The Global Investment Outlook - RBC GAM Investment Strategy Committee - NEW YEAR 2021
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The Global Investment Outlook RBC GAM Investment Strategy Committee NEW YEAR 2021
The RBC GAM Investment
Strategy Committee
The RBC GAM Investment Strategy Committee These include:
consists of senior investment professionals ●● therecommended mix of cash, fixed income
drawn from all areas of RBC GAM. The instruments, and equities
Committee regularly receives economic and
●● therecommended global exposure of fixed
capital markets related input from internal
income and equity portfolios
and external sources. Important guidance
●● theoptimal term structure for fixed income
is provided by the Committee’s regional
equity advisors (North America, Europe, Asia, investments
Emerging Markets) and from the Global Fixed ●● the
suggested sector and geographic make-
Income & Currencies sub-committee. From up within equity portfolios
this, the Committee builds a detailed global ●● the preferred exposure to major currencies
investment forecast looking one year forward.
Results of the Committee’s deliberations are
The Committee’s view includes an assessment published quarterly in The Global Investment
of global fiscal and monetary conditions, Outlook.
projected economic growth and inflation, as
well as the expected course of interest rates,
major currencies, corporate profits and stock
prices.
From this global forecast, the RBC GAM
Investment Strategy Committee develops
specific guidelines that can be used to manage
portfolios.Contents
2 Executive Summary 47 Currency Markets
The Global Investment Outlook U.S. dollar in decline
Eric Savoie, MBA, CFA – Investment Strategist, Dagmara Fijalkowski, MBA, CFA – Head,
RBC Global Asset Management Inc. Global Fixed Income and Currencies,
RBC Global Asset Management Inc.
Daniel E. Chornous, CFA – Chief Investment Officer,
RBC Global Asset Management Inc. Daniel Mitchell, CFA – Portfolio Manager,
RBC Global Asset Management Inc.
4 Economic & Capital Markets Forecasts
Regional Equity Market Outlook
RBC GAM Investment Strategy Committee
54 United States
5 Recommended Asset Mix Brad Willock, CFA – V.P. & Senior Portfolio Manager,
RBC Global Asset Management Inc.
RBC GAM Investment Strategy Committee
56 Canada
10 Capital Markets Performance
Sarah Neilson, CFA – Portfolio Manager,
Milos Vukovic, MBA, CFA – RBC Global Asset Management Inc.
V.P. & Head of Investment Policy,
RBC Global Asset Management Inc. Irene Fernando, CFA – Portfolio Manager,
RBC Global Asset Management Inc.
Aaron Ma, CFA –
Senior Analyst, Investment Strategy, 58 Europe
RBC Global Asset Management Inc.
David Lambert – Senior Portfolio Manager,
European Equities,
Global Investment Outlook RBC Global Asset Management (UK) Limited
13 Economic Outlook
60 Asia
Hope swells for 2021 Chris Lai
Eric Lascelles – Chief Economist, Analyst, Asian Equities,
RBC Global Asset Management Inc. RBC Investment Management (Asia) Limited
28 Market Outlook 62 Emerging Markets
Vaccine brings normalization into view and boosts Veronique Erb – Portfolio Manager,
Emerging Market Equities,
optimism for 2021
RBC Global Asset Management (UK) Limited
Eric Savoie, MBA, CFA – Investment Strategist,
RBC Global Asset Management Inc.
Daniel E. Chornous, CFA – Chief Investment Officer, 64 RBC GAM Investment Strategy Committee
RBC Global Asset Management Inc.
43 Global Fixed Income Markets
Soo Boo Cheah, MBA, CFA – Senior Portfolio Manager,
RBC Global Asset Management (UK) Limited
Suzanne Gaynor – V.P. & Senior Portfolio Manager,
RBC Global Asset Management Inc.
Taylor Self, MBA – Associate Portfolio Manager,
RBC Global Asset Management Inc.
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 1Executive Summary
Looking past COVID-19 to an to remain low, there is the potential
Eric Savoie, MBA, CFA improving outlook for 2021 for prices to rise faster than our
Investment Strategist The pandemic remains the key forecasts, and an environment of too
RBC Global Asset Management Inc. challenge for economies as we much inflation would be worse than
Daniel E. Chornous, CFA approach the New Year, with case not enough. Note that it is normal for
Chief Investment Officer counts and fatalities reaching near the balance of risks to lean toward the
RBC Global Asset Management Inc. downside as there are usually more
record levels. But the transmission
rate is starting to slow and, while ways for the economy to stumble
countries including the U.S. and than to outperform meaningfully. We
Buoyed by ultra-low interest Canada are battling a second wave, should, though, also consider the
rates and fiscal stimulus, many European countries appear possibilities for better-than-expected
financial markets calmed and to be emerging from theirs. Tighter outcomes. The virus could retreat
stocks rose to record levels restrictions to combat the virus may on its own or vaccines could be
as economic normalization lead to some economic slippage at the administered flawlessly. Other sources
drew closer and the recovery end of 2020, but there are reasons to of uncertainty include the amount
be optimistic. The economic recovery and timing of U.S. fiscal stimulus,
progressed.
has been exceeding expectations, Brexit and structural themes related
vaccine developments are promising to demographics, high debt loads and
and markets have responded globalization.
positively to the outcome of the U.S.
presidential election. Although the Inflation gains traction but not
economy may encounter hurdles in the to problematic levels
very near term, our growth forecasts Our thinking about inflation has
for 2021 have featured more upgrades evolved over the past quarter. We
than downgrades and are now situated correctly predicted inflation would be
modestly above the consensus. low amid the pandemic, with falling
oil prices and plunging demand. More
A variety of risks threaten recently, though, inflation has begun to
our base case, but upside stabilize as economic conditions have
surprises are also possible normalized. Our forecasts for inflation
We think the risks to our benign base in 2020 and 2021 point to slightly
case scenario are slightly skewed higher inflation and we recognize
to the downside. The virus is still that a weaker U.S. dollar and the
spreading and colder winter weather in outperformance of the U.S. economy
the northern hemisphere could worsen may support faster price increases in
the situation. It is also possible that the U.S. versus elsewhere. Over the
a third wave of infections emerges longer term, potential upside risks
in the spring as happened in the 1918 to inflation exist. Massive monetary
flu pandemic. Moreover, sentiment stimulus, higher inflation targeting
around vaccines is extremely positive, by the U.S. Federal Reserve (Fed),
but a return to normal could be elevated government-debt loads and
delayed should they cause unexpected a push to support sales of American-
side-effects or prove less effective made products are all elements that
than hoped, or should distribution could push inflation higher than
complications slow the pace of we would have thought before the
inoculations. While we expect inflation pandemic. That said, we don’t think
2 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Executive Summary | Eric Savoie, MBA, CFA | Daniel E. Chornous, CFA
inflation will rise to problematic levels projections. As a result, we now look superior return potential versus
as a number of structural forces such for a more gradual and ultimately fixed income. Our forecasts look for
as demographics will continue to weigh smaller rise in real rates of interest. mid-single to potentially low-double
on inflation pressures. All in all, any Our new modelling suggests that digit returns from stocks over the
faster inflation that we do encounter sovereign bond yields everywhere will year ahead versus low single-digit
is likely to be simply a return to more drift just slightly higher over the next or potentially negative returns from
normal readings after decades of year, acting as a modest headwind to sovereign bonds. Moreover, extremely
subdued price increases. total returns for bondholders. low bond yields mean that fixed-
income markets may not provide as
U.S. dollar weakness ahead Global equities soar to new much protection against stock declines
We expect a sustained U.S.-dollar highs and vaccines trigger as they have in recent decades. In our
decline in 2021 as structural headwinds style rotation opinion, traditional views on optimal
take precedence over short-term Stocks surged from their March lows asset mix should be reconsidered to
factors that have slowed the decline of due to a combination of massive reflect the impact of structural change
the greenback over the past year. U.S. stimulus, a gradual reopening of in the global economy on returns,
twin deficits and the Fed’s intention economies and, more recently, the correlations and risk mitigation within
to boost inflation, coupled with promise of imminent vaccines. The the universe of investment options. For
economic and political improvements latest rally pushed the S&P 500 Index many, one option may be to invest over
and extraordinarily easy financial to a new record and many other longer time horizons and add more
conditions, should cement the U.S.- markets are also showing gains this equities to portfolios.
dollar downtrend. Emerging-market year. We recognize that optimism
Supporting our positive view on stocks
currencies are likely to finally shine is elevated and, while stocks may
is long-term price momentum, which
next year, and the euro, yen and loonie be expensive by some measures,
suggests equities could be in a long
should outperform the British pound. investors are paying up for a recovery
lasting bull market. We continue
in earnings that is just beginning. In
to position our portfolios with an
Bond yields hover around fact, outside of U.S. large-cap stocks,
overweight in stocks and underweight
historic lows, scope for markets remain attractively positioned
in fixed income. This quarter, we
increase is limited with many below the mid-point of our
were further encouraged by the style
Central bankers have expressed fair value bands. The equity-market
rotation into value from growth, the
a commitment to keeping short- rally has broadened from a handful
increasing breadth in small- and
term interest rates extremely low to of U.S. mega-cap technology stocks
mid-cap stocks, international equity
stimulate economies and financial to a much larger base of companies,
outperformance, the steepening yield
markets even as the recovery gains industries and regions that are more
curve and the weakening U.S. dollar, all
traction. Longer-term bond yields have economically sensitive, including
of which are frequently in evidence in
a bit more room to rise, but the scope value, small- and mid-cap stocks, as
the early stages of bull markets. As a
for increases is limited by secular well as segments that were hardest hit
result, we added 2.5 percentage points
pressures such as aging demographics, by COVID-19 such as airlines, hotels,
to our equity allocation during the
slowing population growth and an casinos and energy.
quarter, sourced from fixed income.
increased desire for saving versus For a balanced, global investor, we
spending. All of these factors have Asset mix – boosting equity
currently recommend an asset mix
contributed to declines in real interest overweight, sourced from
of 64.5 percent equities (strategic
rates (i.e. the after-inflation interest fixed income
neutral position: 60 percent) and 34.5
rate) and these trends are unlikely to With the economy entering a period percent fixed income (strategic neutral
change anytime soon. We have evolved of normalization supported by low position: 38 percent), with the balance
our modelling to incorporate these interest rates and ample fiscal in cash.
elements into our real-interest-rate stimulus, stocks continue to offer
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 3Economic & 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
New Year Fall New Year Fall New Year Fall New Year Fall New Year Fall New Year Fall New Year Fall
2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020
Real GDP
2019A 2.16% 1.66% 1.30% 1.25% 0.69% 6.12% 4.47%
2020E (3.50%) 2.50 (5.50%) 1.50 (7.20%) (0.20) (10.90%) (1.90) (5.30%) N/C 1.90% 0.65 (2.20%) (0.50)
2021E 4.00% 0.60 5.00% 0.50 5.60% 2.30 6.60% 1.40 3.70% 2.30 9.00% 1.00 7.40% 0.80
CPI
2019A 1.81% 1.96% 1.19% 1.79% 0.49% 2.90% 3.19%
2020E 1.10% 0.30 0.70% (0.10) 0.30% N/C 0.80% N/C 0.00% 0.20 2.70% (0.30) 3.10% N/C
2021E 1.80% 0.30 1.60% 0.10 1.00% N/C 1.60% 0.10 0.50% N/C 1.90% (0.40) 2.60% (0.30)
A = Actual E = Estimate *GDP Weighted Average of China, India, South Korea, Brazil, Mexico and Russia.
Targets (RBC GAM Investment Strategy Committee)
Forecast Change from 1-year total return
Nov. 2020 Nov. 2021 Fall 2020 estimate* (%)
Currency Markets against USD
CAD (USD–CAD) 1.30 1.27 (0.02) 2.7
EUR (EUR–USD) 1.19 1.27 N/C 5.7
JPY (USD–JPY) 104.32 99.00 N/C 5.1
GBP (GBP–USD) 1.33 1.33 (0.03) (0.3)
Fixed Income Markets
U.S. Fed Funds Rate 0.13 0.13 N/C N/A
U.S. 10-Year Bond 0.84 1.00 0.25 (0.7)
Canada Overnight Rate 0.25 0.25 N/C N/A
Canada 10-Year Bond 0.67 0.85 0.15 (1.0)
Eurozone Deposit Facility Rate (0.50) (0.50) N/C N/A
Germany 10-Year Bund (0.57) (0.40) (0.10) (2.3)
U.K. Base Rate 0.10 0.10 N/C N/A
U.K. 10-Year Gilt 0.31 0.30 (0.10) 0.4
Japan Overnight Call Rate (0.03) (0.10) N/C N/A
Japan 10-Year Bond 0.03 0.05 0.05 (0.1)
Equity Markets
S&P 500 3622 3800 125 6.5
S&P/TSX Composite 17190 17700 1000 6.1
MSCI Europe 129 136 8 8.1
FTSE 100 6266 6500 350 7.1
Nikkei 26434 28250 3650 8.4
MSCI Emerging Markets 1205 1300 125 10.0
*Total returns are expressed in local currencies with the exception of MSCI Emerging Markets whose return is expressed in USD. Source: RBC GAM
4 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Recommended Asset Mix
Asset mix – the allocation within portfolios to stocks, based on our current view of the economy and
bonds and cash – should include both strategic and return expectations for the major asset classes.
tactical elements. Strategic asset mix addresses the These weights are further divided into recommended
blend of the major asset classes offering the risk/ exposures to the variety of global fixed income and
return tradeoff best suited to an investor’s profile. It equity markets. Our recommendation is targeted at
can be considered to be the benchmark investment the Balanced profile where the benchmark setting is
plan that anchors a portfolio through many business 60% equities, 38% fixed income, 2% cash.
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
expectations for capital markets. Tactical asset position allows us to raise or lower exposure to
allocation refers to fine tuning around the strategic specific asset classes with a goal of tilting portfolios
setting in an effort to add value by taking advantage of toward those markets that offer comparatively
shorter term fluctuations in markets. attractive near-term prospects.
Every individual has differing return expectations and This tactical recommendation for the Balanced profile
tolerances for volatility, so there is no “one size fits can serve as a guide for movement within the ranges
all” strategic asset mix. Based on a 40-year study of allowed for all other profiles.
historical returns1 and the volatility2 of returns (the The value-added of tactical strategies is, of course,
range around the average return within which shorter- dependent on the degree to which the expected
term results tend to fall), we have developed five scenario unfolds.
broad profiles and assigned a benchmark strategic
asset mix for each. These profiles range from very Regular reviews of portfolio weights are essential to
conservative through balanced to aggressive growth. the ultimate success of an investment plan as they
It goes without saying that as investors accept ensure current exposures are aligned with levels of
increasing levels of volatility, and therefore greater long-term returns and risk tolerances best suited to
risk that the actual experience will depart from the individual investors.
longer-term norm, the potential for returns rises. The
Anchoring portfolios with a suitable strategic asset
five profiles presented below may assist investors in
mix, and placing boundaries defining the allowed
selecting a strategic asset mix best aligned to their
range for tactical positioning, imposes discipline that
investment goals.
can limit damage caused by swings in emotion that
Each quarter, the RBC GAM Investment Strategy inevitably accompany both bull and bear markets.
Committee publishes a recommended asset mix
1
Average return: The average total return produced by the asset class over the period 1980 – 2020, based on monthly results.
2
Volatility: The standard deviation of returns. Standard deviation is a statistical measure that indicates the range around the average return
within which 2/3 of results will fall into, assuming a normal distribution around the long-term average.
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 5Recommended Asset Mix
Global Asset Mix
Benchmark Past New Year Spring Summer Fall New Year
Policy range 2020 2020 2020 2020 2021
Cash 2.0% 1.0% – 16% 1.0% 2.0% 1.0% 1.0% 1.0%
Bonds 38.0% 25.0% – 54.0% 40.0% 39.0% 38.0% 37.0% 34.5%
Stocks 60.0% 36.0% – 65.0% 59.0% 59.0% 61.0% 62.0% 64.5%
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* Past New Year Spring Summer Fall New Year
Global Bonds Nov. 2020 range 2020 2020 2020 2020 2021
North America 41.1% 18% – 48% 43.8% 44.2% 42.3% 41.3% 41.1%
Europe 41.0% 32% – 56% 37.7% 37.7% 39.0% 36.0% 41.0%
Asia 17.8% 16% – 35% 18.5% 18.2% 18.7% 22.7% 17.8%
Note: Past Range reflects historical allocation from Fall 2002 to present.
MSCI** Past New Year Spring Summer Fall New Year
Global Equities Nov. 2020 range 2020 2020 2020 2020 2021
North America 67.0% 51% – 66% 62.5% 63.6% 65.7% 65.4% 66.0%
Europe 15.3% 15% – 35% 18.6% 17.8% 16.1% 16.2% 14.6%
Asia 9.4% 9% – 18% 11.4% 11.1% 10.7% 9.8% 10.6%
Emerging Markets 8.3% 0% – 8.8% 7.5% 7.5% 7.5% 8.6% 8.8%
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.
Nov. 2020 Fall 2020 New Year 2021 Fall 2020 Benchmark
Energy 2.42% 1.50% 0.42% (1.07) 17.5%
Materials 4.48% 4.95% 5.78% 0.83 129.0%
Industrials 10.43% 10.15% 10.43% 0.28 100.0%
Consumer Discretionary 11.88% 13.29% 13.88% 0.59 116.8%
Consumer Staples 8.14% 7.28% 6.54% (0.74) 80.4%
Health Care 13.52% 14.79% 14.82% 0.03 109.6%
Financials 12.07% 12.39% 12.07% (0.32) 100.0%
Information Technology 21.63% 23.56% 23.63% 0.06 109.2%
Communication Services 9.22% 8.17% 9.22% 1.04 100.0%
Utilities 3.42% 2.54% 2.42% (0.12) 70.7%
Real Estate 2.80% 1.37% 0.80% (0.57) 28.6%
*FTSE World Government Bond Index. **MSCI World Index. Source: RBC GAM Investment Strategy Committee
6 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Recommended Asset Mix
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% 1.0% 1.0% preservation and the potential for modest
Fixed Income 73% 68-88% 72.0% 69.9% capital growth, and be comfortable with
Total Cash & Fixed Income 75% 60-90% 73.0% 70.9% small fluctuations in the value of their
Canadian Equities 10% 0-20% 10.6% 11.5% investments. This portfolio will invest
U.S. Equities 8% 0-18% 8.6% 9.3% primarily in fixed-income securities, and
International Equities 7% 0-17% 7.8% 8.3%
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% 27.0% 29.1%
profile generally plan to hold their
Return Volatility investment for the medium to long term.
40-year average 8.6% 5.3%
Last 12 months 7.6% 7.9%
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 7Recommended Asset Mix
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% 1.0% 1.0% reasonable capital preservation, and be
Fixed Income 58% 43-83% 57.0% 54.6% comfortable with moderate fluctuations
Total Cash & Fixed Income 60% 45-75% 58.0% 55.6% in the value of their investments. The
Canadian Equities 13% 3-23% 13.3% 14.2% portfolio will invest primarily in fixed-
U.S. Equities 15% 5-25% 15.6% 16.6% income securities, with some equities, to
International Equities 12% 2-22% 13.1% 13.6%
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% 42.0% 44.4%
plan to hold their investment over the
Return Volatility medium to long term.
40-year average 8.9% 6.4%
Last 12 months 7.8% 10.0%
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% 1.0% 1.0% long-term capital growth and capital
Fixed Income 38% 23-53% 37.0% 34.5% preservation, with a secondary focus on
Total Cash & Fixed Income 40% 25-55% 38.0% 35.5% modest income, and who are comfortable
Canadian Equities 15% 5-25% 14.9% 15.6% with moderate fluctuations in the value
U.S. Equities 25% 15-35% 25.6% 26.7%
of their investments. More than half
International Equities 15% 5-25% 16.2% 16.5%
the portfolio will usually be invested in
a diversified mix of Canadian, U.S. and
Emerging Markets 5% 0-15% 5.3% 5.7%
global equities. This profile is suitable
Total Equities 60% 45-75% 62.0% 64.5%
for investors who plan to hold their
Return Volatility investment for the medium to long term.
40-year average 9.0% 7.8%
Last 12 months 8.7% 12.9%
8 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Recommended Asset Mix
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% 1.0% 1.0% preservation and regular income, and
Fixed Income 23% 8-38% 22.0% 19.4% be comfortable with considerable
Total Cash & Fixed Income 25% 10-40% 23.0% 20.4% fluctuations in the value of their
Canadian Equities 18% 8-28% 17.8% 18.4% investments. This portfolio primarily
U.S. Equities 30% 20-40% 30.5% 31.7% holds a diversified mix of Canadian, U.S.
International Equities 19% 9-29% 20.3% 20.6%
and global equities and is suitable for
Emerging Markets 8% 0-18% 8.4% 8.9%
investors who plan to invest for the
long term.
Total Equities 75% 60-90% 77.0% 79.6%
Return Volatility
40-year average 9.0% 9.5%
Last 12 months 9.0% 15.2%
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% 1.0% 0.5% 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% 1.0% 0.5% in the value of their investments. The
Canadian Equities 29% 19-39% 28.3% 28.7% portfolio is almost entirely invested in
U.S. Equities 38% 28-48% 37.9% 38.3% stocks and emphasizes exposure to
International Equities 20% 10-30% 21.2% 20.8%
global equities. This investment profile
Emerging Markets 11% 1-21% 11.6% 11.7%
is suitable only for investors with a high
risk tolerance and who plan to hold their
Total Equities 98% 83-100% 99.0% 99.5%
investments for the long term.
Return Volatility
40-year average 8.9% 12.1%
Last 12 months 8.7% 19.5%
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 9Capital Markets Performance
yield curve steepened. The yield on Index and the MSCI Pacific Index
the 10-year Treasury bond rose 13 returned 11.8% and 10.3%, respectively.
Milos Vukovic, MBA, CFA
V.P. & Head of Investment Policy basis points to 84 basis points driven In the year ended November 30, 2020,
RBC Global Asset Management Inc. by the optimism around COVID-19 equity indexes recorded solid gains,
Aaron Ma, CFA vaccine development. The FTSE especially in the U.S. and emerging
Senior Analyst, Investment Strategy European Government Bond Index’s markets. A notable exception was the
RBC Global Asset Management Inc. 2.1% gain topped other major indexes MSCI UK Index, which sank 10.7%.
as European bond yields fell when
governments implemented stricter There was an important shift in size,
The U.S. dollar proved resilient in the measures to fight the second wave of style and sector leadership in the
quarter ended November 30, 2020, COVID-19 infections. On a one-year quarter ended November 30, 2020. As
amid widespread calls for a broadly basis, returns to fixed income ranged vaccine hopes grew, investors began
weaker greenback. The U.S. dollar fell from 3.4% for the FTSE Japanese to look beyond the pandemic to a more
1.4% against the Japanese yen and Government Bond Index to 12.1% for normal world. Large-cap growth stocks
0.4% against the Canadian dollar but the FTSE European Government Bond that boomed for much of 2020 began
remained essentially flat against the Index, as yields declined in most to take a backseat to the smaller, more
euro and actually appreciated 0.3% markets and U.S.-dollar weakness economically sensitive stocks that had
against the British pound. Diverging enhanced returns. been struggling. The small-cap S&P
inflation expectations between the 600 Index and mid-cap S&P 400 Index
U.S. and Japan have widened the Global equity markets continued surged to a 15.5% return and 13.0%
real yield advantage for Japanese to advance in the fall as promising return, respectively. The Russell 3000
assets, boosting the yen relative to COVID-19-vaccine test results and Value Index returned 9.7% compared
the dollar. The loonie benefited from clarity around the U.S. presidential with the Russell 3000 Growth Index’s
the belief that the Canadian economy election stoked investor confidence. 2.3%.
would recover swiftly due to its higher All major global stock markets that
we track recorded positive returns Cyclical sectors like Industrials and
sensitivity to global growth. Concerns
for the quarter ended November 30, Financials led with double-digit gains
about the disturbing second wave
2020, in U.S.-dollar terms. The S&P of around 11%, while Information
of COVID-19 in Europe belied the
500 Index rode a 10.8% gain to a new Technology and Health Care lagged
fundamental support for the single
all-time high in November, good for with increases of about 2%.The shift
currency, leaving it flat against the
the best November in the benchmark’s to cyclical sectors, while notable from
greenback. Over a one-year period, the
history. However, the devastating third a quarterly perspective, is hardly
U.S. dollar depreciated against all four
wave of infections in the U.S. was a noticeable when looking over a one-
currencies, ranging from 2.2% against
drag on S&P 500 stocks in September year time frame: the S&P 500 led the
the Canadian dollar to 7.6% versus the
and October, causing the index to S&P 600 by almost 12 percentage
euro.
finish the quarter in last place among points; the Russell growth index
All major global bond indexes posted major global indexes on a total-return outpaced the Russell value Index by a
positive returns in the latest quarter basis with a 3.9% gain. Among the huge 34 percentage-point margin and
in U.S.-dollar terms. Returns on U.S. best performers were Asian stocks in the Information Technology sector
government bonds, represented countries that had relative success in outperformed Energy by a whopping
by the FTSE U.S. Government Bond containing the virus. The MSCI Japan 72 percentage points.
Index, were a lackluster 0.6% as the
10 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Capital Markets Performance | Milos Vukovic, MBA, CFA | Aaron Ma, CFA
Exchange Rates
Periods ending November 30, 2020
Current 3 months YTD 1 year 3 years 5 years
USD (%) (%) (%) (%) (%)
USD–CAD 1.2987 (0.43) 0.01 (2.23) 0.22 (0.56)
USD–EUR 0.8383 0.04 (5.96) (7.64) (0.07) (2.40)
USD–GBP 0.7501 0.27 (0.64) (2.99) 0.48 2.47
USD–JPY 104.4000 (1.43) (3.92) (4.62) (2.47) (3.24)
Note: all changes above are expressed in US dollar terms
Canada
Periods ending November 30, 2020
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 1.02 8.27 9.43 5.10 4.93 0.58 7.00 5.33
U.S.
Periods ending November 30, 2020
USD CAD
3 months YTD 1 year 3 years 5 years 3 months 1 year 3 years
Fixed Income Markets: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
FTSE U.S. Government TR 0.58 7.56 7.47 5.56 4.41 0.14 5.08 5.65
1 0.48 7.36 7.28 5.45 4.34 0.04 4.89 5.69
BBgBarc U.S. Agg. Bond Index TR
Global
Periods ending November 30, 2020
USD CAD
3 months YTD 1 year 3 years 5 years 3 months 1 year 3 years
Fixed Income Markets: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
FTSE WGBI TR 1.23 8.13 8.61 4.59 4.67 0.79 6.19 4.68
FTSE European Government TR 2.14 11.28 12.13 4.08 5.05 1.69 9.63 4.31
FTSE Japanese Government TR 1.73 2.89 3.35 3.32 4.75 1.29 1.05 3.55
Canada
Periods ending November 30, 2020
USD CAD
3 months YTD 1 year 3 years 5 years 3 months 1 year 3 years
Equity Markets: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
S&P/TSX Composite 5.37 3.80 6.66 5.32 8.88 4.92 4.28 5.56
S&P/TSX 60 4.66 4.09 6.42 5.63 9.26 4.21 4.04 5.86
S&P/TSX Small Cap 11.88 6.68 15.00 1.01 7.81 11.40 12.43 1.24
U.S.
Periods ending November 30, 2020
USD CAD
3 months YTD 1 year 3 years 5 years 3 months 1 year 3 years
Equity Markets: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
S&P 500 TR 3.89 14.02 17.46 13.17 13.99 3.44 14.84 13.42
S&P 400 TR 12.97 6.70 9.70 6.26 10.00 12.48 7.25 6.50
S&P 600 TR 15.52 2.74 5.81 4.72 9.51 15.02 3.45 4.95
Russell 3000 Value TR 9.70 (1.16) 1.60 4.93 8.33 9.23 (0.66) 5.17
Russell 3000 Growth TR 2.27 31.82 35.73 20.86 19.11 1.82 32.71 21.13
NASDAQ Composite Index TR 3.80 37.09 42.06 22.30 20.31 3.35 38.90 22.57
Note: all rates of return presented for periods longer than 1 year are annualized. 1 Bloomberg Barclays U.S. Agg. Bond Index TR. Source: RBC GAM
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 11Capital Markets Performance | Milos Vukovic, MBA, CFA | Aaron Ma, CFA
Global
Periods ending November 30, 2020
USD CAD
3 months YTD 1 year 3 years 5 years 3 months 1 year 3 years
Equity Markets: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
MSCI World TR * 5.55 11.19 14.52 9.51 10.87 4.98 11.73 9.73
MSCI EAFE TR * 8.01 3.03 6.37 3.26 6.19 7.42 3.78 3.47
MSCI Europe TR * 6.74 0.64 4.58 2.49 5.25 6.16 2.03 2.69
MSCI Pacific TR * 10.33 7.12 9.49 4.56 8.05 9.73 6.83 4.76
MSCI UK TR * 5.36 (15.10) (10.73) (2.53) 0.70 4.79 (12.91) (2.34)
MSCI France TR * 11.71 1.20 4.19 3.46 7.70 11.10 1.66 3.66
MSCI Germany TR * 1.92 5.19 7.21 (0.37) 4.78 1.37 4.60 (0.17)
MSCI Japan TR * 11.78 9.95 12.24 4.88 7.85 11.17 9.51 5.09
MSCI Emerging Markets TR * 9.71 10.20 18.43 4.92 10.72 9.12 15.54 5.13
Global Equity Sectors
Periods ending November 30, 2020
USD CAD
3 months YTD 1 year 3 years 5 years 3 months 1 year 3 years
Sector: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
Energy TR * 5.22 (33.91) (30.38) (13.43) (5.73) 4.65 (32.07) (13.26)
Materials TR * 8.54 13.30 17.96 6.40 11.95 7.95 15.09 6.61
Industrials TR * 11.93 9.05 10.14 6.56 10.40 11.33 7.46 6.77
Consumer Discretionary TR * 6.21 29.50 33.34 16.53 14.07 5.64 30.10 16.76
Consumer Staples TR * 2.41 5.08 7.32 5.75 6.85 1.86 4.71 5.96
Health Care TR * 2.21 10.12 13.87 11.61 9.54 1.66 11.10 11.83
Financials TR * 11.35 (7.64) (4.85) (0.62) 5.47 10.75 (7.17) (0.42)
Information Technology TR * 1.97 35.99 41.64 25.00 24.09 1.42 38.19 25.25
Communication Services TR* 5.47 18.59 20.92 11.22 8.66 4.90 17.97 11.44
Utilities TR * 6.66 2.81 6.81 6.94 9.45 6.09 4.21 7.15
Real Estate TR * 3.18 (7.04) (5.97) 2.56 NA 2.62 (8.26) 2.76
* Net of taxes. Note: all rates of return presented for periods longer than 1 year are annualized. Source: Bloomberg/MSCI
12 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Economic Outlook
Hope swells for 2021
Eric Lascelles Exhibit 1: Global COVID-19 cases and deaths still quite high
Chief Economist
RBC Global Asset Management Inc. 700 12
New daily cases (thousands)
Daily deaths (thousands)
600 10
500
8
The pandemic that engulfed the world 400
in early 2020 is still the dominant issue 6
300
even as the year winds down. Near- 4
200
record numbers of infections and
100 2
fatalities continue to be logged across
0 0
the world each day (Exhibit 1), though Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
the rate of transmission is mercifully New daily cases, world (LHS) New daily deaths, world (RHS)
Note: As of 12/2/2020. 7-day moving average of daily new cases and new deaths. Source: CDC,
beginning to decelerate (Exhibit 2). Macrobond, RBC GAM
The status of the pandemic varies
Exhibit 2: Global transmission rate declines as countries reimpose
considerably depending on the nation.
restrictions
Some countries are still very much
in the midst of an aggressive second 3 800
Daily new conÑgmed cases
wave, including the U.S. and Canada. 700
Transmission rate
Others, like many Eurozone members, 600
(thousands)
2 500
appear to be emerging from the worst
of that wave. 400
300
1
The return of stricter social-distancing 200
rules to fight this wave are set to inflict 100
mild to moderate economic damage at 0 0
Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
the end of 2020. New daily cases, world (RHS) Transmission rate, world (LHS)
Note: As of 12/2/2020. Transmission rate calculated as a 7-day change of underlying 7-day moving average
Nevertheless, on the cusp of 2021, smoothened by a 14-day moving average of new daily cases. Source: ECDC, Macrobond, RBC GAM
we see four reasons for mounting
optimism. Third, the market is pleased with As a result, and despite the prospect
the outcome of the U.S. presidential of a mini-economic swoon in the very
First, the economic recovery so far has election – a new political configuration near term, our refinements to the
repeatedly exceeded expectations, that will last for several years. Our own 2021 outlook have almost uniformly
suggesting that economies could analysis concurs that the outcome is been upgrades rather than downward
continue to outpace the normal likely economically positive. revisions, and we are now modestly
recovery experience. above the consensus regarding the
Fourth, it is heartening that long- coming year. In turn, our tactical asset
Second, vaccine-development efforts suffering European nations are starting allocation remains tilted toward risk
are beginning to yield big results, with to emerge from their especially severe assets like equities.
high efficacy rates that point to the second wave, demonstrating that it
genuine possibility of herd immunity is possible to tame the virus even in We are not alone in expressing rising
being achieved in developed nations. adverse winter conditions. optimism, as a U.S. measure of news
sentiment has been rising steadily
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 13Economic Outlook | Eric Lascelles
since the summer – healing continues
from the initial trauma of the pandemic Exhibit 3: Real-time sentiment has increased substantially
(Exhibit 3).
0.4
Virus in context 0.3
Daily News Sentiment Index
This has been a pandemic without 0.2
modern precedent. One has to go 0.1
-0.039
0.0
back to the 1918 flu pandemic to find
-0.1
another virus that affected the world
-0.2
so quickly and profoundly. While there -0.3
have certainly been pandemics since, -0.4
their means of transmission were -0.5
either quite different (as with AIDS) or -0.6
Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
the scale of the pandemics themselves
Note: As of 11/29/2020. Source: Federal Reserve Bank of San Francisco, Macrobond, RBC GAM
was radically smaller (as with SARS).
In fact, it is not unreasonable to
Exhibit 4: Impact of COVID-19 on a population-adjusted basis
go one step further and argue that
this pandemic lacks any precedent,
period. Although the 1918 flu was 45
COVID-19 cases per thousand
deadlier than COVID-19, the bulk of 40
35
the developed world’s population was
30
not obliged to shelter at home for an
people
25
extended period, and there was much 20
less economic damage. As such, we 15
have been operating without anything 10
resembling a guidebook for COVID-19. 5
0
The intensity of the COVID-19
experience has varied substantially
by country (Exhibit 4). Adjusted for Note: As of 12/2/2020. Source: ECDC, Macrobond, RBC GAM
population, the U.S. has had the
most intense encounter with the
Exhibit 5: Five key economic questions
virus, with Brazil and a handful of
European countries faring almost as
badly. Conversely, Germany has done
pretty well, as has Canada. A handful
Level of GDP
5 When GDP
returns to prior
4
When GDP trajectory?
returns to
of superstar countries have been prior level?
We predict
2023.
relatively untouched, including Japan, We predict
Australia, New Zealand and China. 1 Depth
of trough?
10%-25
end 2022.
Recovery story so far
decline.
3 Initial bounce?
Half of economic
decline was
Five key factors collectively recovered by
late June.
characterize the economic contours
of the pandemic (Exhibit 5). Of these, 2 Duration of trough?
Barely over
a month.
three have already been resolved.
Source: RBC GAM
14 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Economic Outlook | Eric Lascelles
First, economies initially shrank by
Exhibit 6: Traditional economic data confirms that significant U.S.
between 10% and 25% during the recovery has already taken place
worst of the spring economic collapse,
with the U.S. losing 15% and Canada Now 7.7% above
10 Still 5.6% below pre-crisis level Still 14.9% below pre- Still 5.6% below
shedding 18%. While the magnitude
% change vs. pre-crisis level
pre-crisis level crisis level pre-crisis level
of the initial economic collapse 0
was unprecedented, it was actually -10
(Feb 2020)
smaller than initially feared. After -20
64.7% of loss 145.2% of loss 66.2% of loss
all, given that the great majority of -30 recovered recovered recovered
the developed world’s workers were -40
suddenly no longer going to work, it -50
was easy to imagine that the economic -60 72.5% of loss
recovered
decline might be more like 50%. Employment Retail sales Food services & Industrial production
drinking places
Trough (Apr 2020) Latest
Second, the duration of this trough was Note: As of Oct 2020. Trough since Feb 2020. Source: Macrobond, RBC GAM
actually quite short, lasting little more
than a month. Economies were growing
again by late April. Exhibit 7: Chinese economy recovering rapidly
Third, the initial rebound proved quite
8
enthusiastic, with half of the initial
6
Real GDP growth (YoY %
economic decline recovered within just
4
two months – by the end of June. We
2
estimate that around two-thirds of the
change)
original economic decline has since 0
been undone, albeit with considerable -2
variation by sector (Exhibit 6). -4
-6
Thus, despite considerable economic
-8
damage, we have actually been Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20
pleasantly surprised by the economic Note: As of Q3 2020. Source: China National Bureau of Statistics, Macrobond, RBC GAM
impact and recovery so far. There are
no guarantees that this happy trend
Exhibit 8: Still considerable room for catch-up growth in coming
persists, but it seems reasonably likely,
years
as demonstrated by bellwether China’s
nearly complete revival (Exhibit 7) and 8
the historic gains in financial markets. 6
There is certainly space for above- 4
(% of potential GDP)
2
U.S. output gap
potential growth over the coming years
0
given the size of the output gap that
-2
remains (Exhibit 8).
-4
The fourth factor relates to when -6
-8
economies will reclaim their pre-
-10
pandemic economic peak. Our thinking
-12
has become incrementally more 1960 1970 1980 1990 2000 2010 2020
optimistic on this front, motivated Note: As of Q3 2020. Shaded area represents recession. Source: CBO, Macrobond, RBC GAM
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 15Economic Outlook | Eric Lascelles
significantly by the promising vaccine
developments discussed later. We Exhibit 9: France has now passed the peak of the second COVID wave
now believe the U.S. and Canadian
economies will achieve this goal by 60 1200
Daily new cases (thousands)
the final quarter of 2021, with Europe,
50 1000
Japan and the U.K. trailing in 2022. This
Daily deaths
nevertheless means that the rate of 40 800
recovery is slowing considerably from 30 600
the heady early months. The low-
20 400
hanging fruit has long been plucked
10 200
in terms of reopening sectors that are
not particularly vulnerable to virus 0 0
2020-02-27 2020-04-22 2020-06-16 2020-08-10 2020-10-04 2020-11-28
transmission. Daily new cases (LHS) Daily deaths (RHS)
Note: As of 12/2/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond,
Fifth, we continue to anticipate that RBC GAM
the full return to economic normality
will occur sometime in 2023. Whether number of new infections, but this is again. Sectors deemed to be a high
this is “slow” or “fast” is entirely a probably a relic of insufficient testing risk such as indoor restaurants, bars
matter of perspective. It is undeniably during the first wave. Of greater and gyms have been limited in the
slow in the sense that the pandemic relevance, the rate of fatalities has services they offer, or even shuttered.
shock is set to last approximately four been lower in the second wave. But Non-economic social activity has
years, with some lingering side-effects the latest outbreak is far from trivial, been similarly curtailed, though this is
persisting even longer. However, by particularly for countries in which the harder for governments to control and
the standards of past major economic wave has not yet crested. may represent a large fraction of the
shocks, this is fairly fast. It took spread.
What allowed the virus to reassert
13 years for the U.S. economy to fully
itself this fall? It has been a In turn, we can see that countries that
normalize after the Great Depression
combination of incrementally more have implemented the most aggressive
(and this was with a substantial boost
feeble government control efforts new restrictions are succeeding in
from World War II), and around nine
as economies were reopened taming their second waves. France
years for the economic slack from the
(and recently reversed), declining had the most challenging second
2008-2009 financial crisis to be fully
compliance with social-distancing wave in Europe, and has now cut its
absorbed.
rules as people grow weary of their daily infection rate by a factor of five
altered lives, the dynamics of colder (Exhibit 9). Other European countries
Second wave complications
and drier weather, the restart of are also beginning to improve.
Providing a striking parallel to the
physical schooling and perhaps even
1918 Flu, COVID-19 infections have The U.S., already in its third viral wave
the many highly social events that are
been arriving in waves. Much of the after a second bout last summer, has
occurring this fall, including Halloween,
world now finds itself suffering a yet to make a concerted push to limit
Thanksgiving and the U.S. election -
second wave of infections after having the spread of the virus. As a result, the
with Christmas looming.
tamed the spring surge and enjoyed a U.S. daily infection numbers continue
relatively peaceful summer. Fortunately, after considerable delay, to deteriorate quite badly (Exhibit 10).
governments have awakened to the
The latest wave appears to be more Canada lands somewhere between
second-wave threat and proceeded
intense than the first in terms of the Europe and the U.S., with substantial
to tighten social-distancing rules
16 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Economic Outlook | Eric Lascelles
new efforts to limit the spread of the
virus, but implemented later and less Exhibit 10: U.S. still in the heat of the third COVID wave
aggressively than in Europe.
250 3.0
Daily new cases (thousands)
Second wave economic
Daily deaths (thousands)
200 2.5
damage
2.0
Policymakers are attempting a delicate 150
balancing act between keeping people 1.5
healthy, minimizing damage to the 100
1.0
economy and limiting the disruption
50 0.5
to personal lives. Each COVID-19 wave
brings with it significant economic and 0 0.0
social costs as governments respond 2020-03-10 2020-05-01 2020-06-22 2020-08-13 2020-10-04 2020-11-25
Daily new cases (LHS) Daily deaths (RHS)
by imposing new social-distancing
Note: As of 12/8/2020. 7-day moving average of daily new cases and new deaths. Source: CDC, Macrobond, RBC GAM
rules. These have disproportionately
limited service-sector activity, with
tourism, entertainment, restaurants, Exhibit 11: Real-time mobility declining again
bars, gyms and small retailers
particularly affected.
1
The impact of the latest restrictions 0
Lockdown severity
can be seen in our real-time mobility -1
index, which combines Google Mobility -2
data with Oxford University lockdown- -3
stringency data, revealing a newly
-4
declining trend (Exhibit 11).
-5
The U.S. second wave that occurred -6
2-15-2020 3-26-2020 5-5-2020 6-14-2020 7-24-2020 9-2-2020 10-12-2020 11-21-2020
during the summer merely slowed the
Canada Italy South Korea Sweden U.K. U.S.
country’s economic recovery. Such Note: Based on latest data available as of 11/27/2020. Deviation from baseline, normalised to U.S.and
smoothed with a 7-day moving average. Source: Google, University of Oxford, Macrobond, RBC GAM
a benign economic outcome is less
realistic this time, regardless of the
country, given the greater intensity of
Exhibit 12: Global manufacturing still points to growth
the outbreak, fewer fiscal tailwinds
and less natural buoyancy now that
57
economies have already reclaimed so 55 Expansion
much lost ground. 53
Manufacturing PMI
51
49
Economic damage is starting to
47
become visible in leading indicators 45
such as national-level purchasing 43
41 Contraction
manager indexes for the Eurozone 39
and U.K., but not yet at the global 37
level (Exhibit 12). In comparison to 35
2012 2013 2014 2015 2016 2017 2018 2019 2020
developed-world countries, we do J.P.Morgan Global PMI Developed markets PMI Emerging markets PMI
not expect the same scale of new Note: As of Nov 2020. PMI refers to Purchasing Managers Index for manufacturing sector, a measure for
economic activity. Source: Haver Analytics, RBC GAM
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 17Economic Outlook | Eric Lascelles
restrictions or economic damage
Exhibit 13: Hours worked by hourly workers in the U.S. have been
across most emerging-market nations,
falling lately
which are not presently recording as
many new infections. 10
0
Change from median (%)
There is some tentative evidence that Slight downward
-10 trend
the U.S. is now starting to experience
-20
a pinch of economic damage itself,
-30
even as it avoids widespread new Temporary drop
-40 due to
restrictions. A real-time measure Thanksgiving
of time worked by American hourly -50
workers was edging slightly lower even -60
before the Thanksgiving holiday sent -70
2020-03-07 2020-05-09 2020-07-11 2020-09-12 2020-11-14
it artificially plunging (Exhibit 13). U.S. Note: As of 12/5/2020. Impact compares hours worked in a day vs. median for the same day of the week in
jobless claims are no longer improving January, 2020. 7-day moving average used. Source: Homebase, RBC GAM
as reliably as earlier in the recovery.
Our proprietary real-time economic
activity indicator for the U.S. also Exhibit 14: U.S. economic activity has shifted to low gear
argues that the economy is growing
less enthusiastically than before 10
U.S. Economic Activity Index
(Exhibit 14). 5
0
(YoY % change)
... Recovery lost steam
Why is the U.S. economy affected -5 during second wave
by the latest virus wave when the -10
Economic activities
country’s policymakers have only -15 have recovered
over 50% of
-20 decline...
minimally tightened social-distancing
-25
rules? IMF research found that a large
-30
fraction of the economic damage
-35
from the first wave came from people Jan-2020 Mar-2020 May-2020 Jul-2020 Sep-2020 Nov-2020
voluntarily limiting their mobility Note: As of 11/28/2020. Economic Activity Index is the average of ten high-frequency economic data series
measuring the year-over-year percentage change. Source: Bank of America, Goldman Sachs, OpenTable,
when they perceived the risk to be Macrobond, RBC GAM
significant, not merely because their
government told them to. As such, it U.S. and Canada may experience less • The new rules are not as strict as the
could be that more Americans than is of a hit. We don’t expect an outright ones in the spring.
generally perceived are engaging in negative print from quarterly GDP for
This last point merits some
voluntary social distancing. either of the latter countries.
elaboration. The sectors that are
Why is the damage set to be so targeted by the latest lockdown
Fortunately, the economic damage
comparatively limited in this wave? represent only a few percentage
from the latest virus wave is set to be
points of GDP. While these restrictions
far less damaging than the first wave
• Businesses and people are are extraordinarily difficult for the
was last spring. Whereas economic
now better at operating under proprietors, employees and customers
output declined by between 10% and
government restrictions; of affected establishments, the
25% last spring, the drop should be an
• There is less fear and paralysis move has only a limited effect on the
order of magnitude smaller this time.
associated with the second wave economy-wide level of output.
The European economy will probably
suffer slightly more due to especially given that people now understand
In distinct contrast to the first wave,
aggressive new restrictions, while the the contours of the virus;
such sectors as manufacturing,
18 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021Economic Outlook | Eric Lascelles
construction, real estate, mining and
education are now able to continue Exhibit 15: U.S. private investment rebounded from trough
operating at near-normal levels.
These are collectively well over 10 19
times larger than the sectors that 18
investment (% of real GDP)
U.S. real private domestic
have been shuttered. Furthermore, 17
any number of other sectors that were 16
never formally restricted in the spring 15
nevertheless suffered temporarily 14
declines in activity as the businesses 13
learned to adapt to a virtual working 12
environment. That same process of 11
adjustment is unnecessary today. 10
1970 1980 1990 2000 2010 2020
All of this is to say that some economic Note: As of Q3 2020. Shaded area represents recession. Source: BEA, Haver Analytics, RBC GAM
damage is probable over the next
few months. However, we do not Timing: Emergency usage is now Take-up: Only time will tell exactly
seriously doubt that the broader beginning at the very end of 2020, with what fraction of the population will be
recovery remains intact. Our business- standard availability as of early 2021 in willing to be inoculated, but surveys
cycle analysis points toward an major developed nations. suggest around 75% is a reasonable
economy that has progressed from a guess. While some countries report
Efficacy: In trials, the top two vaccine less enthusiasm, this may yet be
recessionary footing to an “early cycle”
candidates appear to reduce the boosted via government payments and
positioning, as evidenced by reviving
likelihood of contracting COVID-19 by a companies requiring their employees
private investment (Exhibit 15).
remarkable 95%. Another reports 70% to be inoculated.
efficacy. While detailed information
Vaccine optimism
is still limited and some aspects of Production: Producing a sufficient
The development of an effective
the scientific methodology have been number of shots to inoculate the
vaccine has long been viewed as the
questioned, the prospective vaccines world is far from straightforward
key to eradicating the virus, or at least
appear to be genuinely exceeding given a global population of nearly 8
to downgrading it from pandemic curse
expectations. billion and the expectation that each
to pest. Achieving this was initially
person will require two doses. While
thought to be something of a long shot, Duration: The duration of the manufacturers insist they can produce
as vaccines historically required many protection offered by the vaccines billions of doses in 2021, we suspect
years to be developed, and efforts is not yet clear. Some research a fair portion of the emerging world
to find vaccines for many viruses – suggests that those who obtained their will not be inoculated until 2022 or
including all previous coronaviruses – immunity via infection could already later. The majority of people in the
had failed. start to lose that protection within developed world should be inoculated
a matter of months. This presents a in the second and third quarter of 2021.
Fortunately, the vaccine prospects now
distinct risk. However, at least one
look quite promising, on seven counts:
virus manufacturer has indicated it Distribution: Getting the vaccine
Likelihood: Despite initial doubts, expects vaccine-induced immunity to to every corner of a country – let
it is now virtually certain that last at least a year. This should suffice alone the world – is set to be quite
COVID-19 vaccines will be approved in terms of making vaccines a viable challenging, but not impossible.
given the early success of several means of protection. Most people in the developed world
candidates and limited emergency-use already get a flu shot each year, so
authorizations. the distribution protocols already
THE GLOBAL INVESTMENT OUTLOOK New Year 2021 I 19Economic Outlook | Eric Lascelles
exist. Some COVID-19 vaccines must
be kept in cold temperatures, but the Exhibit 16: U.S. to record biggest budget deficit since WWII
requirements are proving less extreme
than initially anticipated. 0
U.S. budget balance (% of GDP)
In short, it appears that vaccines will
-5
arrive shortly and should be quite -4.6
effective. In turn, they should have
-10 -8.6
a significant effect on the trajectory -9.8
of the pandemic. Herd immunity is
-15
now reasonably likely based on the
-16.0
favourable efficacy rates reported by
-20
several manufacturers, paired with 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
our expectation that most people will Actual CBO projections: Post-crisis Pre-crisis
Note: CBO pre-crisis projections made in March 2020, post-crisis projections made in September
opt to get the vaccine. If 60% to 70% 2020. Source: CBO, Haver Analytics, RBC GAM
of a country’s population can become
immune to COVID-19, the virus would Until recently, the U.S. economy looked This is a prominent reason why the
then struggle to continue circulating. minimally worse for the wear despite economic recovery should proceed
Even if herd immunity proves elusive, the loss of fiscal support. The secret more slowly from here.
the virus will still find conditions was that the prior fiscal stimulus was
so enormous that much of the money Monetary stimulus has been
considerably less fertile for rapid
was initially saved. This nest egg extraordinarily supportive, allowing
spread.
then kept spending going even as the companies to roll over their debt,
These vaccine developments have stimulus faded. However, particularly keeping the rising quantity of public
been key contributors to the recent for low-income Americans, these debt manageable and bolstering
enthusiasm of financial markets, and accumulated savings have now largely housing markets. Although some
also to our own above-consensus been eaten through. In response to quantitative-easing programs are
growth forecasts for 2021. this, it is likely that some additional being scaled back, this is primarily
U.S. fiscal support will be delivered because the need for such support
Policy support once the new U.S. administration is has fallen or because central banks
Policymakers have played an installed next month. have found a better way to provide
unprecedented role in supporting that support, such as by extending
economies and financial markets The orientation of fiscal stimulus the duration of bond purchases. With
throughout the pandemic. may also shift somewhat over time, central-bank support expected to
paring the sometimes excessive persist for several more years, interest
The extraordinary fiscal support is support provided to some groups rates should remain accordingly low.
now starting to fade, partially because and filling previously overlooked
unemployment has declined, resulting gaps, particularly for the proprietors U.S. election aftermath
in fewer unemployment cheques. But it of businesses that were forced by The U.S. election proved a more closely
is also because some pandemic-relief government restrictions to close. contested affair than anticipated by
programs have been allowed to expire. pollsters (Exhibit 17). After a whiplash-
This decline has been particularly Still, large-scale fiscal support cannot
inducing election night in which the
abrupt in the U.S., where partisan last forever, as it is adding profoundly
favoured Democratic Party candidate,
battles resulted in the loss of a handful to the public debt. As such, the amount
Joe Biden, temporarily appeared to be
of programs over the past several of stimulus is forecast by the IMF to
losing to the Republican incumbent,
months. decline notably over the coming year
Donald Trump, Biden managed to hang
in nearly every country (Exhibit 16).
on for the win.
20 I THE GLOBAL INVESTMENT OUTLOOK New Year 2021You can also read
