RBC GAM: 202 Summer Global Investment Outlook

29 juni 2021

Eric Lascelles, Chief Economist at RBC GAM, says inflation is very likely to cool over the second half of 2021, but believes inflationary pressures will persist for a few years – combined with the fact that there is a real risk of another virus wave spurring from the more contagious Delta or other lesser-known vaccine-resistant variants.

Other key points he makes include:

• While monetary policy in the developed world remains extremely stimulative and is unlikely to tighten significantly in the near term, some change is underway.

• Central-bank-run bond-buying programs could begin to ebb over the coming year, with 2022 or 2023 in play for higher policy rates.

• It is reasonable to expect rapid growth over the coming year as vaccines extend their reach, yet the most explosive period of growth has come and gone.

• Equities are fundamentally supported by a solid and improving macro-economic backdrop.

• Past earnings trends reveal the current cycle could still have much further to run. The current cycle is less than one year old and profits remain 7% below their pre-pandemic peak, so the potential exists for a durable and meaningful increase in profits ahead even if the current cycle proves relatively mild.

• Above-average stock valuations largely reflects the dominance of U.S. markets. Markets like the UK, Japan and Europe still offer attractive discounts to fair value.

• RBC GAM believes that Europe and emerging markets offer superior valuations and better return prospects.

US
According to senior portfolio manager Brad Willock, a pattern of returns characterized by strong overall gains and broad participation is typically seen during the first year following a major market low. Returns in the second year are usually better than average, but the market typically experiences more bumps along the way. In particular, he expects the following:

• RBC GAM expects the Fed to gradually tighten monetary policy sometime next year, as economy, employment and inflation pick up.

• The increased mobility post-pandemic should drive increased economic activity and demand for labour, lifting consumer confidence and leading to even more economic activity and job creation. This positive feedback loop should last well into next year and supports a cyclical orientation in portfolios.

• The shift from spending on things to spending on services ought to ease supply-chain pressures and put a cap on prices for goods.

• S&P 500 valuations are likely to remain high until macroeconomic risks (e.g. interest rates, increased regulations and taxes) start to creep back.

Europe
According to European Equities team head Dominic Wallington, the UK government will likely continue with expansionary fiscal policy until at least 2023, while Continental Europe will roll out a large economic recovery plan. He is looking closely at:

• Plans focus on green technology and other new areas of innovation, to support the development of regional capabilities in terms of digitization and the transition to cleaner energy.

• Equity markets have been led by improving macroeconomic indicators and earnings expectations. European stock markets have followed a classic cyclical recovery, and cyclical stocks have outperformed the growth/defensive areas of the market

• Financials (banks and insurance) and consumer staples are expected to outperform.

Emerging markets
Emerging Markets team head Philippe Langham believes the recent market underperformance masks the dramatic style leadership change towards value and cyclical stocks, supported by a backdrop of pent-up demand, loose U.S. monetary and fiscal policy. Here are the team’s views:

• RBC GAM is particularly positive on the outlook for India. A combination of attractive valuations, economic recovery and policy improvements support a more optimistic outlook for Latin American markets against a backdrop of political uncertainty and recent disappointing underperformance.

• Chinese market liberalization and financial reforms are positives. The trade war will provide China with a strong impetus to achieve technological leadership and self-sufficiency.

• RBC GAM has a clear preference for the middle segment of quality stocks trading at sensible valuation levels. In particular, RBC GAM favour the consumer sectors, driven by high returns and economic and demographic tailwinds; and Financials on valuation, improving asset quality, low penetration and structural growth.

Asia
Associate portfolio manager Chris Lai expects even faster economic growth is likely in China, India, Singapore and South Korea, while growth is likely to disappoint in Thailand, Malaysia and Philippines. He is keeping an eye on the following factors:

• Inflation is rising given higher commodity prices, supply-chain bottlenecks and the fact that prices were depressed by the pandemic in the year-ago period.

• Central banks to leave policy rates unchanged this year, but policy hikes are likely next year in China, India, Indonesia, Malaysia and the Philippines.

• RBC GAM remains optimistic about the outlook for Asian equities but are keeping a close eye on the shift away from highly valued growth sectors.

• The impact of COVID-19 on Japanese economic activity to recede. PM Suga and the BoJ are unlikely to pursue the same degree of stimulus as was required last year.