Global Investment Outlook

THE GLOBAL
INVESTMENT
OUTLOOK
RBC Investment Strategy Committee
NEW YEAR 2016
THE RBC INVESTMENT

STRATEGY COMMITTEE
The RBC Investment Strategy Committee consists
of senior investment professionals drawn from
across RBC Global Asset Management. The
Committee regularly receives economic and
capital markets related input from internal and
external sources. Important guidance is provided
by the Committees regional advisors (North
America, Europe, Far East), from the Global
Fixed Income & Currencies Subcommittee and
FROMTHEGLOBALEQUITYSECTORHEADSlNANCIALS
and healthcare, consumer discretionary and
consumer staples, industrials and utilities,
energy and materials, telecommunications and
technology). From this it builds a detailed global
investment forecast looking one year forward.
From this global forecast, the RBC Investment

3TRATEGY#OMMITTEEDEVELOPSSPECIlCGUIDELINES
that can be used to manage portfolios.
The Committees view includes an assessment

OFGLOBALlSCALANDMONETARYCONDITIONS
PROJECTEDECONOMICGROWTHANDINmATIONASWELL
as the expected course of interest rates, major
CURRENCIESCORPORATEPROlTSANDSTOCKPRICES
Results of the Committees deliberations are

published quarterly in The Global Investment
Outlook.
These include:
THERECOMMENDEDMIXOFCASHlXEDINCOME
instruments, and equities
THERECOMMENDEDGLOBALEXPOSUREOFlXED
income and equity portfolios
THEOPTIMALTERMSTRUCTUREFORlXEDINCOME
investments
the suggested sector and geographic make-up
within equity portfolios
the preferred exposure to major currencies
CONTENTS
EXECUTIVE SUMMARY
Sarah Riopelle, CFA V.P. & Senior Portfolio Manager,

RBC Global Asset Management Inc.
Daniel E. Chornous, CFA n#HIEF)NVESTMENT/FlCER
ECONOMIC & CAPITAL MARKETS FORECASTS
RECOMMENDED ASSET MIX
CURRENCY MARKETS
52
Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income

and Currencies (Toronto and London),
Daniel Mitchell, CFA Portfolio Manager,
The Global Investment Outlook
WHY THIS TIME IS DIFFERENT
REGIONAL EQUITY MARKET OUTLOOK

United States
CAPITAL MARKETS PERFORMANCE
Milos Vukovic, MBA, CFA Vice President &

Head of Investment Policy,
10
64
Raymond Mawhinney Senior V.P. & Senior Portfolio Manager,

Brad Willock, CFA V.P. & Senior Portfolio Manager,
Canada
GLOBAL INVESTMENT OUTLOOK
13
Girding for rate hikes and geopolitical risks
66
Stuart Kedwell, CFA Senior V.P. & Senior Portfolio Manager,

Europe
Eric Lascelles Chief Economist,

Eric Savoie, MBA, CFA Senior Analyst, Investment Strategy,
Daniel E. Chornous, CFAn#HIEF)NVESTMENT/FlCER
68
David Lambert Senior Portfolio Manager,

RBC Global Asset Management (UK) Limited
Asia
70
Mayur Nallamala Head & Senior Portfolio Manager,

RBC Investment Management (Asia) Limited
Emerging Markets
GLOBAL FIXED INCOME MARKETS
Soo Boo Cheah, MBA, CFA Senior Portfolio Manager,
Suzanne Gaynor V.P. & Senior Portfolio Manager,
61
Taylor Self, MBA Analyst,

Global Fixed Income and Currencies,
46
72
Veronique Erb Portfolio Manager,

RBC INVESTMENT STRATEGY COMMITTEE
74
THE GLOBAL INVESTMENT OUTLOOK New Year 2016 I 1
EXECUTIVE SUMMARY
3IGNIlCANTHEADWINDSREMAIN
Sarah Riopelle, CFA
Vice President & Senior Portfolio Manager
Daniel E. Chornous, CFA

&KLHI,QYHVWPHQW2IFHU
Economic data remains

uninspiring in most regions,
although the threat of
recession seems modest.
While we continue to expect
moderate economic growth,
we recognize that warning
signs are more and more
evident and that it is prudent
to raise the alert status. The
downward trend for the U.S.
ISM Index, sluggish corporate
PROlTSANDAVARIETYOFMARKET
based indicators, including a
sustained widening of highyield-bond spreads, sensitizes
us to the possibility that
the business cycle may be
maturing. Sovereign-bond
yields have traded in a fairly
tight range over the last quarter
ANDWHILEEQUITYMARKETSARE
still mostly below the levels of
last summer, they have been
STAGINGASIGNIlCANTREBOUND
DURINGTHElNALFEWMONTHS
of the year. We expect the
heightened level of volatility
to persist over the coming
quarters.
2 I THE GLOBAL INVESTMENT OUTLOOK New Year 2016
3IGNIlCANTDOWNSIDERISKSREMAIN
creating a challenging environment
for investors. The geopolitical
environment has been fraught
WITHCONmICTANDUNCERTAINTYFOR
quite some time, and this is only
increasing. The most salient recent
developments relate to ISIS, but there
are also long-term trends brewing
with regard to the polarization of
developed-world politics, Russias
increased aggression and Chinas
growing global clout. Although
#HINAREMAINSAKEYCONCERNITS
MUCHMALIGNEDHOUSINGMARKET
recently stabilized and it continues
to defy hard-landing fears. We would
ALSOINCLUDETHEEMERGING MARKET
SLOWDOWNTHERESOURCESHOCKAND
the prospect of tighter U.S. monetary
policy to the list of headwinds that we
are monitoring closely.
Minor revisions to our

economic forecasts
Global economic growth has
unquestionably slowed over the
past year, with some concerned that
the process is accelerating into a
more severe correction. We fail to
lNDANYEVIDENCEOFTHIS$ESPITE
the recent downward trend in the
U.S. ISM Index, the latest batch of
leading indicators has tentatively
pushed higher and global industrial
production remains fairly normalLOOKING7HETHERTHISINITIALSTEP
higher in the leading indicators
proves prescient, current levels
remain inconsistent with a global
recession. We have made only minor
TWEAKSTOOURGROWTHFORECASTSTHIS
quarter, nudging them slightly lower
INAGGREGATEDUETOEMERGING MARKET
WEAKNESS
U.S. dollar bull market

maturing
4HE53DOLLARBULLMARKETIS
MATURINGASITENTERSITSlFTHYEAR
Many investors expect continued
dollar strength, and they may be
correct given that previous dollar
CYCLESLASTEDlVETOYEARS
7ELOOKFORFURTHERGAINSFORTHE
GREENBACKEVENAFTERAYEAROF
incredible dollar strength. The
prospect of policy normalization
by the U.S. Federal Reserve (Fed),
coupled with expansionary monetary
policies elsewhere, means that
THISBULLMARKETSTILLHASROOMTO
run. However, with the U.S. dollar
no longer deeply undervalued and
the prospect of volatility rising, our
POSITIONSANDWILLINGNESSTOTAKE
RISKAREAPPROPRIATELYSMALLER/FTHE
four major currencies we expect most
WEAKNESSFROMTHEEUROTHEYEN
and the Canadian dollar, leaving the
pound little changed in our forecasts.
)NmATIONSHOULDBEGINTO
move higher
)NmATIONREMAINSVERYLOWASTHEEND
of the commodity supercycle has
EXERTEDAPOWERFULDISINmATIONARY
effect over the past few years.
However, we believe the downward
PRESSURESONINmATIONWILLBEGINTO
abate as resource prices have largely
completed their swoon and there
is the potential for modest gains
in some commodities in the years
ahead. We continue to believe that
THEMUCHTALKED ABOUTDEmATION
threat remains limited. We can
LARGELYACCOUNTFORWHYINmATIONISSO
low today, and those pressures are
inherently temporary. Altogether, we
LOOKFORINmATIONTORECOVERPARTIALLYIN
%XECUTIVE3UMMARY\3ARAH2IOPELLE#&!\$ANIEL%#HORNOUS#&!
2016, but not all the way to a normal

level, and we suspect that the revival
will be a tad more gradual than the
MARKETCONSENSUS
Divergent monetary policies

The theme of diverging monetary
POLICIESWILLLIKELYBECOMEMORE
pronounced in the coming quarters.
&ORTHEMANYCENTRALBANKERSSTILL
entertaining the delivery of more
stimulus, the rationale generally
RESTSONVERYLOWINmATIONPAIRED
WITHPERSISTENTECONOMICSLACKINTHE
developed world and decelerating
GROWTHINEMERGINGMARKETS!TTHE
other monetary policy extreme, the
WORLDSBELLWETHERCENTRALBANKnTHE
Fed is set to begin raising rates. We
BELIEVESUCHACTIONISJUSTIlEDTOKEEP
the economy on its optimal growth
TRAJECTORY4OTHEEXTENTTHATMARKETS
are priced for this outcome, and the
Fed has emphasized its desire to
proceed with extreme caution, this
should not be overly problematic.
Forecasting a modest increase

in bond yields
Interest rates remain low and have
proven adept at defying widespread
forecasts over the past several years
that they would rise. There is a
DISTINCTRISKTHATTHISTRENDPERSISTS
especially given the downward
pressure that comes from ultraSTIMULATIVECENTRALBANKSSLOW
GROWTHLOWINmATIONSHRINKINGlSCAL
DElCITSANDANAGINGPOPULATION
In the U.S., some of these conditions
seem more vulnerable to reversal
than they have been for some time.
7ITHTHE&EDSETTOEMBARKONA
new tightening cycle, rising shortterm interest rates should nudge
bond yields higher over the coming

quarters. However, there are a
number of factors that may discourage
53YIELDSFROMRISINGTOOQUICKLY4HE
MACROECONOMICBACKDROPOFMODERATE
GROWTHANDINmATIONWILLALLOWTHE&ED
to be patient, subtle and transparent
as it sets itself on the long path
to restoring normal monetary
conditions. In addition, relatively low
yields elsewhere in the world have
made U.S. Treasury bonds attractive
to global investors and the demand
for Treasuries should limit how far
yields can rise in the near term.
#ORPORATEPROlTGROWTHCRITICAL
to outlook
3TOCKSHAVEEXPERIENCEDSIGNIlCANT
volatility so far in 2015 driven by the
EBBANDmOWOFHEADLINESAROUNDTHE
VARIOUSRISKSTHATHAVETHEPOTENTIAL
TOIMPACTTHEECONOMYANDMARKETS
-OSTEQUITYMARKETSHAVEMOVED
sideways or down through 2015
as valuations have moderated and
earnings estimates have experienced
constant negative revisions since the
end of 2014.
4HESELL OFFINMANYEQUITYMARKETS
over the last few months has
bolstered the long-term return
POTENTIALFORSTOCKS%VENINTHE53
WHERESTOCKSCLIMBEDSLIGHTLYABOVE
fair value in the spring of 2015,
VALUATIONSAREBACKBELOWTHENORM
for periods of sustained growth,
LOWINmATIONANDLOWINTERESTRATES
Valuations are considerably more
attractive in Europe and other global
ANDEMERGINGMARKETS
However, as expanding valuations
HAVEBEENTHEKEYDRIVEROFRISING
STOCKPRICESSINCETHE
lNANCIALCRISISTHEYMAYBELESS
supportive of higher equity prices
going forward. With higher valuation
LEVELSEARNINGSGROWTHWILLLIKELY
BETHEKEYDRIVEROFFURTHERGAINSIN
STOCKS!NALYSTSEXPECTCORPORATE
PROlTSTOBEABOVECURRENTLEVELS
in 2016 and 2017, but given that
earnings estimates have been coming
down for most of this year, this bears
watching.
A little less underweight bonds

As the Fed begins a new tightening
cycle, we expect bond yields to rise,
albeit at a gradual pace. That said,
even a modest rise in yields from the
CURRENTLOWLEVELSWILLPUTSIGNIlCANT
pressure on bond returns. However,
bonds offer stability through periods
of higher volatility and, as yields rise,
we expect to increase our exposure
TOlXEDINCOME$URINGTHEQUARTER
WETOOKADVANTAGEOFASPIKEINYIELDS
following positive U.S. employment
data and added one percentage
POINTTOOURlXED INCOMEWEIGHTING
sourced from cash.
Our models continue to indicate
THATEQUITIESARELIKELYTOOUTPERFORM
bonds so we remain overweight
STOCKSBUTUNDERSTANDTHENEEDTO
MANAGERISKSESPECIALLYCAREFULLYIN
this volatile investing environment.
Should our stress indicators worsen,
it may be prudent to begin scaling
BACKSOMEOFOUROVERWEIGHTINSTOCKS
in the months and quarters ahead.
For a balanced, global investor, we
recommend an asset mix of 62%
equities (strategic neutral position:
ANDlXEDINCOME
(strategic neutral position: 43%), with
the balance in cash.
ECONOMIC & CAPITAL MARKETS FORECASTS

ECONOMIC FORECAST (RBC INVESTMENT STRATEGY COMMITTEE)
UNITED
STATES
CANADA
EUROPE
UNITED
KINGDOM
JAPAN
EMERGING
MARKETS1
CHINA
Change
Change
Change
Change
Change
Change
Change
New Year from New Year from New Year from New Year from New Year from New Year from New Year from
2016 Fall 2015 2016 Fall 2015 2016 Fall 2015 2016 Fall 2015 2016 Fall 2015 2016 Fall 2015 2016 Fall 2015
REAL GDP
2014A
2.42%
2015E
2.50%
0.25
2.40%
1.00%
N/C

1.50%
N/C
2.56%
2.50%
N/C
0.00%
0.75%
N/C
6.75%
7.41%
N/C
5.50%
4.75%
N/C
2016E
2.50%
N/C
1.50%
(0.25)
2.00%
(0.25)
2.50%
N/C
1.50%
(0.25)
6.00%
N/C
5.00%
(0.25)
CPI
2014A
1.61%
2015E
0.00%
N/C
1.00%
0.25
0.00%
N/C
0.00%
N/C
0.50%
N/C
1.50%
N/C
4.00%
N/C
2015E
1.50%
(0.25)
1.75%
(0.25)
1.00%
N/C
1.50%
(0.25)
1.50%
N/C
2.25%
N/C
3.75%
N/C
A = Actual

E = Estimate
0.43%
1.47%
2.75%
2.00%
4.15%
'$07EIGHTEDAVERAGEOF#HINA)NDIA3OUTH+OREA"RAZIL-EXICOAND2USSIA
TARGETS (RBC INVESTMENT STRATEGY COMMITTEE)

NOVEMBER 2015
FORECAST
NOVEMBER 2016
CHANGE FROM
FALL 2015
1-YEAR TOTAL RETURN

ESTIMATE (%)
CURRENCY MARKETS AGAINST USD

#!$53$n#!$
1.34
1.40
N/C

%52%52n53$
1.06
1.00
N/C
(6.0)

133.00
N/C

1.51
1.51
N/C
0.3
*0953$n*09
'"0'"0n53$
FIXED INCOME MARKETS
U.S. Fed Funds Rate
0.25
1.00
N/C
N/A
U.S. 10-Year Bond
2.22
2.50
(0.25)
(0.2)
Canada Overnight Rate
0.50
0.50
N/C
N/A
Canada 10-Year Bond
1.57
1.75
N/C
(0.1)
Eurozone Policy Rate
0.05
-0.10
(0.15)
N/A
Germany 10-Year Bund
0.47
0.50
(0.50)
0.2
U.K. Base Rate
0.50
1.00
(0.25)
N/A
U.K. 10-Year Gilt

2.40
(0.35)
(3.3)
Japan Overnight Call Rate
0.10
0.05
N/C
N/A
Japan 10-Year Bond
0.31
0.50
(0.10)
(1.6)

2275
50
11.4
13470
14500
(1000)

1564
1750
(150)
15.2
EQUITY MARKETS
S&P 500
S&P/TSX Composite
MSCI Europe
FTSE 100
.IKKEI
-3#)%MERGING-ARKETS
Source: RBC GAM
6356

N/C
11.0

22000
N/C
13.0

N/C
13.6
RECOMMENDED ASSET MIX

!SSETMIXnTHEALLOCATIONWITHINPORTFOLIOSTOSTOCKS
bonds and cash should include both strategic and
tactical elements. Strategic asset mix addresses the blend
OFTHEMAJORASSETCLASSESOFFERINGTHERISKRETURNTRADEOFF
BESTSUITEDTOANINVESTORSPROlLE)TCANBECONSIDERED
TOBETHEBENCHMARKINVESTMENTPLANTHATANCHORSA
portfolio through many business and investment cycles,
independent of a near-term view of the prospects for the
ECONOMYANDRELATEDEXPECTATIONSFORCAPITALMARKETS
4ACTICALASSETALLOCATIONREFERSTOlNETUNINGAROUND
THESTRATEGICSETTINGINANEFFORTTOADDVALUEBYTAKING
ADVANTAGEOFSHORTERTERMmUCTUATIONSINMARKETS
Every individual has differing return expectations and
TOLERANCESFORVOLATILITYSOTHEREISNOhONESIZElTSALLv
strategic asset mix. Based on a 35-year study of historical
returns and the volatility of returns (the range around
the average return within which shorter-term results
TENDTOFALL WEHAVEDEVELOPEDlVEBROADPROlLESAND
ASSIGNEDABENCHMARKSTRATEGICASSETMIXFOREACH4HESE
PROlLESRANGEFROMVERYCONSERVATIVETHROUGHBALANCEDTO
aggressive growth. It goes without saying that as investors
accept increasing levels of volatility, and therefore greater
RISKTHATTHEACTUALEXPERIENCEWILLDEPARTFROMTHELONGER
TERMNORMTHEPOTENTIALFORRETURNSRISES4HElVEPROlLES
presented below may assist investors in selecting a
strategic asset mix best aligned to their investment goals.
Each quarter, the RBC Investment Strategy Committee
publishes a recommended asset mix based on our current
view of the economy and return expectations for the
major asset classes. These weights are further divided
into recommended exposures to the variety of global
lXEDINCOMEANDEQUITYMARKETS/URRECOMMENDATION
ISTARGETEDATTHE"ALANCEDPROlLEWHERETHEBENCHMARK
SETTINGISEQUITIES3lXEDINCOME2CASH
!TACTICALRANGEOF AROUNDTHEBENCHMARK
POSITIONALLOWSUSTORAISEORLOWEREXPOSURETOSPECIlC
asset classes with a goal of tilting portfolios toward
THOSEMARKETSTHATOFFERCOMPARATIVELYATTRACTIVENEAR
term prospects.
4HISTACTICALRECOMMENDATIONFORTHE"ALANCEDPROlLECAN
serve as a guide for movement within the ranges allowed
FORALLOTHERPROlLES)FFOREXAMPLETHERECOMMENDED
CURRENTEQUITYEXPOSUREFORTHE"ALANCEDPROlLEISSETAT
IEABOVEITSBENCHMARKOFANDPART
way toward its upper limit of 70% for equities), that would
imply a tactical shift of + 5.02% to 25.02% for the Very
#ONSERVATIVEPROlLEIEAPROPORTIONATEADJUSTMENT
ABOVETHEBENCHMARKEQUITYSETTINGOFWITHINTHE
allowed range of +/- 15%).
The value-added of tactical strategies is, of course,
dependent on the degree to which the expected
scenario unfolds.
Regular reviews of portfolio weights are essential to the
ultimate success of an investment plan as they ensure
current exposures are aligned with levels of long-term
RETURNSANDRISKTOLERANCESBESTSUITEDTOINDIVIDUAL
investors.
Anchoring portfolios with a suitable strategic asset mix,
ANDPLACINGBOUNDARIESDElNINGTHEALLOWEDRANGEFOR
tactical positioning, imposes discipline that can limit
damage caused by swings in emotion that inevitably
ACCOMPANYBOTHBULLANDBEARMARKETS
1. Average return: 4HEAVERAGETOTALRETURNPRODUCEDBYTHEASSETCLASSOVERTHEPERIODnBASEDONMONTHLYRESULTS

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.
Recommended Asset Mix
GLOBAL ASSET MIX

BENCHMARK
POLICY
PAST
RANGE
NEW YEAR
2015
SPRING
2015
SUMMER
2015
FALL
2015
NEW YEAR
2016
CASH
2.0%
1% 16%
1.0%
1.0%
2.0%
2.0%
1.0%
BONDS
43.0%
25% 54%

36.0%
37.0%
STOCKS
55.0%
36% 65%
61.0%
61.0%
60.0%
62.0%
62.0%
NOTE%FFECTIVE3EPTEMBERWEREVISEDOURSTRATEGICNEUTRALPOSITIONSWITHINlXEDINCOMELOWERINGTHE@NEUTRALCOMMITMENTTOCASHFROMTO
ANDMOVINGTHEDIFFERENCETOBONDS4HISTAKESADVANTAGEOFTHEPOSITIVESLOPEOFTHEYIELDCURVEWHICHPREVAILSOVERMOSTTIMEPERIODSANDALLOWS
OURlXEDINCOMEMANAGERSTOSHORTENDURATIONANDBUILDCASHRESERVESWHENEVERACORRECTIONINTHEBONDMARKETORESPECIALLYANINVERTEDYIELDCURVE
is anticipated.
REGIONAL ALLOCATION
CWGBI*
NOV. 2015
PAST
RANGE
NEW YEAR
2015
SPRING
2015
SUMMER
2015
FALL
2015
NEW YEAR
2016
North America
37.7%
40%

36.4%

37.5%
37.7%
Europe
40.3%
32% 56%

40.5%
40.7%
40.7%
45.3%
Asia
22.0%
17% 35%
21.4%
23.1%
22.4%

17.0%
GLOBAL BONDS
Note: Past Range reflects historical allocation from Fall 2002 to present.
MSCI**
NOV. 2015
PAST
RANGE
NEW YEAR
2015
SPRING
2015
SUMMER
2015
FALL
2015
NEW YEAR
2016
North America
60.3%
51% 61%
60.5%

58.0%
Europe
21.5%
21% 35%

22.4%

23.5%
Asia
11.0%

11.3%
10.5%
11.5%
11.4%
11.0%
Emerging -ARKETS
7.3%
0%
7.5%
7.5%
7.5%
7.5%
7.5%
GLOBAL EQUITIES
/URASSETMIXISREPORTEDASATTHEENDOFEACHQUARTER4HEMIXISmUIDANDMAYBEADJUSTEDWITHINEACHQUARTERALTHOUGHWEDONOTALWAYSREPORT
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**
NOV. 2015
RBC ISC
FALL 2015
RBC ISC
NEW YEAR 2016
CHANGE FROM
FALL 2015
WEIGHT VS.
BENCHMARK
Energy

0.31

Materials
4.56%
3.77%
3.56%
(0.21)

Industrials
10.66%

12.16%
2.50
114.1%
#ONSUMER$ISCRETIONARY
13.36%
15.10%
14.36%
(0.74)
107.5%
Consumer Staples
10.30%

Health Care
13.12%

14.12%

107.6%
Financials
20.65%
21.15%
20.15%
(1.00)

Information Technology

15.05%

1.14
114.1%
Telecom. Services
3.36%
3.42%
2.66%
(0.76)

Utilities
3.12%
1.10%
1.62%
0.52
51.9%
*Citigroup World Global Bond Index **MSCI World Index
Source: RBC 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
lVECLIENTRISKPROlLESTHATCORRESPONDTOBROADINVESTOROBJECTIVESANDRISK
PREFERENCES4HESElVEPROlLESRANGEFROM6ERY#ONSERVATIVETHROUGH
Balanced to Aggressive Growth.
VERY CONSERVATIVE
BENCHMARK
RANGE
2%
0-15%
2.0%
1.2%
Fixed Income

72.3%
73.1%
Total Cash & Fixed Income

74.3%
74.3%
Canadian Equities
10%
5-20%
11.6%
11.5%
U.S. Equities
5%
0-10%
6.6%

International Equities
5%
0-10%
7.5%

%MERGING-ARKETS
0%
0%
0.0%
0.0%
20%
5-35%
25.7%
25.7%
RETURN
VOLATILITY
ASSET CLASS
Cash & Cash Equivalents
Total Equities
LAST
CURRENT
QUARTER RECOMMENDATION
35-Year Average

Last 12 Months
3.4%

Very Conservative investors will

SEEKINCOMEWITHMAXIMUMCAPITAL
preservation and the potential for modest
capital growth, and be comfortable with
SMALLmUCTUATIONSINTHEVALUEOFTHEIR
investments. This portfolio will invest
PRIMARILYINlXED INCOMESECURITIESAND
a small amount of equities, to generate
income while providing some protection
AGAINSTINmATION)NVESTORSWHOlT
THISPROlLEGENERALLYPLANTOHOLDTHEIR
investment for the short to medium term
(minimum ONETOlVEYEARS
CONSERVATIVE
ASSET CLASS
BENCHMARK
RANGE
2%
0-15%
LAST
CURRENT
2.0%
1.1%
Fixed Income
63%
56.7%
57.5%
65%

Canadian Equities
15%
5-25%

16.7%
U.S. Equities
10%
0-15%

11.1%
10%
0-15%
12.7%
13.6%
0%
0%
0.0%
0.0%
20-50% 41.3%
41.4%
%MERGING-ARKETS
Total Equities
35%
RETURN
VOLATILITY
35-Year Average

7.1%
Last 12 Months
4.3%
6.7%
BALANCED
ASSET CLASS
BENCHMARK
RANGE
2%
0-15%
LAST
CURRENT
2.0%
1.0%
Fixed Income
43%
20-60% 36.0%
37.0%
45%
30-60%

Canadian Equities

10-30%
20.7%
U.S. Equities
20%
10-30%
21.1%
12%
5-25%
14.7%
15.5%
4%
0-10%
4.7%
4.7%
40-70% 62.0%
62.0%
%MERGING-ARKETS
Total Equities
55%
RETURN
VOLATILITY
35-Year Average

Last 12 Months
5.5%

)4(%',/"!,).6%34-%.4/54,//+ New Year 2016
Conservative investors will pursue

modest income and capital growth with
reasonable capital preservation, and be
COMFORTABLEWITHMODERATEmUCTUATIONS
in the value of their investments. The
PORTFOLIOWILLINVESTPRIMARILYINlXED
income securities, with some equities, to
achieve more consistent performance and
provide a reasonable amount of safety.
4HEPROlLEISSUITABLEFORINVESTORSWHO
plan to hold their investment over the
MEDIUMTOLONGTERMMINIMUMlVETO
seven years).
The Balanced portfolio is appropriate

FORINVESTORSSEEKINGBALANCEBETWEEN
long-term capital growth and capital
preservation, with a secondary focus on
modest income, and who are comfortable
WITHMODERATEmUCTUATIONSINTHEVALUE
of their investments. More than half the
portfolio will usually be invested in a
DIVERSIlEDMIXOF#ANADIAN53AND
GLOBALEQUITIES4HISPROlLEISSUITABLE
for investors who plan to hold their
investment for the medium to long term
MINIMUMlVETOSEVENYEARS
GROWTH
BENCHMARK
RANGE
2%
0-15%
2.0%
1.0%
Fixed Income

5-40%
20.3%
21.4%
30%
15-45%
22.3%
22.4%
Canadian Equities
23%
15-35%
25.0%

U.S. Equities
25%
15-35%
27.0%
26.3%
16%
10-30%

6%
0-12%

70%

77.7%
77.6%
RETURN
VOLATILITY
35-Year Average

10.6%
Last 12 Months
6.3%

ASSET CLASS
%MERGING-ARKETS
Total Equities
LAST
CURRENT
AGGRESSIVE GROWTH
BENCHMARK
RANGE
2%
0-15%
1.0%
1.0%
Fixed Income
0%
0-10%
0.0%
0.0%
2%
0-20%
1.0%
1.0%
Canadian Equities
32.5% 20-45%
32.4%
32.4%
U.S. Equities
35.0% 20-50%
35.1%
34.3%
21.5% 10-35%
22.5%
23.3%
0-15%

ASSET CLASS
%MERGING-ARKETS
Total Equities

LAST
CURRENT
RETURN
VOLATILITY
35-Year Average

13.1%
Last 12 Months
7.4%

InvestorsWHOlTTHEGrowthPROlLE
WILLSEEKLONG TERMGROWTHOVERCAPITAL
preservation and regular income, and
be comfortable with considerable
mUCTUATIONSINTHEVALUEOFTHEIR
investments. This portfolio primarily
HOLDSADIVERSIlEDMIXOF#ANADIAN53
and global equities and is suitable for
investors who plan to invest for the long
term (minimum seven to
ten years).
Aggressive GrowthINVESTORSSEEK
maximum long-term growth over capital
preservation and regular income, and are
COMFORTABLEWITHSIGNIlCANTmUCTUATIONS
in the value of their investments. The
portfolio is almost entirely invested in
STOCKSANDEMPHASIZESEXPOSURETO
GLOBALEQUITIES4HISINVESTMENTPROlLE
is suitable only for investors with a high
RISKTOLERANCEANDWHOPLANTOHOLDTHEIR
investments for the long term (minimum
seven to ten years).
THE GLOBAL INVESTMENT OUTLOOK New Year 2016)
CAPITAL MARKETS PERFORMANCE
Milos Vukovic, MBA, CFA

Vice President & Head of Investment Policy
The U.S. dollar rose against all major

currencies between September
1, 2015, and November 30, 2015.
4HEGREENBACKGAINEDVERSUS
THEEUROAGAINSTTHE"RITISH
pound, and 1.5% against both
the yen and the Canadian dollar.
Over the 12-month period ended
November 30, 2015, the U.S. dollar
ROSEAGAINSTTHEEUROAND
VERSUSTHE#ANADIANDOLLAR
4HEGREENBACKCLIMBEDVERSUS
sterling and 3.7% versus the yen.
&IXED INCOMEMARKETSCLIMBED
modestly in the U.S. during the
three-month period, but currency
depreciation contributed to bond
losses elsewhere. The Barclays
Capital Aggregate Bond Index,
ABROADMEASUREOF53lXED
income performance, climbed 0.4%.
European bonds fell 3.0% in U.S.
dollar terms as measured by the
Citigroup WGBI Europe Index.
The FTSE TMX Canada Universe
"OND)NDEX#ANADASlXED INCOME
BENCHMARKDROPPEDWHILE
Japanese bonds, as measured by

the Citigroup Japanese Government
Bond Index, decreased 0.7%.
-AJOREQUITYMARKETSGENERALLYROSE
during the latest three-month period,
ALTHOUGH#ANADIANSTOCKSDECLINED
amid further drops in commodity
prices. The S&P 500 climbed 6.1%,
followed by a 1.6% rise for the MSCI
Japan and a 0.3% gain for the MSCI
Europe. Within Europe, the MSCI
'ERMANYWASUPTHE-3#)
&RANCEROSEANDTHE-3#)5+
gained 0.2%. Over the 12-month
PERIODTHE30INCREASED
and the MSCI Japan gained 7.7%.
However, the MSCI U.K. lost 6.4%,
followed by a 3.7% drop in the MSCI
'ERMANYANDAFALLINTHE-3#)
France. The S&P/TSX Composite
Index lost 3.5% in U.S. dollar terms
during the three months, versus the
3.6% drop for the large-cap S&P/TSX
60 Index and a 5.7% decline in the
S&P/TSX Small Cap Index. The MSCI
%MERGING-ARKETS)NDEXFELL
during the three-month period and
dropped 17.0% over the 12-month
period.
The S&P 400 Index, a measure of
THE53MID CAPMARKETROSE
in the latest three months and rose
FORTHE MONTHPERIODWHILE

the S&P 600 Index, a gauge of smallcap performance, gained 5.1% in the
THREE MONTHPERIODANDOVER
the 12 months. The Russell 3000
'ROWTH)NDEXROSEDURINGTHE
quarter versus a 4.7% increase for
the Russell 3000 Value Index. Over
the 12 months, the Russell 3000
Growth Index rose 6.1%, while the
Russell 3000 Value Index lost 1.0%.
Seven of the 10 global equity sectors
climbed during the quarter ended
November 30, 2015. The bestperforming sector was Information
4ECHNOLOGYWITHAGAINOF
followed by Consumer Staples
with a rise of 5.4%, and Consumer
$ISCRETIONARYWITHAINCREASE
The worst-performing sectors over
the past three months were Health
Care, which lost 1.1%; Materials,
which lost 0.6%; and Utilities, with
mATPERFORMANCE/VERTHE MONTH
period, the best-performing sectors
WERE#ONSUMER$ISCRETIONARY
Information Technology and
Consumer Staples, and the worstperforming were Energy, Materials
and Utilities.
#APITAL-ARKETS0ERFORMANCE\-ILOS6UKOVIC-"!#&!
EXCHANGE RATES
Periods ending November 30, 2015
3 months
94$
1 year
(%)
(%)
(%)
Current
53$
3 years
(%)
5 years
(%)
10.37
5.41
53$n#!$
1.3355
1.51

16.75
53$n%52

6.21
14.53
17.77
7.17
4.21
53$n'"0
0.6640

0.65
123.1000
1.54
2.77
3.73

USDJPY
Note: all changes above are expressed in US dollar terms
CANADA
USD
Fixed Income Markets: Total Return
FTSE TMX Canada Univ. Bond Index
3 months
(%)

94$
(%)

CAD
1 year
(%)
3 years
(%)
5 years
(%)
3 months
(%)
1 year
(%)
3 years
(%)

(6.51)
(0.77)
(0.43)

U.S.
USD
CAD
3 months
(%)
94$
(%)
1 year
(%)
3 years
(%)
5 years
(%)
3 months
(%)
1 year
(%)
3 years
(%)
Citigroup U.S. Government

1.13

2.52
1.60

11.36
Barclays Capital Agg. Bond Index
0.43

1.50

12.03
5 years
(%)
3 months
(%)
1 year
(%)
GLOBAL
USD
3 months
(%)
94$
(%)
Citigroup WGBI
(1.15)
Citigroup European Government
(3.03)
Citigroup Japanese Government
(0.73)
CAD
1 year
(%)
3 years
(%)
3 years
(%)

(4.46)
(1.75)
1.12
0.34
11.54

(10.32)
(0.70)

(1.56)
4.70

(2.21)

(10.42)

0.77

(1.13)
CANADA
USD
Equity Markets: Total Return
3 months
(%)
94$
(%)
CAD
1 year
(%)
3 years
(%)
5 years
(%)
3 months
(%)
1 year
(%)
3 years
(%)
(3.60)
(1.55)
(2.02)

6.40
S&P/TSX Composite
(3.47)
(17.72)

S&P/TSX 60
(3.55)

(1.01)
(2.10)
(5.43)
7.26
S&P/TSX Small Cap
(5.72)

(11.01)

(4.30)
(12.22)

U.S.
USD
CAD
3 months
(%)
94$
(%)
1 year
(%)
3 years
(%)
5 years
(%)
3 months
(%)
1 year
(%)
3 years
(%)
S&P 500
6.07
3.01
2.75

14.40
7.67

S&P 400
3.62

13.05

20.15
27.14
S&P 600
5.13

16.70
14.25
6.71
23.63

Russell 3000 Value
4.71
(1.77)
(1.01)
14.51
13.23

15.57

Russell 3000 Growth

6.14
17.37

7.53

N!3$!1#OMPOSITEIndex

6.62

24.47
31.65
Note: all rates of return presented for periods longer than 1 year are annualized
Source: Bloomberg/MSCI
#APITAL-ARKETS0ERFORMANCE\-ILOS6UKOVIC-"!#&!
GLOBAL
3 months
(%)
94$
(%)
USD
1 year
(%)
3 years
(%)
5 years
(%)
3 months
(%)
CAD
1 year
(%)
3 years
(%)
MSCI World*
3.43

(0.72)

3.52

22.36
MSCI EAFE*
0.75
0.54

6.60
5.52

13.35
17.54
MSCI Europe*

(4.57)
6.40
6.12
0.37
11.45
17.32
MSCI0ACIlC
1.74
2.02
0.15

4.51

MSCI UK*
0.17

5.77
0.25

14.55
MSCI France*

3.34

5.21

14.61
17.76
MSCI Germany*

(3.67)

6.37

12.50

MSCI Japan*

7.65

1.67
25.72
23.45
(0.14)

(4.55)
(3.05)
(0.06)
(3.05)
5.24
MSCI Emerging MARKETS
GLOBAL EQUITY SECTORS

3 months
(%)
Sector: Total Return
94$
(%)
USD
1 year
(%)
3 years
(%)
5 years
(%)
3 months
(%)
CAD
1 year
(%)
3 years
(%)
(3.50)
0.02

(1.33)
6.40
1.70
(14.62)
(15.51)
Materials
(0.62)
(11.66)
(13.55)
(3.26)

(0.53)

6.67
Industrials
5.23
0.50
(0.67)
11.25

5.33
16.00
22.67
Consumer$ISCRETIONARY
5.34

7.44

14.15
5.43

Consumer Staples
5.40
5.36
3.07
10.62
12.15

20.37

Health Care
(1.13)
5.00
2.34

(1.04)

31.50
Financials

(1.63)
(3.03)
10.50

13.25


7.22
5.55
17.21
13.41

23.27

Energy
Telecommunication Services
Utilities
* Net of Taxes
0.07

0.16

(0.06)

6.56
4.26
0.03
7.40
17.50
Note: all rates of return presented for periods longer than 1 year are annualized
Source: Bloomberg/MSCI
GLOBAL INVESTMENT OUTLOOK

Girding for rate hikes and geopolitical risks
Eric Lascelles
Exhibit 1: A tricky investing environment
Chief Economist
Eric Savoie, MBA, CFA

Senior Analyst, Investment Strategy
Sluggish
growth
Substantial
risks
Market
displeasure

#HIEF)NVESTMENT/FlCER
4HEBULKOFTHEWORLDSECONOMIES
continue to deliver growth below
their historical norms, and a bit
worse than a quarter ago
(Exhibit 2). Fortunately, no outright
collapse is evident, and there is
even a tentative signal of growth
bottoming out among emerging
economies. Meanwhile, although
#HINAREMAINSAKEYCONCERNITS
MUCHMALIGNEDHOUSINGMARKET
recently stabilized and it continues
to defy hard-landing fears.
)NmATIONISVERYLOWBUTSHOULDEDGE
higher in the future as commodity
prices cease to fall and developedWORLDSLACKCONTINUESTOEBB
$OWNSIDERISKSAREMATERIALWITH
a particular emphasis on debt
HOTSPOTSTHEEMERGING MARKET
SLOWDOWNTHERESOURCESHOCKAND
China (Exhibit 3). The prospect
of tighter U.S. monetary policy
is assigned a high relevance by
MANYINTHEMARKET'EOPOLITICAL
events are also becoming more
Source: RBC GAM
Exhibit 2: Unusually slow growth in most countries

Fraction of countries in the
decile (%)
The world remains enmeshed in a

challenging environment of sluggish
GROWTHSUBSTANTIALDOWNSIDERISKS
ANDBUMPYlNANCIALMARKETS
(Exhibit 1).
25
Over 70% of countries are

growing at below historically
normal rates
20
15
10
5
0
<=10
10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90

Growth decile
>90
Note: Q2 2015 year-over-year real GDP growth of a country relative to its historical growth
from 2001 to 2014. A sample of 55 countries used. Source: Havre Analytics, RBC GAM
Exhibit 3: Substantial downside risks

Debt hot spots
EM slowdown
Resource shock
Deflation
EU politics
China
Russia
Middle-East turmoil
Humanitarian crisis
Hawkish
Asian militaries
(Ukraine, Oil, Syria)
Source: RBC GAM
'LOBAL)NVESTMENT/UTLOOK\%RIC,ASCELLES\%RIC3AVOIE-"!#&!\$ANIEL%#HORNOUS#&!
Global economic growth has

unquestionably slowed over the past
year, with some pundits concerned
that the process is accelerating into
a more severe correction. We fail to
lNDANYEVIDENCEOFTHIS
From a breadth perspective, only
slightly more than half of national
leading indicators are trending lower
(Exhibit 6). More serious downturns,
SUCHASINANDHAVE
tended to be associated with a far
more broad-based decline.
#ONlRMINGTHISLUKEWARM
interpretation, the one-year
CONSENSUSGROWTHOUTLOOKSHOWS
a relatively even split between
S&P
500
EM
U.S.
currencies 10yr yield
IG credit
spread
Yield/spread change
(basis points)
Price change (%)
Latest
TSX
Extreme
Note: Percentage change of S&P Goldman Sachs Commodity Index, TSX, S&P 500 and
JP Morgan EM Currency Index since 6/30/2015. Basis point change of U.S. 10-year yield and
investment-grade credit spread since 6/30/2015. Source: Haver Analytics, RBC GAM
Exhibit 5: High-yield credit spreads send cautious signal
2000
1600
Spreads have gone up
nearly 200 bps since
May 2015
1200
800
400
0
2006
2009
2012
2015
Note: Credit spread is spread to worst over government. Source: Haver Analytics, RBC GAM
Exhibit 6: Economic deceleration is not unprecedented

100
90
80
70
60
50
40
30
20
10
0
2001
More countries More countries
Slower, but no collapse
Commodities
40
30
20
10
0
-10
-20
-30
-40
2003
2005
2007
2009
2011
2013
with falling PMI with rising PMI
With the possibility of stabilizing

economic growth in much of
the world and the U.S. Federal
Reserve (Fed) on the cusp of
raising rates, it seems logical that
bond yields will start transitioning
HIGHER-EANWHILETHANKSTOPAST
SUCCESSES53STOCKSARENO
LONGERCHEAPANDTHECREDITMARKET
continues to emit a more cautious
message (Exhibit 5). The business
cycle is also growing longer in the
tooth, and the way forward may be
less uniformly sunny for investors.
40
30
20
10
0
-10
-20
-30
-40
Credit spread (basis points)
&INANCIALMARKETSARESTILLMOSTLY
below the levels of last summer,
but have nevertheless staged a
SIGNIlCANTREBOUNDOVERTHElNALFEW
months of the year (Exhibit 4).
Exhibit 4: Financial-market hit has faded
Countries with rising PMI (%)
consequential given the broadening

of the war with ISIS, European
political complexities and Chinas
expanding military might.
2015
Note: Number of countries with positive 3-month change in Manufacturing PMI as percentage
of total number of countries included in the sample. Source: Haver Analytics, RBC GAM
$ESPITECLAIMSTOTHECONTRARYWE
calculate that global industrialproduction growth remains fairly
NORMAL LOOKING%XHIBIT 3IMILARLY
global trade is not actually in freefall
ONCEADJUSTEDFORINmATIONAND
CURRENCYDISTORTIONS%XHIBIT
Finally, the latest batch of leading
indicators has tentatively pushed
HIGHER!DDITIONALCONlRMATION
is necessary to ensure that the
turn is real, but the uniformity
of the October increase in the
global manufacturing and service
indicators, and in both emergingMARKETANDDEVELOPEDNATIONS
leaves ample room for optimism
(Exhibit 10). Whether this initial
step higher proves prescient or not,
current levels remain inconsistent
with a global recession.
Exhibit 7: Some consensus forecasts fall, but others rise

Russia
Cyprus
Ireland
Italy
Netherlands
Spain
Austria
France
Sweden
Finland
Eurozone
Portugal
Japan
Germany
India
U.K.
Canada
U.S.
China
Mexico
Turkey
South Africa
Australia
Indonesia
Brazil
Greece
0.0
-0.1
-0.1
-0.2
-0.2
-0.3
-0.3
-0.4
-0.5
-0.5
-0.5
-0.6
0.2
0.2
0.2
0.1
0.1
0.0
0.4
0.4
0.3
0.8
1.3
-1.0
-0.5
0.0
0.5
1.0
1.5
Change in consensus GDP forecast over past six months (ppt)
1.9
2.0
Note: Change in rolling 1-year out consensus GDP forecast (percentage points) from April 2015 to
October 2015. Source: Consensus Forecasts, RBC GAM
Exhibit 8: Global industrial production holding together ok

15
10
5
0
-5
-10
-15
-20
2007
2008
Global
2009
2010
2011
Emerging markets
2012
2013
2014
2015
Developed markets
Note: Country weights based on country PPP share of world total. Countries include Canada,
France, Germany, Italy, Japan, Netherlands, Spain, U.K., U.S., Brazil, China, India, Indonesia,
Korea, Mexico, Poland, Russia, Turkey. Source: Haver Analytics, RBC GAM
Forecast update
Exhibit 9: Global trade is not collapsing

World exports (YoY % change)
7EHAVEMADEONLYMINORTWEAKSTO
our growth forecasts this quarter,
nudging them slightly lower in
AGGREGATEDUETOEMERGING MARKET
WEAKNESS'ROWTHSTILLSEEMS
MATERIALLYMORELIKELYTHANRECESSION
THANKSTOTHEINHERENTBUOYANCY
OFMARKET ORIENTEDECONOMIES
combined with the tailwinds from
low commodity prices, low interest
rates and currencies that are falling
against the U.S. dollar (Exhibit 11).
4HERAWBENElTOFLOWOILPRICES
may not be quite as potent as
-1.0
-2.9
-4.0
Industrial production
(YoY % change)
countries for which forecasts are

being upgraded versus those that
are being downgraded (Exhibit 7).
4HISBALANCEFURTHERCONlRMSTHAT
the global economy is not truly
crumbling.
40
30
20
10
0
-10
-20
-30
-40
2001
2003
2005
Nominal exports
2007
2009
Real exports
2011
2013
2015
Note: Year-over-year % change of 3-month moving average of world exports. Nominal

exports in U.S. dollars. Source: IMF, Credit Suisse, Haver Analytics, RBC GAM
)NTHEDEVELOPEDWORLDWELOOK
for above-consensus growth in
Japan and the Eurozone, consensus
growth for the U.S. and U.K.,
and below-consensus growth for
Canada (Exhibit 12). For emerging
economies, we anticipate belowconsensus growth in China, roughly
consensus growth in India, Brazil
and South Korea, and slightly aboveconsensus growth for Mexico and
Russia (Exhibit 13).
Exhibit 10: Global PMIs turn tentatively higher

55
54
Manufacturing PMI
in past cycles given a declining

resource reliance over time as
countries become more oriented
toward services, but it still lends an
important helping hand.
Expansion
53
52
51
50
49
48
Contraction
47
Feb-12
Jan-13
Framed from an economic

perspective, this new strategy
imposes a temporary cost on the
Effect
Oct-15
Low
resource
prices
Low
interest
rates
Low
exchange
rates
Economic boost
Economic boost
Economic boost
Becoming less
helpful on
secular basis
Unchanged
importance
Unchanged
importance
Shifting
importance
Source: RBC GAM
Exhibit 12: RBC GAM GDP forecast for developed markets

3.0
Annual GDP growth (%)
2ECENT)3)3TERRORISTATTACKSIN0ARIS
and elsewhere reveal a new strategy
for the organization. Whereas it was
once content to carve out sovereign
territory within Syria and Iraq, it is
now also pursuing the classic Al
1AEDATACTICOFINmICTINGLOSSESON
its adversaries outside of the
Middle East.
Nov-14
Exhibit 11: Sources of economic stimulus
Fractured geopolitics
The geopolitical environment has
BEENFRAUGHTWITHCONmICTAND
uncertainty for quite some time, and
this is only increasing. The most
salient recent developments relate
to ISIS, but there are also longterm trends brewing with regard
to the polarization of developedworld politics, Russias increased
aggression and Chinas growing
global clout.
Dec-13
JP Morgan Global PMI

Developed markets PMI
Emerging markets PMI
Note: PMI refers to Purchasing Managers Index for manufacturing sector, a measure for
economic activity. Source: Haver Analytics, RBC GAM
2.50% 2.50%
2.50% 2.50%
2.5
2.00%
2.0
1.50%
1.50%
1.50%
1.5
1.00%
1.0
0.75%
0.5
0.0
U.S.
2015
U.K.
2016
Source: RBC GAM
Eurozone
Canada
Japan
4HE-IDDLE%ASTERNBACKDROP
remains complicated. The multifaceted battle between ISIS, the
Syrian government, the Iraqi
government, non-ISIS Syrian
rebels, Kurdish forces, Russia and
the U.S. and its allies remains the
most troubling situation. Given the
reluctance of Western nations to
engage in another ground war in
THE-IDDLE%ASTTHEYARELIKELYTO
CONTINUERAMPINGUPTHEIRAIRSTRIKES
support of local forces and logistical
efforts to undermine ISISs oil sales,
lNANCIALRESOURCESANDINmUXOF
combatants.
There also remain serious
disagreements along Sunni-Shia
lines even between established
regional powers, as demonstrated
by the ongoing proxy war in Yemen
between Saudi Arabia and Iran.
!FTERlVEYEARSOFEFFORTSTHE!RAB
3PRINGHASLARGELYlZZLEDWITHFEW
countries managing any sort of
material progress toward democracy
or greater stability.
Exhibit 13: RBC GAM GDP forecast for emerging markets
Annual GDP growth (%)
targeted countries via lost tourism,

REDUCEDRETAILSALESANDGREATERRISK
aversion. But the consequences are
usually not lasting. By far, the greater
challenge is political as voters and
PARTIESMAYRESPONDTOTHESEATTACKS
by tilting even further toward farleft and far-right political agendas
that result in a sub-optimal policy
mix of diminished immigration,
less free trade and fewer individual
liberties. Particularly in Europe,
WHERESIGNIlCANTREFUGEEINmOWS
provide another catalyst, voters are
increasingly inclined in this direction.
7.25% 7.75%
6.75%
6.00%
6
4
2.50%
3.00%
3.00%
2.25%
2
0.25%
0
-0.75%
-2
-4
-2.75%
India
2015
China
2016
South Korea
Mexico
Brazil
-2.75%
Russia
Source: RBC GAM
Russia continues to merit close

examination given its recent military
aggressions: the earlier annexation
OF#RIMEAANDEASTERN5KRAINEAND
its new involvement in Syria. One
can hope that the latest round of
TERRORISTATTACKSWILLSPURGREATER
cooperation between Russia and the
other Western powers in Syria, as
this maximizes the odds of reducing
THEEXTENTOFGEOPOLITICALRISKIN
the world.
Whereas Russia remains globally
relevant from a military perspective,
it has ceased to be a global
economic power. China is the mirror
image of this: an ascending global
economic power with only regional
MILITARYASPIRATIONS#HINAHASTAKEN
an increasingly aggressive stance
in both the East China and South
China seas, but has never in its long
HISTORYDEMONSTRATEDAKEENDESIRE
to expand its military reach beyond
ITSOWNBACKYARD
From an economic perspective,
however, China is indisputably
relevant. Historically, global trade
and global growth appear to thrive

during hegemonic eras when
one country effectively rules the
world a position helmed by the
U.S. for the better part of the last
CENTURY%XHIBIT 4HISMAKES
intuitive sense as the world is not
divided into competing factions.
However, with Chinas ascension
it would appear we are now
transitioning toward a more multipolar world. This could act as one
of several factors constraining the
further progress of globalization.
There are already tentative signs
of consequences, such as the new
53 LED4RANS 0ACIlC0ARTNERSHIP
(TPP) trade deal that excludes China,
contrasted against Chinas recent
efforts to develop its own regional
trade bloc.
There are a few common
conclusions that emerge from
these observations. Geopolitical
uncertainty promises to be unusually
high in the future due to the
RAMPING UPOFCONmICTINTHE-IDDLE
East, the increased possibility of
TERRORISTATTACKSTHEPOTENTIALFORFAR
HE GLOBAL INVESTMENT OUTLOOK New Year 2016 I 17
Economic growth is also set to be

challenged by these developments.
A focus on military expenditures may
result in less attention to, and fewer
resources directed toward, domestic
growth. A multi-polar world has not
historically been good for economic
growth and political polarization
presents a similar threat. To be fair,
these geopolitical drags are merely
one among dozens of relevant inputs
INTOTHELONG TERMGROWTHOUTLOOK
but it is undeniable that they
constitute a drag.
Exhibit 14: Hegemonies are good for global trade

Trade Globalization Indicator
from-centre governments, Russias

increased military aggression, the
shift toward a multi-polar world
and the uncertainty regarding U.S.
foreign policy beyond the 2016
presidential election. Global military
SPENDINGWILLLIKELYWORKITSWAY
higher over time for many of
these reasons.
A return to
multipolarity?
35
30
25
20
Multipolar
world
Multipolar
world
15
U.S.
hegemony
10
U.K.
hegemony
5
0
1791
1828
1865
1902
1939
1976
2013
Note: Measured as average of imports as % of GDP weighted by population. 148 countries

used for 1791 to 1995, 126 countries after 1995. Source: Chase-Dunn, C., Kawano, Y.,
Brewer, B., "Trade Globalization Since 1975: Waves of Integration in the World System,"
American Sociological Review, 2000, Haver Analytics, RBC GAM
Exhibit 15: Four Chinese complications, two overrated

New
currency
regime
Stock
market
bubble
China worries
#HINESElNANCIAL MARKET
concerns
)4(%',/"!,).6%34-%.4/54,//+New Year 2016
Exhibit 16: Chinese stocks below recent peak

Free fall
7000
3500
3000
6000
5000
Bubble fueled by
reforms and
stimulus
4000
3000
2500
2000
1500
2000
1000
1000
500
0
2005
2007
2009
2011
2013
Shenzhen Stock Exchange Composite (RHS)
Shanghai Stock Exchange Composite (LHS)
Source: CNBS, Bloomberg, Haver Analytics, RBC GAM
0
2015
Shenzhen Stock Exchange

Composite Index
As we argued last quarter, Chinas

NEWCURRENCYREGIMEANDSTOCK
MARKETGYRATIONSARENOTAS
consequential or problematic as
THEYlRSTLOOK7HILEMARKETFORCES
will now theoretically exert a greater
force on the countrys exchange
rate, in practice the currency has
barely moved and the notion that the
COUNTRYISSEEKINGTOOUTMANEUVER
Slowing
economy
Source: RBC GAM
Shanghai Stock Exchange

Composite Index
#HINAREMAINSANENTIRELYJUSTIlED
FOCUSFORMARKETSWITHFOUR
particular subjects of interest: a new
CURRENCYREGIMEASTOCK MARKET
bubble, some credit excesses and
decelerating economic growth
(Exhibit 15).
Debt
excesses
Chinese credit concerns

In contrast, Chinas credit challenges
AREVERYREAL3EVERAL"ANKOF
International Settlements tests
designed to highlight the potential
for future credit distress put China at
the top of the list (Exhibit 17).
2EmECTINGATLEASTAPARTIAL
manifestation of these credit
WORRIES#HINESEBANKSARE
experiencing non-performing-loan
growth of almost 60% per year
%XHIBIT 4HEFACTTHATTHEINITIAL
Credit-to-GDP
risk
Debt
servicing risk
Debt servicing
stress test risk
China
High
Moderate
High
Brazil
High
Moderate
High
4URKEY
High
Moderate
Moderate
Asia
High
Low
Moderate
Netherlands
Low
Low
High
Canada
Moderate
Low
Moderate
France
Moderate
Low
Moderate
Switzerland
Moderate
Low
Low
Mexico
Moderate
Low
Low
Japan
Moderate
Low
Low
Korea
Moderate
Low
Low
Nordic countries
Low
Low
Moderate
India
Low
Low
Low
Germany
Low
Low
Low
Italy
Low
Low
Low
U.S.
Low
Low
Low
U.K.
Low
Low
Low
Spain
Low
Low
Low
Note: Calculations by BIS of deviation from normal credit metrics as predictor of future credit
PROBLEMS$ATAFORPRIVATE SECTORNON lNANCIALDEBTCORPORATEPLUSHOUSEHOLD !SIAISEX#HINA
and Japan. Stress test assumes 250bps increase in rates. Source: BIS, RBC GAM
Exhibit 18: Non-performing loans in China rising

60
50
40
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
Mar-08
7
6
5
4
3
2
1
Sep-09
Mar-11
NPLs YoY % change (LHS)
Sep-12
Mar-14
NPLs ratio (RHS)
0
Sep-15
Non-performing loans ratio (%)
-EANWHILE#HINASMAINLANDSTOCK
MARKETHASSTABILIZEDOVERTHELAST
several months. The earlier decline
in equities was less consequential
than it seems given that the
countrys equity indices are still
higher than they were a year ago,
and furthermore given the relatively
SMALLSIZEOFTHECOUNTRYSSTOCK
MARKET%XHIBIT
Exhibit 17: China especially vulnerable to a debt crisis
Non-performing loans
(YoY % change)
its peers via a competitive

devaluation seems unfounded given
the governments active defense of
the yuan. Chinas imminent addition
to the International Monetary Funds
)-&S 3PECIAL$RAWING2IGHTS
3$2 CURRENCYBASKETISALSOLESS
consequential than it seems, as only
a tiny fraction of the worlds currency
reserves are actually invested in
3$2S4OBESURETHESEEVENTS
are both highly symbolic and will
help in Chinas eventual ascension
toward a more central role in the
WORLDSlNANCIALMARKETSBUTTHEY
dont move the needle very much in
the short term. Our bias is that the
Chinese currency may decline only
modestly over the next year given
CAPITAL mOWPRESSURES
Note: Non-performing loans (NPLs) of commercial banks. Source: China Banking

Regulatory Commission, Haver Analytics, RBC GAM
THE GLOBAL INVESTMENT OUTLOOK New Year )
For now, at least, Chinese housing

has ceased to be an immediate
CONCERNASPOLICYMAKERSHAVE
revived it via interest-rate cuts
and more favourable terms for
homebuyers. Home sales and prices
are ascending once more, though we
remain concerned that these trends
are not sustainable (Exhibit 20).
Meanwhile, although there are
legitimate corporate-debt concerns
IN#HINAITISWORTHACKNOWLEDGING
two tempering forces. First, the
most levered of Chinas companies
are state-owned, meaning they are
UNLIKELYTOGOBUST%XHIBIT
Second, China has a long history
with debt bubbles that seem to
arrive roughly once a decade, but
just as importantly there is also
a long history of the government
stepping in and providing relief.
Already, the government has bailed
out local government borrowers. As
a result, Chinas credit excesses to
the extent that they arrive are far
Total social financing

(YoY % change)
40
35
30
Downward trend to
lowest growth rate
since
pre-crisis
25
20
15
10
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: Haver Analytics, RBC GAM
Exhibit 20: Chinese home prices rebound

100-city average home prices
(YoY % change)
4HElRSTSTEPIN#HINASADJUSTMENT
to this less favourable credit
environment is already well
underway as the countrys credit
growth rate has slowed materially
%XHIBIT
Exhibit 19: Chinese private credit growth slowing
12
10
8
6
4
2
0
-2
-4
-6
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Source: China Index Academy/Soufun, Haver Analytics, RBC GAM
%XHIBIT#HINESECORPORATELEVERAGELOWERFORPRIVATElRMS
Leverage ratio (%)
STARTINGPOINTISOFlCIALLYQUITE
tame with just 1.5% of all loans
in default seems heartening,
but more credible estimates put
THETRUElGUREATLEASTTHREETIMES
HIGHER4HEBULKOFTHESEBADLOANS
actually relate to Chinas slowing
heavy-industry base, not to the
maligned housing sector. This
SUGGESTSADDITIONALHOUSING SPECIlC
challenges are possible.
360
90th percentile:
SOEs
320
280
SOEs have
240
higher
leverage than
200
private firms at
Private firms both median
160
Median:
and 90th
120
percentile
SOEs
80
40
Private firms
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Note: Measured as median and 90th percentile of total-liabilities-to-total-equity ratio of listed
corporations in China. SOEs refers to state-owned enterprises. Source: IMF GFSR, RBC GAM
$ESPITEMANYTHIRD PARTYCLAIMSTHAT
the Chinese economy is actually
GROWINGFARLESSQUICKLYTHANTHE
OFlCIALNUMBERSSUGGESTOUROWN
metric broadly agrees with the
OFlCIALlGURES%XHIBIT -ORE
pessimistic interpretations tend to
focus on heavy-industry metrics
such as electricity consumption and
rail shipments. Heavy industry is
indeed struggling, but consumeroriented and service sectors are
underweighted in such measures,
ANDEXPANDINGMUCHMOREQUICKLY
China has slowed but not collapsed.
15
14
13
12
11
10
9
8
7
6
5
1995
4
3
2
1
0
-1
-2
Economic Activity Index

(standard deviations from
historical norm)
The Chinese economy has

decelerated for a number of years,
and is now expanding at just
under a 7% annual pace. Given the
COUNTRYSEBBINGCREDITmOWSAND
diminished competitiveness, growth
ISUNLIKELYTORECLAIMPRIORHEIGHTS
4HEGOVERNMENTITSELFACKNOWLEDGES
THISRECENTLYSETTINGAlVE YEAR
growth target of 6.5% per annum,
down from the prior 7.0% goal. We
suspect actual growth may come
in even a little below the newly
diminished target.
China GDP growth

(YoY % change)
Decelerating Chinese growth
Exhibit 22: China rebalancing to slower growth
-3
1999
2003
GDP Growth (LHS)
2007
2011
2015
Economic Activity Index (RHS)
Note: Index constructed using sixteen proxies for real economic activity in China.
Source: Bloomberg, Haver Analytics, RBC GAM
%XHIBIT#ENTRALBANKSDOVISHONGROWTHANDINmATIONOUTLOOK
Change in central bank policy rates
(% raising/cutting in month)
MORELIKELYTORESULTINDIMINISHED
economic growth than to manifest
ASAlNANCIALCRISISFORTHECOUNTRYOR
the world.
Emerging
market led
tightening
50
Tightening
Widespread easing
in reaction to
financial crisis
-50
-100
2008
Persistently
accomodative policy
Easing
2009
2010
2011
% of central banks tightening
Net % of banks easing
2012
2013
2014
2015
% of central banks easing
Note: Based on policy rate for 30 countries. Source: Haver Analytics, RBC GAM
Divergent monetary policy
in monetary-easing mode (Exhibit

23). China and India both recently
cut their policy rates again, the
%UROPEAN#ENTRAL"ANK%#" SEEMS
ONTHECUSPOFMOREANDTHE"ANKOF
Japan (BOJ) contemplates additional
stimulus as well.
$IVERGENTMONETARY POLICYTRENDSARE
set to become even more apparent
in the near future. Whereas the Fed
wishes to tighten rates imminently,
the vast majority of the worlds major
CENTRALBANKSREMAINVERYMUCH
&ORTHEMANYCENTRALBANKERSSTILL
entertaining the delivery of more
stimulus, the rationale generally
RESTSONVERYLOWINmATIONPAIRED
WITHPERSISTENTECONOMICSLACKINTHE
developed world and decelerating
GROWTHINEMERGINGMARKETS4OTHE
extent that this additional monetary
stimulus helps to spur growth in
an otherwise sluggish economic
environment, it is welcome. Since the
lNANCIALCRISISTHESESORTSOFEFFORTS
HAVEBEENABOONFORDOMESTICSTOCK
ANDBONDMARKETSANDNEGATIVEFOR
a countrys currency.
At the other monetary policy
extreme, the worlds bellwether
CENTRALBANKnTHE&EDnISSETTO
begin raising rates (Exhibit 24). Most
4HEREALQUESTIONFORMARKET
participants is whether the Fed is
MAKINGANERRORINRAISINGRATES7E
BELIEVESUCHACTIONISJUSTIlEDTO
KEEPTHEECONOMYONITSOPTIMAL
growth trajectory. Moreover,
while raising the policy rate
inevitably elicits a domino-effect of
consequences, their cumulative hit
should be fairly mild (Exhibit 25).
Exhibit 24: U.S. fed funds rate

Equilibrium range
economic factors provide strong

SUPPORTFORTHEINITIATIONOFTHElRST
new tightening cycle in 11 years, and
the Fed has been signaling as much.
4OTHEEXTENTTHATMARKETSAREPRICED
for this outcome and the Fed has
emphasized its desire to proceed
with extreme caution this should
not be overly problematic. History
SHOWSTHATSTOCKMARKETSAREUSUALLY
able to continue advancing after a
new tightening cycle has begun.
24
22
20
18
16
14
12
10
8
6
4
2
0
-2
1980
1985
1990
Last plot: 0.12%
1995
2000
2005
2010
2015
2020
Current range: -1.43% - 0.76% (Mid: -0.33%)
Source: Federal Reserve, RBC GAM
Exhibit 25: Complexity need not be paralyzing

Lower profit
Stronger exchange rate
Rate hike
Lower wages
Lower commodity prices

Bond sell-off
Lower stocks
Higher borrowing cost
)NmATIONTOREBOUNDSLIGHTLY
Part of this perspective revolves

around our belief that resource
prices have largely completed their
swoon, with the potential for modest
gains in certain commodities in the
years ahead. Even if this assessment
were incorrect, commodity prices
would need to continue falling at
THEIRRECENTCLIPTOKEEPINmATIONAS
low as it is today.
Another part of our view rests on the
EXPECTATIONTHATECONOMICSLACKIN
the developed world will continue
Possible debt problems
Yes, the world is complicated, but the collective effect is modest:

+ 25 bps
rate hike
-0.1 to -0.4 ppt

GDP growth
Source: RBC GAM
Exhibit 26: Post-supercyle era for commodities

900
Initial commodity
rout
800
S&P Goldman Sachs
Commodity Index
The end of the commodity

supercycle has exerted a powerful
DISINmATIONARYEFFECTOVERTHEPAST
few years (Exhibit 26). However, we
believe the downward pressures on
INmATIONWILLBEGINTOABATE
700
600
500
400
300
Second wave and
hovering near low
200
Historical
low
100
0
2005
2007
2009
2011
2013
Note: Historical low since July 2005. Source: Haver Analytics, RBC GAM
2015
!BOVEALLELSETHEKEYMESSAGE
ISTHATTHESUPPOSEDDEmATION
threat remains limited. We can
LARGELYACCOUNTFORWHYINmATIONIS
so low today, and those pressures
are inherently temporary. What of
other more persistent downward
pressures, such as the seeming
DEmATIONARYTHREATOFANAGING
population? One cannot deny that
ANAGING*APANHASLONGBEENSTUCK
INADEmATIONARYFUNKBUTTHISIS
arguably the result of policy errors
more than demographic inevitability.
In fact, one can mount a serious
theoretical argument that an aging
population should actually increase
INmATIONRATHERTHANREDUCEIT
After all, while retirees do tend
to consume somewhat less than
WORKING AGEINDIVIDUALSTHEMORE
SALIENTPOINTFROMANINmATION
perspective is that they produce
far, far less. Thus, their economic
demand exceeds their supply.
!LTOGETHERWELOOKFORINmATIONTO
recover partially in 2016, but not all
the way to a normal level (Exhibit
27). Furthermore, we suspect the
Exhibit 27: RBC GAM CPI forecast for developed markets
YoY CPI change (%)
2.0
1.75%
1.50%
1.50%
1.50%
1.5
1.00%
1.00%
1.0
0.50%
0.5
0.00%
0.00%
0.0
Canada
Japan
2015
2016
Source: RBC GAM
U.K.
U.S.
0.00%
Eurozone
Exhibit 28: Outlook for world oil demand more optimistic

98
World crude oil demand
(million bbl/day)
to ebb over the coming years.

&URTHERWENOTETHATANNUALINmATION
readings should rise by as much
as 0.5 to 1.0 percentage point over
the next few months as the extreme
WEAKNESSOFLATEFALLSOUTOF
the annual equation. Finally, the
effect of El Nino on weather patterns
seems set to push food prices higher
due to poorer growing conditions in
much of the world (though it may
simultaneously limit the increase in
energy costs).
October
96
94
92
90
88
86
Forecast
84
2010
2011
2012
2013
2014
2015
2016
World demand (historical)
Jan
April
Sept
Oct
Note: Shaded area represents EIA forecast. Source: OECD,EIA, Haver Analytics, RBC GAM
revival will be a tad more gradual

THANTHEMARKETSUPPOSES
Oil toils in the murky depths

Oil prices remain extraordinarily
low, having collapsed over the past
MONTHSDUETOnINORDEROF
declining importance a multi-year
surge in U.S. shale-oil production,
OPECs abandonment of its swing
producer role and decelerating
EMERGING MARKETDEMANDGROWTH
Ultra-low oil prices wont last forever.

4HEOILMARKETISNOWBEGINNING
THELONGMARCHBACKTONORMALVIA
improving supply and demand.
Global demand for oil is now growing
robustly, and expectations have,
in fact, been repeatedly ratcheted
HIGHER%XHIBIT -EANWHILE
GLOBALSUPPLYGROWTHISlNALLY
HALTING)NSODOINGTHEMARKET
ISGRADUALLYRIGHTINGITSELFBACKTO
equilibrium.
4HERISKSTOTHISOIL MARKETOUTLOOK
extend in both directions. To the
downside, oil-inventory levels are
extremely high and rising (Exhibit
31). Were storage limits to be hit,
prices would have to fall sharply.
On the other hand, OPEC production
is running unusually close to its
maximum, leaving little ability to
BUFFERASUDDENGEOPOLITICALSHOCK
4HISRISKCOULDSENDPRICESSHARPLY
higher on short notice.
U.S. crude production

(million bbl/day)
9.6
9.5
9.4
9.3
9.2
9.1
9.0
Jan-2015
Apr-2015
Nov-2015
Exhibit 30: World oil-supply forecast revised upwards

98
October
96
94
92
90
88
86
Forecast
84
2010
2011
2012
2013
2014
2015
2016
World production (historical)
Jan
April
Sept
Oct
Note: Shaded area represents EIA forecast. Source: OECD, EIA, Haver Analytics, RBC GAM
Exhibit 31: Bearish scenario for oil still revolves around inventories
500
480
460
440
420
400
380
360
340
320
300
Max=362
Min=330
Min=322
1
Max=343
7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52
Weekly average (2005-2014)
Weekly average (1983-2014)
Source: EIA, RBC GAM
Jul-2015
Source: EIA, Haver Analytics, RBC GAM
World crude oil supply

(million bbl/day)
This latter trend delays but does not

HALTOILSJOURNEYBACKTOEQUILIBRIUM
Barring further unforeseen
DEVELOPMENTSTHEOILMARKETSHOULD
normalize by 2017, permitting a
gradual increase in the price of oil.
#OSTEFlCIENCIESANDTHESTRENGTH
of the U.S. dollar mean that the
normal price of oil has arguably
FALLENFROMABOVE53PERBARREL
to below US$70.
Exhibit 29: U.S. crude-oil production off its peak
Commercial crude inventory

(million barrels)
In particular, the long-awaited

53SUPPLYRESPONSEHASlNALLY
appeared, with U.S. oil production
down by nearly half a million barrels
per day from the summer (Exhibit
(OWEVERTHEADJUSTMENT
remains smaller than expected, and
has recently stalled. Simultaneously,
ANDWORKINGATCROSSPURPOSESTHE
oil supply elsewhere in the world
has actually increased, with Iran in
particular set to substantially raise
production in 2016 on diminished
sanctions. As a result, while the
global oil supply is no longer
expected to grow, prior hopes that
it would fall outright have had to be
SCALEDBACK%XHIBIT
U.S. split personality

The U.S. remains an economy with a
SPLITPERSONALITY$OMESTICDEMAND
is robust, whereas foreign demand
for U.S. products is anemic.
$OMESTICALLYTHE53ENJOYSA
STRONGANDIMPROVINGJOBMARKET
as demonstrated by a rising ratio of
JOBOPENINGSTOJOBSEEKERS%XHIBIT
32). This metric argues that the
53LABOURMARKETCOULDBEEVEN
healthier today than it was at the
top of the last economic cycle. When
partnered with decent real wage
GROWTHWITHMORELIKELYONITSWAY
real personal income across the U.S.
is now expanding at an impressive
rate of 4% per year (Exhibit 33).
Providing further evidence of an
improved domestic environment,
household formation continues to
rise at a strong rate, demonstrating
IMPROVEDCONSUMERCONlDENCEAND
1.0
Job openings to unemployment
ratio
Second, low oil prices create

enormous winners and losers. Most
countries and indeed the world
in aggregate view low oil as a
growth-enhancing tax cut. However,
oil-producing nations suffer
intensely. These divergent prospects
are very much in effect.
Exhibit 32: U.S. job market improving
0.9
Back to precrisis peak
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
2001
2003
2005
2007
2009
2011
2013
2015
Source: BLS, Haver Analytics, RBC GAM
Exhibit 33: U.S. real personal income rising briskly

8
U.S. real personal income
(YoY % change)
4HEOILMARKETREMAINSASUBJECT
of outsized importance, for two
reasons. First, oil- and gas-producing
companies have roughly tripled their
indebtedness since 2006, creating
a basic vulnerability now that oil
prices have fallen. Historically, such
debt problems mount materially after
oil prices have been low for a year,
MEANINGTHISSECTORSlNANCIALSTRAIN
may continue to increase.
6
4
2
0
-2
-4
-6
1999
2001
2003
2005
2007
2009
2011
2013
2015
signaling a need for more homes,

furnishings and cars.
While income-inequality concerns
remain relevant and arguably
impose a slight drag on long-term
economic growth in the developed
world, it is nevertheless heartening
THATTHECONlDENCEOFLOW INCOME
U.S. consumers has increased
dramatically, easily exceeding the
PEAKOFTHEPRIORCYCLE%XHIBIT
/FCOURSETHEmIPSIDEOFTHE53
coin is that the strong dollar has
weighed materially on exports

%XHIBIT 7ELOOKFOR53TRADETO
remain underwhelming over the next
year as the U.S. dollar continues to
rise. Fortunately, the U.S. is better
positioned than almost any other
country to handle this adversity
given its healthy domestic side,
its insular economic structure and
its high value-added exports. That
SAID53MULTINATIONALlRMSMAY
feel differently given that their
orientation to foreign demand is far
higher than the average.
Global Investment Outlook | Eric Lascelles | Eric Savoie, MBA, CFA | Daniel E. Chornous, CFA
The Eurozone recovery remains

fragile after two recessions in short
order, and the region is grappling
with a number of fresh concerns
related to the Volkswagen crisis,
the sudden influx of Middle East
refugees, terrorism and polarizing
politics.
Despite this, the regions prospects
are generally improving. It has
now achieved consistent economic
growth for well over a year. Low
resource prices, low borrowing costs
and a weak euro remain central
features. We expect more of this in
the future thanks to a likely uptick
in ECB stimulus and a probable
further decline in the euro. The
regions money-supply growth has
been a reliable signal of economic
conditions, and this has improved
nicely (Exhibit 36). Credit conditions
also continue to improve, if slightly
less quickly than in prior quarters
(Exhibit 37). Growth has broadened
Expected change in financial situation

in a year for households in first
income tercile (index level)
Surpassed precrisis high
150
140
130
120
110
100
90
80
1980
1985
1990
1995
2000
2005
2010
2015
Note: Shaded area represents recession. Source: University of Michigan Surveys of

Consumers, RBC GAM
Exhibit 35: Mighty dollar hurts U.S. trade

30
U.S. real trade in goods
(YoY % change)
Eurozone to surmount
challenges
Exhibit 34: Low-income households are optimistic about the future
20
6.8%
10
0
-10
-2.5%
-20
-30
2005
2007
Exports
2009
Imports
2011
2013
2015
Exhibit 36: Eurozone money-supply growth has picked up

14
Euro area M3 (YoY % change)
Combining the strong domestic

environment and weak foreign one,
U.S. growth should remain decent at
a 2.5% clip in 2016. In the near term,
it is worth remembering that firstquarter U.S. economic growth has
tended to be weak in recent years,
though some of the past statistical
distortions were recently addressed,
and El Nino may have a mild positive
effect. While we dont see any
immediate signs of recession, a
number of indicators suggest that the
business cycle is maturing, and we
know that all economic expansions
eventually come to an end.
12
10
8
6
4
2
0
-2
2005
2007
2009
Source: ECB, Haver Analytics, RBC GAM
2011
2013
2015
4HESUDDENSPIKEINMIGRANTSTO
Europe due to the war in Syria is no
trivial matter, with almost 1 million
additional immigrants expected
to arrive in Germany in 2016, and
SIGNIlCANTNUMBERSELSEWHERE
This presents challenges in that
government resources will be
taxed, Europe has a poor record of
integrating past waves of immigrants
and the migrants have language and
cultural obstacles to overcome, not
to mention a generally low level of
education.
20
-20
-20
20
-40
40
-60
2003
Deteriorating credit
conditions
2005
2007
Credit demand (LHS)
2009
Credit availability
(net percent balance)
-40
Improving credit
conditions
60
2011
2013
2015
Credit availability (RHS)
Source: European Central Bank, Haver Analytics, RBC GAM
Exhibit 38: Robust U.K. economy still hiring though at slower pace
6
-2
-1
-4
-2
-6
2005
U.K. employment
(YoY % change)
What of the regions problems?

We have already addressed the
temporary nature of the fallout
FROMRECENTTERRORISTATTACKS4HE
6OLKSWAGENEMISSIONSSCANDALIS
certainly relevant given Germanys
auto-manufacturing base, but beyond
the corporate -level implications
the greatest message is that the
European bet on diesel technology
as an environmental panacea seems
TOHAVEBEENMISPLACED)TWILLTAKE
many years for the region to pivot
toward other green technologies. In
the meantime, credible estimates
put the Eurozone economic hit at
0.25 percentage point per year a
notable, but manageable blow.
German leading indicators are
holding up reasonably well.
40
Credit demand
(net percent balance)
European economic data continues

to pleasantly exceed expectations
and our models point to a further
slight acceleration in activity. As
SUCHWELOOKFORABOVE CONSENSUS
'$0GROWTHINn
SUFlCIENTTOMATERIALLYEATTHROUGH
THE%UROZONESECONOMICSLACK
Exhibit 37: Demand and supply of credit improving in the Eurozone
U.K. real GDP (YoY % change)
to include past laggards such as

Ireland, Spain and Portugal.
-3
2007
GDP (LHS)
2009
2011
Employment (RHS)
2013
2015
Source: Office for National Statistics, Haver Analytics, RBC GAM
However, it isnt all negative. The

resulting European government
spending is well-timed given an
ARGUABLENEEDFORlSCALSTIMULUS
Mathematically, the additional
construction and government
spending should add as much as
0.5 percentage point to Eurozone
growth. The sheer number of
migrants is not unreasonable for a
continent of Europes size to absorb,
THOUGHTHE'ERMAN SPECIlCmOWIS
MATERIAL-OREOVERTHERATEOFINmUX
is not entirely out of German hands
as the country has opted to reject

so-called economic migrants who
do not have a serious refugee claim.
Over the long run, these refugees
present a potential partial solution
to Europes demographic woes.
Finally, Eurozone politics remain
complicated. Some of the most acute
RISKSHAVEFADEDnSUCHASCONCERNS
revolving around Greece but others
persist, such as Portugals new
far-left coalition and the separatist
demands of Spains Catalonia region
THOUGHTHECLAIMSARELACKINGWITH
The British economy continues to

trundle along at a reasonable rate of
growth, providing one of the more
stable economic environments in
the world. Economic growth and job
creation are both adequate, if a bit
less zippy than in the recent past
%XHIBIT
Anecdotes from the ground
remain fairly good, though leading
indicators have softened a touch.
0OLITICALLYTHE5+HASSCALEDBACK
THEEXTENTOFITSIMMINENTlSCAL
austerity, achieved greater political
COHERENCETHANKSTOANEWMAJORITY
Conservative government and is not
yet staring at a promised referendum
on EU membership in the face.
Total private sector pay

(YoY % change)
U.K. steady
Exhibit 39: U.K. wage growth accelerates

6
5
4
3
2
1
0
-1
-2
-3
2005
2007
2009
2011
2013
2015
Note: 6-month moving average of year-over-year % change of private sector pay.

Source: Office for National Statistics, Haver Analytics, RBC GAM
Exhibit 40: U.K. base rate equilibrium range

18
16
14
12
10
8
6
4
2
0
-2
regard to legitimacy and legality).

-OREGENERALLYTHEREISARISKTHAT
European politics will continue to
drift further from centre as hotbutton issues such as bailouts,
REFUGEESANDTERRORISTATTACKS
continue to push voters in a more
populist direction.
1980
1985
1990
Last plot: 0.50%
1995
2000
2005
2010
2015
2020
Current range: -1.87% - 0.71% (Mid: -0.58%)
Source: RBC GAM, RBC CM
4HANKSTOCONTINUEDSUCCESSTHE
British economy no longer has much
ECONOMICSLACK4HISISASIGNOF
success, but also brings the reality
of higher wages and the prospect of
HIGHERINmATION%XHIBIT )NTURN
THE"ANKOF%NGLANDISTHEOTHER
DEVELOPED WORLDCENTRALBANKTHATIS
seriously contemplating tightening
monetary policy (Exhibit 40). We
LOOKFORASTARTTOTHISINTHElRST
HALFOFTRAILINGINTHEWAKEOF
the Fed.
)4(%',/"!,).6%34-%.4/54,//+ New Year 2016
!GAINSTTHISBACKDROPWEANTICIPATE
continued steady and roughly
consensus economic growth of
around 2.5%. A reviving Eurozone
economy is helpful, as is the recent
mUTTERLOWEROFTHEPOUND
Japanese silver linings

It is easy to be sour on Japan.
,ACKLUSTERGROWTHANDNONEXISTENT
INmATIONAGAINSTABACKDROPOFPOOR
demographics and high public debt
HAVEMANYINVESTORSASKINGWHETHER
Prime Minister Abes three-year-old
ECONOMIC REFORMPROGRAMKNOWNAS

Abenomics, has been a failure.
However, in our opinion, this grim
perspective misses some important
victories.
As an opening observation,
the countrys recent economic
performance is not quite as poor as
it seems. Much of the latest quarterly
decline in output related to inventory
DESTOCKING$EMANDCONTINUED
TOGROW*APANESEBANKLENDING
has also continued to shift higher,
A common criticism of Japan

has been that the roughly 40%
depreciation in its exchange rate
has failed to revive exports. Strictly
SPEAKINGTHISISTRUE"UTCURRENCY
SWINGSAREKNOWNTOIMPACT
Japanese trade over a much longer
timeframe than most other nations.
)NTHEMEANTIMETHEBENElTOF
THEWEAKERCURRENCYISEVIDENTIN
the sharp increase in the countrys
CORPORATEPROlTABILITY%XHIBIT
44). Rather than increasing sales
by passing along lower prices to
FOREIGNBUYERS*APANESElRMSHAVE
left their prices unchanged and
REAPEDGREATERPROlTS7EEXPECT
Bank lending to private sector

(YoY % change)
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
2003
2005
2007
2009
2011
2013
2015
Source: Bank of Japan, Haver Analytics, RBC GAM
%XHIBIT*APANESEINmATIONEXPECTATIONSSTILLLOOKlNE
4.0
Japan's expected inflation (%)
-EANWHILETHECOUNTRYSINmATION
performance is not quite as grim as
ITlRSTLOOKS3URVEY BASEDINmATION
expectations are materially higher
than a few years ago, portending
an important change in economic
BEHAVIOUR%XHIBIT 7HILEOFlCIAL
readings of total and core CPI are
quite low, a better measure of core
one that excludes both food and
energy, and the temporary effects
of sales-tax changes argues that
*APANSUNDERLYINGINmATIONTREND
has been climbing steadily for
several years, and now exceeds
1.0% (Exhibit 43). While wage
growth sends only a mixed message
about such matters, the BOJ has
INDICATEDTHATITBELIEVESTHEOFlCIAL
statistics are failing to capture
SIGNIlCANTUPWARDPRESSUREON
wages. The Japanese economy
HASVERYLITTLEREMAININGSLACK
suggesting further pressure on
INmATIONIN
Exhibit 41: Japanese bank lending gradually growing
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Consumer Confidence Survey, Cabinet Office of Japan, Haver Analytics, RBC GAM
%XHIBIT*APANESEINmATIONISRISINGWHENDISTORTIONSREMOVED
4.0
CPI (YoY % change)
CONlRMINGTHATTWODECADESOFFROZEN
credit are thawing (Exhibit 41).
Core CPI adjusted for

April 2014
sales tax hike
3.0
2.0
1.0
0.0
-1.0
-2.0
2010
2011
CPI
2012
2013
CPI ex food and energy
2014
2015
Note: CPI adjusted for sales tax hike based on assumption for full pass-through to consumers
and BoJ estimates of weights of items affected. Source: BoJ, Ministry of Internal Affairs and
Communication, Haver Analytics, RBC GAM
The Canadian economy remains

troubled by low resource prices.
!LTHOUGH'$0GROWTHSNEAKED
BACKINTOPOSITIVETERRITORYOVERTHE
second half of 2015, our leading
indicator signals the persistence
OFCONSIDERABLEWEAKNESS
(Exhibit 47). A few more sporadic
NEGATIVEMONTHLY'$0PRINTSARE
LIKELY%CONOMICSLACKHASGROWN
materially.
The Canadian economy feels even
WORSETHANITLOOKSTHANKSTOA
TERMS OF TRADESHOCKTHATHASSEEN
the price of resource exports fall
and the cost of imports rise. Given
THELATESTROUNDOFCAP EXCUTBACKS
in the oil patch, we are lowering our
2016 growth forecast to 1.5% from
an already modest 1.75%.
Of course, not all parts of the
country are suffering. Canada is
divided between oil-exporting
provinces and those that import
100
80
60
40
20
0
1980
1985
1990
1995
2000
Exchange rate (LHS)
2005
2010
Japan's corporate profits

(% of GDP)
18
16
14
12
10
8
6
4
2
0
2015
Corporate profits (RHS)
Source: JP Morgan, Ministry of Finace Japan, Haver Analytics, RBC GAM
Exhibit 45: TPP trade-deal consequences

Vietnam
Malaysia
Japan
New Zealand
Singapore
Peru
Mexico
Chile
Australia
Canada
U.S.
Indonesia
Philippines
China
Thailand
13.6
Canada drags
120
6.1
2.2
2.2
2.0
1.4
1.0
0.9
0.6
0.5
0.4
-0.2
-0.3
-0.3
-0.7
-2
Big winners
Modest winners
Modest losers
0
4HE4RANS 0ACIlCDEALAGREEDTOIN

principle in October, must still be
RATIlEDBYNATIONALLEGISLATIVEBODIES
Inevitably, trade deals have both
winners and losers, but the net effect
is usually positive. Japan stands to
BEAMONGTHELARGESTBENElCIARIESOF
TPP as it is more protective than most
to begin with (Exhibit 45). The trade
deal is part of a broader effort by
Japan to structurally boost its growth
(Exhibit 46).
%XHIBIT#ORPORATEPROlTSREBOUNDASYENDEPRECIATES
JPY nominal effective exchange
rate (2010=100)
the yen to soften slightly further,

and see a reasonable chance that
the BOJ delivers additional monetary
stimulus.
11
13
Cumulative increase in level of GDP after ten years (ppt)
Within TPP
Outside TPP
Source: Peterson Institute for International Economics, RBC GAM
Exhibit 46: Japan reforms offer some promise

Labour
s Efforts underway to reduce two-tier nature of

LABOURMARKET
s 5NDERUTILIZEDPOOLSOFPOTENTIALWORKERS
being tapped
Governance
s 4OKYO3TOCK%XCHANGEMANDATESINDEPENDENT
directors on boards
s Shareholder activism comes to Japan
Trade
Source: RBC GAM
s 4RANS 0ACIlC0ARTNERSHIPDEALSTRUCK
15
&INALLY#ANADASLABOURMARKET
remains mysteriously resilient
%XHIBIT 4HISCONlRMSTHATTHE
national economy has not truly
experienced a recession, though it
also sends a less friendly message
that Canadian productivity growth
has been quite poor. Consistent with
THISLATTERINTERPRETATIONTHE"ANK
OF#ANADA"/# THINKSTHATTHE
potential rate of economic growth
in Canada over the next few years is
below 1.5%.
Given the challenging environment,
WECONTINUETOLOOKFORTHE#ANADIAN
dollar to shed a few more cents
and for the BOC to welcome further
WEAKNESSWEREITTOARRIVE%XHIBIT
50). The countrys biggest question
MARKISITSEXPORTPERFORMANCE
4HEREISlNALLYSOMEEVIDENCETHAT
export-sensitive sectors are enjoying
Canadian Economic Composite

(standard deviations from
historical norm)
2
1
0
-1
-2
-3
-4
-5
2001
2003
2005
2007
2009
2011
2013
2015
Note: Composite constructed using four leading indicators from surveys on Canadian
businesses. Source: CFIB, Haver Analytics, RBC GAM
Exhibit 48: Ontario trumps Alberta

Monthly GDP (YoY % change)
The new Liberal majority

government casts a moderate
SHADOWONlNANCIALMARKETS
given a less friendly atmosphere
for the resource sector alongside
an expected reduction in the taxexempt investment limit and a
HIGHERTOPTAXBRACKET(OWEVER
the new governments economic
policy should provide a boost to
economic growth on the order of a
few tenths of a percentage point over
the next few years given aggressive
infrastructure spending plans and
additional immigration.
Exhibit 47: Canadian economy still adjusting to oil shock
Ontario unusually
good
8
6
4
2
0
-2
-4
-6
-8
2001
Alberta unusually
weak
2006
Ontario GDP proxy
2011
Alberta GDP proxy
2015
Note: Monthly provincial GDP estimated from available monthly economic variables, combined
via principal component analysis and then regressed against annual provincial GDP. Source:
Haver Analytics, RBC GAM
%XHIBIT#ANADIANEMPLOYMENTISSTILLlNE
Canadian employment
(6-month % change annualized)
fuels. Alberta and the other oil

exporters continue to experience
recessionary conditions, whereas
/NTARIOISGROWINGMOREQUICKLY
THANITDIDBEFORETHElNANCIALCRISIS
%XHIBIT
4
3
2
1
0
-1
-2
-3
-4
-5
-6
2003
2005
2007
2009
2011
2013
2015
Note: Employment change adjusted by full-time and part-time employment data.

Source: Statistics Canada, Haver Analytics, RBC GAM
growth, but aggregate trade remains

distinctly underwhelming given the
MARKEDDEPRECIATIONINTHECURRENCY
over the past few years.
Exhibit 50: Canada overnight rate equilibrium range

24
20
Emerging-market debt worries
4HEEMERGING MARKETECONOMIC
engine has decelerated
The Fed may trigger an increase

in global borrowing costs
4HESTRONG53DOLLARISMAKING
dollar-denominated debt more
expensive
The decline in resource prices
challenges resource-oriented
lRMSANDCOUNTRIES
A granular examination of emergingMARKETCORPORATEDEBTCONlRMSTHAT

the portion vulnerable to distress or
outright default has risen steadily,
and is now at an unusually high level
(Exhibit 52).
%MERGING MARKETEXTERNALDEBT
ANDEMERGING MARKETCORPORATE
debt sums are both quite large.
&ORTUNATELYTHERISKASSOCIATED
with each is a bit smaller than it
lRSTSEEMS4HERAPIDINCREASEIN
EXTERNALDEBTSINCETHElNANCIAL
crisis has been fully matched by the
INCREASEDSIZEOFEMERGING MARKET
economies. As a result, the external
DEBT TO '$0RATIOISNOWORSETHAN
8
4
0
1980
1985
1990
Last plot: 0.48%
1995
2000
2005
2010
2015
2020
Current range: -0.06% - 1.88% (Mid: 0.91%)
Exhibit 51: Emerging-market bond fund exodus continues

3
Weekly EM bond fund net flows
(US$ billions)
This is a timely subject as several

catalysts for debt distress have
STRUCKSIMULTANEOUSLY
12
Inflow
2
1
0
-1
-2
Taper
tantrum
-3
-4
Outflow
-5
-6
2010
Renewed
outflows
2011
2012
2013
2014
2015
Source: EPFR, RBC GAM
%XHIBIT2ISINGSHAREOFLIABILITIESHELDBYVULNERABLElRMSIN%60
100
Share of EM corporate liabilities

(%)
%MERGING MARKETNATIONSAREHOST
to a disproportionate share of the
worlds debt worries and capital
OUTmOWSCONTINUESFROMTHEASSET
class (Exhibit 51).
16
Higher
than
2008
50
40
30
20
10
0
2004 2005
2<=ICR
2006 2007
1<=ICR<2
2008
2009
ICR<1
2010
2011
2012
2013
Note: Share of liablities held by listed companies in emerging market countries according to their
interest coverage ratio (ICR), measured as ratio of earnings before interest and taxes to interest
expenses. Source: IMF, RBC GAM
)NCONTRASTEMERGING MARKET

corporate debt has undeniably
outgrown its host economies
(Exhibit 54). Fortunately, much of the
DEBTISNTATSERIOUSRISKOFDEFAULTAS
ITISBACKEDINSOMEFASHIONBYTHE
sovereign (Exhibit 55). Furthermore,
concerns about what will happen
when the Fed raises rates may be
beside the point given that credit
spreads have already widened far
MORESIGNIlCANTLYTHANAHANDFUL
OFRATEHIKESCOULDEVERELICITBY
themselves.
.EVERTHELESSEMERGING MARKETDEBT
threats are both real and elevated,
but not as screamingly high as they
lRSTSEEM
Seeking an emerging-market
bottom
In a world of sluggish economic
growth, it is important to recognize
THATTHEBULKOFTHEDISAPPOINTMENT
has been centered in emerging
MARKETS4HEIRECONOMICGROWTH
has slowed, whereas the developed
world has actually accelerated
slightly (Exhibit 56).
There are many reasons for this
EMERGING MARKETDECELERATION
(Exhibit 57). Common drags include
more sluggish global demand
(though there is a circularity to this
argument), the aforementioned debt
RISKSDECELERATINGGLOBALIZATION
slowing productivity growth and
worsening demographics.
Exhibit 53: Emerging-market external debt tame relative to GDP

External liabilities (% of GDP)
before the crisis (Exhibit 53). This

DOESNTENTIRELYELIMINATETHERISK
given the strengthening U.S. dollar
and rising borrowing costs, but it
puts it into perspective.
100
90
80
70
60
50
40
30
20
10
0
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Global
Emerging markets
Note: Measured as external debt securities and loans of all reporting countries.
Source: BIS, IMF, Haver Analytics, RBC GAM
Exhibit 54: Some emerging markets pile on debt

Hong Kong
China
Singapore
Malaysia
Thailand
Turkey
Brazil
Poland
Russia
Mexico
Hungary
Indonesia
South Africa
India
-10
10
30
50
70
90
Change in indebtedness from 2007 to 2014 (ppt)
Household
Nonfinancial corporate
Government
110
Note: Debt expressed in % of GDP. Change for Malaysia from 2008 to 2014.
Source: BIS, Morgan Stanley, IMF, RBC GAM
Exhibit 55: Emerging-market corporate-debt risk smaller than it looks
27%
51%
government-backed
= less risk
Pure corporate
Quasi
Partial quasi
22%
Note: Quasi is fully state-backed corporation. Partial quasi is partially state-backed corporation.
Source: J.P. Morgan, RBC GAM
/FCOURSEEMERGING MARKET

growth prospects are highly varied,
DEPENDINGINSIGNIlCANTPARTON
WHETHERACOUNTRYBENElTSFROMLOW
RESOURCEPRICESWHETHERITSBANKS
had extended too much credit, and
whether it is turning its attention
BACKTOLONG NEGLECTEDSTRUCTURAL
reforms.
We cannot claim to see a clear
SIGNALTHATEMERGING MARKETGROWTH
has bottomed, though there may
be the beginning of an argument.
On the positive side, the currency
depreciation that has occurred
in many countries should prove
useful in securing additional room
for future growth. On the negative
side, the El Nino effect may prove a
hindrance for several Asian countries
such as India, Indonesia and the
Philippines.
Rate reversal
Interest rates remain astonishingly
low and have proven adept at
defying widespread forecasts over
Exhibit 56: Steady global growth masks divergent trends

Real GDP (annual % change)
10
8
6
4
2
0
-2
-4
IMF forecast
-6
2004
2006
2008
Emerging markets
2010
2012
2014
2016
Developed markets
2018
2020
Source: IMF, Haver Analytics, RBC GAM
Exhibit 57: Review of EM drivers

CYCLICAL
COMMON
STRUCTURAL
Sluggish global demand
Slowing globalization
$EBTRISKS
Slower productivity gains
Commodity decline
New reform era
Worsening demographics
(Exporter/Importers)
INDIVIDUAL
Credit slowdown
(India, Mexico, China, Indo.)
Shifting competitiveness
(China, Brazil, etc./Others)
(China/Mexico, frontier
MARKETS
Source: RBC GAM
Exhibit 58: EM productivity growth slows for one key reason
10
9
8
7
6
5
4
3
2
1
0
-1
Contribution to GDP growth

(ppt)
)TISNOTTHATEMERGING MARKETNATIONS
have stopped investing in capital,
EDUCATINGPEOPLEORHIRINGWORKERS
Rather, they are seemingly achieving
less total-factor productivity (TFP)
growth the creation and diffusion
of new technologies and processes
%XHIBIT 4HISISINPARTACLASSIC
and unavoidable consequence of
countries becoming wealthier, so
we cannot realistically expect most
EMERGING MARKETGROWTHRATESTOSOAR
BACKTOPRIORHIGHS"UTTHESLOW4&0
GROWTHISALSOANACKNOWLEDGEMENT
OFINSUFlCIENTSTRUCTURALREFORMSAND
this is something that countries
can address.
Lost TFP growth explains

all of productivity
slowdown
2002
2004
2006
Total factor productivity (TFP)
2008
Labour
2012
2010
2014
Capital
Note: 3-year moving average of contribution to GDP growth of six major EM countries. Labour includes
labour quality and labour quantity. Source: The Conference Board Total Economy Database, RBC GAM
U.S. bond yields traded in a narrow

range over the past quarter, but
have moved above levels of earlier
this year and are now above our
estimate of fair value. To determine
the equilibrium yield for sovereign
BONDSWECOMBINEANINmATION
premium with the real rate of
INTEREST%XHIBITBREAKSDOWN
these two components for 10-year
4REASURIES4HEINmATIONPREMIUM
embedded in bonds is low, but
appears to have stopped falling. We
EXPECTINmATIONTORISEONLYMODESTLY
over the next year but to stay low by
historical standards, so the impact
1995
Fed Funds Rate
2000
2005
2010
2015
Predicted Fed Funds Rate (Koenig Taylor Rule)
Exhibit 60: Fair-value estimate composition

United States
Real 10-year T-bond yield
United States
#0))NmATION
16
14
12
10
8
6
4
2
0
-2
-4
12.0
36-month Centred CPI

Last Plot: 0.8%
12-Month Forecast: 1.0%
10.0
8.0
Sovereign-bond risks
moderate
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
1990
Source: Federal Reserve Bank of Dallas, RBC GAM
Some of these conditions seem more

vulnerable to reversal than they
have been in some time. First among
THESETHE&EDISABOUTTOEMBARKON
a round of tightening which appears
JUSTIlEDGIVENIMPROVEMENTSINTHE
economy, employment and expected
INmATION4HESEFACTORSARECAPTURED
in the Taylor rule, which reinforces
a view that now is an appropriate
TIMETOACT%XHIBIT 2ISING
short-term interest rates should
nudge bond yields higher, but given
AMACROECONOMICBACKDROPOF
MODERATEGROWTHANDLOWINmATION
the path to higher rates is expected
to be gradual and well telegraphed.
Exhibit 59: Koenig Taylor rule and the fed funds rate
6.0
+1 SD
Last Plot: 1.4%
4.0
2.0
0.0
-2.0
1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 2020
36-month Centred CPI Inflation
Actual Monthly CPI Inflation
-1 SD
Average: 2.2%
12-Month Forecast: 1.27%

-4.0
1960 1966 1972 1978 1984 1990 1996 2002 2008 2014 2020
Real T-Bond Yield
Real 10-Year Time Weighted Yield
U.S. 10-year T-bond yield

Equilibrium range
16
14
12
10
8
%
the past several years that they

would rise. There is thus a distinct
RISKTHATTHISTRENDSIMPLYPERSISTS
especially given the downward
pressure that comes from ultraSTIMULATIVECENTRALBANKSSLOW
GROWTHLOWINmATIONSHRINKINGlSCAL
DElCITSANDANAGINGPOPULATION
6
4
2
0
1980
1985
1990
Last Plot: 2.22%
1995
2000
2005
2010
2015
2020
Current Range: 0.88% - 2.67% (Mid: 1.77%)
As the Fed is about to start a round

of tightening, investors are rightly
FOCUSEDONTHELIKELYEFFECTOFTHAT
action on longer-term interest
rates. History shows that bond
yields do not necessarily rise after
the Fed begins to increase shortterm interest rates. We analyzed
the trajectory of bond yields over
RATE HIKECYCLESDATINGBACKTO
THESMEASURINGTHEIRCHANGE
through the 12 months leading up
to the initiation of a tightening cycle
and the 24 months after (Exhibit 61).
The median outcome of all scenarios
Median Bond Yield as a % of

Level at Date of Initial Rate Hike
The other component of the model

the real rate of interest continues
to lie below its long-term norm and
was even negative from late 2011 to
early 2013. Negative or ultra-low real
rates of interest are unsustainable as
investors ultimately need to be paid
to defer access to their capital. That
said, the longer that interest rates
stay low, the more they will come
to feel normal. The persistence of
LOWRATESFOLLOWINGTHE
lNANCIALCRISISHASALMOSTCERTAINLY
anchored investor mindsets to a
low level of rates going forward.
Our equilibrium models embed this
concept of adaptive expectations,
reducing the expected level of
nominal interest rates in the near
term and lowering the trajectory of
their climb through the longer term.
4HERECENTRISEINTHEMARKETREAL
rate of interest has pushed it a bit
above our modeled level, reducing
the threat that was apparent in
nominal bond yields a couple of
years ago.
Exhibit 61: U.S. 10-year bond yield and the fed funds rate hike
)MPLICATIONSFORCURRENTCYCLEFOLLOWINGlRSTRATEHIKE
150
140
130
120
110
100
90
80
70
60
50
Assume first hike: December 2015
-12
-9
-6
-3
0
3
6
9
12
15
18
21
24
Months Prior to & Following Fed Fund Rate Hike
Median of All Cycles
Recession Cycles
No Recession Cycles
Worst (1994)
Current Cycle
Source: RBC GAM
Exhibit 62: Global bond yields

10-year government bonds
2.5
2.22
2.0
1.83
1.57
1.52
1.5
1.42
ONNOMINALBONDYIELDSISLIKELYTO
be small.
1.0
0.47
0.5
0.31
0.0
U.S.
U.K.
Canada
Spain
Italy
Germany
Japan
Source: Bloomberg, RBC GAM
shows that yields rise only slightly

FOLLOWINGANINITIALHIKEINTHEFED
funds rate. In cases where tightening
led to a recession, bond yields rose
meaningfully, but then ultimately fell
as the economy began to contract. In
non-recessionary cycles, yields tend
to decline following the start of a
ROUNDOFTIGHTENINGBECAUSETHEBULK
of the adjustment in yields occurs in
the period leading up to the initial
HIKE&ORTHESEREASONSWEEXPECT
that yields will climb only modestly
to 2.50% over the coming year even

as the fed funds rate starts to rise.
There are several other factors that
may limit the rise in U.S. yields.
-OSTSIGNIlCANTLYRELATIVELYLOW
YIELDSELSEWHEREINTHEWORLDMAKE
Treasury bonds appear attractive
to global investors (Exhibit 62). The
resulting demand for Treasuries
should cap how far yields on
these instruments can rise in the
short term. A prime example is
THE%UROZONEWHERETHE%#"S1%
Equities: a look back at 2015

Expanding valuations have been
AKEYCONTRIBUTORTORISINGSTOCK
PRICESSINCETHE lNANCIAL
CRISISASINVESTORSRISKAPPETITE
was gradually restored. Exhibit 67
shows the year-by-year contribution
TOSTOCKRETURNSFROMBOTHEARNINGS
growth and multiple expansion.
Total
Cyprus
Portugal
Malta
Latvia
Slovenia
Italy
Spain
Ireland
Lithuania
Sweden
Luxembourg
Denmark
Austria
Belgium
Slovakia
France
Netherlands
Finland
Germany
Switzerland
The recent widening in high-yield

credit spreads is concerning. Under
NORMALMARKETCONDITIONSHIGH YIELD
bonds typically trade at a spread
of 300 to 400 basis points. Recent
EVENTSHAVEPUSHEDSPREADSTO
basis points. While spreads are
wider than normal, the frequency
distribution of high-yield credit
spreads in Exhibit 64 suggests
that they can get a lot wider still.
0ROBLEMSINCREDITMARKETSWERE
initially isolated to energy, but other
sectors are now also being affected
as well (Exhibit 65). Credit spreads
HAVEHISTORICALLYHADASTRONGLINKTO
THESTOCKMARKETASSTRESSINCREDIT
usually comes a little before or at
the same time as equities correct
(Exhibit 66). In this instance, though,
the spread widening has occurred
WITHTHESTOCKMARKETSTAYINGNEAR
an all-time high. It is unusual for this
divergence to persist for an extended
period. At some point, the situation
WILLBERESOLVEDBYAlRMINGOFCREDIT
MARKETSORADROPINSTOCKPRICES
80
70
60
50
40
30
20
10
0
Note: the total value of outstanding European government bonds is 7.6 trillion euros and, of
those, 3.0 trillion euros worth of European government bonds are trading below a 0% yield.
Source: Deutsche Bank Research
Exhibit 64: High-yield bond spread

Frequency distribution
120
Number of months
Early signs of strain in

credit markets
Exhibit 63: European government bonds

0ERCENTAGEOFMARKETABLEBONDSTRADINGBELOWYIELD
100
Latest: 680bps
80
60
40
20
0
<=300
300 400
400 500 600 700 500

600
700
800
Credit spread range (basis points)
800 900
900 1000
>=1000
Note: Data is based on monthly closing values for the CS High Yield Index II (formerly DLJ High
Yield Index) Spread to Worst, dating back to January 1986. Source: Credit Suisse, RBC GAM
Exhibit 65: High-yield bond spread

Option-adjusted spread
1200
1100
Basis points (bps)
program is contributing to extremely

low yields. In fact, Exhibit 63 shows
that 40% of outstanding European
government bonds are trading at
sub-zero yields!
1000
900
800
700
600
500
400
300
Dec-13
Apr-14
Aug-14
HY Index
Dec-14
HY Energy
Apr-15
Aug-15
Dec-15
HY ex Energy
Source: BofAML, RBC GAM
If valuations are to be less

SUPPORTIVEOFEQUITYMARKETRALLIES
going forward, then earnings growth
WILLHAVETODRIVESTOCKSFROMHERE
(OWEVER30EARNINGSPEAKED
at the end of 2014 and have been
declining gradually throughout 2015.
While the declines have been mostly
related to the collapse in energy
prices and the impact of a rapidly
APPRECIATING53DOLLARALOOKAT
past earnings cycles suggests that
we are at a point where earnings
growth frequently begins to fade.
%XHIBITSHOWSAhROADMAPvOF
earnings cycles, anchoring the start
OFEACHCYCLETOTHEEARNINGSPEAK
preceding a recession. The median
)4(%',/"!,).6%34-%.4/54,//+ New Year 2016
80
60
40
20
0
-20
-40
-60
-80
100
Basis Points
%XHIBITSHOWSASTANDARDIZED
version of our equilibrium P/E
model. The midpoint is the result
of 12 equations combining interest
RATESINmATIONANDCORPORATE
PROlTABILITY4HEBANDSTRACK
0.5, 1 and 2 standard deviations
from equilibrium. The latest bull
MARKETBEGANIN-ARCH
with the price-to-earnings ratio
at two standard deviations below
equilibrium. Valuations have been
moving gradually higher since
then and are now at 0.5 standard
deviations above equilibrium. While
P/Es are not unusually stretched at
these levels, they do not provide
THETAILWINDFORSTOCKPRICESTHAT
investors enjoyed through the initial
recovery from the crisis period.
Exhibit 66: Corporate bond spread (inverted) vs. S&P 500 earnings
200
300
400
500
600
700
1980
YoY % Change
3TOCKSEXPERIENCEDSIGNIlCANT
volatility in 2015, but the S&P 500
Index remains almost unchanged
from the start of the year. Rising
valuations offset the decline in
earnings that began late last year.
1985
1990
1995
2000
2005
2010
2015
Baa Corporate Yield Minus 10-Year T-Bond Yield (inverted, LHS)
S&P 500 Earnings (RHS)
Source: RBC CM, RBC GAM
Exhibit 67: S&P 500 return decomposition

Return contribution of earnings growth and multiple expansion
60%
40%
20%
0%
-20%
-40%
-60%
'89
'91
'93
'95
'97
Multiple Expansion
'99
'01
'03
'05
Earnings Growth
'07
'09
'11
'13
'15
(YTD)
S&P500 Price Return
Exhibit 68: S&P 500 Index

Normalized (equilibrium) price/earnings ratio
+2 SD
+1 SD
+ SD
EQ
- SD
-1 SD
-2 SD
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Gauging the opportunity

in stocks
While some of our indicators
ARESTARTINGTOmASHANEEDFOR
increased caution in todays
investing environment, the balance
of our signals suggests that these
issues will ultimately be resolved.
If our base case materializes,
compelling upside potential for
STOCKSREMAINS%XHIBITPRESENTS
possible outcomes for the S&P 500
based on various combinations of
earnings and valuations. Assuming
the current top-down consensus
earnings of $120.04 for the S&P
500 is delivered and a multiple of
CONSISTENTWITHCURRENTLEVELS
OFINmATIONINTERESTRATESAND
CORPORATEPROlTABILITY ISSUSTAINED
the index would reach 2,170.51 by
year-end, or 4% above its current
level at the time of writing. For 2016,
the same multiple applied to todays
2016 top-down consensus earnings
ESTIMATEOFWOULDGENERATE
a total return of 14% over the next
13 months, in line with our forecast.
Earnings Level as % of Cycle

Peak Earnings Level
Exhibit 69: S&P 500 recurring earnings

!LLEARNINGSPEAKSASSOCIATEDWITHPERIODSOFRECESSION
180
160
140
120
100
80
60
40
20
Median Months: Earnings Peak to Earnings Trough:19 months

(Current Period since July '07 Earnings Peak: 100 months)
-6
12 18 24 30 36 42 48 54 60 66 72 78 84 90 96 102
Current Cycle
Best (1973-1975)
Worst (2001)
Median of All Cycles
Months Prior to & Following Peak in Earnings

Exhibit 70: S&P 500 Composite Index

Consensus earnings estimates
Consensus earnings estimates
($US)
duration for a cycle, measured from

PEAKTOPEAKISMONTHSANDIF
we assume that the current cycle
ENDEDWITHTHEEARNINGSPEAKSET
$ECEMBERITWOULDHAVELASTED
MONTHS7HILEANALYSTSCONTINUE
TOFORECASTCORPORATEPROlTSABOVE
current levels in 2016 and 2017,
earnings estimates have undergone
constant negative adjustment since
the end of 2014 (Exhibit 70). It will
BEMORECHALLENGINGFORSTOCKSTO
progress higher without positive
earnings momentum.
160
150
140
130
120
110
100
90
2009
2010
2012
2011
2013
2012
2014
2013
2014
2015
2015
2016
2016
2017
Source: Thomson Reuters, Bloomberg
Exhibit 71: Earnings estimates & alternative scenarios for valuations and
outcomes for the S&P 500 Index
CONSENSUS
2015
Top down
2015
Bottom up
2016
Top down
2016
Bottom up
P/E
$120.0

3TANDARD$EVIATION
22.2
2670.4

3TANDARD$EVIATION
20.2
2420.4

Equilibrium

2170.5
2136.2

3TANDARD$EVIATION
16.0

2060.1
3TANDARD$EVIATION

1670.6
1644.2

Source: RBC GAM
Whats in style?
With economic growth at uninspiring
levels, investors have favoured
GROWTHSTOCKSASTHESECOMPANIES
have demonstrated the ability to
increase their earnings without
much reliance on a solid advance in
'$0%XHIBITSHOWSTHATGROWTH
has dominated during the past
YEAROUTPERFORMINGVALUESTOCKSBY
THROUGHTHEENDOF.OVEMBER
A swing away from growth and
toward value can be expected when
investors grow more positive on the
INTERMEDIATETERMOUTLOOKFOR
the economy.
300
16%
12%
100
10%
8%
6%
-100
4%
-200
Fed funds rate
14%
200
Basis points
2%
-300
1977
1982
1987
1992
1997
2002
Periods of tightening monetary policy

Fed funds rate (RHS)
2007
2012
0%
2017
10-year minus 2-year bond yield (RHS)
Source: Haver Analytics, RBC CM, RBC GAM
Exhibit 73: U.S. yield curve vs. VIX volatility

-2%
70
60
-1%
50
VIX last plot: 15.8

0%
40
1%
30
Index level
As always, the path to higher equity

prices is not expected to be smooth.
A tightening of monetary policy
USUALLYLEADSTOAmATTENINGOFTHE
yield curve, typically foreshadowing
ANINCREASEINEQUITY MARKET
VOLATILITY$URINGPERIODSOFEASING
the yield curve (i.e. 10-year yields
minus 2-year yields) steepens as
the Fed cuts short-term interest
rates to stimulate the economy
(Exhibit 72). The opposite is true
during periods of tightening. Notice
that there is an inverse relationship
between the Volatility Index (VIX)
and the steepness of the yield curve,
advanced by 30 months (Exhibit
73). Beginning in 2014, the yield
CURVEBEGANTOmATTENAS1%TAPERING
alleviated downward pressure on
short-term yields. Should the past
relationship between the yield
curve and the VIX hold, be prepared
for a continued rise in volatility
during 2016.
Exhibit 72: U.S. yield curve and monetary policy

10-year minus 2-year bond yield vs. fed funds rate
20
2%
10
3%
1990
0
1994
1998
Recession periods
2002
2006
2010
2014
U.S. 10yr-2yr spread (LHS, Inv, Adv 30 months)
2018
VIX (RHS)
Exhibit 74: Growth to value relative performance

S&P 500 Growth Index / S&P 500 Value Index
10%
Cumulative relative performance
Volatility likely to persist

in 2016
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Asset Mix
Without question, the domestic and
GLOBALECONOMYHASMADESIGNIlCANT
PROGRESSSINCETHEGLOBAL
lNANCIALCRISIS/URDISCUSSIONS
since then have focused on the
ongoing normalization in bond yields
and equity valuations. We recognize
that the dialogue is now shifting
somewhat. We continue to expect
moderate economic growth, but
warning signs are accumulating for
investors, namely in the yield curve
ANDWITHINCREDITMARKETSWHICH
suggest that the U.S. business cycle
may be maturing.
!STHE&EDEMBARKSONATIGHTENING
OFMONETARYPOLICYFORTHElRSTTIME
in nearly a decade, we expect bond
yields to rise, albeit at a gradual
pace. That said, even a modest
rise in yields from the current low
LEVELSCANPUTSIGNIlCANTPRESSURE
ONTOTALRETURNSFROMlXEDINCOME
Exhibit 75: Relative strength to S&P 500 Index

Rebased to 100 as of Jan. 1, 2015
105
104
103
102
101
100
99
98
Jan-15
Apr-15
S&P 100 Mega Cap Index
S&P 400 Mid Cap Index
Jul-15
Oct-15
S&P 600 Small Cap Index
Jan-16
Exhibit 76: U.S. 10-year Treasury

2EQUIREDMOVEINYIELDSFORBREAK EVENRETURNAGAINST DAY4 BILL
50
45
Basis Points (bps)
!STHEBULLMARKETMATURESAND
investors become more defensive,
THEREHASBEENSHIFTINMARKET CAP
size preference toward larger-cap
companies. Small- and mid-cap
STOCKSLEDINTHElRSTHALFOFTHEYEAR
but mega caps have outperformed
in the second half (Exhibit 75). The
LARGESTSTOCKSINTHE30
MAKEUPTWO THIRDSOFTHEWEIGHTING
of the S&P 500, so their strong
performance has boosted the overall
)NDEX2OTATIONBACKINTOSMALL AND
MID CAPSTOCKLEADERSHIPWOULD
be an additional sign of growing
INVESTORCONlDENCE4HESESTOCKS
recovered slightly near the end of
November and, while encouraging,
it is still too early to tell if the trend
has turned.
40
35
30
Last Plot: 23
25
20
15
10
2009
2010
2011
2012
2013
2014
2015
2016
investments. The capital loss from

a mere 23-basis-point rise in the
U.S. 10-year T-bond yield will offset
coupon income, resulting in a 0%
total return over the following
12 months (Exhibit 76).
Exhibit 77 shows a table of
prospective returns for various asset
classes based on the assumption
THATMARKETPRICESWILLRETURNTO
our estimate of equilibrium or
fair value over a variety of time
FRAMES)TISDIFlCULTTOGETEXCITED
ABOUTlXED INCOMERETURNSINTHIS
ENVIRONMENTWHICHISREmECTEDIN
our underweight position in the
asset class, particularly sovereign
bonds. However, bonds typically
offer stability through periods
of higher volatility and, as yields
gradually rise, we expect to increase
EXPOSURETOlXEDINCOME2EmECTING
THISDURINGTHEQUARTERWETOOK
ADVANTAGEOFASPIKEINYIELDS
following positive U.S. employment
data in early November, adding one
PERCENTAGEPOINTTOOURlXED INCOME
weighting, sourced from cash.
Global Investment Outlook | Eric Lascelles | Eric Savoie, MBA, CFA | Daniel E. Chornous, CFA
EXHIBIT 77: Asset-class forward returns
Asset class
Current
return1
U.S. Treasury Bill
0.12%
U.S. 10 Year Treasury Bond

Canada 10 Year Government Bond
U.S. Investment Grade Bond**
1-year
forward
return
2-year*
forward
return
3-year*
forward
return
5-year*
forward
return
10-year*
forward
return
4.16%
3.90%
0.83%
0.86%
1.15%
1.42%
(6.69%)
(6.32%)
(3.69%)
(2.29%)
(1.01%)
0.00%
15-year*
forward
return
20-year*
forward
return
4.62%
6.17%
2.96%
2.88%
3.06%
3.28%
Canada Investment Grade Bond**
(3.29%)
(1.28%)
(0.21%)
0.63%
1.45%
2.14%
U.S. High Yield Bond***
10.24%
17.51%
11.37%
10.23%
9.57%
9.21%
U.S. Stocks (S&P 500) Total Return
6.15%
26.09%
18.20%
14.44%
11.94%
10.27%
9.67%
9.35%
Canadian Stocks (TSX) Total Return
26.86%
32.31%
19.38%
15.18%
12.66%
10.61%
9.88%
9.50%
1
If market moves to equilibrium. *Annualized returns **Bank of America ML Indexes, assuming long-term reversion to normal spread to T-bond, evenly through to end date
Source: RBC GAM, Bloomberg
Our models continue to indicate that

equities are likely to outperform
bonds, and we remain overweight
stocks. Nevertheless, we are also
cognizant of the need to focus even
more on downside protection in the
current environment. Should our
stress indicators continue to worsen,
it may be prudent to begin scaling
back some of our overweight in

stocks in the months and quarters
ahead. For a balanced, global
investor, we currently recommend an
asset mix of 62% equities (strategic
neutral position: 55%), and 37%
fixed income (strategic neutral
position: 43%), with the balance in
cash.
4HISPAGEINTENTIONALLYLEFTBLANK

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

Equilibrium range
16
18
14
16
12
14
10
12
10
8
%
6
4
6
4
1980
1985 1990 1995 2000 2005 2010 2015

Last Plot: 2.22%
2020
1980
1985 1990 1995 2000 2005 2010 2015

Last Plot: 0.83%
2020
Japan 10-Year Bond Yield

Equilibrium range
Canada 10-Year Bond Yield

Equilibrium range
14
18
12
16
14
12
10
10
2
0
0
1980
1985 1990 1995 2000 2005 2010 2015

Last Plot: 0.31%
2020
1980
1985 1990 1995 2000 2005 2010 2015

Last Plot: 1.57%
2020
U.K. 10-Year Gilt

Equilibrium range
18
16
14
12
10
8
6
4
2
0
1980
1985 1990 1995 2000 2005 2010 2015

Last Plot: 1.83%
2020
The persistence of low rates

FOLLOWINGTHE lNANCIAL
crisis has almost certainly
anchored investor mindsets to a
low level of rates going forward.
GLOBAL EQUITY MARKETS

S&P 500 Equilibrium
Normalized earnings and valuations
5120
S&P/TSX Composite Equilibrium

Nov. '15 Range: 1620 - 2707 (Mid: 2164)

Nov. '16 Range: 1926 - 3219 (Mid: 2573)
Current (30-November-15): 2080
2560
Nov. '15 Range: 13271 - 19839 (Mid: 16555)
25600
Nov. '16 Range: 13905 - 20788 (Mid: 17346)

1280
6400
640
320
1600
160
80
40
1960
1970
1980
1990
2000
2010
2020
400
1960
Source: RBC GAM
Japan Datastream Index

5760
520
2000
2010
2020
1440
720
260
Nov. '15 Range: 279 - 808 (Mid: 544)
Nov. '16 Range: 272 - 786 (Mid: 529)
65
1980 1985 1990 1995 2000 2005 2010 2015 2020
360
180
90
1980
Source: Datastream, Consensus Economics, RBC GAM
6720
1990
1995
2000
2005
2010
2015
2020
Emerging Market Datastream Index

Nov. '15 Range: 239 - 429 (Mid: 334)
Nov. '16 Range: 251 - 450 (Mid: 351)
Nov. '15 Range: 5856 - 11127 (Mid: 8491)

Nov. '16 Range: 6891 - 13093 (Mid: 9992)
1985
U.K. Datastream Index

13440
1990
Nov. '15 Range: 1702 - 3639 (Mid: 2670)

Nov. '16 Range: 1795 - 3838 (Mid: 2817)
2880
26880
1980
Eurozone Datastream Index

1040
130
1970
Source: RBC GAM
640
320
160
3360
1680
80
840
40
420
210
1980 1985 1990 1995 2000 2005 2010 2015 2020
20
1995
2000
2005
2010
2015
2020
Source: Datastream, RBC GAM
Soo Boo Cheah, CFA

Senior Portfolio Manager
Exhibit 1: 10-year Treasury yield stays low while investors await the
Feds decision
6.0
Suzanne Gaynor
5.0
V.P. & Senior Portfolio Manager

%
4.0
Average
2.55%
3.0
2.0
It has been more than 13 months

since the U.S. Federal Reserve (Fed)
COMPLETEDBONDPURCHASESLINKED
to quantitative easing. Janet Yellens
&EDBOUGHTITSlNAL1% LINKEDASSET
on October 27, 2014, at which
time the Fed chief predicted that
interest-rate increases would soon
be on the way. And still we wait.
While there is little reason to doubt
the Feds intention to close the
chapter on zero-interest-rate policy
at its next policy announcement on
$ECEMBERTHEREISMUCHREASON
to doubt that such a move will have a
SIGNIlCANTIMPACTONGLOBALINTEREST
rates. Thats because monetary
EASINGBYOTHERMAJORCENTRALBANKS
including the European Central
"ANK%#" ISINFULLFORCEANDWILL
CONTINUETOKEEPGLOBALINTERESTRATES
historically low. In this article, we
will lay out how continued Treasury
purchases by the private sector,
POTENTIALDISRUPTIONSTOlNANCIAL
MARKETSRESULTINGFROM&EDTIGHTENING
and the consequences of the global
hADDICTIONvTO1%AREEXPECTEDTO
continue exerting downward pressure
on bond yields.
!FTERALONGSTREAKOFINCORRECTCALLS
for higher bond yields, investors have
SCALEDBACKTHEIREXPECTATIONSFORTHE
1.0
0.0
2007
2009
2011
U.S. Treasury 10-year Yield
2013
2015
Fed Fund Rate
Source: Bloomberg
Exhibit 2: Foreign central banks facilitate private-sector demand for

safe-haven Treasuries
Foreign purchases of U.S.
Treasury
(12-month rolling sum $bil.)
Market view
400
300
200
100
0
-100
-200
Jul-2012
Jan-2013
Official
Jul-2013
Jan-2014
Jul-2014
Jan-2015
Jul-2015
Private
Source: Bloomberg
speed at which they expect interest

rates to rise, and this view may be
partially responsible for the 10-year
Treasury yield trading at the lower
end of the range established since
the Fed cut its policy rate to 0.25%
(Exhibit 1). Our 12-month forecast
for the yield on the 10-year Treasury
bond is 2.50%, which is the midpoint of the 1.50%-3.50% range in
PLACESINCE
Some may argue that a 2.50% yield
target is too conservative at a time
WHENEMERGING MARKETCENTRALBANKS
are selling Treasuries, especially
Chinas. We would point out that the
motivation of these foreign central
BANKSISTOSELL4REASURIESMAINLY
to meet the currency-redemption
demands of the private sector.
Exhibit 2 illustrates this relationship,
ASOFlCIALSLIQUIDATED4REASURIES
valued at US$167 billion over the
past 12 months while foreign private
INVESTORSSPENT53BILLION
purchasing Treasuries. EmergingMARKETCENTRALBANKSAREINEFFECT
'LOBAL&IXED)NCOME-ARKETS\3OO"OO#HEAH#&!\3UZANNE'AYNOR
While much discussion of monetary

tightening is centered on the Fed
raising the policy rate, it is potential
changes in the composition of the
Feds balance sheet that would
have a bigger effect on prices for
RISKASSETS4HE&EDSPURSUITOF
1% LINKEDASSETPURCHASESHAS
AMPLIlEDTHEAMOUNTOFEXCESS
reserves held by U.S. commercial
BANKSTO53TRILLIONFROMAMORE
typical amount under US$100 billion.
!SIGNIlCANTPORTIONOFTHIS
US$2.7 trillion is funding investmentBANKINGACTIVITIESKEEPINGTHECOST
of money at historical lows. We are
now concerned that any move by the
Fed to reduce its reliance on excess
reserves as funding for assets
purchased over the past seven
years could trigger an unwinding
of derivatives trades and raise
investing costs, possibly leading
to a near-term disruption in money
MARKETS/NEOFTHEWAYSTHESE
RISKSMAYALREADYBESTARTINGTOBE
felt is that investors have started
demanding extra compensation for
cross-border borrowing (Exhibit 3).
'LOBALlNANCEISHOOKEDONCHEAP
ANDABUNDANT53DOLLARSANDRISKS
associated with any unwinding are
ANOTHERFACTORLIKELYTOHOLDDOWN
Treasury yields.
The best outcome investors could
hope for following an initial rate
HIKEISANINDICATIONFROMTHE&ED
that it does not intend to raise rates
Exhibit 3: Investors have started demanding extra compensation for

cross-border borrowing
EUR and JPY float-to-float

basis (bps)
handing the proceeds of Treasury

sales to the private sector, which is
RECYCLINGTHEMONEYBACKINTOSAFE
haven Treasuries.
0
Negative basis means EUR and JPY is
-10
cheaper to fund than the US$
-20
-30
-40
-50
-60
-70
-80
Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2015 Jul-2015 Oct-2015
USD-JPY 2-year Xccy Basis
USD-EUR 2-year Xccy Basis
Source: Bloomberg
again unless warranted by economic

conditions, as well as a commitment
that it will not begin/expand the
use of its other tools for tightening
policy. These tools include pruning
the Feds balance sheet by selling
bonds and/or boosting the use of
reverse repos (RRP), whereby it
OFFERSSUFlCIENTLYHIGHINTERESTRATES
that investment funds and other
NON BANKlNANCIALlRMSWILLMOVE
SOMEOFTHEIRMONEYHELDINBANKS
to the Fed. As a result, some of the
EXCESSRESERVESONBANKBALANCE
sheets are removed, lowering the
amount of money available for loans.
The Fed has been largely mute on
balance-sheet reduction and RRP,
and we suspect this will continue as
engaging in either while rates are
RISINGWOULDPOSESIGNIlCANTRISKS
FORPRICESOFRISKASSETS
!SLONGASCENTRALBANKSEXPAND
or maintain the assets on their
balance sheets, low bond yields
will persist. It is no coincidence
THATLOWGROWTHANDLOWINmATION
are entrenched across the globe,
ANDRELYINGON1% BLOATEDBALANCE
SHEETSTOKEEPTHEBANKINGSYSTEM
AmOATWILLONLYACCENTUATETHETREND
toward lower potential economic
growth. Why is this? We believe that
1%SSUPPORTFORASSETPRICESHAS
enabled the private sector to avoid
SHRINKINGITSBALANCESHEETAND
resulted in capital being directed
to less productive areas of the
economy. This misallocation of
capital, combined with the effect of
wealth inequality, will tend to limit
the long-term growth potential of the
economy and hold down Treasury
YIELDS-AJORCENTRALBANKS%UROPE
and Japan in particular, will continue
to experiment with ultra-low interest
rates, and may try negative lending
RATESIFDISINmATIONPERSISTS)N
an environment where people are
actually losing money on cash,
higher-quality bonds will start to
LOOKALOTMOREATTRACTIVE
The onset of negative interest rates
and competition among central
BANKSARESIGNSTHATTHISECONOMIC
CYCLEISSIGNIlCANTLYDIFFERENTFROM
Direction of rates
We are trimming our bond-yield
forecasts and continue to expect
shorter-maturity yields to rise faster
than yields on longer-term securities.
We forecast that bond yields will be
little changed over the next year,
meaning a global bond portfolio
should produce a small positive
return of 1.5%, not the typical 3% to
5% loss in years after the Fed begins
a tightening cycle. We expect the
"ANKOF%NGLAND"/% TOFOLLOWTHE
&EDINDELIVERINGARATEHIKEAFTER
'OVERNOR-ARK#ARNEYISSATISlED
that the Feds move has been
ACCEPTEDBYTHEMARKET-EANWHILE
we expect the ECB to extend its
)4(%',/"!,).6%34-%.4/54,//+ New Year 2016
Exhibit 4: Our model suggests 1% fed funds rate could narrow yield gap
between 2-year and 10-year Treasuries
250
U.S. Yield curve 10-year vs
2-year (bps)
previous ones. Using unorthodox

MONETARYPOLICIESTOlGHTLOW
INmATIONREQUIRESEVER LARGERDOSES
OF1%ANDCENTRALBANKSARENOW
trying to outdo each other in this race
to the bottom. Even the Fed, which
HASBEENTALKINGUPPLANSTOTIGHTEN
policy amid modest domestic growth,
will be limited by how fast it can raise
rates given slowing global growth,
plummeting trade and increased
asset-price volatility. In this monetary
environment, bond investors can
pretty much ignore any single action
by the Fed to get policy rates up, and
should instead focus on whether the
Fed will be able to continue boosting
RATES5NTILTHEREISAMARKED
improvement in global economic
conditions, the pace of tightening by
THE&EDISLIKELYTOBEVERYGRADUAL
and global bond yields are expected
to move sideways within the band
ESTABLISHEDSINCE
200
150
2004 Cycle
100
50
This Cycle?
0
-50
0
3
Fed Fund Rate
Source: Bloomberg
planned asset purchases and further

cut the policy rate into negative
territory. In Japan, the direction
of yields on Japanese government
bonds (JGBs) will depend largely on
BOND BUYINGBYTHE"ANKOF*APAN
(BOJ) and the speed of investors
shift away from holding JGBs. We
expect Government of Canada bonds
with intermediate to long maturities
TOTRACK4REASURIESWHILESHORT
MATURITIESWILLREMAINLARGELYmAT
ONEXPECTATIONSTHATTHE"ANKOF
#ANADA"/# KEEPSITSBENCHMARK
interest rate unchanged.
U.S. We expect the Fed to deliver

the long-anticipated policy-rate
HIKEWITHINTHENEXTTHREEMONTHS
while assuring investors that the
size of its balance sheet will remain
unchanged. Our view is that the Fed
WILLBEGINLAYINGTHEGROUNDWORKFOR
REDUCINGTHELARGECASHSTOCKPILES
HELDBYBANKSATTHECENTRALBANK
to facilitate further tightening over
the next 12 months. We expect this
adjustment to result in volatility for
STOCKSBONDSANDOTHERASSETS7E
forecast a 1.00% fed funds rate by
the end of 2016.
The Fed is preparing investors for

A$ECEMBERRATEHIKESWIMMING
upstream against many other major
CENTRALBANKSSTILLENGAGINGIN1%
Our belief that the pace of interestRATEHIKESWILLBEGRADUALSUGGESTS
that this tightening cycle will be less
THREATENINGFORBONDMARKETSAT
least in the early stages. However,
WITHCENTRALBANKSMOVINGIN
opposite directions, the impact of
changes in policy-rate differentials
COULDBEAMPLIlEDDOWNTHEROAD
To derive our 2.50% forecast for the

10-year Treasury, we assume a slow
and gradual tightening cycle and use
the 2-year point of the yield curve
to express this view. Our model
suggests a 2-year yield of 1.50% by
$ECEMBER)FWETHENASSUMEA
spread of 100 basis points between
yields on the 2-year and the 10-year
Treasury bonds (Exhibit 4), we get a
2.50% yield for the 10-year bond in a
years time.
Japan Nothing has changed over

the past year regarding our view of
JGBs: valuations remain unattractive.
"ONDINVESTORSLOOKINGFORCOMFORT
MAYlNDSOMEINTHEFACTTHAT*'"S
have produced negative returns
JUSTONCEINTHEPASTYEARSnA
period during which the 10-year
YIELDHASBEENSTUCKBELOW
Also on a positive note, much
needed domestic reforms are slowly
being enacted, and joining the
4RANS 0ACIlC0ARTNERSHIPSHOULD
%XHIBIT%#"ISWORRIEDABOUTWEAK INmATIONTRENDANDFALLINGINmATION
expectations
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
2009
2.8
2.6
Inflation expectation (rhs)
2.4
2.2
2
1.8
Euro-area CPI
1.6
1.4
2010
2011
2012
2013
2014
Euro inflation swap forward

5Y5Y (%)
Euro-area CPI y-o-y (%)
Germany Yields on bunds should

STAYLOWASINmATIONREMAINS
subdued (Exhibit 5) and the ECB
has hinted at policy rates going
into negative territory. With the Fed
tightening and the ECB pursuing a
looser monetary policy, the interestrate differential between 10-year
bunds and Treasuries should rise
to 200 basis points in favour of
Treasuries from 175. Bunds will
continue to be supported by ECB
ASSET BUYINGANDTHElSCALSURPLUS
in Germany, which does not have
to issue net new debt. While we
ASSUMETHATTHETERRORISTATTACKSIN
Paris on November 13 will have a
negligible effect on the economy, the
Eurozone recovery to date remains
FRAGILEANDTHEATTACKSCOULDDERAIL
HOUSEHOLDCONlDENCE)FECONOMIC
GROWTHFALTERSORDISINmATIONWORSENS
ASARESULTOFTHEATTACKSWEEXPECT
the ECB to loosen policy. We are
reducing our policy-rate forecast to
-0.10% from 0% as the ECB delivers
further easing measures to boost
INmATION/URFORECASTFORTHE YEAR
yield drops to 0.50% from 1.00%.
1.2
2015
Source: Bloomberg
boost economic growth over the

intermediate term. We expect the
"/*TOBACK0RIME-INISTER!BES
latest reforms and spending plans
(targeted at newborns and the
elderly) to boost economic growth
and to supply further monetary
easing if deemed necessary. Japan
has shown the world that the
malaise following a long period of
LOWINmATIONANDLOWGROWTHISHARD
TOSHAKEOFF*APANISlNALLYADOPTING
ARADICALRETHINKTOBREAKTHIS
vicious cycle, with the government
delivering productivity-boosting
reforms. Although it is still early
days, Abe and BOJ Governor Kuroda
are off to a good start. Perhaps
Japan can show the world there is a
WAYOUTOFDEmATION
In line with the direction of global
rates, we are decreasing our yield
forecast for the 10-year JGB to
0.50%, 10 basis points lower than
our previous forecast. We are
KEEPINGOURPOLICY RATEFORECAST
unchanged at 0%.
Canada Lower prices for oil and

other commodities led the BOC
at its October meeting to reduce
domestic growth forecasts for 2016
ANDANDTHECENTRALBANK
SAIDITDOESNTSEEANYRISKOFAN
overheating economy before mid2017. The statement also alluded
to concerns about household debt,
but the concerns do not seem as
pronounced as they did during the
tenure of Governor Carney. The
MARKETISVERYMUCHAWARETHAT
FEDERALlSCALPOLICYISABOUTTO
become more stimulative under
the new Liberal government, and
proposed new spending could
transform a projected $1.4 billion
SURPLUSINTOABILLIONDElCIT
We do not expect the BOC to raise
rates next year unless the ramp-up
INlSCALSPENDINGSTIMULATESTHE
economy to a degree that boosts
INmATIONMORETHANWEANTICIPATE
'IVENTHATWEEXPECTTHE&EDTOHIKE
several times while the BOC stays
on hold, the extra yield offered by
Treasuries relative to Government of

Canada bonds should increase along
the entire yield curve. As a result,
Canadian bonds should hold their
own, if not outperform Treasuries,
in the moderately rising yield
environment that we expect over the
next 12 months.
/URFORECASTISFORTHE"ANKOF
Canada policy rate and 10-year
government-bond yield to remain
unchanged at 50 basis points and
1.75%, respectively.
U.K.n!"/%RATEHIKEISSTILL
PREDICATEDONTHE&EDGOINGlRST
)NVESTORSAREPRICINGINA"/%HIKE
for November 2016, although a
move could come earlier should a
TIGHT5+LABOURMARKETPRODUCE
INmATIONARYPRESSURES4HE"/%
REITERATEDTHATITWILLKEEPTHESIZE
OFITS1%PORTFOLIOATaBILLION
until policy rates reach at least 2%.
Gilts will receive additional support
FROMTHE"/%REINVESTINGABOUTa
BILLIONOF1%PROCEEDSCOMINGDUE
over the next 12 months.
The possibility that Britain exits the
EU in a referendum slated for as
soon as the second quarter could
HAVEANEFFECTONTHEGILTMARKET
Any indication that Britons will
vote to pull out would tend to push
yields lower because of concern that
withdrawal would lead to safe-haven
demand, at least initially, as well as
slower economic growth.
INTEREST RATE FORECAST: 12-MONTH HORIZON

4OTAL2ETURNCALCULATION.OVEMBERn.OVEMBER
U.S.
3-month
5-year
10-year
Horizon
30-year return (local)
Base
1.00%
1.50%
2.00%
2.50%
3.10%
Change to prev. quarter
0.00%
(0.25%)
(0.40%)
(0.25%)
(0.25%)
High
1.50%
2.20%
2.75%
3.00%
3.65%

Low
0.13%
0.30%
1.00%
1.50%
2.25%
1.01%
6.43%
Expected Total Return US$ hedged: 1.24%

GERMANY
3-month
2-year
5-year
10-year
Horizon
Base
(0.10%)
0.01%
0.10%
0.50%
1.15%
(0.15%)
(0.34%)
(0.45%)
(0.50%)
(0.50%)
High
0.05%
0.50%

1.25%
1.70%
(4.25%)
Low
1.47%
(0.50%)
(0.50%)
(0.25%)
0.10%
0.60%

%XPECTED4OTAL2ETURN53HEDGED
JAPAN
Horizon
3-month
2-year
5-year
10-year
Base
0.05%
0.10%
0.15%
0.50%
1.50%
0.00%
(0.05%)
(0.10%)
(0.10%)
(0.20%)
High
0.05%
0.30%
0.50%
1.00%
1.75%
(3.52%)
Low
(0.10%)
(0.10%)
0.00%
0.00%
0.75%

(0.27%)
#!.!$!
Horizon
3-month
2-year
5-year
10-year
Base
0.50%

1.20%
1.75%
2.50%
0.00%
0.10%
0.00%
0.00%
0.00%
0.46%
High
1.00%
1.50%
2.00%
2.50%
3.00%

Low
0.00%
0.00%
0.20%
0.75%
1.60%

5-year
10-year
Expected Total Return US$ hedged: 0.03%

U.K.
3-month
Base
2-year
Horizon
1.00%
1.40%
2.00%
2.40%

(0.25%)
(0.20%)
(0.50%)
(0.35%)
(0.10%)
High
1.50%

2.60%
3.00%
3.00%
(3.73%)
Low
0.50%
0.50%
1.00%
1.50%
2.25%
7.25%
We are reducing our 12-month

forecast for the 10-year gilt to
2.45%, 35 basis points lower than
the previous quarter. Our policy-rate
2-year
Source: RBC GAM
(0.55%)
FORECASTISMARKEDDOWNBYBASIS
points to 1.00%.
Regional preferences
We expect global bond yields to
increase marginally from current
levels driven by higher Fed policy
rates. In our view, short-maturity
rates will rise more than those

on longer maturities, which are
anchored by uncertainty related
TODIVERGINGGLOBALCENTRAL BANK
POLICIESANDTHEPOTENTIALSHOCKTO
GLOBALMONEYMARKETSIF53 DOLLAR
funding costs continue to rise.
We recommend a 5% overweight
in German bunds and a similar

underweight in JGBs.
CURRENCY MARKETS
Daniel Mitchell, CFA

Portfolio Manager
Exhibit 1: Currency returns versus the U.S. dollar (since January 1, 2015)
5%
0%
CHF
JPY
CNY
GBP
TWD
CNH
PHP
INR
SGD
KRW
THB
CZK
SEK
HUF
RON
EUR
DKK
IDR
AUD
PLN
RUB
PEN
MXN
NOK
ARS
CAD
CLP
NZD
MYR
TRY
ZAR
COP
BRL
Head, Global Fixed Income & Currencies

(Toronto & London)
ILS
HKD
USD
Dagmara Fijalkowski, MBA, CFA
-5%
-10%
-15%
The U.S. dollar cycle still

strong
-20%
As 2015 draws to a close, the U.S.

dollar appears poised for another
SPECTACULARYEAR4HEGREENBACK
has outperformed practically every
other currency in the world (Exhibit
1), and thats without the U.S.
&EDERAL2ESERVE&ED LIFTINGAlNGER
to raise interest rates. Most of the
U.S. dollars strength this year has
BEENCOURTESYOFOTHERCENTRALBANKS
easing monetary policy. The catalyst
for further appreciation was set
after decent U.S. economic strength
ALLOWEDTHE&EDTOPUTRATEHIKES
BACKONTHETABLEBEFOREYEAR END
WHILETHE%UROPEAN#ENTRAL"ANK
(ECB) extended its quantitativeeasing program and investors
INCREASEDEXPECTATIONSTHATTHE"ANK
of Japan (BOJ) would ease next year.
Neither the ECB nor the BOJ would
OBJECTTOFURTHERWEAKNESSINTHEIR
currencies against the U.S. dollar.
-30%
!SWENEARTHEENDOFTHElFTHYEAR
of U.S. dollar strength, we wonder
about the longevity of this trend
(Exhibit 2). While stronger growth,
a tightening Fed, smaller currentACCOUNTDElCITSANDFOREIGNINmOWS
ALLSUGGESTTHETRENDISLIKELYTO
continue, there are at least two
-25%
-35%
Source: Bloomberg
Exhibit 2: Long-term U.S. dollar cycles

145
6 yrs
+67%
8 yrs
-26%
135
7 yrs
+43%
10 yrs
-47%
5 yrs
+39%
9 yrs
-40%
125
115
105
95
85
75
65
1971
1975
1979
1983
1987
1991
1995
1999
2003
2007
2011
2015
reasons to be cautious. First, the

U.S. dollar is now above its fair
value, so the valuation tailwind is
absent. Second, bullish dollar views
are well subscribed and, to some
extent, positioned for. Consequently,
we continue to expect further U.S.
DOLLARSTRENGTHBUTACKNOWLEDGE
these two potential constraints and
favour a more cautious approach,
WHICHISREmECTEDINTHESMALLER
size of our bullish positions.
A weaker euro may be the

most acceptable policy tool
At this stage of the U.S. dollar
cycle, we pay little attention to
purchasing-power-parity valuations
(PPP), for while the euro is slightly
undervalued on a PPP basis, this
YARDSTICKISLESSUSEFULWHEN
currencies are not trading at the
extremes.
#URRENCY-ARKETS|$AGMARA&IJALKOWSKI-"!#&!|$ANIEL-ITCHELL#&!
Our experience tells us that the

periods of valuation extremes
present great opportunities when
they occur, but now is not one
of those times (Exhibit 3).
For now, we focus on capital
mOWSASAPOTENTIALDRIVEROF
currencies. While improvement
in the credit and economic cycles
has somewhat buoyed the euro
over the past quarter, the theme
of divergent monetary policies has
BEENDElNITIVELYRE ESTABLISHED
Signals for further easing from the
ECB should exert further downward
pressure on the single currency. To
wit, the October press conference
SAW%#"0RESIDENT-ARIO$RAGHISET
the table for further easing, which
HESTARTEDTODELIVERIN$ECEMBER
Exhibit 3: The euro and its purchasing power parity valuation

1.60
1.40
1.20
1.00
0.80
0.60
1973
1979
PPP
1985
1991
20% Bands
1997
2003
EURUSD
2009
2015
Source: Deutschebank, Bloomberg
%XHIBIT%#"STAFFINmATIONFORECASTS
3.0%
September 2013
Forecast
2.5%
2.0%
After explicitly ruling out a cut in

short-term policy rates earlier in the
YEARTHE%#"PUTTHATTOOLBACKON
THETABLE4HECENTRALBANKSEEMS
to have been emboldened by the
LACKOFADVERSECONSEQUENCESFACED
by other European economies in
which rates are even more negative,
such as Switzerland, Sweden and
$ENMARK$RAGHICOMMENTEDIN
October that: we consider other
nonstandard monetary policy
measures, one of which is the
negative rate on the deposit facility...
NOWWEARETHINKINGABOUTTHATv1
Our expectations for the ECB
to continue on its easing path
AREBASEDONTHECENTRALBANKS
FAILURETOREACHITSINmATIONTARGET
1.5%
1.0%
September 2014
Forecast
0.5%
September 2015
Forecast
0.0%
2012
2013
2014
2015
2016
2017
Source: European Central Bank
FORTHEPASTTWOYEARS)NmATION
EXPECTATIONSWHICHSUGGESTlRMER
INmATIONDOWNTHEROADARESTILL
fragile and ECB staff forecasts dont
envision a return to the central
BANKSINmATIONTARGETBEFORE
(Exhibit 4). One caveat is that the
%#"FORECASTLIKEMANYMARKET
forecasts, does not anticipate a
sharp recovery in commodity prices.
Easier monetary policies outside
the U.S. will be a meaningful
DRIVEROFMONEYmOWS)NTHE
aftermath of the euro crisis, the
Eurozones trade balance led to a
large current-account surplus due
TOSHRINKINGIMPORTSPROVIDINGA
fundamental argument in favour of
euro strength. However, portfolioINVESTMENTmOWSANDFOREIGNDIRECT
investments are now fully recycling
this surplus (Exhibit 5) given ECB
quantitative easing and negative
interest rates. We can see the
1
%UROPEAN#ENTRAL"ANK0RESS#ONFERENCEIN
Malta, October 22, 2015
The odds that divergent monetary

policies will send the euro-dollar
exchange rate lower are fairly
STRONGAS$RAGHIANNOUNCED
additional easing before the end of
the year and the Fed appears quite
DETERMINEDTOKEEPRATEHIKESONTHE
table for this month. We continue to
expect parity within our 12-month
forecast horizon, but are convinced
that this will not be the end of the
euros underperformance. Even if
the turn of the calendar leads to a
bout of euro strength caused by
5%
3%
1%
-1%
-3%
-5%
2002
2004
2006
Portfolio Investment
C/A Balance
2008
2010
2012
2014
Direct Investment
Basic Balance of Payments
2016
Source: Eurostat
%XHIBIT%UROZONEPORTFOLIOmOWS
Inflows to the
Eurozone
300
EURbn
4HATSAIDWEDONTTHINKTHATNET
PORTFOLIOOUTmOWSANDAWEAKEREURO
are necessarily inconsistent with
strong European equities. Equity
mOWSCONTINUETOENTERTHE
Eurozone it is demand for Eurozone
bonds that has really started to
wane. The story is much the same
FOR%UROPEANINVESTORSASTHEBULK
OFTHEIROUTmOWSHAVEBEENONTHE
lXED INCOMESIDE/URVIEWISTHAT
the strong demand for European
equities will not have much effect
on the euro as the ECBs renewed
commitment to negative rates and
AWEAKEREUROWILLENCOURAGEEQUITY
investors to place currency hedges
on their purchases (Exhibit 7).
Exhibit 5: Eurozone basic balance of payments

4-quarter rolling sum, % of '$0
-300
-600
2002
Outflows from
the Eurozone
2004
2006
Foreign Investors
2008
2010
2012
European Investors
2014
2016
Net Flows
Source: Eurostat
Exhibit 7: European equity investors have increased appetite for

euro-hedged ETFs
Hedged Share of European

Equity ETFs
PORTFOLIO mOWEFFECTSEVENMORE
STARKLYWHENWESPLITTHEMBETWEEN
foreign and European investor
activity. Foreigners appetite for
European assets has waned, while
Europeans, spurred by the paltry
rates offered by government bonds,
have started investing elsewhere,
PUSHINGTHENETmOWMEASUREINTO
negative territory (Exhibit 6).
50%
40%
30%
20%
10%
0%
2012
2013
Hedged ETFs
Source: Bloomberg
2014
2015
2016
PROlT TAKINGONhBUYTHERUMOUR
sell the fact sentiment, we would
LOOKATITASANOPPORTUNITYTO
re-establish shorts before the next
driver emerges to push the euro
toward more extreme levels of
undervaluation during this cycle.
The weaker yen may not

be palatable, but few other
policy choices
The yens circumstances are
not all that different from the
euros in that they involve some
expectations of continued monetary
EASINGANDCAPITALOUTmOWS
The critical difference lies in
VALUATION5NLIKETHEEUROTHE
yen is extremely cheap whether
WEUSE000ORLOOKATTHE"/*S
measure of real effective exchange
rates, which shows the yen near
ITS YEARLOW%XHIBIT 7HILE
stable versus the U.S. dollar over
the past several months, the yen
has strengthened somewhat relative
TOITSBASKETOFTRADINGPARTNERS
On a trade-weighted basis, the yen
returned to levels similar to the fall
OFUNDOINGTHEWEAKNESS
INmICTEDBYTHEINCREASEINTHE"/*S
quantitative-easing program.
What contributed to this
APPRECIATIONWASWEAKNESSIN
the currencies of Asian trading
partners other than China, which
AREMORESENSITIVETOWEAKENING
Chinese growth or competitive
pressure from the renminbi. Japan,
for example, has smaller trade ties
with China than does South Korea.
Exhibit 8: Japanese yen real effective exchange rate

160
140
120
100
80
60
1984
1988
1992
Long-term Average
1996
2000
2004
2008
2012
2016
Source: Bank of Japan
Exhibit 9: Japans current-account balance

Trillions of Japanese yen
8
7
6
5
4
3
2
1
0
-1
-2
1999
2003
Current Account Balance
2007
2011
2015
Source: Bank of Japan, Ministry of Finance
Another difference lies in the BOJs

PRONOUNCEMENTS7HILE$RAGHI
HASBEENGUIDINGTHEMARKETTOTHE
probability of further quantitative
easing, BOJ Governor Kuroda has
BEENEXPRESSINGCONlDENCEINTHE
"/*SABILITYTOACHIEVEITSINmATION
goals without resorting to further
ASSETPURCHASES4HEMARKETHAS
paid attention, with a huge decline
in investor willingness to short the
yen. However, opinions remain
divided on the future course of
Japanese monetary policy, leaving

room for an outsized reaction to
any surprise policy change.
#APITALmOWSARELESSNEGATIVEFOR
the yen than they were a few years
ago. For one thing, the decline in
global commodity prices has caused
Japans current-account balance to
mIPSTRONGLYINTOSURPLUSAFTERABRIEF
TIMEINDElCIT%XHIBIT ANDTHE
cautious re-start of nuclear-energy
production has stirred expectations
of further improvement. Just as

in Europe, however, the surplus
from this development has been
fully offset by portfolio and
merger-and-acquisition (M&A)
mOWSFROM*APAN%XHIBIT
/UTBOUNDPORTFOLIOmOWSSTARTED
in 2014 and accelerated this year
as Japans Government Pension
Investment Fund (GPIF) invested
more overseas as part of investmentpolicy changes under which the
US$1.1 trillion fund is moving money
out of the country. While the GPIF
rebalancing is mostly complete,
the impact will continue as other
pension funds and insurance
companies adjust their asset
mixes in a similar way. There are
seven other public pension funds
that collectively manage assets
amounting to about a third of those
held by the GPIF, and most of these
are expected to follow the GPIFs
lead, as are private pension funds.
)NSURANCECOMPANIESAREALSOLIKELY
to raise foreign holdings, partly in
response to regulatory changes
lowering capital charges on foreign
bonds and removing ownership
limits on foreign securities, as
well as the need to secure higher
returns to fund policy liabilities.
The IMF estimates these collective
OUTmOWSWILLBEATLEAST53
billion,2 but potentially much larger
(Exhibit 11). Such an amount would
SIGNIlCANTLYWEAKENTHEYEN
2
!SLANALP3AND"OTMAN$)-&7ORKING
Paper: Portfolio Rebalancing in Japan:
#ONSTRAINTSAND)MPLICATIONSFOR1UANTITATIVE
Easing, August 2015
Exhibit 10: Japans basic balance of payments

QUARTERROLLINGSUMOF'$0
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
1999
2003
C/A Balance
2007
2011
Direct Investment
2015
Source: Bank of Japan, Ministry of Finance
Exhibit 11: Estimated rebalancing to foreign assets

800
700
600
USD211bn
USD419bn
USD86bn
500
400
300
200
100
0
Baseline
High Case
Private Pensions
Insurance Cos
Public Pensions
Source: IMF, RBC GAM
Another potential negative for

THEYENISTHELIKELIHOODTHAT
hedging costs will rise. We have
previously highlighted that Japanese
investors could achieve superior
bond returns versus JGBs by
INVESTINGABROADWITHOUTTAKING
CURRENCYRISK(OWEVERWITHTHE
&EDEXPECTEDTOSTARTHIKINGRATES
the cost of hedging currency
RISKWILLLIKELYINCREASE%XHIBIT
Low Case
Completed GPIF
12), leading to hedge unwinds

that would have a potentially
negative impact on the yen.
!SFOR-!mOWSTHEIROUTWARD
DIRECTIONREmECTSLOW GROWTH
potential in Japan, necessitating
corporate investment abroad.
Moreover, corporate-governance
reforms that are part of
Abes three arrows could be
convincing corporate boards to

SEEKHIGHERRETURNSVIAFOREIGN
investments and projects.
Exhibit 12: The cost of hedging U.S. dollars is rising for Japanese investors
1.2%
4HISANALYSISOFCAPITALmOWS
leads us to expect further yen
WEAKNESSDESPITETHECURRENCYS
attractive valuations. We are also
not persuaded that the BOJ is
lNISHEDWITHQUANTITATIVEEASING
Kuroda has been denying that
additional bond purchases are in
THEOFlNGBUTTHETIMEMIGHTSOON
be right for further quantitative
easing aimed at boosting investor
CONlDENCEAHEADOF5PPER
House elections in July 2016.
The pound follows in the

dollars footsteps
Among major currencies, the
pound most resembles the U.S.
dollar in terms of valuations and
the effect of monetary policies.
,IKETHEGREENBACKTHEPOUNDIS
overvalued on PPP. However, the
overvaluation is not at extreme
levels so we cant rely on valuations
much in determining near-term
currency movements (Exhibit 13).
!GAINLIKETHE53DOLLARSTERLING
HASEXHIBITEDSIGNIlCANTSTRENGTH
on a trade-weighted basis. These
SIMILARITIESREmECTTHESIMULTANEOUS
economic upswings that have been
TAKINGPLACEINTHE5+ANDTHE
53ALLOWINGTHE&EDAND"ANK
of England (BOE) to move closer
to normalizing monetary policy.
,ACKINGNEAR TERMDIRECTIONBASEDON
VALUATIONSWEEXAMINETHEOUTLOOK
for the BOE and the potential for the
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
2010
2011
Annual Cost
2012
2013
2014
2015
Source: Bloomberg
Exhibit 13: The pound and its purchasing power parity valuation
3.5
3.0
2.5
2.0
1.5
1.0
1973
1979
PPP
1985
1991
20% Bands
1997
GBPUSD
2003
2009
2015
5+TOBENElTFROMPORTFOLIOmOWS
from other parts of Europe. Tradeweighted sterling has appreciated
BYABOUTSINCE3EPTEMBER
2014. The currencys strength,
coupled with much lower oil prices,
HASKEPTINmATIONLOW-OREOVER
LOWINmATIONANDCONCERNTHATA
STRONGCURRENCYMAKES"RITISHlRMS
uncompetitive have allowed the
BOEs Monetary Policy Committee
(MPC) to avoid raising rates even
as wage growth accelerated and

THEJOBSMARKETEXCEEDED"/%
expectations. According to a speech
by MPC member Kristin Forbes in
September, currency movements
HAVEBEENAKEYFACTORALLOWING
THE-0#TOKEEPINTERESTRATESON
hold, despite the solid recovery and
WITHOUTWORRYINGABOUTINmATION
overshooting our 2% target.3
3
Speech on September 11, 2015: Much ado
about something important: How do exchange
RATEMOVEMENTSAFFECTINmATIONv
!STHE"/%SDISINmATIONDIVIDEND
from lower energy prices fades,
THEPROSPECTOFAPOSITIVEINmATION
SURPRISEWILLRISE4HEMARKETIS
PRICINGINAlRSTHIKENEARTHEENDOF
2016, which in our view may be too
dovish. However, we dont expect
the pound to rise materially against
the U.S. dollar since the central
BANKSOFBOTHCOUNTRIESWILLLIKELY
be raising rates over the next year.
Over the longer term, funding needs
for the U.K.s large current-account
DElCITWEIGHONTHEOUTLOOKFOR
sterling. For now, the current account
ISNOTANISSUEASPORTFOLIOINmOWS
related in part to quantitative easing
and negative rates on the continent,
as well as inward direct investment,
KEEPTHEDElCITMORETHANFULLY
funded (Exhibit 14).
Exhibit 14: U.K. basic balance of payments

20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
2002
2004
2006
C/A Balance
2008
2010
2012
2014
Direct Investment
Source: Office for National Statistics
Exhibit 15: A weaker currency helps with a lag

1.65
2,300
2,200
1.50
2,100
1.35
2,000
An interesting development has

TAKENPLACEINTHECOMPOSITIONOF
the U.K. current account. Historically,
the income portion of the currentaccount balance has been positive
and helped offset a persistently
negative trade balance. However,
the income ledger is deteriorating as
the U.K. now pays out more interest
and dividends to foreigners than it
receives on assets owned abroad.
!SLONGAS1%ISUNDERWAYIN%UROPE
we expect that the current-account
DElCITCANBEFUNDEDBYINmOWSFROM
the Eurozone and therefore expect
the pound to hold its own against
the U.S. dollar, while outperforming
the euro, the yen and the Canadian
dollar. Should funding for the
CURRENT ACCOUNTDElCITRUNDRYTHE
)4(%',/"!,).6%34-%.4/54,//+New Year 2016
2016
1,900
1.20
1,800
1.05
1,700
1,600
1976
0.90
1981
1986
1991
1996
2001
2006
Manufacturing Employment, SA 000s 2yr Lag (LHS)
2011
2016
USDCAD (RHS)
Source: Statistics Canada, Bloomberg
MOSTLIKELYADJUSTMENTWILLBEVIA
STERLINGWEAKNESS
The weaker loonie a posterCHILDmOATINGCURRENCY

5NLIKETHE"/%THE"ANKOF#ANADA
(BOC) is a long way behind the Fed
WHENITCOMESTOTHELIKELIHOODOF
RAISINGPOLICYRATESANDTHElRST"/#
HIKESARENOTEXPECTEDWITHINTHE
next two years. Barring a sustained
recovery in global commodity
PRICESTHE"/#LOOKSSETTOREMAIN
on hold while relying on the sharp

depreciation of the loonie to revive
Canadian manufacturing (Exhibit 15).
Investors are therefore awaiting
evidence of a revival in the nonenergy manufacturing sector, which
suffered a much deeper downturn
in volume terms than implied
by levels of economic activity in
Canadas biggest trading partner,
the U.S. Unfortunately, nonenergy manufacturing continued
to contract in Canada even after
7HILETHEEFFECTOFAWEAKER
CURRENCYSLOWLYMAKESITSWAY
through the economy, Canadas
basic balance-of-payments situation
is not encouraging. The currentACCOUNTDElCITISFUNDEDVIAOTHER
INVESTMENTmOWSASWELLASPORTFOLIO
mOWSWHICHSEEMTOHAVEWANED
(Exhibit 16). The depreciation of
the Canadian dollar to date has not
BEENENOUGHTOMAKE#ANADIAN
assets attractive to longer-term
foreign investors. Based on PPP, the
loonie is cheap but not extremely so
(Exhibit 17).
In the meantime, a relatively benign
OUTLOOKFORINmATIONWILLGIVETHE
"/#COVERTOKEEPMONETARYPOLICY
UNCHANGED%XHIBIT %VENTHOUGH
HEADLINEINmATIONHASDESCENDED
to the lower end of the BOCs
target band, two notions have
BEENGIVINGTHEBANKSOMESOLACE
&IRSTLYMOSTOFTHEDISINmATIONARY
SHOCKHASCOMEDUETOLOWEROIL
PRICES3ECONDLYCOREINmATIONHAS
remained relatively stable, sitting
just above the 2% target.
Exhibit 16: Canada basic balance of payments

8%
6%
4%
2%
0%
-2%
-4%
-6%
C/A Balance
2003
-8%
1999
2007
Direct Investment
2011
2015
Source: Statistics Canada
Exhibit 17: USDCAD and its purchasing power parity valuation

1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
1973
1979
PPP
1985
1991
20% Bands
1997
2003
USDCAD
2009
2015
%XHIBIT#ANADAINmATION
5.0%
4.0%
3.0%
% chg. y-o-y
U.S. import volumes started

recovering. Research by the BOC
suggests that prolonged strength
in the Canadian dollar between
2007 and 2012 and the economic
downturn not only depressed,
but destroyed manufacturing
capacity in some sectors, hurting
Canadas competitiveness abroad.
!WEAKERLOONIEWILLHELPTORESTORE
competitiveness, but with a lag, and
INALLLIKELIHOODTHEWEAKNESSWILL
HAVETOBESIGNIlCANTANDPERSISTENT
to attract opportunistic investment
mOWSFROMFOREIGNERS
2.0%
1.0%
0.0%
-1.0%
-2.0%
2000
2003
Headline Inflation
2006
2009
Core Inflation
2012
2015
Target Band
Source: Bank of Canada
THE GLOBAL INVESTMENT OUTLOOK New Year )
Naturally, a sustained recovery

in global commodity demand
and prices would change this
assessment, but for now such a
recovery is far from our base case
scenario. We expect the U.S. dollar
to appreciate above C$1.40 in the
next 12 months. We place a higher
PROBABILITYONCURRENCYWEAKNESS
beyond that point than we do on
strength from higher oil prices.
To conclude
While it may be tempting to fade the
continued strength of the U.S. dollar,
given its duration and magnitude
as well as consensus about it, we
believe its too early to do so.
4HECURRENT53DOLLARBULLMARKET
ISAPPROACHINGITSlFTHANNIVERSARY
WHILETHETYPICALUPSWINGLASTSlVE
to seven years. As for magnitude,
THEGREENBACKISOVERVALUEDBUT
would require another 10% move
in overvaluation to reach a point
that we consider extreme. Finally,
while the consensus view may be
for the U.S. dollar to go higher, we
dont believe that positions are
SUFlCIENTLYBUILTUPTOREmECTTHAT
consensus. However, with the U.S.
dollar no longer deeply undervalued
and the prospect of volatility rising,
our positions and willingness to
TAKERISKAREAPPROPRIATELYSMALLER
For now, the ECB appears to be a

willing participant in the currency
wars and the BOJ may be dragged
into battle. Meanwhile, the BOC
can stay above the fray, aided by a
LOONIEWEAKENEDBYSOFTPRICESFOR
energy and other commodities. We
expect the euro, the yen and the
#ANADIANDOLLARTOWEAKENMORE
versus the U.S. dollar. On the other
HANDTHE"/%SRELATIVELYHAWKISH
stance will offset the negative
impact of the pounds modest
overvaluation until a more dominant
theme emerges, leaving the pound
little changed in our forecasts.
WHY THIS TIME IS DIFFERENT
Taylor Self, MBA
Exhibit 1: Required versus total reserves
Analyst
RBC Global Asset Management
Trillions of U.S. Dollars
Its one of the most

overwrought phrases in
lNANCE"UTASFARASTHE53
Federal Reserve is concerned,
this time is different. For one
thing, the Feds substantial
balance sheet presents novel
challenges for the control of
short-term interest rates as
traditionally practiced. As the
Fed begins to raise interest
rates, it will be relying on tools
that either did not exist or
were not previously used for
policy implementation, such
as interest on excess reserves
and reverse repurchase
agreements. Moreover,
THE&EDERAL/PEN-ARKET
Committees (FOMC) most
important policy signal in
recent history, the fed funds
rate, will be moved upwards
within a target range, rather
than set at a target level.
2.5
Excess reserves
This time is different.
3.0
2.0
1.5
1.0
0.5
0.0
1960
1970
1980
Total Reserves of Depository Institutions
1990
2000
2010
Required Reserves of Depository Institutions
Source: The Federal Reserve System
To quote Simon Potter, the Fed

OFlCIALCHARGEDWITHORCHESTRATING
THElRSTINTEREST RATEHIKEINNEARLY
ADECADEhWEDONTKNOWWHATIS
going to happen. With Fed Chair
Janet Yellen and most of the FOMC
signaling they consider the time to
begin normalizing monetary policy
to be at hand, we examine how they
are going to achieve this, why this
time is so different, and the dilemma
the Fed is facing.
New tools, new target range

Lets start with the new tools in
the Feds toolbox interest on
excess reserves (IOER) and reverse
repurchase agreements (RRPs).
Both of these instruments were
born of the necessity imposed by
the massive expansion of the Feds
balance sheet and the concomitant
creation of substantial excess
RESERVESINTHEBANKINGSYSTEM
(Exhibit 1). Before introducing these
tools, however, we should highlight
what the Feds modus operandi was
PRIORTOANDWHATEXACTLYIT
tries to control.
"EFORETHEGLOBALlNANCIALCRISISTHE
Fed implemented monetary policy
by setting a target level for the fed
funds rate. This is the interest rate
ATWHICHBANKSCANLENDOVERNIGHT
to one another in order to meet their
reserve requirements. What the
fed funds rate represented was the
MARGINALCOSTFORABANKTOINCREASE
its reserves, and thus new lending.
7ITHBANKSTRYINGTOMINIMIZETHEIR
total balances, the fed funds rate
could be controlled with small
purchases and sales by the Fed.
)NDEEDTHEMARKETRATETRACKEDTHE
target fed funds rate very closely and
these small interventions by the Fed
were routine.
Enter the IOER

!KEYCHANGEINTHE&EDS
OPERATIONSOCCURREDINWITH
the authorization to begin paying
interest on excess reserves. With
Why this time is different | Taylor Self, MBA
a much larger balance sheet, the

FOMC faced the prospect that these
rising reserves would limit its ability
to control the fed funds rate. This
is what the IOER was intended to
address.
Effectively, the IOER rate (currently
held at 0.25%) represents the
INTERESTRATEATWHICHBANKSCANLEND
to the Fed. Theoretically, this should
set a minimum interest rate in the
FEDFUNDSMARKET"ANKSSHOULD
have no incentive to lend to other
MARKETPARTICIPANTSATANINTEREST
rate lower than the one they can
EARNRISK FREEBYLENDINGTOTHE&ED
Since its implementation, however,
)/%2HASHADLITTLEINmUENCEONTHE
fed funds rate, even as the size of the
Feds balance sheet has remained
large. This is due to a variety of
factors, not least of which is that
MANYlNANCIALINSTITUTIONSTHAT
participate in and depend on the
FEDFUNDSMARKETDONOTHAVEACCESS
to the IOER, which is restricted to
DEPOSIT TAKINGINSTITUTIONS
High levels of excess liquidity in
THElNANCIALSYSTEMCOUPLEDWITH
limited access to IOER, means that
THEMARKETRATEFORFEDFUNDSHAS
been both consistently below the
IOER rate set by the Fed, as well
as highly variable. This inability to
control the fed funds rate explains
why the FOMC has changed from
a target level to a target range,
currently set at 0.00% to 0.25%.
The shadow policy rate RRP

7ITH)/%2FAILINGTOSUFlCIENTLY
impact short-term interest rates,
the Fed has had to consider other
tools. Namely, it needs a method to
impose some measure of control on
the fed funds rate, while leaving the
size of its balance sheet unchanged.
4HETOOLITHASDEEMEDMOSTLIKELY
to succeed and has thus chosen
to employ is reverse repurchase
agreements (RRPs).
In essence, a RRP boils down to
being able to lend to the Fed, much
LIKE)/%27HENTHE&EDIMPLEMENTS
a RRP, it removes reserves from the
BANKINGSYSTEMBUTWITHOUTALTERING
the size of its balance sheet.
The reason that RRPs will be more
EFFECTIVETHAN)/%2INPUTTINGAmOOR
beneath short-term interest rates is
THATTHENUMBERANDTYPEOFlNANCIAL
institutions with access to the RRP
facility will be much larger than
those with access to IOER. Indeed,
MONEY MARKETFUNDSAREINCLUDED
in the list of counterparties eligible
for RRPs. The expectation is that
the RRP rate will be set below IOER,
most probably by 25 basis points.
7HENTHE&EDDOESHIKEITWILL
move both the IOER and RRP rates
UPWARDS4HEMARKETRATEFORFED
funds will end up somewhere in
between, as it is both pushed
up from below by the RRP facility
being offered directly to short-term
FUNDINGMARKETSASWELLASPULLED
UPWARDSBYTHE)/%2DUETOBANK
arbitrage activities. Other research

concurs with this assessment that
THEFEDFUNDSRATEWILLLIKELYSETTLE
somewhere within the target range.1
Do you want the price or

the quantity?
The use of RRPs as a policy tool is
not uncontroversial for the Fed. One
issue that arises is the fact that it will
dramatically increase the footprint
of the Fed in short-term funding
MARKETSBEYONDTHEBANKINGSYSTEM
directly. Currently, the Feds stated
limit for the RRP facilitys size is $300
billion per day. However, considering
the amount of excess reserves in the
system and the degree to which IOER
HASFAILEDTOPULLTHEMARKETRATEFOR
fed funds upwards, the size of the
RRP facility may need to be much
larger. Indeed, the Fed has indicated
that it will offer unlimited amounts of
RRPs initially.
"YOFFERINGAWIDERRANGEOFlNANCIAL
MARKETPARTICIPANTSTHEABILITYTOLEND
to the Fed, RRPs are effectively the
CREATIONOFANEWSHORT TERMRISK FREE
asset. Important sources of shortTERMFUNDSSUCHASMONEY MARKET
funds, could gravitate towards
placing their money directly with the
Fed and erode the proper functioning
OFSHORT TERMlNANCINGAVENUES
More than that, the draining of a
large amount of excess liquidity
FROMTHEBANKINGSYSTEMCOULDHAVE
unintended consequences for other
ASSETMARKETSnEVENIFTHISWERE
limited to a perceived tightening
1
Zoltan Pozsar, Credit Suisse
Why this time is different | Taylor Self, MBA
OFlNANCIALCONDITIONSASEXCESS
RESERVESINTHEBANKINGSYSTEMFELL
due to the RRP facility.
The Fed has tried to mitigate these
concerns, which have been raised
BYBOTH&EDMEMBERSANDlNANCIAL
MARKETPARTICIPANTSBYOUTLINING
its plan for normalizing policy. With
regard to RRPs, the Fed has said
THATITWOULDMAKECLEARTHATITS220
facility is meant to be temporary, and
LIKELYTOBEPHASEDOUTOVERTIME
Another mitigating action by the
Fed has been to discuss limiting the
amount of RRPs it is willing to offer,
thereby ensuring that providers
of short-term funds are forced to
engage with the normal avenues
OFTHElNANCIALSYSTEM(OWEVERA
limited offering of RRPs, and thus
the RRP interest rate, could handicap
the Feds ability to control short-term
interest rates.
Overall, considering the

DIFlCULTYWITHWHICHTHE&EDHAS
COMMUNICATEDITSlRSTRATEHIKETHE
prospects for a clear and successful
articulation of the RRP facilitys
longevity and eventual retirement
SEEMSLIM7HATISMORELIKELYIS
that the RRP facility becomes a
permanent feature of short-term
FUNDINGMARKETSASLONGASTHEREARE
substantial excess reserves in the
lNANCIALSYSTEM
Conclusion
The above concerns are what have
driven the Fed to revise its plans
for using IOER and RRPs and,
consequently, has increased the
level of uncertainty surrounding
just how the Fed is going to be
ABLETOSUFlCIENTLYCONTROLSHORT
term interest rates when the FOMC
lNALLYDECIDESTOTIGHTENPOLICY
!PARTICULARLYDARKSCENARIOFOR
the FOMC is one in which, having
decided to raise interest rates
by moving the IOER-RRP corridor

upwards, the fed funds rate fails to
respond in a commensurate way.
Overall, we have to return to
Mr. Potters appraisal of the
situation while we can reasonably
MAPTHEIRINTENTWECANONLYKNOW
to a limited extent what direct
impact the Feds new tools will have,
or what forms the manifestation of
secondary and tertiary effects will
TAKE!TLEASTINITIALLYTHE&EDWILL
LIKELYlNDITSELFFRUSTRATEDINITS
efforts to both minimize its footprint
INSHORT TERMFUNDINGMARKETSAND
ensure control of the Fed Funds rate
while its balance sheet remains very
large. Moreover, considering the
53lNANCIALSYSTEMSPRE EMINENT
position globally, the uncertainty
surrounding the implementation and
USEOFTHESENEWTOOLSWILLLIKELY
CREATEVOLATILITYINASSETMARKETS
beyond those simply concerned with
short-term interest rates.
REGIONAL OUTLOOK U.S.

UNITED STATES RECOMMENDED SECTOR WEIGHTS
Ray Mawhinney
Senior V.P. & Senior Portfolio Manager
RBC INVESTMENT
STRATEGY COMMITTEE
November 2015
Brad Willock, CFA

V.P. & Senior Portfolio Manager
4HE53STOCKMARKETHASRECOVERED
most of the losses suffered during
the sharp sell-off at the end of the
summer, rising almost 6% in the
past three months and bringing the
total return for the S&P 500 Index
over the past 12 months to about
3%. Recent returns have been driven
by tentative signs of stabilization
INTHEOUTLOOKFOR#HINASECONOMY
improvement in a number of global
business-activity indexes and the
slow but steady improvement of
THE53EMPLOYMENTBACKDROP
$ESPITERECENTGAINSINVESTORS
remain anxious about the trajectory
of short-term U.S. interest rates,
the health of many emergingMARKETECONOMIESANDTHERELATIVELY
muted level of economic growth
experienced in the developed
world over the past several years.
BENCHMARK
S&P 500
November 2015
Energy
7.0%
7.1%
Materials

Industrials
10.3%
10.1%
13.5%
13.1%
Consumer Staples

Health Care
15.5%
14.6%
Financials
16.5%
16.6%
22.4%

1.5%
2.3%
Utilities
2.0%

Source: RBC GAM
S&P 500 EQUILIBRIUM

5120
Nov. '15 Range: 1620 - 2707 (Mid: 2164)
2560
Nov. '16 Range: 1926 - 3219 (Mid: 2573)

1280
640
320
160
80
40
1960
1970
1980
1990
2000
2010
2020
Source: RBC GAM
It would appear that the waiting is

almost over for those who want the
U.S. Federal Reserve (Fed) to raise
short-term interest rates. Following
recent comments by various Fed
governors and the robust October
EMPLOYMENTREPORTTHEMARKETHAS
priced in a probability exceeding
THATTHE&EDWILLHIKEATITSNEXT
meeting later this month. Provided
that the November payroll data
CONlRMSTHEIMPROVINGTRENDIN
employment and wage growth, we
expect the Fed to begin increasing

rates and to communicate its
intention to continue raising them
over an extended period as long as
economic data is strong enough.
4HEPERPLEXINGTHINGFORMARKETSIS
THATTHISWILLBETHElRSTTIMETHAT
the Fed raises rates with the goal of
returning them to normal, versus
the typical motivation of cooling an
overheated economy. Importantly,
MARKETSAREWELLPREPAREDFORTHIS
move as bond yields have moved
up, yield-sensitive areas of the
STOCKMARKETHAVEFALLENTOSOME
degree and the U.S. dollar has
remained strong against almost
all major currencies. At this point,
the big surprise would be if the Fed
left rates unchanged. While the
Fed has made its intentions quite
CLEARTHEMARKETSRESPONSEHAS
2EGIONAL/UTLOOKn53\2AY-AWHINNEY\"RAD7ILLOCK#&!
led to some concerns. For example,

the U.S. dollar is up about 5% in
the past three months against a
TRADE WEIGHTEDBASKETOFCURRENCIES
and over 13% in the past year.
One concern is that emergingMARKETCOMPANIESWITH53DOLLAR
DENOMINATEDLIABILITIESWILLlNDIT
harder to service that debt as their
currencies fall in value. This concern
is particularly relevant to companies
that produce commodities, since
the demand for oil and metals
has declined as Chinas economy
slows. The second concern is that
53COMPANIESWITHSIGNIlCANT
INTERNATIONALOPERATIONSWILLTAKE
further hits to earnings as foreign
PROlTSARETRANSLATEDBACKINTO53
dollars. This is no small effect. In
the most recent quarter, S&P 500
earnings were reduced by over
ONTHEBACKOFTHISTRANSLATION
effect. Keep in mind, however, that
consumers and some companies
BENElTFROMASTRONGER53DOLLAR
including manufacturers that import
commodities or parts/assemblies
from international suppliers.
Another concern that has persisted
for several years is that slow
economic growth could lead to
disappointing earnings. Up to this
point, operating leverage has been
impressive, and has supported
PROlTS)NTHEPASTSIXQUARTERS
REVENUEGROWTHFORTHEMARKET
excluding the Energy sector has
come in at 2% to 4%, but earnings
GROWTHHASBEENRUNNINGATTO
10%. In the third quarter, revenue
GROWTHFORTHEMARKETEXCLUDING
Energy was just over 1% but
earnings growth was 6% as each

new dollar of sales generated over
CENTSOFPROlT/FNOTETHE
growth in capital spending has been
less than the growth in earnings
throughout this cycle. In general,
MANAGEMENTTEAMSHAVELACKEDTHE
CONlDENCETOEXPANDAGGRESSIVELY
OPTINGINSTEADTOBUYBACKSTOCK
and increase dividends. This trend
should help support equities.
For the U.S. economy, fundamentals
appear somewhat mixed.
Employment is improving as the
number of people applying for
unemployment insurance recently
dropped to a 15-year low and the
number of jobs available reached
a 14-year high. The unemployment
rate has fallen to 5% as 11 million
jobs have been created since the
lNANCIALCRISIS)NADDITIONTHE
number of job openings is higher
than it has been in 15 years and the
TIMEREQUIREDTOlNDANEWJOBAFTER
a person has lost one is at a cycle
low. As one would expect, this has
led to a solid recovery in the housing
MARKET)NVENTORIESOFHOMESFOR
sale are low, new homes under
construction are at a seven-year
high, and prices of existing homes
have gained roughly 5% in the past
year. In addition, a recent survey of
home builders measuring buying
interest reached a 10-year year high
THANKSINPARTTOLONG TERMMORTGAGE
rates below 4% and improved
access to credit. In contrast to the
employment and housing data, retail
sales have been underwhelming,
inventories are uncomfortably
high and industrial production has
WEAKENED3OMEOFTHEWEAKNESSIN
retail store sales can be attributed
to a shift to on-line retailers and
away from goods such as clothing
to services such as health care and
travel. Overall, the U.S. consumer
is in good shape. Savings and net
worth are up and debt loads down.
The economy is muddling along with
growth between 2%-3% as it has
each year over the past 10 years
outside the crisis. We expect much
the same in the year ahead.
4HEBIGGESTRISKSTOTHESTOCKMARKET
ARELIKELYTOCOMEFROM#HINAAND
OTHEREMERGINGMARKETS#HINAS
economy continues to decelerate,
Brazil remains in recession as
ITBATTLESTOO HIGHINmATIONAND
stagnant growth, and Russia is
in deep recession. Currencies of
many of the emerging economies
AREUNDERSIGNIlCANTPRESSUREAS
China slows, commodity prices
WEAKENANDTHE&EDPREPARESTO
HIKESHORT TERMINTERESTRATES
$URINGTHEPASTYEARTHESTRONG
U.S. dollar and a falling oil price
have combined to reduce S&P 500
earnings by over 10%. We expect
the U.S. dollar to move higher in the
near term and gains in the oil price
to be limited, with neither creating
SIGNIlCANTHEADWINDSTOEARNINGS
INTHEYEARAHEAD7ITHTHEMARKET
near its all-time high, valuations
are neither expensive nor cheap at
roughly 16.5 times forward earnings
estimates. These levels suggest
investors should expect long-term
returns in the mid-single digits.
REGIONAL OUTLOOK CANADA

Stuart Kedwell, CFA
CANADA RECOMMENDED SECTOR WEIGHTS
Senior V.P. & Senior Portfolio Manager

The S&P/TSX Composite Index

declined in the latest three months
and lagged the returns of both the
S&P 500 and MSCI World Index. This
underperformance was compounded
by a further 2% decline in the
Canadian dollar during the quarter.
While many of the same trends
persisted for the broad S&P/TSX, the
MOSTSIGNIlCANTEVENTFORTHEINDEX
was the abrupt reversal of Valeant
Pharmaceuticals. After challenging
for the top spot on the S&P/TSX in
TERMSOFMARKETCAPITALIZATIONTHIS
summer, the shares fell 60% during
the three-month period. Headwinds
for the energy and basic materials
AREASOFTHEMARKETREMAINED
offset somewhat by the steadying
and positive performance of the
Financials sector.
In the commodity sectors, the
solution to low prices will be low
prices, as supply and demand
will re-balance and prices will
move towards the marginal cost of
production. So far, unfortunately,
this process has been drawn-out and
challenging. After a period of little
change in September and October,
prices for oil and natural gas prices
TUMBLEDANDlNISHEDTHE3EPTEMBER
November period down about 15%.
In the case of natural gas, high
inventories and worries about a
DEMANDBUSTLINKEDTOTHE%L.INO
weather pattern hit the price hard.
)NCRUDE OILMARKETSINVENTORIES
RBC INVESTMENT
STRATEGY COMMITTEE
November 2015
Energy
BENCHMARK
S&P/TSX COMPOSITE
November 2015

Materials

Industrials

7.0%
7.1%
Consumer Staples
5.0%
4.4%
Health Care
0.5%
2.7%

Financials
4.0%
3.0%
5.0%
5.6%
Utilities
2.0%
2.2%
Source: RBC GAM
S&P/TSX COMPOSITE EQUILIBRIUM

25600
Nov. '15 Range: 13271 - 19839 (Mid: 16555)

Nov. '16 Range: 13905 - 20788 (Mid: 17346)
6400
1600
400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: RBC GAM
remained high and, with little sign

of OPEC action, the rebalancing
PROCESSHASYETTOTAKEHOLD%VEN
so, there has been some progress
ON53RIG COUNTREDUCTIONS$URING
the quarter, Alberta announced new
carbon-emission targets which, on
the surface, appear manageable
for the Energy sector. However,
THETARGETSARELIKELYTOBEQUITE
challenging for the provinces coalpower industry.
Our economic growth forecast

continues to slip in Canada and we
ARENOWLOOKINGFORGROWTHIN
2016. This compares to our forecast
of 2.5% in the U.S. We believe that
THE#ANADIANDOLLARISLIKELYTO
remain subdued, as the economicgrowth gap persists between
Canada and the U.S. and concerns
remain about the impact of energy
MARKETSANDTHESUSTAINABILITYOF
housing activity. Our forecast for
2EGIONAL/UTLOOKn#ANADA\3TUART+EDWELL#&!
the Canadian dollar stays at $1.40.

4HE53&EDERAL2ESERVELOOKSSET
TORAISETHEBENCHMARKINTEREST
rate later this month. While a U.S.
TIGHTENINGCYCLEWILLLIKELYBESLOW
and drawn-out, it should lead
any similar move in Canada by a
considerable period.
The aggregate 2016 earnings
estimate for the S&P/TSX Composite
continues to decline and now sits
JUSTABOVE4HISSTILLREPRESENTS
sizable growth from 2015 and
BAKESINSIZABLEGROWTHYEAR OVER
year growth in the Energy sector.
The S&P/TSX has dropped to the
low end of our fair-value band and
WEBELIEVEITLOOKSINCREASINGLY
attractive. Nevertheless, the case
for outperformance rests on an
IMPROVINGOUTLOOKFOROILAND
gas prices.
!STHEMARKETSHIFTSITSFOCUSTO
2016 earnings forecasts, valuations
INTHEBANKINGINDUSTRYAREBELOW
longer-term averages. In 2015,
BANKEARNINGSWEATHEREDCONCERNS
about falling energy prices and a
CHALLENGINGBACKDROPFOR#ANADIAN
consumers. Restructuring charges
were also a theme in 2015, as
THEBANKSMOVEDTORESHAPETHEIR
businesses amid slowing economic
growth and the need to invest
in digitization to both improve
customer experience and simplify
processes. Provisions for credit will
rise next year on early indications
that consumer credit in Alberta
ISWEAKENING#ORPORATE CREDIT
exposure to the energy patch has

proven more manageable than many
investors would have predicted,
although 2016 will continue to be
CHALLENGING%VENWITHTHISBACKDROP
current valuations and dividend
yields, coupled with modest dividend
GROWTHMAKETHEBANKSARELATIVELY
attractive area of the S&P/TSX.
)NSURANCESTOCKSCONTINUETOLOOK
interesting, particularly if longerterm interest rates drift upwards.
Sunlife and Manulife recently
outlined earnings-growth targets
in the high single digits to low
double digits. These targets,
combined with rising returns on
equity, increasing dividends and a
focus on wealth management and
MARKETSOUTSIDE#ANADASHOULD
lead to share gains. Elsewhere,
we continue to believe that assetMANAGEMENTlRMSLIKE/NEXAND
"ROOKlELDCANCONTINUETOPERFORM
well over the intermediate term.
Both of Canadas major railways
are managing through a period of
DIFlCULTSHIPMENTVOLUMESVIAA
combination of price increases and
COSTDISCIPLINE#ANADIAN0ACIlC
has made headlines recently with
ANAPPROACHTOACQUIRE.ORFOLK
Southern, which operates in the U.S.
Southeast. While the acquisition
would face hurdles, we see a
OPPORTUNITYFOR#ANADIAN0ACIlCS
management approach to create
SIGNIlCANTVALUEFORBOTHSETSOF
shareholders.
!PARTFROMTHElNANCIALANDRESOURCE
AREASOFTHEMARKETVALUATIONSARE
in many cases equal to or greater
than those of similar companies in
the U.S. as Canadian capital has
funneled into these companies at
THEEXPENSEOFBANKINGANDENERGY
In the slow growth, low-interestrate environment, many companies
have either grown via acquisition
ORBORROWEDTOBUYBACKSTOCKAND
we therefore remain selective. While
some companies should be able to
compound earnings at attractive
rates going forward, others may
struggle as investor focus moves
from P/E ratios to balance-sheet
valuation metrics such as enterprisevalue-to-sales and enterpriseVALUE TO %")$4!WHICHINMANY
cases are elevated.
/ILPRICESAREDIFlCULTTOFORECAST
in the short run, and it now
appears that prices will be lower
on average and more volatile than
we have seen in the recent past.
Longer-term discussions about
carbon emissions and electric cars
complicate investor appetite for a
SECTORTHATLOOKSQUITEINTERESTING
on a valuation basis. On the positive
side, a declining Canadian dollar
aids Canadian producers to some
degree as it reduces costs. The large
long-life reserve companies that are
well-capitalized are set to deliver
attractive levels of free cash when
crude prices bounce, even toward
the marginal cost which we estimate
to be in the $65-$70 level.
REGIONAL OUTLOOK EUROPE

David Lambert
EUROPE RECOMMENDED SECTOR WEIGHTS

6OLATILITYIN%UROPEANEQUITYMARKETS
appears tied somewhat to emergingMARKETGROWTHPROSPECTS-ARIO
$RAGHIPRESIDENTOFTHE%UROPEAN
#ENTRAL"ANK%#" HASTALKEDABOUT
the possible adverse effects of
lNANCIAL MARKETSTRESSANDSLOWER
EMERGING MARKETECONOMIESON
European exports which could in
turn weigh on domestic demand. As
ACONSEQUENCE$RAGHIREITERATEDTHAT
he will review the size, composition
and duration of the ECB monetary
stimulus program if needed. This
willingness to act should provide
comfort and ultimately more
underpinning for European equity
MARKETS!GREATERCOMMITMENT
to monetary stimulus would also
prevent the euro from strengthening
too much, and it is the euros
WEAKNESSOVERTHEPASTMONTHS
THATHASHELPEDKICK STARTTHEREGIONS
earnings recovery.
At the company level, the slowdown
INEMERGINGMARKETSISONETHAT
has been well telegraphed and is
lRMLYBAKEDINTO%UROPEANEARNINGS
expectations. Third-quarter earnings
showed signs of stabilization in this
area, and future gains will be viewed
positively.
Eurozone credit is expanding again,
ASCONlRMEDBY/CTOBERS%#""ANK
,ENDING3URVEY"ANKSCONTINUETO
relax standards on business loans,
ASIGNOFGROWINGCONlDENCEINTHE
economy, and demand for loans from
)4(%',/"!,).6%34-%.4/54,//+ New Year 2016
RBC INVESTMENT
STRATEGY COMMITTEE
November 2015
BENCHMARK
MSCI EUROPE
November 2015
Energy
6.0%
6.7%
Materials
6.0%
6.7%
Industrials
12.5%
11.3%
12.4%
11.6%
Consumer Staples

Health Care
14.0%
13.6%
Financials
21.6%
22.6%
5.0%


5.1%
Utilities
3.0%

Source: RBC GAM
EUROZONE DATASTREAM INDEX EQUILIBRIUM

5760
Nov. '15 Range: 1702 - 3639 (Mid: 2670)

Nov. '16 Range: 1795 - 3838 (Mid: 2817)
2880
1440
720
360
180
90
1980
1985
1990
1995
2000
2005
2010
2015
2020
companies and households increased

in the third quarter from the previous
three months. Three credit drivers
demand for loans, the supply of
credit and the falling price of credit
all continue to be supportive of
economic growth.
European economic indicators
continue to be robust and are
broadening out. The latest Purchasing
Managers Indexes (PMIs) and IFO,
ASWELLASECONOMIC CONlDENCEAND
CAR REGISTRATIONMEASURESALLREmECT
positively. The money-supply leading
indicator, which is correlated with
economic expansion, also suggests
activity will remain resilient. The most
notable of all metrics is probably
)TALIANCONSUMERCONlDENCEWHICH
recently hit a 15-year high.
The implications of the current level
OF%UROPEAN0-)SARE'$0GROWTH
2EGIONAL/UTLOOKn%UROPE\$OMINIC7ALLINGTON
in excess of 2% and double-digit

earnings growth. It is clear that
%UROZONEEARNINGSAREBREAKINGAWAY
FROMAFOUR YEARDOWNTRENDAND'$0
growth exceeding 1% has typically
been associated with strong margin
expansion in Europe.
These developments increase the
LIKELIHOODTHAT%UROPEANVALUATIONS
will rise closer to those in U.S
MARKETS4HELEVELOF%UROZONE
earnings relative to the U.S. has never
been as depressed as it was over
the past year. The return-on-equity
differential between the two regions
is at the top of its historical range,
and should start to narrow.
Based on P/E valuations, European
STOCKSHAVEFALLENSHARPLYOVERTHE
past three months. Earnings have
continued to climb, but share prices
have fallen similar to other global
STOCKMARKETS
(IGHER RISKLOWER QUALITYSTOCKS
including small and mid caps, have
been gaining momentum since
the beginning of 2015, as leading
indicators climbed in Europe. This
was to be expected as we could see
some macroeconomic indicators
beginning to stabilize/improve in
2014 given the benign economic
ENVIRONMENT'$0REVISIONSEARNINGS
REVISIONSTHE/%#$%5LEADING
indicator and purchasing power
indexes have all improved over the
course of 2015.
Style cycles typically last nine to
12 months. The improvement in the
composite indicator is moderating
somewhat, and this means we expect
ROTATIONINTHEMARKETOVERTHENEXT
FEWMONTHSBACKTOHIGHER QUALITY
franchises with improving operations.
7ELIKEHIGHLYPROlTABLECOMPANIES
that can expand their asset bases
over time as they generate the best
opportunities for shareholders over
time. For example, the consumer and
Health Care sectors are high-return
areas with good capital growth,
whereas the Energy and Materials
sectors have experienced constant
declines in their returns over time and
score poorly on cost of capital due to
the capital-intensive nature of their
operations.
4HE#ONSUMER$ISCRETIONARYSECTOR
still appeals to us, particularly the
media and gaming areas. We remain
committed to media companies that
ARETAKINGADVANTAGEOFCHANGESIN
the operating environment, especially
those that have reduced their capital
intensity and broadened their
exposure online. Our auto-related
exposure is extremely limited, with
just one auto-equipment supplier in
the portfolio. These manufacturers
are typically capital-intensive and
offer low returns. The scandal at
6OLKSWAGENISSOMETHINGTHATWE
avoided owing to the companys
chequered corporate-governance
history and its low-margin/return
business model.
The Consumer Staples sector contains
many high-quality companies. We
remain focused on beverages, food
ingredients and household goods
because these areas offer the best
mix of growth and valuation. They are
appealing in part because they allow
investors to capitalize on the growing
MIDDLECLASSESINEMERGINGMARKETS
In the Energy sector, we have had

concerns over the rising cost of
CAPITALEXPENDITURESANDWEAK
production-growth expectations.
Valuations are at almost
unprecedentedly low levels, both in
absolute and relative terms, but are
not low enough to completely offset
THEWEAKFUNDAMENTALBACKDROP
$IVIDENDYIELDSAREHIGHBUTFORMANY
oil companies high levels of capex
mean that these costs are only just
COVEREDBYCASHmOW'IVENTHEOIL
PRICECOLLAPSEWETHINKSOMEBALANCE
sheets in the oil-services industry
may come under stress.
4HEPERFORMANCEOFTHEBANKING
INDUSTRY%UROZONEBANKSIN
PARTICULARHASEBBEDANDmOWED
of late in line with macroeconomic
data, and has begun to run with
the implementation of quantitative
EASING!TIGHTERREGULATORYBACKDROP
MEANSTHATTHEBANKSAREUNLIKELY
TORETURNTOLEVELSOFPROlTABILITY
SEENBEFORETHElNANCIALCRISISAND
MANYBANKSWILLSTRUGGLETOGENERATE
returns above their cost of equity.
-ININGSTOCKSHAVEDRAMATICALLY
underperformed, ceding the growth
valuations acquired over a decadelong run. They are now valued more
LIKEVALUESTOCKSWITHDIVIDEND
YIELDSSLIGHTLYHIGHERTHANTHEMARKET
average. In the Materials sector, our
preference is for speciality chemicals
as well as the niche areas of enzymes
ANDmAVOURSANDFRAGRANCESWHERE
we see high barriers to entry and
good growth and returns.
REGIONAL OUTLOOK ASIA

ASIA RECOMMENDED SECTOR WEIGHTS
Mayur Nallamala
Head & Senior Portfolio Manager
RBC Investment Management (Asia) Limited
4HEABRUPTSELL OFFIN!SIANMARKETS
OVERTHEPASTTWOQUARTERSlNALLY
appeared to have found a bottom in
September, as the Chinese equity
crash was countered with aggressive
policy intervention including stateDIRECTEDSTOCKPURCHASESSHORT
selling bans and a raft of other
measures aimed at resuscitating
lNANCIALMARKETS3LOWINGECONOMIC
fundamentals in the region have
also been met with increasingly
accommodative policies by Asian
CENTRALBANKS!SARESULTREGIONAL
EQUITYMARKETSBOUNCEDBACK
somewhat beginning in October.
)NDIANSTOCKSlNALLYLOSTSOME
momentum as investors increased
SCRUTINYOFTHEPALPABLELACKOF
progress that has been made in
achieving Prime Minister Narendra
-ODISKEYINVESTMENTTARGETS
Further dampening the optimism
is the defeat suffered by the ruling
BJP party in Bihar state elections.
The loss somewhat damages Modis
credibility and boosts the perception
THATHEWILLHAVEEVENMOREDIFlCULTY
pushing through his economic
POLICIES$URINGTHEPERIOD!USTRALIA
underperformed amid ongoing
concerns about softening investment
demand from China and lower
commodity prices. Japanese equities
STRENGTHENEDONTHEBACKOFSTRONGER
than-expected corporate earnings
ANDYENWEAKNESS
RBC INVESTMENT
STRATEGY COMMITTEE
November 2015
BENCHMARK
MSCI PACIFIC
November 2015
Energy
2.5%

Materials
5.3%

Industrials
14.0%
13.0%
14.5%
13.6%

6.7%
Consumer Staples
Health Care

5.4%
Financials

14.5%
14.3%
6.0%
5.5%
Utilities
3.0%
3.2%
Source: RBC GAM
JAPAN DATASTREAM INDEX EQUILIBRIUM
1040
520
260
Nov. '15 Range: 279 - 808 (Mid: 544)
Nov. '16 Range: 272 - 786 (Mid: 529)
130
65
1980
1985
1990
1995
2000
2005
2010
2015
2020
!SIGNIlCANTEVENTDURINGTHEQUARTER
WASTHE,$0SRE ELECTIONOF0RIME
Minister Abe to a second three-year
term as party leader. He continued
to push his economic revitalization
PACKAGEANDHASOUTLINEDTHENEXT
STEPSINHIS@!BENOMICSSTRATEGY
to drive a recovery in growth. While
THEREISSTILLPLENTYOFSKEPTICISMON
THEEFlCACYOFTHEMONETARYPROGRAM
he continues to push for aggressive
policy measures that should be
CONSTRUCTIVEFOREQUITYMARKETSOVER
the medium term.
4HAT*APANESEEQUITYMARKETSHAVE
outperformed over the past three
years is partly attributable to laws
aimed at improving corporate
governance and shareholder returns.
7HILETHEMARKETWILLREMAINVOLATILE
in the short term, quality companies
THATHAVEROOMFORSIGNIlCANT
improvement in areas ranging from
2EGIONAL/UTLOOKn!SIA\-AYUR.ALLAMALA
balance-sheet management to
corporate governance will continue to
provide shareholder returns.
Getting a precise view on whats
happening inside Chinas economy
ISALWAYSCHALLENGING#HINAS'$0
GROWTHOFINTHETHIRDQUARTER
marginally beat expectations but
was the slowest pace in six years.
!CLOSERLOOKREVEALSTHAT#HINAS
traditional, industrial-based
economic engine is slumping, while
the countrys services sector is
EXPANDINGFAST7ANINGlXED ASSET
investment and industrial production
indicate that growth in China is
set to continue to slow over the
medium to longer term as it pivots
to a consumption-driven economy.
Meanwhile, an oversupply of unsold
apartments has resulted in sharply
decelerating new construction and
property investments. While the
announcement by the Chinese
CENTRALBANKTOLOWERDOWN PAYMENT
requirements to 25% from 30%
will provide a short-term boost to
property and we have already
seen prices begin to recover in major
MARKETSANDSOMESMALLERONESnWE
believe there remains a structural
OVERSUPPLYINSOMEMARKETS
4HE#HINESESTOCKMARKETHAS
stabilized in recent months following
a 40% decline from its June
highs, with overall margin lending
bottoming out after contracting
sharply from record levels.
#REDITGROWTHHASPICKEDUPSINCE
!UGUSTONTHEBACKOFSTRONGER
DEMANDASTHE#HINESECENTRALBANK
eased monetary policies in efforts to
stimulate the economy. Additionally,

lSCALSPENDINGPICKEDUPIN!UGUST
and September, pointing to efforts
beyond the monetary front. We are
now approaching the traditionally
stronger seasonal period into the
Chinese new year, and expect the
data will remain reasonable in the
coming months.
4HE)NDIANMARKETMOVEDLOWERAS
MARKETEXPECTATIONSFORECONOMIC
reform have still not materialized
ASQUICKLYORASWIDELYASHOPED
for after Modis election last year.
)N3EPTEMBERTHE2ESERVE"ANKOF
)NDIATHECOUNTRYSCENTRALBANK
surprised investors by reducing its
BENCHMARKINTERESTRATEBYBASIS
points to 6.75%, a move that should
boost investment. We note that
monthly indicators in the past three
months have turned positive after
APOORlRSTHALFWHENGOVERNMENT
investment expectations fell short
OFTHEMARK)TISWORTHBEARINGIN
MINDHOWEVERTHATSTOCKVALUATIONS
increasingly leave little margin for
error in the near term.
4HEREBUKETO-ODISPOLITICALPARTY
in the recent state elections has
negative implications for the prime
ministers reform agenda, as hopes
for a co-operative parliament have
dimmed considerably. Over the
longer haul it seems that the election
result, by itself, wont change Modis
plans for economic reform.
Equities in South Korea outperformed
OVERTHEPASTQUARTERAMIDAWEAKER
won, stronger-than-expected
September exports and the impact
OFADISEASEOUTBREAKINTHESECOND
QUARTER,OOKINGAHEADARECOVERY
in Chinese visitors and domestic
CONSUMPTIONWILLBETHEKEY
drivers for South Koreas consumer
SECTORS-ARKETHEAVYWEIGHT
Samsung Electronics, which has
been under pressure this year given
WEAKSMARTPHONEANDMEMORY
industry dynamics, surprised with
strong results. Also positive was
managements decision to return
more capital to shareholders, helping
TOBOOSTTHESTOCKFROMDEPRESSED
levels. Hopefully, this is the start
of a trend, with smaller companies
and other chaebols (South Korean
conglomerates) following Samsungs
lead in pursuing more-shareholderfriendly policies.
Australian equities were punished
in the most recent quarter, as
ENERGYSTOCKSFELLINRESPONSETO
further declines in oil prices. In the
Materials sector, the most notable
development was a rebound in ironore prices amid supply disruptions
in Brazil. Given Chinas rapidly
declining production of steel and
cars, however, the current rally
should be temporary. In the political
arena, Malcolm Turnbull replaced
Tony Abbott as prime minister after
winning a leadership contest in
3EPTEMBERMAKING4URNBULLTHE
COUNTRYSlFTHLEADERINlVEYEARS
The change has provided a shortTERMBOOSTTOCONSUMERCONlDENCE
which has been hurt by the end of
the commodity boom and its impact
on the broader economy, as well as
the potential effect of an end to the
house price boom/bubble in Sydney
and Melbourne.
REGIONAL OUTLOOK EMERGING MARKETS

EMERGING MARKET DATASTREAM INDEX EQUILIBRIUM
Veronique Erb
Portfolio Manager
Nov. '15 Range: 239 - 429 (Mid: 334)

Nov. '16 Range: 251 - 450 (Mid: 351)
640
4HERECENTQUARTERMARKEDASTRONG
rebound from the lows in emergingMARKETEQUITIESWITH#HINALEADING
THEPACK4HISADVANCEFOLLOWED
AVERYWEAKSUMMERFORRETURNS
WHENTHESTOCK MARKETPANICIN
China caused a huge sell-off across
EMERGINGMARKETS
4HE-3#)%MERGING-ARKETS)NDEX
HASREMAINEDSTUCKINARANGESINCE
(OWEVEREMERGING MARKET
valuations and currencies are
cheap, and there is room for
monetary stimulus. Fears of
a hard landing in China are
largely overblown as longer-term
demographic trends such as a
growing middle class continue to
support our domestic bias.
/VERTHEPASTlVEYEARSEMERGING
MARKETSHAVEUNDERPERFORMED
DEVELOPEDMARKETSBYAND
this period of underperformance
has been the longest in our
EXPERIENCE%MERGINGMARKETS
appear to be in the midst of a nearperfect storm of falling commodity
prices, stalling Chinese growth,
renminbi devaluation, a strong U.S.
dollar, oversupplies of both oil and
industrial commodities and concerns
about the effect of what will
PROBABLYBETHElRST53RATEHIKEIN
nearly nine years.
/NEOFTHEKEYISSUESPLAGUING
EMERGINGMARKETSISATRENDTOWARD
320
160
80
40
20
1995
2000
2005
2010
2015
2020
Source: Datastream, RBC GAM
WEAKCURRENCIES)NTHECASESOF
the Indian rupee, Brazilian real and
South African rand, the declines
have exceeded those experienced
DURINGTHE!SIANlNANCIALCRISISOF
AND/NECONCERNISTHAT
THISCURRENCYWEAKNESSFORESHADOWS
a repeat of the Asian crisis. It does
NOT.OSINGLEEMERGINGMARKET
has an extreme current-account
DElCITANDTOTALDEBT TO '$0LEVELS
appear to be high only in China
and Malaysia. Gross external debt
to foreign-exchange reserves are
AQUARTEROFLEVELS"ASED
ONTHEMARKETEXPERIENCEOF
WECANEXPECT'$0ANDSTOCK
MARKETSTOTROUGHSIXMONTHSAFTER
currencies put in their bottom.
Indeed, exchange rates are the
critical variable for returns. Roughly
ONE QUARTEROFEMERGING MARKET
equity returns in U.S. dollar terms
have come from exchange-rate
moves over the past 15 years, and
EMERGING MARKETCURRENCIESAND
EQUITYMARKETSTENDTOMOVEINTHE
same direction.
7HATISTHEOUTLOOKFOR#HINA
Clearly there is overcapacity in the
INDUSTRIALSECTORANDTHISISUNLIKELY
to imminently abate. However, China
is doing as it should in moving
away from investment-led growth
to a focus on consumption and
services. The problem is that as
China transfers to a new economic
POLICYMODELMISTAKESAREBOUNDTO
HAPPEN/NESUCHMISTAKEOCCURRED
on August 11, when the central
BANKDEVALUEDTHERENMINBI4HIS
action triggered the single biggest
SPECULATIVEATTACKEVERWITNESSEDON
the Chinese currency.
The renminbi has since recovered
a long way. While the currencys
strength has been doubtlessly
INmUENCEDBYTHEINTERVENTIONOF
THE#HINESECENTRALBANKITISALSO
INmUENCEDBYTHEDRAMATICBOUNCE
in some Asian currencies after
MARKETSCONCLUDEDTHAT&EDRATE
HIKESWILLPROCEEDGRADUALLYINTHE
WAKEOFALIKELY BASIS POINT
increase later this month.
2EGIONAL/UTLOOKn%MERGING-ARKETS\6ERONIQUE%RB
For the renminbi, however, the

reduced speculative pressures
on the Chinese currency are also
EXPLAINEDBYTHElRSTCONCRETE
EVIDENCETHATCAPITALOUTmOWS
decelerated in September after
ABIGOUTmOWIN!UGUST#HINAS
foreign-exchange reserves fell
by US$43.3 billion in September,
ANIMPROVEMENTFROMA53
billion decline in August. The fact
THATCAPITALOUTmOWSDECLINEDIN
September is somewhat encouraging
since it suggests that Beijing
has gained some control over
WIDESPREADCAPITALmIGHT
Besides currency effects, one
increasingly important change in
Chinas economy is the growth in
the services sector. China is now the
worlds third-largest service economy
after the U.S. and the Eurozone, and
services became the largest sector
of the Chinese economy in 2012.
The services sector has expanded
at a compound annual growth rate
of 17% over the past decade
faster than the manufacturing and
agriculture sectors.
According to the third-quarter
'$0REPORTSERVICESEXPANDED
INTHETHIRDQUARTERANDNOW
account for more than 50% of the
Chinese economy. It appears to us
that the old measures of capitalINTENSIVE'$0GROWTHnELECTRICITY
PRODUCTIONFREIGHTRAILBANKLOANS

and manufacturing PMIs are now
MUCHLESSUSEFULASPROXIESFOR'$0
progress.
We note that services and
consumption have supplanted
investment sectors as the two
BIGGESTCONTRIBUTORSTO#HINESE'$0
This is important as the services
sector is the single biggest creator
of jobs in China and has been the
largest collective employer since
2011. Tourism is a bright spot,
creating a multiplier effect on wealth
elsewhere in Asia. It is widely
ACKNOWLEDGEDTHAT4HAILANDWOULD
SLIDEBACKINTOACURRENT ACCOUNT
DElCITWEREITNOTFOR#HINESE
tourism. Chinas new economic
model is characterized by robust
GROWTHIN)NTERNETTRAFlCRAILWAY
passengers and civil aviation.
As Chinas economy shifts towards
services from manufacturing
and consumption, the countrys
consumption data is changing.
Rising incomes mean that purchases
of basic goods such as food
and clothing become a smaller
part of household budgets, with
marginal disposable income being
spent on services. Therefore, we
expect health care, education,
entertainment, transportation and
telecommunication services to be the
major growth drivers of consumption.
)NTHElRSTNINEMONTHSOF
)NTERNETTRAFlCTHROUGHMOBILE
devices nearly doubled and the
number of high-speed-rail passenger
passes sold rose 10%, while freightrail numbers were down 11%.
This highlights the increasingly
consumption-led nature of the
economy and the fact that positive
economic conditions on the ground
are increasingly divorced from the
CURRENTNEGATIVEMARKETPERCEPTIONS
/NEFACTORTOKEEPINMINDASWE
CONSIDEREMERGING MARKETGROWTH
GOINGFORWARDISTHATUNLIKEIN
DEVELOPEDMARKETSTHEREISPLENTY
of room for monetary stimulus. Many
EMERGINGMARKETSHAVE REAL
rates of growth so there is room
to cut interest rates. China and
India have both cut rates in recent
months.
The quality of growth is also
IMPROVINGASEMERGINGMARKETS
move away from commodities and
toward consumption. Consumption
now represents a greater share of
EMERGING MARKETMARKETCAPTHAN
resources, and we expect the shift
to continue. The shift away from the
investment-led model is negative for
the Materials sector worldwide.
RBC INVESTMENT STRATEGY COMMITTEE

Members
Chief Investment Officer
Chair, RBC Investment Strategy Committee
Dan Chornous is Chief Investment Officer of RBC Global Asset Management Inc., which has total assets under management of $380 billion. Mr. Chornous is
responsible for the overall direction of investment policy and fund management. In addition, he chairs the RBC Investment Strategy Committee, the group responsible
for global asset-mix recommendations and global-fixed income and equity portfolio construction for use in RBC Wealth Managements key client groups including
retail mutual funds, International Wealth Management, RBC Dominion Securities Inc. and RBC Phillips, Hager & North Investment Counsel Inc. He also serves on the
Board of Directors of the Canadian Coalition for Good Governance and is Chair of its Public Policy Committee. Prior to joining RBC Asset Management in November
2002, Mr. Chornous was Managing Director, Capital Markets Research and Chief Investment Strategist at RBC Capital Markets. In that role, he was responsible for
developing the firms outlook for global and domestic economies and capital markets as well as managing the firms global economics, technical and quantitative
research teams.
Dagmara Fijalkowski, MBA, CFA

Stephen Burke, PhD, CFA
Vice President and Portfolio Manager
Stephen is a fixed-income portfolio manager and Head of the Quantitative
Research Group, the internal team that develops quantitative research
solutions for investment decision-making throughout the firm. He is also
a member of the PH&N IM Asset Mix Committee. Stephen joined Phillips,
Hager & North Investment Management in 2002. The first six years of his
career were spent at an investment-counselling firm where he quickly rose to
become a partner and fixed-income portfolio manager. He then took two years
away from the industry to begin his Ph.D. in Finance and completed it over
another three years while serving as a fixed-income portfolio manager for a
mutual-fund company. Stephen became a CFA charterholder in 1994.

(Toronto and London)
As Head of Global Fixed Income & Currencies at RBC Global Asset
Management, Dagmara oversees 15 investment professionals in Toronto
and London, with more than $40 billion in assets under management. In
her duties as a portfolio manager, Dagmara looks after foreign-exchange
hedging and active currency-management programs for fixed-income and
equity funds, and co-manages several of the firm's bond portfolios. Dagmara
chairs the RBC Fixed Income & Currencies Committee. She is also a member
of the RBC Investment Policy Committee, which determines the asset mix for
RBC balanced products, and the RBC Investment Strategy Committee, which
establishes global strategy for the firm.
Stuart Kedwell, CFA

Senior Vice President and
Stu began his career with RBC Dominion Securities in the firms Generalist
program and completed rotations in the Fixed Income, Equity Research,
Corporate Finance and Private Client divisions. Following this program, he
joined the RBC Investments Portfolio Advisory Group and was a member of the
RBC DS Strategy and Stock Selection committees. He later joined RBC Global
Asset Management as a senior portfolio manager and now manages the RBC
Canadian Dividend Fund, RBC North American Value Fund and a number of
other mandates. He is co-head of RBC Global Asset Managements Canadian
Equity Team.
Eric Lascelles
Chief Economist
Eric is the Chief Economist for RBC Global Asset Management Inc. (RBC GAM)
and is responsible for maintaining the firms global economic forecast and
generating macroeconomic research. He is also a member of the Investment
Strategy Committee, the group responsible for the firms global asset-mix
recommendations. Eric is a frequent media commentator and makes regular
presentations both within and outside RBC GAM. Prior to joining RBC GAM in
early 2011, Eric spent six years at a large Canadian securities firm, the last
four as the Chief Economics and Rates Strategist. His previous experience
includes positions as economist at a large Canadian bank and research
economist for a federal government agency.
Ray Mawhinney
Hanif Mamdani
Head of Alternative Investments
Hanif Mamdani is Head of both Corporate Bond Investments and Alternative
Investments. He is responsible for the portfolio strategy and trading execution
of all investment-grade and high-yield corporate bonds. Hanif is Lead Manager
of the PH&N High Yield Bond Fund and the PH&N Absolute Return Fund (a
multi-strategy hedge fund). He is also a member of the Asset Mix Committee.
Prior to joining the firm in 1998, he spent 10 years in New York with two global
investment banks working in a variety of roles in Corporate Finance, Capital
Markets and Proprietary Trading. Hanif holds a master's degree from Harvard
University and a bachelor's degree from the California Institute of Technology
(Caltech).
Senior Vice President and

Ray leads the U.S. Equity team in Toronto and brings a wealth of expertise to
his role, having specialized in U.S. equities since 1984. He joined the firm in
1992 and is involved in managing several of the firm's U.S. equity funds. Ray
is also a member of the RBC Investment Policy Committee, which determines
asset mix for balanced products, and the RBC Investment Strategy Committee,
which establishes a global asset mix covering mutual funds, as well as
portfolios for institutions and high-net-worth private clients. Ray graduated
from the University of Manitoba with a bachelor's of commerce degree in
finance, with honours.
Martin Paleczny, CFA
Sarah Riopelle, CFA
Vice President and

Vice President and

Martin Paleczny, who has been in the investment industry since 1994, began
his career at Royal Bank Investment Management, where he developed an
expertise in derivatives management and created a policy and process for the
products. He also specializes in technical analysis and uses this background
to implement derivatives and hedging strategies for equity, fixed-income,
currency and commodity-related funds. Since becoming a portfolio manager,
Martin has focused on global allocation strategies for the full range of assets,
with an emphasis on using futures, forwards and options. He serves as advisor
for technical analysis to the RBC Investment Strategy Committee.
Since 2009, Sarah has managed the entire suite of RBC Portfolio Solutions,
including the RBC Select Portfolios, RBC Select Choices Portfolios, RBC Target
Education Funds and RBC Managed Payout Solutions. Sarah is a member of
the RBC Investment Strategy Committee, which sets global strategy for the
firm, and the RBC Investment Policy Committee, which is responsible for the
investment strategy and tactical asset allocation for RBC Funds balanced
products and portfolio solutions. In addition to her fund management role,
she works closely with the firms Chief Investment Officer on a variety of
projects, as well as co-manages the Global Equity Analyst team.
William E. (Bill) Tilford

(EAD1UANTITATIVE)NVESTMENTS
Bill is Head, Quantitative Investments, at RBC Global Asset Management and
is responsible for expanding the firms quantitative-investment capabilities.
Prior to joining RBC GAM in 2011, Bill was Vice President and Head of
Global Corporate Securities at a federal Crown corporation and a member of
its investment committee. His responsibilities included security-selection
programs in global equities and corporate debt that integrated fundamental
and quantitative disciplines, as well as management of one of the worlds
largest market neutral/overlay portfolios. Previously, Bill spent 12 years with
a large Canadian asset manager, where he was the partner who helped build
a quantitative-investment team that ran core, style-tilted and alternative
Canadian / U.S. funds. Bill has been in the investment industry since 1986.
GLOBAL EQUITY HEADS

> Paul Johnson
V.P. & Senior Portfolio Manager,
Global Equities
> Philippe Langham

Senior Portfolio Manager,
%MERGING-ARKETS
RBC Global Asset Management (UK)
Limited
> Ray Mawhinney

Senior V.P. & Senior Portfolio Manager,
U.S. & Global Equities
> Dominic Wallington

#HIEF)NVESTMENT/FlCER
Limited
> Mayur Nallamala

Head & Senior V.P., Asian Equities
RBC Investment Management (Asia)
Limited
GLOBAL EQUITY ADVISORY COMMITTEE

> Stuart Morrow, CFA
Portfolio Manager, U.S. Equities &
Vice President Global Equity Research
> Martin Paleczny, CFA

V.P. & Senior Portfolio Manager,
!SSET!LLOCATION$ERIVATIVES
RBC Global Asset Management Inc
> Hakim Ben Aissa, CFA

Senior Analyst, Global Equities (Energy)
> Rob Cavallo, CFA
> Kent Crosland, CFA

Analyst, Global Equities (Semis/Tech
Hardware, Commercial Services)
> Sean Davey, CFA

Analyst, Global Equities
(Consumer Staples)
> Matt Gowing, CFA

(Telecommunications, Software,
Utilities)
> John Richards, CFA

!NALYST'LOBAL%QUITIES"ANKS
> Joe Turnbull, CFA

(Industrials ex Commercial Services,
Building Products)
> Angelica Uruena

Senior Analyst, Global Equities

(Health Care)
GLOBAL FIXED INCOME & CURRENCIES ADVISORY COMMITTEE

> Dagmara Fijalkowski, MBA, CFA
(Toronto and London)
> Soo Boo Cheah, MBA, CFA

Senior Portfolio Manager,
Global Fixed Income & Currencies
Limited
> Suzanne Gaynor

V.P. & Senior Portfolio Manager, Global
Fixed Income & Currencies
> Eric Lascelles

Chief Economist
DISCLOSURE
This report has been provided by RBC Global Asset Management Inc. (RBC GAM Inc.) for informational purposes only and may
not be reproduced, distributed or published without the written consent of RBC GAM Inc. In the United States, this report is
provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser founded in 1983. In Europe
and the Middle East, this report is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated
by the Financial Conduct Authority. RBC Global Asset Management (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 Alternative Asset Management Inc., and BlueBay Asset Management LLP, which are
SEPARATEBUTAFlLIATEDCORPORATEENTITIES
4HISREPORTISNOTINTENDEDTOPROVIDELEGALACCOUNTINGTAXINVESTMENTlNANCIALOROTHERADVICEANDSUCHINFORMATIONSHOULD
not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable
information, and believes the information to be so when printed. Due to the possibility of human and mechanical error as well
as other factors, including but not limited to technical or other inaccuracies or typographical errors or omissions, RBC GAM is
not responsible for any errors or omissions contained herein. RBC GAM reserves the right at any time and without notice to
change, amend or cease publication of the information.
Any investment and economic outlook information contained in this report 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
IMPLIEDISMADEBY2"#'!-ITSAFlLIATESORANYOTHERPERSONASTOITSACCURACYCOMPLETENESSORCORRECTNESS2"#'!-AND
ITSAFlLIATESASSUMENORESPONSIBILITYFORANYERRORSOROMISSIONS
All opinions and estimates contained in this report constitute our judgment as of the indicated date of the information, are
subject to change without notice and are provided in good faith but without legal responsibility. To the full extent permitted
BYLAWNEITHER2"#'!-NORANYOFITSAFlLIATESNORANYOTHERPERSONACCEPTSANYLIABILITYWHATSOEVERFORANYDIRECTOR
consequential loss arising from any use of the outlook information contained herein. Interest rates and market conditions are
subject to change.
A note on forward-looking statements
This report may contain forward-looking statements about future performance, strategies or prospects, and possible future
action. The words may, could, should, would, suspect, outlook, believe, plan, anticipate, estimate,
expect, intend, forecast, objective and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and
uncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking
statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important
factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking
statement made. These factors include, but are not limited to, general economic, political and market factors in Canada, the
United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition,
technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic
events. The above list of important factors that may affect future results is not exhaustive. Before making any investment
decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking statements
are subject to change without notice and are provided in good faith but without legal responsibility.
100537 (12/2015)
/TM Trademark(s) of Royal Bank of Canada. Used under licence.
RBC Global Asset Management Inc. 2015.

Global Investment Outlook

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THE GLOBAL

NEW YEAR 2016

THE RBC INVESTMENT

From this global forecast, the RBC Investment

The Committees view includes an assessment

Results of the Committees deliberations are

Sarah Riopelle, CFA V.P. & Senior Portfolio Manager,

ECONOMIC & CAPITAL MARKETS FORECASTS

RBC Investment Strategy Committee

RECOMMENDED ASSET MIX

Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income

The Global Investment Outlook

RBC Investment Strategy Committee

WHY THIS TIME IS DIFFERENT

REGIONAL EQUITY MARKET OUTLOOK

CAPITAL MARKETS PERFORMANCE

Milos Vukovic, MBA, CFA Vice President &

Raymond Mawhinney Senior V.P. & Senior Portfolio Manager,

Girding for rate hikes and geopolitical risks

Stuart Kedwell, CFA Senior V.P. & Senior Portfolio Manager,

Eric Lascelles Chief Economist,

David Lambert Senior Portfolio Manager,

Mayur Nallamala Head & Senior Portfolio Manager,

Taylor Self, MBA Analyst,

Veronique Erb Portfolio Manager,

RBC INVESTMENT STRATEGY COMMITTEE

THE GLOBAL INVESTMENT OUTLOOK New Year 2016 I 1

Daniel E. Chornous, CFA

Economic data remains

2 I THE GLOBAL INVESTMENT OUTLOOK New Year 2016

Minor revisions to our

U.S. dollar bull market

%XECUTIVE3UMMARY\3ARAH2IOPELLE #&!\$ANIEL%#HORNOUS #&!

2016, but not all the way to a normal

Divergent monetary policies

Forecasting a modest increase

bond yields higher over the coming

A little less underweight bonds

THE GLOBAL INVESTMENT OUTLOOK New Year 2016 I 3

ECONOMIC & CAPITAL MARKETS FORECASTS

'$07EIGHTEDAVERAGEOF#HINA )NDIA 3OUTH+OREA "RAZIL -EXICOAND2USSIA

TARGETS (RBC INVESTMENT STRATEGY COMMITTEE)

1-YEAR TOTAL RETURN

CURRENCY MARKETS AGAINST USD

U.S. 10-Year Bond

Canada Overnight Rate

Canada 10-Year Bond

Eurozone Policy Rate

Germany 10-Year Bund

U.K. Base Rate

U.K. 10-Year Gilt

Japan Overnight Call Rate

Japan 10-Year Bond

4 I THE GLOBAL INVESTMENT OUTLOOK New Year 2016

RECOMMENDED ASSET MIX

1. Average return: 4HEAVERAGETOTALRETURNPRODUCEDBYTHEASSETCLASSOVERTHEPERIODn BASEDONMONTHLYRESULTS

THE GLOBAL INVESTMENT OUTLOOK New Year 2016 I 5

Recommended Asset Mix

GLOBAL ASSET MIX

NOTE%FFECTIVE3EPTEMBER  WEREVISEDOURSTRATEGICNEUTRALPOSITIONSWITHINlXEDINCOME LOWERINGTHE@NEUTRALCOMMITMENTTOCASHFROMTO

*Citigroup World Global Bond Index **MSCI World Index

6 I THE GLOBAL INVESTMENT OUTLOOK New Year 2016

Source: RBC Investment Strategy Committee

Recommended Asset Mix

%XECUTIVE3UMMARY\3ARAH2IOPELLE#&!\$ANIEL%#HORNOUS#&!

'$07EIGHTEDAVERAGEOF#HINA)NDIA3OUTH+OREA"RAZIL-EXICOAND2USSIA

1. Average return: 4HEAVERAGETOTALRETURNPRODUCEDBYTHEASSETCLASSOVERTHEPERIODnBASEDONMONTHLYRESULTS

NOTE%FFECTIVE3EPTEMBERWEREVISEDOURSTRATEGICNEUTRALPOSITIONSWITHINlXEDINCOMELOWERINGTHE@NEUTRALCOMMITMENTTOCASHFROMTO

)4(%',/"!,).6%34-%.4/54,//+ New Year 2016

THE GLOBAL INVESTMENT OUTLOOK New Year 2016)

FORTHE MONTHPERIODWHILE

#APITAL-ARKETS0ERFORMANCE\-ILOS6UKOVIC-"!#&!

#APITAL-ARKETS0ERFORMANCE\-ILOS6UKOVIC-"!#&!

'LOBAL)NVESTMENT/UTLOOK\%RIC,ASCELLES\%RIC3AVOIE-"!#&!\$ANIEL%#HORNOUS#&!