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Jun 15, 2023

The global economy is slowing as higher borrowing costs and tighter financial conditions weigh on activity. At this late stage in the business cycle, short-term interest rates are likely nearing their peak, bonds are more appealing than they’ve been in a long time, and equity markets could be vulnerable to correction should a recession materialize.

Economy

  • The economy has been resilient so far this year, but the higher interest rates have increased cost of borrowing, diminished risk appetite and emerged as a root cause of banking-sector stress.
  • Additional headwinds include waning business confidence, shrinking global trade, growing consumer debt and reduced government spending following the U.S. debt-ceiling resolution.
  • We expect that inflation can continue falling and our inflation estimates are below the consensus but achieving the 2% inflation target could take considerable time.
  • We anticipate that developed-world economies will fall into a mild to middling recession within the next few quarters.
  • A mild recession could help cool inflation, prompt central banks to cut interest rates and set the stage for the next durable economic expansion.

RBC GAM GDP forecast for developed markets

RBC GAM GDP forecast for developed markets

Note: As of April 28, 2023. Source: RBC GAM

Fixed Income

  • It appears that the relentless increase in bond yields from last year has eased and investors have been conditioned to a higher interest-rate environment.
  • As inflation soared, investors embedded a higher inflation premium into bonds and our models suggest the reverse will be true as inflation moderates.
  • Over the longer term, we still expect real interest rates to rise slightly above zero as savers will ultimately need to be compensated for saving instead of spending.
  • We look for the 10-year Treasury-bond yield to fall to 3.25% over the next year, which would generate close to a 7% total return with minimal valuation risk.

U.S. 10-year T-Bond yield

Equilibrium range
U.S. 10-year T-Bond yield

Note: As of May 31, 2023. Source: RBC GAM, CM

Equity Markets

  • The stock-market rebound since late 2022 was propelled by easing investor concerns regarding inflation and about the sustainability of economic growth.
  • The rally was initially broad-based across regions but returns in recent months have been concentrated in a narrow set of U.S. mega-cap technology stocks.
  • We would prefer to see expanding breadth alongside a rising stock-market index to confirm a healthy, durable, bull market.
  • The bigger threat to the stock market is now the sustainability of corporate profits which have been struggling and will be vulnerable if the economy falls into recession.

Major equity market indices

Cumulative price returns indices in USD
Major equity market indices

Note: As of May 31, 2023. Price returns computed in USD. Source: Bloomberg, RBC GAM

Discover more insights from this quarter's Global Investment Outlook.

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Any investment and economic outlook information contained in this document has been compiled by RBC GAM from various
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is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates
assume no responsibility for any errors or omissions.



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.





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© RBC Global Asset Management Inc. 2023


Publication date: June 15, 2023

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