorb the growing population and boost
discount over the past 25 years has been 30%. India was economic growth above the levels of the past decade. In this
the most expensive emerging market at the end of 2023, environment, investors should focus on areas of the market
and valuations measured based on PB were at their highest where valuations are not stretched.
levels since 2007, just before the financial crisis. India’s stock

Regional outlook – Emerging markets | Laurence Bensafi
Emerging markets – Recommended sector weights
MSCI
Emerging Markets
Energy 5.2% -5.0%
Materials 7.1% -1.0%
Industrials 6.9% -2.0%
Consumer staples 13.0% 9.0%
Health care 5.4% 1.0%
Utilities 9.2% -3.0%
Real estate 1.5% 1.0%

-9.0% -6.0% -3.0% 0.0% 3.0% 6.0% 9.0%
MSCI Emerging Markets Index Equilibrium

4096 May. '24 Range: 1222 – 2216 (mid: 1719)

May. '25 Range: 1242 – 2253 (mid: 1747)
Current (31-May-24): 1049
2048
“Since January 22, the MSCI Emerging

1024
Markets Index has returned about
10% in U.S. dollars, compared with a 512
9% gain for the MSCI World Index.”

256
128
1995 2000 2005 2010 2015 2020 2025
Source: RBC GAM

Regional outlook – Emerging markets | Laurence Bensafi
China’s economy, in contrast to India’s, has been weak Indeed, the MSCI China Index has outperformed the
since 2020. That was the year that China started to stress emerging-market index by 9.6 percentage points and the
the quality of its economic expansion via productivity and MSCI India Index by 9 percentage points since January 22
domestic demand, rather than simply the pace of growth. of this year as the government increased support for the
While this change is necessary to ensure that growth is economy and the Real Estate sector. The rally could well
accompanied by sustainably rising incomes, policymaking continue if China’s central bank eases policy at a time when
has so far been mostly ineffective in restoring investor inflation-adjusted interest rates are relatively high. One
confidence. The severity of the government’s two-year-old key positive is that the savings rate is down amid a modest
regulatory crackdown on many parts of the economy caught recovery in consumption and consumer confidence.
many investors by surprise, and there is now concern that
high debt levels and a shrinking population could lead to Beyond China and India, investors can expect the run-up to
deflation. The result is that valuations of Chinese equities at November’s U.S. presidential election to result in financial-
the end of January of this year fell to their lowest since the market volatility. A notable risk is the imposition of tariffs
2008-2009 financial crisis. and other trade restrictions in areas where China has been
ramping up exports, regardless of whether Biden or Trump
Since the start of the year, Chinese stock valuations have wins the election. The longer-term direction remains a more
fallen mainly in fast-growing technology-related issues and polarized world, with trading blocs increasingly dictated by
private companies, while state-owned enterprises and more geopolitics.
cyclical areas have done better. These trends were largely
reflected in foreign investors selling widely held, quality In conclusion, it is important to remember that it’s emerging-
stocks and a delayed recovery in consumption. So far in 2024, market countries that are driving global GDP growth. While
however, concerns about China’s big-picture challenges have China's growth rate is declining, investors expect the country
taken a back seat to investors wanting exposure to a market to remain the main contributor to global GDP growth in the
that may be undervalued from a long-term perspective. coming years as it accounts for 30% of emerging-market
economic growth. India’s economy is now expanding faster
than China’s, but China’s economy is about 4.5 times bigger.

Members
Daniel E. Chornous, CFA

Chief Investment Officer
Chair, RBC GAM Investment Strategy Committee
Dan Chornous is Chief Investment Officer of RBC Global Asset Management Inc. (RBC GAM), the Royal Bank of Canada’s
wholly-owned investment management subsidiary. The firm manages assets nearing (CAD) $639.8 billion for institutional, high net worth and
individual investors in fixed income, equity and alternative mandates in Canada and around the world. Since joining RBC GAM in November 2002,
Dan has been responsible for the overall direction of investment policy and asset management across the firm’s global investment platform.
Prior to that, Dan was Managing Director, Capital Markets Research and Chief Strategist at RBC Capital Markets.
Dan joined the RBC Global Asset Management board immediately upon his arrival at the firm. In December 2010, Dan joined the board of
BlueBay Asset Management following its merger with RBC GAM. He also sits on the board of RBC Global Asset Management (UK) Ltd., is a
member of the RBC Pension Investment Strategy Committee and chairs the RBC GAM Investment Strategy Committee (RISC) among others.
For many years, Dan has been active in the Canadian investment community. He served on the board of the Canadian Coalition for Good
Governance from 2008 to 2020 and as its chair from 2012 to 2016. In addition, he is a member of CFA Society Toronto Advisory Council, a past
member of the Toronto United Way major giving cabinet, a former Director of the Toronto Society of Financial Analysts and of the Winnipeg
Society of Financial Analysts.
Dan is a graduate of the University of Manitoba (B. Comm, Honours, 1980) and is a member of The Associates, Asper School of Business. In 1985,
Dan was awarded the Chartered Financial Analyst designation.
*AUM in CAD as of May 31, 2024
Soo Boo Cheah, MBA, CFA Dagmara Fijalkowski, MBA, CFA

Senior Portfolio Manager Head of Global Fixed Income & Currencies
RBC Global Asset Management (UK) Limited RBC Global Asset Management Inc.
Based in the U.K., Soo Boo is responsible for managing global fixed- As Head of Global Fixed Income and Currencies, Dagmara leads
income allocations. He specializes in assessing the impact of central a team of 40+ investment professionals in Toronto, London and
bank policies and global macroeconomic trends on developed-market Minneapolis with almost $100 billion in assets under management.
bonds. In his role as a senior portfolio manager, he integrates a wide In her duties as a portfolio manager, Dagmara leads management
range of investment strategies involving interest rates, currencies, and of several bond funds, including the RBC Bond Fund, and manages
derivatives. Soo Boo started his career in the investment industry in foreign-exchange hedging and active overlay programs. She leads
2000 and holds an MBA from University of New Brunswick. the Fixed Income Strategy Committee, which determines appropriate
Soo Boo has been a CFA charterholder since 2002. levels of risk taking given market opportunities. Dagmara is a member
of the RBC Investment Policy Committee, which determines the
asset mix for balanced products; and the RBC Investment Strategy
Committee. In 2016, she was appointed to the RBC GAM Executive
Committee. Dagmara, who began her investment career in 1994, holds
an MBA from the Richard Ivey School of Business at the Western
University in Canada and a Master’s degree in economics from the
University of Lodz in Poland. Dagmara has been a CFA charterholder
since 1997.

Stuart Kedwell, CFA Eric Lascelles

Senior Portfolio Manager Chief Economist
Stu co-leads the North American Equity team and is a member of Eric is the Chief Economist for RBC Global Asset Management Inc.
the RBC GAM Investment Strategy Committee, which is responsible (RBC GAM) and is responsible for maintaining the firm’s global
for establishing the firm-wide global asset mix for mutual funds and economic forecast and generating macroeconomic research. He is
for institutional and high net worth private clients. Stu began his also a member of the RBC GAM Investment Strategy Committee, the
career in 1996 with RBC Dominion Securities in the firm’s Generalist group responsible for the firm’s global asset-mix recommendations.
program, a two-year internship in which participants rotate through Eric is a frequent media commentator and makes regular
different areas of the firm. In 1998, he joined the RBC Investments presentations both within and outside RBC GAM. Prior to joining
Portfolio Advisory Group, which provides investment ideas and RBC GAM in 2011, Eric led a team of economists and fixed income
recommendations to RBC DS Investment Advisors. He was also a strategists at another large Canadian financial institution. He began
member of the RBC DS strategy & focus list committees. Stu has been his career as a research economist for a federal government agency.
with the firm since 2002 and is a CFA charterholder.
Scott Lysakowski, CFA Hanif Mamdani

Managing Director & Senior Portfolio Manager Managing Director &
Head of Canadian Equities (Vancouver) Head of Alternative Investments
Scott is Head of the Vancouver-based Canadian Equity Team. He is Hanif Mamdani is Head of both Corporate Bond Investments and
primarily responsible for overseeing equity research and portfolio Alternative Investments. He is responsible for the portfolio strategy
management of the firm’s core Canadian equity strategies. Scott also and trading execution of all investment-grade and high-yield
serves as lead manager for the Canadian income strategies. Scott corporate bonds. Hanif is Lead Manager of the PH&N High Yield Bond
began his investment management career with the firm in 2002 as a and Alternative strategies, including a multi-strategy hedge fund. He is
senior research analyst and portfolio manager within the Toronto- also a member of the Asset Mix Committee. Prior to joining the firm in
based Canadian Equity Team. He transitioned to the Vancouver team 1998, he spent 10 years in New York with two global investment banks
seven years later and assumed his current leadership role in 2012. working in a variety of roles in Corporate Finance, Capital Markets
During his tenure with the organization, he has conducted research and Proprietary Trading. Hanif holds a master's degree from Harvard
for and managed a broad spectrum of Canadian equity portfolios, University and a bachelor's degree from the California Institute of
specializing in dividend and income mandates. Technology.

Bryan Mascoe, CFA Sarah Riopelle, CFA

Managing Director & Senior Portfolio Manager Managing Director & Senior Portfolio Manager
Co-head, Fixed Income (Vancouver) Investment Solutions
Bryan is co-Head and a senior portfolio manager on the PH&N Fixed Since 2009, Sarah has managed the entire suite of RBC Portfolio
Income Team. He co-manages the investment-grade credit research Solutions which totals $180 billion in assets. She is a member of the
effort. As part of this role, he manages our dedicated corporate RBC GAM Investment Strategy Committee, which sets global strategy
bond portfolios and is responsible for performing credit analysis on for the firm, and the RBC GAM Investment Policy Committee, which is
responsible for the investment strategy and tactical asset allocation
investment-grade issuers. He also assists with the strategy and trade
for RBC Funds’ balanced products and portfolio solutions. In addition
execution of corporate bonds held in broader short, universe, and
to her fund management role, she works closely with the firm’s
long fixed-income mandates. Bryan has a Bachelor of Commerce
Chief Investment Officer, ensuring that all aspects of the investment
degree from the University of British Columbia and is a Leslie Wong management function at RBC GAM are running smoothly. She is co-
Fellow as a graduate of the UBC Portfolio Management Foundation. chair of the RBC Wealth Management Diversity Leadership Committee
He has been a CFA charterholder since 2005. – Canada, as well as a member of the Dean’s Advisory Board for both
the Telfer School of Management at the University of Ottawa and the
Faculty of Management at Laurentian University.
Sarah joined RBC Global Asset Management in 2003 and held roles
in Investment Strategy and Canadian Equities before assuming her
current responsibilities in 2009. Prior to joining RBC GAM, Sarah
worked at RBC Capital Markets in both the Quantitative Research and
Investment Strategy groups. She began her career in the investment
industry in 1996 after graduating from the University of Ottawa with a
Bachelor of Commerce degree, majoring in Finance and International
Management. She was awarded the Chartered Financial Analyst
designation in 2001.
Martin Paleczny, CFA Kristian Sawkins, CFA

Managing Director & Managing Director & Senior Portfolio Manager
Senior Portfolio Manager Co-head, Fixed Income (Vancouver)
Martin Paleczny, who has been in the investment industry since 1994, Kristian is co-Head and a senior portfolio manager on the PH&N Fixed
began his career at Royal Bank Investment Management, where he Income team, specializing in universe and short-term bond mandates.
developed an expertise in derivatives management and created a He is also a member of the PH&N IM Asset Mix Committee. Kristian
policy and process for the products. He also specializes in technical joined Phillips, Hager & North Investment Management in 2002 as an
analysis and uses this background to implement derivatives and associate analyst with the Canadian Equities Team and moved to the
hedging strategies for equity, fixed-income, currency and commodity- Fixed Income Team in 2005. Prior to joining the organization, Kristian
related funds. Since becoming a portfolio manager, Martin has spent three years at a major investment bank in New York across a
focused on global allocation strategies for the full range of assets, few different roles. Kristian has a Bachelor of Commerce degree from
with an emphasis on using futures, forwards and options. He serves the University of British Columbia and is a Leslie Wong Fellow as a
as advisor for technical analysis to the RBC GAM Investment Strategy graduate of the UBC Portfolio Management Foundation. He has been
Committee. a CFA charterholder since 2002.

Jaco Van der Walt, DCom Milos Vukovic, CFA

Managing Director & Global Head of Managing Director &
Quantitative Research & Investments Head of Investment Policy
As Head of Quantitative Investments, Jaco leads an experienced Milos, who joined RBC in 2003, oversees investment-management
team that is driven to continually innovate across all its capabilities, activities including new-fund launches, performance analytics
including research, portfolio management, data and systems to and trade-cost analysis. He is also responsible for developing and
leverage the combination of human and machine in investment monitoring investment mandates and implementing tactical asset
decision-making. He previously held an executive role at one of South allocation for the RBC GAM investment solutions. Milos earlier worked
Africa’s largest financial services companies, leading the Investment for a Big 4 accounting firm and two top-tier securities firms. He earned
Management Office, with experience spanning pensions, insurance, an MBA at the Schulich School of Business and has held the CFA
banking and wealth management. As asset owner, he also chaired designation since 2004.
the boards and investment committees of several of the company’s
pension plans, promoting investment excellence and driving
transformational change to ensure members reach their retirement
goals. Jaco began his investment career in 1996 and holds a Master’s
degree in Economics from the University of Toronto and a Doctorate
from the University of Pretoria.
Brad Willock, CFA

Managing Director &
Senior Portfolio Manager
Brad Willock joined RBC Global Asset Management in

July 2002 and is a Senior Portfolio Manager and CFA charterholder.
In his current role, Brad has responsibility for RBC Global Asset
Management’s core and income-oriented U.S. equity strategies. He
joined RBC in May 1996 after receiving a bachelor’s of commerce
degree with distinction from the University of Calgary. Prior to that,
Brad obtained a bachelor’s of science degree at the University of
British Columbia and represented Canada at the 1992 Barcelona
Summer Olympics in volleyball.

RBC Global Asset Management
Global equity advisory committee
> Philippe Langham > Mayur Nallamala > David Lambert

Managing Director & Managing Director & Managing Director & Senior Portfolio
Senior Portfolio Manager, Head of Head of Asian Equities Manager, Head of European Equities
Emerging Market Equities RBC Global Asset Management (Asia) RBC Global Asset Management (UK)
RBC Global Asset Management (UK) Limited Limited
Limited
> Martin Paleczny, CFA
> Brad Willock, CFA Managing Director &
Managing Director & Senior Portfolio Manager,
Senior Portfolio Manager, Asset Allocation & Derivatives
North American Equities RBC Global Asset Management Inc.
Global Fixed Income & Currencies advisory committee
> Dagmara Fijalkowski, MBA, CFA > Joanne Lee, MFin, CFA > Eric Lascelles
Managing Director & Head of Senior Portfolio Manager, Managing Director &
Global Fixed Income & Currencies Global Fixed Income & Currencies Chief Economist
RBC Global Asset Management Inc. RBC Global Asset Management Inc. RBC Global Asset Management Inc.
> Soo Boo Cheah, MBA, CFA

Managing Director &
Global Fixed Income & Currencies
RBC Global Asset Management (UK)
Limited

Disclosure
This document 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 document 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 document 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 Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC
Global Asset Management (Asia) Limited, and RBC Indigo Asset Management Inc. which are separate, but affiliated
subsidiaries of RBC.
In Canada, this document is provided by RBC Global Asset Management Inc. (including PH&N Institutional) and/or
RBC Indigo Asset Management Inc. which is regulated by each provincial and territorial securities commission with
which it is registered. In the United States, this document is provided by RBC Global Asset Management (U.S.) Inc., a
federally registered investment adviser. In Europe this document is provided by RBC Global Asset Management (UK)
Limited, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this document is provided by
RBC Global Asset Management (Asia) Limited, 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 document 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 document 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 such errors or omissions.
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 document 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
Publication date: June 15, 2024
100537 (06/2024)
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The Global

15 Economic outlook 65 Europe

28 Market outlook 68 Asia

Joanne Lee, MFin, CFA – Senior Portfolio Manager,

Taylor Self, MBA, CFA – Portfolio Manager,

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 1

Economies to grow at modest pace

Inflation has been sticky, but continues to moderate gradually

2 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024

U.S. dollar resilience is set to fade

Central-bank rate cuts have begun

Sovereign bonds offer decent return potential, minimal valuation risk

Stocks extend gains, led by U.S. mega-cap technology

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 3

Recommended asset mix

Equities Fixed income Cash

60.0% 38.5% 1.5%

Strategic neutral position: Strategic neutral position: Strategic neutral position:

Note: As of May 31, 2024. Source: RBC GAM

4 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024

Targets (RBC GAM Investment Strategy Committee)

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 5

6 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024

Global asset mix

Cash 2.0% 0.0% – 15.0% 2.0% 2.0% 1.5% 1.5% 1.5%

Bonds 38.0% 23.0% – 53.0% 38.0% 38.0% 38.5% 38.5% 38.5%

Stocks 60.0% 45.0% – 75.0% 60.0% 60.0% 60.0% 60.0% 60.0%

Europe 34.0% 24.0% – 44.0% 37.1% 39.8% 34.4% 34.6% 34.0%

Asia 21.4% 11.4% – 31.4% 20.3% 20.0% 18.0% 18.4% 21.4%

MSCI** Allowable Summer Fall New Year Spring Summer

Europe 13.7% 3.7% – 23.7% 15.8% 14.5% 14.1% 13.8% 13.7%

Asia 7.1% 0.0% – 17.1% 8.4% 8.2% 8.1% 7.5% 7.5%

Global equity sector allocation

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 7

At RBC GAM, we have a team dedicated to setting and

8 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 9

Last 12 months 11.6% 10.4%

10 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024

Milos Vukovic, MBA, CFA Aaron Ma, MBA, CFA

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 11

gains in the low to high single digits. Performance ranged

Stocks of U.S. companies of all sizes delivered respectable

12 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024

Global fixed income markets

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 13

Global equity markets

Global equity sectors

14 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024

Hard landing -1.00

THE GLOBAL INVESTMENT OUTLOOK Summer 2024 I 15

given the resilience demonstrated by the economy and

ISM Manufacturing Index

continues to mount in some corners of the economy and it

East conflict, China-U.S. tensions and the war in Ukraine 30

together pose challenges for continued global stability and 20

across a wide range of indicators, from first-quarter GDP -0.5

figures that were reliably positive across the developed -1.0

(Exhibit 5). Note: Twitter Economic Sentiment Index as of 05/29/2024, University of

16 I THE GLOBAL INVESTMENT OUTLOOK Summer 2024