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Progress against inflation has ignited both bonds and stocks as the need for additional tightening of monetary policy is removed. While the threat of recession in early 2024 remains as the full force of prior rate hikes feeds through, the next cycle is moving into view. We believe that capital markets are transitioning to reflect a return to optimal inflation and firming growth later next year and doing so with a backdrop of generally attractive valuation levels.

Economy

  • Interest rates have surged to their highest in 16 years by mid-2023 and, if they remain elevated, higher borrowing costs could discourage business and consumer spending while making debt-servicing more difficult.

  • Economic data now feeling the pressure of higher interest rates. Global trade is contracting, business expectations are soft, housing activity has plummeted and the labour market is starting to lose momentum, albeit gradually.

  • Although pathways to an economic soft landing are evident and the odds of such an outcome are improving as inflation moderates, we continue to look for mild contraction in the U.S., Canada, the U.K. and the eurozone during the first half of 2024.

RBC GAM GDP forecast for developed markets

Note: As of November 3, 2023. Source: RBC GAM

Fixed Income

  • Yields surged over the past two years, largely restoring a proper level of compensation for fixed-income investors. The scope for lower yields opened up during the fall, setting up one of the most attractive entry points for bond investors in a long time.

  • Many bond markets rallied in November as investors entertained the potential end of tightening and possible easing into next year.

  • Our analysis suggests yields could fall to levels that would deliver mid-to-high single digit total returns over the year ahead as investors receive attractive coupon income in addition to capital gains as yields move lower.

U.S. 10-year T-Bond yield

Equilibrium range

Note: As of November 30, 2023. Source: RBC GAM

Equity Markets

  • A distinguishing characteristic of the 2023 stock-market rally was the narrowness of the advance. The “Magnificent 7,” the seven largest stocks in the S&P 500 by market value, thrived but most stocks lagged the capitalization-weighted index returns significantly.

  • Apart from the capitalization-weighted and Magnificent 7 dominated S&P 500, global equities are not all that expensive and regions outside the U.S. are trading at particularly attractive discounts to their fair value.

  • In our view, earnings expectations for 2024 would be vulnerable if economies fell into recession. A soft landing, though, would see stocks extend their gains with the rally broadening out and potential shifts in leadership to value and small cap stocks.

Major equity market indices

Cumulative price returns indices in USD

Note: As of November 30, 2023. Price returns computed in USD. Source: Bloomberg, RBC GAM

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Disclosure

Date of publication: Dec 21, 2023

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., each of 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.

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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.

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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