RBC Global-Investment-outlook SEP 2016

THE GLOBAL
INVESTMENT
OUTLOOK
RBC GAM Investment Strategy Committee
FALL 2016
THE RBC GAM INVESTMENT
STRATEGY COMMITTEE
The RBC GAM Investment Strategy Committee From this global forecast, the RBC GAM
consists of senior investment professionals Investment Strategy Committee develops
drawn from across RBC Global Asset specific guidelines that can be used to manage
Management. The Committee regularly receives portfolios.
economic and capital markets related input
These include:
from internal and external sources. Important
guidance is provided by the Committees the recommended mix of cash, fixed income
regional advisors (North America, Europe, instruments, and equities
Far East), from the Global Fixed Income & the recommended global exposure of fixed
Currencies Subcommittee and from the global income and equity portfolios
equity sector heads (financials and healthcare, the optimal term structure for fixed income
consumer discretionary and consumer staples, investments
industrials and utilities, energy and materials,
the suggested sector and geographic make-up
telecommunications and technology). From this
within equity portfolios
it builds a detailed global investment forecast
looking one year forward. the preferred exposure to major currencies
The Committees view includes an assessment Results of the Committees deliberations are
of global fiscal and monetary conditions, published quarterly in The Global Investment
projected economic growth and inflation, as well Outlook.
as the expected course of interest rates, major
currencies, corporate profits and stock prices.
CONTENTS
EXECUTIVE SUMMARY 2 CURRENCY MARKETS 47

The Global Investment Outlook Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income
Sarah Riopelle, CFA V.P. & Senior Portfolio Manager, and Currencies (Toronto and London),
RBC Global Asset Management Inc. RBC Global Asset Management Inc.
Daniel E. Chornous, CFA Chief Investment Officer, Daniel Mitchell, CFA Portfolio Manager,
Taylor Self, MBA Analyst,
RBC Global Asset Management Inc.
ECONOMIC & CAPITAL MARKETS FORECASTS 4
RBC GAM Investment Strategy Committee
REGIONAL EQUITY MARKET OUTLOOK
United States 56
RECOMMENDED ASSET MIX 5
Raymond Mawhinney Senior V.P. & Senior Portfolio Manager,
RBC GAM Investment Strategy Committee RBC Global Asset Management Inc.
Brad Willock, CFA V.P. & Senior Portfolio Manager,
CAPITAL MARKETS PERFORMANCE 10
Milos Vukovic, MBA, CFA V.P. & Head of Investment Policy, Canada 58
RBC Global Asset Management Inc. Stuart Kedwell, CFA Senior V.P. & Senior Portfolio Manager,
Europe 60
GLOBAL INVESTMENT OUTLOOK 13 James Jamieson Portfolio Manager,
Green shoots trump Brexit RBC Global Asset Management (UK) Limited
Eric Lascelles Chief Economist,
RBC Global Asset Management Inc. Asia 62
Eric Savoie, MBA, CFA Senior Analyst, Investment Strategy, Mayur Nallamala Head & Senior Portfolio Manager,
RBC Global Asset Management Inc. RBC Investment Management (Asia) Limited
Daniel E. Chornous, CFA Chief Investment Officer, Emerging Markets 64
RBC Global Asset Management Inc. Christoffer Enemaerke Associate Portfolio Manager,
RBC Global Asset Management (UK) Limited
GLOBAL FIXED INCOME MARKETS 42

Soo Boo Cheah, MBA, CFA Senior Portfolio Manager, RBC GAM INVESTMENT STRATEGY COMMITTEE 66
RBC Global Asset Management (UK) Limited
Suzanne Gaynor V.P. & Senior Portfolio Manager,
THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 1

EXECUTIVE SUMMARY
Downside risks have Speed limit for economic

Sarah Riopelle, CFA moderated growth remains low
V.P. & Senior Portfolio Manager
RBC Global Asset Management Inc. Risks to the global economy and Seven years following the financial
markets have indeed diminished, crisis, investors are perhaps starting
Daniel E. Chornous, CFA but have not disappeared. Business- to realize that the slow-growth, low-
Chief Investment Officer
cycle risks are still front and centre, inflation environment is structural
but perhaps a little less acute than in nature and therefore here to stay.
before. Chinese downside risks Our growth forecasts remain heavily
remain sizeable, but our concerns informed by the experience of the
As we reflect back on a for the countrys housing and debt post-financial-crisis era. Central to this,
quarter that contained one markets have shrunk slightly. Global the speed limit for economic growth
debt risks are significant, but dont remains low for a variety of reasons.
of the most surprising and
appear on the cusp of being triggered. Some of the recent temporary drags
consequential geopolitical Most evidently, the risk of further are mercifully ebbing, such as the
shocks in years the U.K. downside from emerging-market abatement of tight financial conditions,
economies or commodity prices but Brexit is a new risk and policy
vote to leave the European has been progressively fading for uncertainty has arguably increased. In
Union it is remarkable that several quarters. One source of mild short, it is unlikely that global growth
trepidation is that markets have been is about to break completely out of its
financial markets managed
unusually complacent and it seems recent rut.
to deliver handsome reasonable to budget for something
Recognizing the persistent constraints
gains to investors and a little bumpier, especially with the
on growth, our developed-world growth
many event risks approaching over the
exuded calm. Economic fall. While there are many reasons for
forecasts have been revised moderately
lower this quarter, and land slightly
data improved over the concern, our base case scenario is one
short of the consensus. Our emerging-
summer, global downside where the economy is able to handle
market growth forecasts have been
these challenges and continue to grow,
risks shrank somewhat and albeit slowly.
revised a little higher, and we now find
ourselves in the unusual position of
the decline in bond yields being slightly above the consensus with
The U.K. publics surprise vote to
over the period seemed to leave the EU has so far proven less our 2016 calls.
strengthen the search-for- problematic for markets and economies
than initially feared. The economic U.S. dollar bull market is not
yield mentality, resulting in impact of Brexit beyond British shores over yet
narrower credit spreads and has been almost non-existent, at least We continue to expect the U.S. dollar
higher stock valuations. for now. The main global consequence to resume its rising trend. While
is a further increase in political risks, central-bank policy divergence may
both in the context of higher policy be losing importance, factors such
uncertainty and greater populist as relative economic-growth rates
pressures now rearing their heads will likely emerge to support the
elsewhere.
argument for additional U.S. dollar
strength. In Japan and Europe,
enormous financial outflows and
rising hedging costs should exert
downward pressure on the yen and
2 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

Executive Summary | Sarah Riopelle, CFA | Daniel E. Chornous, CFA
the euro. Meanwhile, the pound will still powerful downward forces on yields quarters, given that a number of
be dogged by questions surrounding at work. indicators suggest equities are now
the countrys exit from the EU. expensive. However, the average of the
Many international bodies continue to
Canadas economic adjustment has eight valuation measures that we look
call for a new round of fiscal stimulus
been only slight thus far, and we at indicates that stocks are roughly in
as a means of taking pressure off over-
expect further loonie weakness. line with the historical norm and we
worked central bankers. We support
therefore do not share the markets
any such effort, so long as the stimulus
Inflation to edge higher view that equities are expensive.
is implemented in areas with high
Global inflation remains low by fiscal multipliers such as infrastructure While there is still some room for an
historical standards. But this is at least spending. upward move in valuations, earnings
partially an illusion, as it represents growth will be critical to sustaining
the remnants of the commodity shock Continue to forecast any meaningful advance in stocks.
depressing headline inflation rates. rising yields Fortunately, the two largest headwinds
Core inflation levels are much closer to corporate profits since the end of
The world remains trapped in an
to normal, as they are better able to 2014 the collapse in oil prices and
extraordinarily low interest-rate
convey general economic conditions. the strengthening U.S. dollar have
environment given the slow economic
We anticipate a gradual normalization moderated and should allow for
growth and low inflation, as well as
of headline-inflation rates as they corporate profit growth to resume in the
an aging population, high income
shake off the prior effects of the coming quarters.
inequality, elevated debt loads and a
commodity shock and converge toward
shortage of safe assets. Global bond
current core inflation readings. With
yields fell to record lows during the
No change to asset mix
this forecast, we are a little above the We have opted to maintain our
quarter, with some bond markets
market consensus. recommendation for a moderately
characterized by negative yields even
at the longer end of the yield curve. overweight equity allocation. This is
Central banks still front and Our models project that yields should motivated primarily by the superior
centre rise from these unusually low levels, valuations of equities over bonds, and
The U.S. Federal Reserve (Fed) but any near-term adjustment will be secondarily by our belief that further
continues to press forward with its plan constrained by the current low speed economic advances remain more likely
to nudge the fed funds rate higher. limit on economic growth. While a bit than not, especially as downside risks
A rate hike is considered more likely of extra inflation and a Fed rate hike or have declined slightly. Even slow
than not by the end of 2016. While we two could prompt bond yields to move economic growth will be sufficient to
believe a modicum of Fed tightening is higher, a return to historically normal allow for a modest increase in interest
justified and thus at worst benign for rates appears quite unlikely over the rates, which will act as a headwind for
risk assets, we must not completely forecast horizon. fixed-income investments. Coupons
forget that the financial markets are so low that they do little to cushion
struggled in the months after the last Stocks extend gains against capital losses resulting from
rate increase. even a slight increase in yields. We
We saw further gains in global
forecast negative total returns for
Globally, many central banks are equities over the quarter, supported
10-year sovereign bonds across all
still focused on delivering prior by improving credit markets, better-
major developed regions over the
quantitative-easing commitments, and than-expected economic data and low
year ahead and remain underweight
some are continuing to build on those interest rates, and it was these factors
fixed income as a result. For a
promises. The Bank of England has that allowed stocks to mostly shrug
balanced, global investor, we currently
been buying corporate bonds anew off what many investors had assumed
recommend an asset mix of 60%
since Brexit, while the Bank of Japan would be the widespread negative
equities (strategic neutral position:
increased the clip of its asset buying in impact of Brexit.
55%), and 37% fixed income (strategic
the spring. The European Central Bank Investors have voiced surprise at the neutral position: 43%), with the
is also pressing forward with its own stock markets buoyancy in recent balance in cash.
bond-buying program. Thus, there are

ECONOMIC & CAPITAL MARKETS FORECASTS
ECONOMIC FORECAST (RBC GAM INVESTMENT STRATEGY COMMITTEE)
UNITED UNITED EMERGING

STATES CANADA EUROPE KINGDOM JAPAN CHINA MARKETS1
Change Change Change Change Change Change Change
from from from from from from from
Fall Summer Fall Summer Fall Summer Fall Summer Fall Summer Fall Summer Fall Summer
2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016
REAL GDP
2015A 2.38% 1.20% 1.49% 2.19% 0.47% 6.91% 4.67%
2016E 1.50% (0.25) 1.25% (0.25) 1.50% N/C 1.50% (0.25) 0.50% N/C 6.50% 0.25 5.00% 0.25
2017E 1.75% (0.25) 1.50% (0.25) 1.25% (0.50) 0.75% (1.25) 1.00% N/C 6.00% 0.25 5.25% 0.25
CPI
2015A 0.12% 1.09% 0.03% 0.05% 0.77% 1.54% 4.17%
2016E 1.25% N/C 1.75% (0.25) 0.50% N/C 1.00% N/C (0.25%) (0.75) 2.25% N/C 3.75% 0.25
2017E 2.00% N/C 2.25% N/C 1.50% N/C 2.75% 0.75 1.00% (0.25) 2.00% (0.25) 3.25% 0.25
1
A = Actual E = Estimate GDP Weighted Average of China, India, South Korea, Brazil, Mexico and Russia.
TARGETS (RBC GAM INVESTMENT STRATEGY COMMITTEE)

FORECAST CHANGE FROM 1-YEAR TOTAL RETURN
AUGUST 2016 AUGUST 2017 SUMMER 2016 ESTIMATE* (%)
CURRENCY MARKETS AGAINST USD
CAD (USDCAD) 1.31 1.44 N/C (8.8)
EUR (EURUSD) 1.12 1.00 N/C (11.5)
JPY (USDJPY) 103.42 110.00 (10.00) (7.3)
GBP (GBPUSD) 1.31 1.25 (0.13) (5.6)
FIXED INCOME MARKETS
U.S. Fed Funds Rate 0.50 0.75 (0.25) N/A
U.S. 10-Year Bond 1.58 2.00 (0.25) (2.2)
Canada Overnight Rate 0.50 0.50 N/C N/A
Canada 10-Year Bond 1.02 1.50 (0.25) (3.4)
Eurozone Deposit Facility Rate (0.40) (0.40) 0.10 N/A
Germany 10-Year Bund (0.06) 0.30 (0.20) (3.7)
U.K. Base Rate 0.25 0.25 (0.50) N/A
U.K. 10-Year Gilt 0.64 1.00 (1.00) (2.8)
Japan Overnight Call Rate (0.05) (0.10) 0.30 N/A
Japan 10-Year Bond (0.06) 0.00 0.20 (0.7)
EQUITY MARKETS
S&P 500 2171 2300 70 8.1
S&P/TSX Composite 14598 15250 450 7.3
MSCI Europe 1470 1525 (45) 7.4
FTSE 100 6782 7200 500 10.2
Nikkei 16887 17900 (575) 7.9
MSCI Emerging Markets 894 950 65 8.9
*Total returns are expressed in local currencies with the exception of MSCI Europe and MSCI Emerging Markets indices whose returns are expressed in USD.
Source: RBC GAM

RECOMMENDED ASSET MIX
Asset mix the allocation within portfolios to stocks, expectations for the major asset classes. These weights
bonds and cash should include both strategic and are further divided into recommended exposures to the
tactical elements. Strategic asset mix addresses the blend variety of global fixed income and equity markets. Our
of the major asset classes offering the risk/return tradeoff recommendation is targeted at the Balanced profile where
best suited to an investors profile. It can be considered the benchmark setting is 55% equities, 43% fixed income,
to be the benchmark investment plan that anchors a 2% cash.
portfolio through many business and investment cycles,
independent of a near-term view of the prospects for the A tactical range of +/- 15% around the benchmark
economy and related expectations for capital markets. position allows us to raise or lower exposure to specific
Tactical asset allocation refers to fine tuning around asset classes with a goal of tilting portfolios toward
the strategic setting in an effort to add value by taking those markets that offer comparatively attractive near-
advantage of shorter term fluctuations in markets. term prospects.
Every individual has differing return expectations and This tactical recommendation for the Balanced profile can
tolerances for volatility, so there is no one size fits all serve as a guide for movement within the ranges allowed
strategic asset mix. Based on a 40-year study of historical for all other profiles.
returns1 and the volatility2 of returns (the range around The value-added of tactical strategies is, of course,
the average return within which shorter-term results dependent on the degree to which the expected
tend to fall), we have developed five broad profiles and scenario unfolds.
assigned a benchmark strategic asset mix for each. These
profiles range from very conservative through balanced to Regular reviews of portfolio weights are essential to
aggressive growth. It goes without saying that as investors the ultimate success of an investment plan as they
accept increasing levels of volatility, and therefore greater ensure current exposures are aligned with levels of
risk that the actual experience will depart from the longer- long-term returns and risk tolerances best suited to
term norm, the potential for returns rises. The five profiles individual investors.
presented below may assist investors in selecting a
strategic asset mix best aligned to their investment goals. Anchoring portfolios with a suitable strategic asset mix,
and placing boundaries defining the allowed range for
Each quarter, the RBC GAM Investment Strategy tactical positioning, imposes discipline that can limit
Committee publishes a recommended asset mix damage caused by swings in emotion that inevitably
based on our current view of the economy and return accompany both bull and bear markets.
1. Average return: The average total return produced by the asset class over the period 1976 2016, based on monthly results.
2. Volatility: The standard deviation of returns. Standard deviation is a statistical measure that indicates the range around the average
return within which 2/3 of results will fall into, assuming a normal distribution around the long-term average.

Recommended Asset Mix
GLOBAL ASSET MIX
BENCHMARK PAST FALL NEW YEAR SPRING SUMMER FALL

POLICY RANGE 2015 2016 2016 2016 2016
CASH 2.0% 1.0% 16% 2.0% 1.0% 3.0% 3.0% 3.0%
BONDS 43.0% 25.0% 54.0% 36.0% 37.0% 37.0% 37.0% 37.0%
STOCKS 55.0% 36.0% 65.0% 62.0% 62.0% 60.0% 60.0% 60.0%

Note: Effective September 1, 2014, we revised our strategic neutral positions within fixed income, lowering the neutral commitment to cash from 5% to
2%, and moving the difference to bonds. This takes advantage of the positive slope of the yield curve which prevails over most time periods, and allows
our fixed income managers to shorten duration and build cash reserves whenever a correction in the bond market, or especially an inverted yield curve,
is anticipated.
REGIONAL ALLOCATION
CWGBI* PAST FALL NEW YEAR SPRING SUMMER FALL

GLOBAL BONDS AUG. 2016 RANGE 2015 2016 2016 2016 2016
North America 36.9% 18% 40% 37.5% 37.7% 38.2% 37.0% 36.9%
Europe 39.4% 32% 56% 40.7% 45.3% 39.9% 35.3% 34.4%
Asia 23.8% 17% 35% 21.8% 17.0% 21.9% 27.7% 28.8%
Note: Past Range reflects historical allocation from Fall 2002 to present.
MSCI** PAST FALL NEW YEAR SPRING SUMMER FALL

GLOBAL EQUITIES AUG. 2016 RANGE 2015 2016 2016 2016 2016
North America 61.7% 51% 61% 58.2% 58.0% 59.2% 60.2% 60.0%
Europe 19.9% 21% 35% 22.9% 23.5% 22.2% 21.6% 20.5%
Asia 11.1% 9% 18% 11.4% 11.0% 11.1% 10.8% 12.0%
Emerging Markets 7.3% 0% 8.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Our asset mix is reported as at the end of each quarter. The mix is fluid and may be adjusted within each quarter, although we do not always report
on shifts as they occur. The weights in the table should be considered a snapshot of our asset mix at the date of release of the Global Investment
Outlook.
GLOBAL EQUITY SECTOR ALLOCATION
MSCI** RBC GAM ISC RBC GAM ISC CHANGE FROM WEIGHT VS.
AUG. 2016 SUMMER 2016 FALL 2016 SUMMER 2016 BENCHMARK
Energy 6.52% 5.79% 4.77% (1.02) 73.2%

Materials 4.85% 4.11% 3.85% (0.26) 79.4%
Industrials 10.89% 12.51% 12.39% (0.13) 113.8%
Consumer Discretionary 12.56% 12.94% 12.56% (0.38) 100.0%
Consumer Staples 10.78% 10.70% 11.78% 1.09 109.3%
Health Care 13.50% 13.08% 14.50% 1.41 107.4%
Financials 19.16% 17.98% 17.41% (0.57) 90.9%
Information Technology 14.73% 14.67% 16.73% 2.06 113.6%
Telecom. Services 3.58% 4.82% 3.58% (1.24) 100.0%
Utilities 3.43% 3.40% 2.43% (0.97) 70.9%
*Citigroup World Global Bond Index **MSCI World Index Source: RBC GAM 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
five client risk profiles that correspond to broad investor objectives and risk
preferences. These five profiles range from Very Conservative through

Balanced to Aggressive Growth.
VERY CONSERVATIVE
BENCH- LAST CURRENT
Very Conservative investors will
ASSET CLASS MARK RANGE QUARTER RECOMMENDATION seek income with maximum capital
Cash & Cash Equivalents 2% 0-15% 2.9% 2.9% preservation and the potential for modest
Fixed Income 78% 55-95% 72.6% 72.6% capital growth, and be comfortable with
Total Cash & Fixed Income 80% 65-95% 75.5% 75.5% small fluctuations in the value of their
Canadian Equities 10% 5-20% 11.4% 11.0% investments. This portfolio will invest
U.S. Equities 5% 0-10% 6.4% 6.0% primarily in fixed-income securities, and
International Equities 5% 0-10% 6.7% 7.5% a small amount of equities, to generate
Emerging Markets 0% 0% 0.0% 0.0% income while providing some protection
Total Equities 20% 5-35% 24.5% 24.5%
against inflation. Investors who fit
this profile generally plan to hold their
RETURN VOLATILITY investment for the short to medium term
40-Year Average 9.0% 5.9% (minimum one to five years).
Last 12 Months 6.0% 2.8%

CONSERVATIVE
BENCH- LAST CURRENT
Conservative investors will pursue
ASSET CLASS MARK RANGE QUARTER RECOMMENDATION modest income and capital growth with
2% 0-15%
Cash & Cash Equivalents 2.9% 2.9% reasonable capital preservation, and be
Fixed Income 63% 40-80% 57.3% 57.3% comfortable with moderate fluctuations
Total Cash & Fixed Income 65% 50-80% 60.2% 60.2% in the value of their investments. The
Canadian Equities 15% 5-25% 16.5% 16.1%
portfolio will invest primarily in fixed-
U.S. Equities 10% 0-15% 11.6% 11.2%
income securities, with some equities, to
International Equities 10% 0-15% 11.7% 12.5%
achieve more consistent performance and
Emerging Markets 0% 0% 0.0% 0.0%
provide a reasonable amount of safety.
Total Equities 35% 20-50% 39.8% 39.8%
The profile is suitable for investors who
RETURN VOLATILITY plan to hold their investment over the
40-Year Average 9.5% 7.2% medium to long term (minimum five to
Last 12 Months 6.1% 4.0% seven years).
BALANCED
The Balanced portfolio is appropriate
BENCH- LAST CURRENT
ASSET CLASS MARK RANGE QUARTER RECOMMENDATION for investors seeking balance between
Cash & Cash Equivalents 2% 0-15% 3.0% 3.0% long-term capital growth and capital
Fixed Income 43% 20-60% 37.0% 37.0% preservation, with a secondary focus on
Total Cash & Fixed Income 45% 30-60% 40.0% 40.0% modest income, and who are comfortable
Canadian Equities 19% 10-30% 20.4% 20.0% with moderate fluctuations in the value
U.S. Equities 20% 10-30% 21.5% 21.1% of their investments. More than half the
International Equities 12% 5-25% 13.6% 14.4% portfolio will usually be invested in a
Emerging Markets 4% 0-10% 4.5% 4.5% diversified mix of Canadian, U.S. and
Total Equities 55% 40-70% 60.0% 60.0% global equities. This profile is suitable
RETURN VOLATILITY
for investors who plan to hold their
40-Year Average 9.7% 8.5% investment for the medium to long term
Last 12 Months 7.0% 6.0% (minimum five to seven years).

GROWTH
BENCH- LAST CURRENT
Investors who fit the Growth profile
ASSET CLASS MARK RANGE QUARTER RECOMMENDATION will seek long-term growth over capital
2% 0-15%
Cash & Cash Equivalents 3.0% 3.0% preservation and regular income, and
Fixed Income 28% 5-40% 21.7% 21.7% be comfortable with considerable
Total Cash & Fixed Income 30% 15-45% 24.7% 24.7% fluctuations in the value of their
Canadian Equities 23% 15-35% 24.4% 24.0%
investments. This portfolio primarily
U.S. Equities 25% 15-35% 26.6% 26.2%
holds a diversified mix of Canadian, U.S.
International Equities 16% 10-30% 17.7% 18.5%
and global equities and is suitable for
Emerging Markets 6% 0-12% 6.6% 6.6%
investors who plan to invest for the long
Total Equities 70% 55-85% 75.3% 75.3%
term (minimum seven to
RETURN VOLATILITY ten years).
40-Year Average 10.0% 10.6%
AGGRESSIVE GROWTH
BENCH- LAST CURRENT
Aggressive Growth investors seek
ASSET CLASS MARK RANGE QUARTER RECOMMENDATION maximum long-term growth over capital
2% 0-15%
Cash & Cash Equivalents 1.0% 1.0% preservation and regular income, and are
Fixed Income 0% 0-10% 0.0% 0.0% comfortable with significant fluctuations
Total Cash & Fixed Income 2% 0-20% 1.0% 1.0% in the value of their investments. The
Canadian Equities 32.5% 20-45% 32.6% 31.9% portfolio is almost entirely invested in
U.S. Equities 35.0% 20-50% 35.3% 34.6%
stocks and emphasizes exposure to
International Equities 21.5% 10-35% 21.8% 23.2%
global equities. This investment profile
Emerging Markets 9.0% 0-15% 9.3% 9.3%
is suitable only for investors with a high
Total Equities 98% 80-100% 99.0% 99.0%
risk tolerance and who plan to hold their
RETURN VOLATILITY
investments for the long term (minimum
40-Year Average 10.2% 13.2% seven to ten years).

CAPITAL MARKETS PERFORMANCE
The Citigroup Japanese Government The S&P 400 Index, a measure of

Milos Vukovic, MBA, CFA Bond Index climbed 6.2%, aided the U.S. mid-cap market, rose 5.3%
V.P. & Head of Investment Policy by the strong yen, and the FTSE in the latest three-month period and
TMX Canada Universe Bond Index, rose 12.3% in the 12-month period,
Canadas fixed-income benchmark, while the S&P 600 Index, a gauge of
rose 2.7%. small-cap performance, rose 7.2%
The U.S. dollar rose significantly
and 13.3% respectively. The
versus the British pound, fell against Major equity markets generally Russell 3000 Growth Index rose
the yen and euro, and finished recorded gains during the three- 4.0% during the quarter versus a
flat against the Canadian dollar month period, with the exception of 4.9% rise for the Russell 3000 Value
during the three-month period the U.K. and France after Brexit. The Index. Over the 12 months, the
ended August 31, 2016. The gain S&P 500 Index rose 4.1%. The MSCI Russell 3000 Growth Index gained
against sterling was 10.3% after Germany climbed 3.4%, while the 10.0%, while the Russell 3000 Value
the U.K. voted to leave the EU in MSCI Japan rose 4.3%, aided again Index rose 13.0%.
late June (Brexit), while the 6.6% by the strong yen. The MSCI U.K. lost
drop versus the yen stemmed from 0.8% and the MSCI France lost 1.1%. All of the 10 global equity sectors
disappointment about the pace of Over the 12-month period, the S&P gained during the quarter ended
economic stimulus. The greenback 500 gained 12.6%, outperforming August 31, 2016. The best-
lost 0.3% versus the euro in the other developed markets. The performing sector was Materials
three-month period. Over the 12 MSCI U.K. dropped 4.0% and the with a gain of 7.5%, followed by
months ended August 31, 2016, the MSCI France lost 1.9%. The MSCI Information Technology with a rise
U.S. dollar rose 16.9% against the Germany gained 1.9% and the of 7.1% and Industrials with a 4.7%
pound, while falling 14.7% against MSCI Japan gained 2.9%. The S&P/ increase. The worst-performing
the yen. The U.S. dollar declined TSX Composite Index rose 4.5% in sectors over the past three months
0.3% against the Canadian dollar, U.S. dollar terms during the three were Utilities, which rose 0.4%;
but rose 0.6% versus the euro. months, in line with the 4.5% gain Telecommunication Services, which
for the large-cap S&P/TSX 60 Index rose 0.7%; and Health Care, with
Global fixed-income markets posted
and lower than the 7.1% rise for the a 1.0% return. Over the 12-month
gains during the three-month period,
S&P/TSX Small Cap Index. The MSCI period, the best-performing sectors
as yields declined modestly. The
Emerging Markets Index rose 11.9% were Information Technology,
Barclays Capital Aggregate Bond
during the three-month period and Consumer Staples and Industrials,
Index, a broad measure of U.S. fixed-
gained 11.8% over the 12-month and the worst-performing were
income performance, climbed 2.3%,
period. Appreciations in emerging- Health Care, Financials and
while European bonds rose 2.4% in
market currencies fueled the gains. Consumer Discretionary.
U.S. dollar terms as measured by
the Citigroup WGBI Europe Index.

Capital Markets Performance | Milos Vukovic, MBA, CFA
EXCHANGE RATES
Periods ending August 31, 2016
Current 3 months YTD 1 year 3 years 5 years
USD (%) (%) (%) (%) (%)
USDCAD 1.3114 0.00 (5.23) (0.32) 7.59 6.02
USDEUR 0.8965 (0.25) (2.57) 0.60 5.82 5.19
USDGBP 0.7615 10.30 12.26 16.86 5.68 4.34
USDJPY 103.4650 (6.57) (13.92) (14.66) 1.76 6.20
Note: all changes above are expressed in US dollar terms
CANADA
USD CAD
3 months YTD 1 year 3 years 5 years 3 months 1 year 3 years
Fixed Income Markets: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
FTSE TMX Canada Univ. Bond Index 2.72 10.81 6.10 (1.41) (1.24) 2.72 5.76 6.07
U.S.
USD CAD
Citigroup U.S. Government 2.04 5.15 5.07 3.59 2.53 2.05 4.74 11.46
Barclays Capital Agg. Bond Index 2.32 5.86 5.97 4.37 3.24 2.33 5.63 12.30
GLOBAL
USD CAD
Citigroup WGBI 2.91 8.70 8.08 2.57 1.16 2.91 7.74 10.35
Citigroup European Government 2.43 8.17 5.89 2.03 1.60 2.44 5.55 9.77
Citigroup Japanese Government 6.21 22.57 25.55 2.32 (2.73) 6.21 25.15 10.09
CANADA
USD CAD
Equity Markets: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
S&P/TSX Composite 4.54 20.74 9.04 0.43 (0.15) 4.54 8.69 8.06
S&P/TSX 60 4.47 19.85 8.10 0.94 0.31 4.47 7.75 8.61
S&P/TSX Small Cap 7.14 37.42 23.08 (1.27) (4.85) 7.15 22.69 6.22
U.S.
USD CAD
S&P 500 4.10 7.82 12.55 12.30 14.69 4.11 12.19 20.83
S&P 400 5.25 13.12 12.33 11.45 14.07 5.25 11.97 19.92
S&P 600 7.16 13.15 13.26 11.03 15.18 7.17 12.90 19.45
Russell 3000 Value 4.87 10.55 12.98 10.51 14.24 4.88 12.61 18.90
Russell 3000 Growth 4.04 5.65 9.99 12.94 14.60 4.04 9.64 21.51
NASDAQ Composite Index 5.36 4.11 9.14 13.24 15.11 5.36 8.79 21.84
Note: all rates of return presented for periods longer than 1 year are annualized Source: Bloomberg/MSCI

Capital Markets Performance | Milos Vukovic, MBA, CFA
GLOBAL
USD CAD
MSCI World* 3.14 4.99 6.68 7.39 9.51 3.45 5.20 15.49
MSCI EAFE* 1.61 0.49 (0.12) 2.48 5.00 1.92 (1.50) 10.20
MSCI Europe* (0.15) (0.86) (3.14) 1.48 4.81 0.15 (4.48) 9.13
MSCI Pacific* 4.92 3.24 6.01 4.24 5.39 5.24 4.54 12.10
MSCI UK* (0.76) (0.21) (3.96) (0.35) 3.85 (0.46) (5.29) 7.17
MSCI France* (1.13) 0.61 (1.93) 1.28 4.01 (0.83) (3.29) 8.92
MSCI Germany* 3.35 0.88 1.94 2.98 6.94 3.66 0.52 10.75
MSCI Japan* 4.25 0.93 2.85 5.57 6.66 4.57 1.43 13.53
MSCI Emerging Markets* 11.94 14.55 11.83 1.12 (0.42) 12.28 10.28 8.74
GLOBAL EQUITY SECTORS

USD CAD
Sector: Total Return (%) (%) (%) (%) (%) (%) (%) (%)
Energy 2.79 14.58 5.35 (5.00) (0.80) 3.10 3.89 2.17
Materials 7.45 16.72 11.29 1.23 (1.11) 7.77 9.75 8.87
Industrials 4.66 9.89 12.70 8.19 10.36 4.98 11.14 16.35
Consumer Discretionary 2.17 1.01 4.00 8.60 13.55 2.47 2.56 16.79
Consumer Staples 2.65 7.64 14.52 10.34 11.64 2.96 12.93 18.66
Health Care 1.00 (1.41) (1.04) 11.90 15.33 1.31 (2.41) 20.34
Financials 1.79 (0.65) (0.57) 4.01 8.55 2.10 (1.95) 11.85
Information Technology 7.14 8.44 16.18 15.45 14.52 7.47 14.57 24.16
Telecommunication Services 0.67 7.74 7.46 8.10 8.54 0.97 5.97 16.25
Utilities 0.43 8.42 10.00 7.56 5.83 0.74 8.47 15.67
* Net of taxes Note: all rates of return presented for periods longer than 1 year are annualized Source: Bloomberg/MSCI

GLOBAL INVESTMENT OUTLOOK
Green shoots trump Brexit
Eric Lascelles Exhibit 1: An uptick in global manufacturing

Chief Economist
55 Expansion
Eric Savoie, MBA, CFA 54
Manufacturing PMI
Senior Analyst, Investment Strategy 53
RBC Global Asset Management Inc. 52
51
Daniel E. Chornous, CFA
50
RBC Global Asset Management Inc. 49
48
Contraction
47
2012 2013 2014 2015 2016
As we reflect back on a quarter that JP Morgan Global PMI Developed markets PMI Emerging markets PMI
contained one of the most surprising Note: PMI refers to Purchasing Managers Index for manufacturing sector, a measure for economic activity.
Source: Haver Analytics, RBC GAM
and consequential geopolitical
shocks in years the U.K. vote to
leave the European Union (EU) it Exhibit 2: Significant but slightly shrinking risks
is remarkable that financial markets
managed to deliver handsome gains Maturing
to investors and exuded calm. business cycle
Debt hot spots
This improbable outcome was China
thanks to three other developments.
First, economic data flitted
pleasantly higher over the summer. Geopolitics
EM slowdown
Second, global downside risks
shrank somewhat. Third, the decline
in bond yields over the period
Resource shock Fed rate hikes
seemed to strengthen the search
for yield mentality, resulting in Source: RBC GAM
narrower credit spreads and higher
stock valuations. particularly welcome, coming as it debt risks remain enormous, but
does after years of downgrades. dont appear on the cusp of being
The improved macroeconomic triggered. Most evidently, the risk
trend is most easily observed via Sifting through the most prominent of further downside from emerging-
the recent increase in purchasing threats to growth (Exhibit 2), it market economies or commodity
manager indexes (Exhibit 1). Global strikes us that several have been prices has been progressively fading
economic surprises have also been shrinking recently. Business-cycle for several quarters.
largely positive. Corporate earnings, risks are still front and centre,
long mired in a slump, are hinting but perhaps a bit less acute than Of course, the task at hand is
at green shoots, and global trade is before. Chinese downside risks anticipating the future performance
no longer decelerating. A tentative remain sizeable, but our concerns of financial markets, not admiring
uptick in emerging-market growth is for the countrys housing and debt recent gains. On this front, one
markets have shrunk slightly. Global source of mild trepidation is that

Global Investment Outlook | Eric Lascelles | Eric Savoie, MBA, CFA | Daniel E. Chornous, CFA
markets are unusually complacent

right now (Exhibit 3). Investors Exhibit 3: Market volatility has been low lately
expect the recent period of low
volatility to persist for both stocks 24 11.5
23.1 115
110.3 11.0
CBOE Market Volatility Index

11.0
Merrill Lynch Option Volatility

110
and bonds. The future may well 22
Currency Volatility Index

105 10.5
continue to unfurl in an unusually 20 100
10.0
leisurely manner, but it seems more
Estimate
95 95.6
9.5
18 17.9 90 9.5 9.5
reasonable to budget for something 85 9.0
16
a little bumpier, especially with the 80
8.5
79.4
many event risks approaching over 14 14.1 75 8.4
71.2 8.0
14.1 70
the fall. 12 65 7.5
Bonds
Equities Currencies
Latest Median
Additionally, we suspect the recent Note: Top and bottom of box represent the 75th and 25th percentiles for CBOE Market Volatility Index and Merrill
Lynch Option Volatility Estimate since 1990; and for Deutsche Bank Currency Volatility Index since 2001.
trend of unexpectedly happy Source: Bloomberg, RBC GAM
economic data may be starting
to fade. Economic surprises are
beginning to drift back down to a Exhibit 4: S&P 500 now diverging from economic surprises
more neutral reading (Exhibit 4)
and the autumns first smattering 50
2200
Citi U.S. Economic Surprise Index

of purchasing manager indexes 30
2150
suggests a tentative tempering of
2100 10
S&P 500 Index
earlier enthusiasm. To be clear,

2050 -10
they are still signaling growth, just 2000
of a more pedestrian variety. Let -30
1950
us also not forget that while Brexit 1900
-50
has so far been less problematic 1850 -70
than expected, it is not entirely 1800 -90
consequence-free as policy May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16
SPX Index (LHS) Citigroup Economic Surprise Index (RHS)
uncertainty and political risks have Source: Citigroup Alpha Surprise Index, Bloomberg, RBC GAM
indisputably increased.
Weighing these considerations, Exhibit 5: Markets have rebounded from post-Brexit extremes
we have opted to maintain our
recommendation for a moderately 8 80
6
Yield/spread change
60
overweight equity allocation within 4
(basis points)
40
Price change (%)
2
a balanced investment portfolio. 0 20
-2 0
This is motivated primarily by the -4 -20
-6 -40
superior valuations of equities over -8
-10 -60
bonds, and secondarily by our belief -12 -80
-14 -100
that further economic advances
All Share
GBPUSD
IG credit
S&P 500
dollar
10yr yield
10yr yield
HY credit
EM credit
U.S.
spread
spread
spread
FTSE
U.K.
U.S.
remain more likely than not,

especially as downside risks have Latest Extreme
declined slightly. Note: Percentage change of FTSE All Share Index, S&P 500, pound-dollar (GBPUSD) exchange rate and trade-
weighted exchange value of U.S. dollar since 6/23/2016. Basis point change of U.K. and U.S. 10-year yields;
investment-grade, high-yield and EM credit spreads since 6/23/2016. Source: Bloomberg, Haver Analytics,
RBC GAM

Brexit aftermath
Exhibit 6: Marked U.K. economic hit from Brexit
The U.K. publics surprise vote to
bolt from the EU has so far proven
20 63
less problematic for markets and 61
U.K. consumer confidence

10
economies than initially feared. 59
U.K. Composite PMI

While financial markets initially 0 57
(% balance)
reacted quite negatively to the news, -10
55
they have since more than fully 53
-20 51
recovered (Exhibit 5). The pound
49
remains significantly weaker than -30
47
before Brexit and government yields -40 45
have fallen both clear markers of 1986 1992 1998 2004 2010 2016
Consumer confidence (LHS) Composite PMI (RHS)
Brexits vestigial effects. Fortunately,
however, both serve to improve
U.K. financial conditions rather than
undermine them.
Exhibit 7: U.K. in modest recovery
The odds of a U.K. recession
European U.K. Pre-Brexit
following Brexit have also fallen, 6 Initial recovery renaissance Medium-run
GDP growth (QoQ % annualized)
debt worries
crisis under
with the initial probability of 60% 4 performance
now down to no more than 40%. 2
0
This is partly because of the
-2
aforementioned improvement in Post-Brexit
-4 recession?
financial conditions, and partly -6
because we can already see that -8
economic activity has dipped by -10
Recession Forecast
less than feared in the months after -12
2008 2010 2012 2014 2016 2018
Brexit. The short-term economic
Source: ONS, Haver Analytics, RBC GAM
implications were always something
of a guessing game given that the
main channels are via confidence The Bank of England (BOE) certainly yet to be activated, meaning formal
and expectations rather than hasnt let its guard down, having negotiations are some distance
specific economic hurdles. Let us be responded to the shock with a off. The U.K. is busy adjusting to
clear: we still expect some negative measured 25-basis-point rate cut new Prime Minister Theresa May
consequences given the material and a new round of credit-oriented and must also ramp up its trade-
decline in consumer and business quantitative easing (Exhibit 8). negotiating capabilities a branch
confidence already demonstrated Additional fiscal stimulus is also of the civil service that had withered
(Exhibit 6), and we still budget for expected in the upcoming budget. given the EUs dominion over
weaker-than-normal U.K. economic trade. We expect Article 50 will be
performance over the next year Of course, nothing has changed yet activated in 2017, allowing a multi-
(Exhibit 7) with 1.5% growth in 2016 regarding the U.K.s relationship year negotiation process to begin.
and just 0.75% growth in 2017. with the EU. The clause governing That said, there is still perhaps a
the exit of a member country has 25% chance that Brexit never takes

place. It is conceivable that during

Exhibit 8: United Kingdom 10-year bond yield
the course of negotiations, the Equilibrium range
British publics attitude changes or
that sufficient concessions are made 18
16
by the EU such that a severing of ties
14
is no longer necessary to achieve
12
U.K. aims. 10
8
Over the medium run, the 6
%
economic damage from Brexit 4

will primarily involve a dimmed 2
trading relationship between the 0
1980 1985 1990 1995 2000 2005 2010 2015 2020
U.K. and the rest of Europe, fewer Last Plot: 0.64% Current Range: 0.37% - 2.37% (Mid: 1.37%)
European head offices in London Source: RBC GAM, RBC CM
and conceivably fewer immigrants.
There are a variety of opinions on
the economic ramifications of these Exhibit 9: Most models predict a moderate medium-term Brexit hit
eventualities (Exhibit 9), with much
depending on the precise contours 2
of the new relationship. Most models 0
Economic impact on
level of GDP (ppt)
point to the loss of 2% to 3% of -2

economic activity over the coming -4
Optimistic
decade relative to if the U.K. had -6 Central

remained within the EU. -8
Pessimistic
So far, the economic impact of Brexit -10
LSE CEP
Europe
Average
CEPR
CBI/PwC
Bertelsmann
Oxford
Econ.
OECD
Treasury
Open
U.K.
IEA
beyond British shores has been

almost non-existent. The main global
consequence is a further increase in Note: Projections cover varying timeframes. Source: Barclays, The Economist, OECD,
U.K. Treasury, RBC GAM
political risks, both in the context of
higher policy uncertainty (Exhibit 10)
and greater populist pressures now Exhibit 10: Brexit plunges world into uncertainty
in evidence elsewhere.
400
Economic Policy Uncertainty Index
Upcoming geopolitical risks 350

300
These populist inclinations happen
250
to be especially consequential
200
right now given an unusually large
150
number of upcoming political
100
inflection points (Exhibit 11). 50
0
There is the upcoming U.S. 2000 2004 2008 2012 2016
presidential election, obviously a U.S. EU U.K.
Note: 12-month moving average shown in chart. Mean=100 for U.K. and EU; 1985-2009 mean=100 for
subject we tackle in more detail U.S. Source: PolicyUncertainty.com, Haver Analytics, RBC GAM

later. Spain continues to struggle

Exhibit 11: Election schedule offers breathing room, but threat of snap
to secure a working political election
majority despite two elections in E- Election / Political Stability Index
short succession. Voters in the Year R- Referendum Country (Percentile Rank)
Netherlands, France and Germany R Hungary 69
will all go to the polls in 2017 as E Austria 96
2016
populist inclinations are surging R Italy 64
in response to high economic E United States 67
inequality, feeble economic growth, E Netherlands 86

E France 59
elevated debt levels and the divisive
2017 E Iran 17
politics of bailouts and austerity
E Germany 79
programs. On the whole, populist
E South Korea 54
policies tend not to be growth- E Cyprus 69
enhancing. E Finland 96
2018 E Russia 18
Of Europes many political risks,
E Mexico 21
Italy warrants the greatest attention.
E Ireland 86
As seen in the Venn diagram Italy 64
Wildcard
(Exhibit 12), the country sits at the (Snap Elections) Greece 47
intersection of four risk factors. Italy Note: Political Stability Index percentile ranks for 2014. Source: World Bank, Haver Analytics, RBC GAM
a) is a large nation, b) has troubled
banks, c) suffers from a weak
economy and high public debt, and
d) suffers from fractious politics. Exhibit 12: Italy sits in the middle of a Venn diagram of risk
These political issues are coming to
a head in the form of a referendum
on Senate reform scheduled for later Large Troubled
this fall. The consequences of the nation banks
vote could be enormous given that
the prime minister has threatened to
resign if Italians reject the reforms. Italy
A snap Italian election would be
dangerous because the Eurosceptic
Five-Star Movement is flirting with Weak economy/
Fragile
first place in recent political polls. High public
politics
It would not take much for Italy debt
to begin careening down an anti-
Source: RBC GAM
European path.
We do not look for a Eurozone

breakup, but the risk must surely be
higher after Brexit.

Updated forecasts
Exhibit 13: Slow growth in three buckets
Our growth forecasts remain
heavily informed by the experience
1 2 3
of the post-financial-crisis era.
Central to this, the speed limit for STRUCTURAL CRISIS-INDUCED RECENT SHOCKS
economic growth remains low for

a variety of reasons (Exhibit 13). Demographics Less business Tighter financial
Some of the recent temporary EM Deceleration investment conditions
High policy
drags are mercifully ebbing, such Less globalization Skill decay
uncertainty
High debt
as the abatement of tight financial Brexit
conditions (Exhibit 14), but the
Brexit drag is new and policy Persists for a decade-
Persists indefinitely Temporary, but powerful
uncertainty has arguably increased. plus; not over yet
In short, it is unlikely that global Source: RBC GAM
growth is about to break completely

out of its recent rut.
Exhibit 14: Financial conditions unwinding tightness nicely
Collectively, our developed-world
growth forecasts have been revised 105
U.S. Financial Conditions Index
moderately downward this quarter, 104

and land slightly short of the 103
consensus (Exhibit 15). Some of this
102
is purely a mathematical response to
weak second-quarter GDP readings. 101
But it is more fundamentally based 100

on our recognition of the persistent 99
constraints on growth, partly
98
because consensus growth forecasts 2004 2007 2010 2013 2016
are still trending downward (Exhibit Source: Goldman Sachs, Bloomberg, RBC GAM
16), and also because the winning

bet has repeatedly been on below-
Exhibit 15: RBC GAM GDP forecast for developed markets
consensus growth outcomes.
In contrast to the developed-world 2.0

1.75%
forecasts, our emerging-market
Annual GDP growth (%)
1.5% 1.5% 1.5% 1.5%

growth forecasts have been revised 1.5
1.25% 1.25%
a little higher this quarter, and we
1.0%
now find ourselves in the unusual 1.0
0.75%
position of being slightly above the
0.5%
consensus with our 2016 calls. 0.5
Business-cycle risks 0.0

U.S. Eurozone U.K. Canada Japan
2016 2017
Our attitude toward business-cycle
Source: RBC GAM
risks remains one of high alert.

The current economic expansion in

North America is now longer than the Exhibit 16: Steady downgrading of 2016 consensus forecasts
average cycle, rendering it somewhat
vulnerable. The precise age itself 2.5
Jan-15 Jan-15
Consensus forecast for inflation

is not so much the issue as the Aug-16 Jan-15
2.0
fact that enough time has passed
1.5 Jan-15
that most U.S. economic slack Aug-16
1.0 Jan-15
has evaporated. The U.S. Federal (%)
Aug-16
Reserve (Fed) is now responding 0.5
to this, and the commencement of Aug-16

0.0
Aug-16
Fed tightening cycles precedes the -0.5
next downturn by an average of two 0.5 1.0 1.5 2.0 2.5 3.0
Consensus forecast for GDP growth (%)
years. While admittedly imprecise, U.S. Canada Eurozone U.K. Japan
this would argue for a late 2017 Source: Consensus Economics, RBC GAM
recession.
Another indicator of rising recession Exhibit 17: U.S. yield curves flattening
risk is the recent flattening (and
unusual flatness) of the yield curve 120 107.7
(Exhibit 17). The credit cycle also
10-year and 2-year bonds (bps)
Difference in yields between
100
continues to age, with potential 82.1
implications for the broader 80 74.2
economic cycle. Whereas credit 60

spreads have narrowed, default rates 40.2
40
are edging inexorably higher (Exhibit Real curve
even flatter
20
18), and sovereign downgrades than
nominal
have now outpaced upgrades for six 0
Nominal Real
consecutive years. 6 months prior Current
Note: As of September 6, 2016. Real and nominal U.S. Treasury spreads calculated using Bloomberg
BVAL data. Source: Bloomberg, RBC GAM
Fortunately, a few other gauges
of the business cycle have lately
become a bit less problematic: Exhibit 18: Global default rates rising
1. Earnings growth may now be 15

starting to stabilize after a
High-yield bond default rate (%)
lengthy period of decline 12
(Exhibit 19).
9
2. Global trade appears to be
stabilizing, if in a position of 6
almost non-existent growth

3
(Exhibit 20).
0
3. The amount of temporary 2008 2010 2012 2014 2016
hiring in the U.S. labour force Developed markets Emerging markets
traditionally a leading indicator Source: BofAML, RBC GAM

of the employment trend

has stabilized after pointing Exhibit 19: Global earnings have declined, but are they about to stabilize?
ominously lower last quarter
(Exhibit 21). 140
MSCI 12-month trailing earnings

per share (multiple currencies)
120
In aggregate, then, business-cycle
risks remain concerning, but are no 100
longer actively rising. We believe the 80
risk of a U.S. recession over the next 60
year rests at around 30%, whereas 40
the likelihood of a U.K. or Canadian 20

recession is higher at 40%. 0
1998 2001 2004 2007 2010 2013 2016
DM (USD) EM (USD) U.S.
Presidential preview Canada (CAD) Europe (EUR) Asia Pacific (USD)
Source: MSCI, Bloomberg, RBC GAM
The quadrennial U.S. election cycle
is again upon us. This one looks
to be unusually consequential, with Exhibit 20: Tentative sign of bottoming in global trade
quite a lot of daylight between
the policy positions of this cycles 40
World exports (YoY % change)
two candidates. 30
20
At the time of writing, betting 10
markets have assigned the 0
Democrats Hillary Clinton a nearly -10
-20
80% chance of victory, while the
-30
Republicans Donald Trump trails
-40
well behind with just over a 20% 2001 2004 2007 2010 2013 2016
likelihood (Exhibit 22). Nominal exports Real exports
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
We believe the race is marginally
closer than this, as Brexit
demonstrated that populist
inclinations are now unusually Exhibit 21: Temporary employment signal not great
strong. Trump has repeatedly
125 3.0
exceeded expectations in his short
temporary help services (millions)
Temporary
Nonfarm payroll employment,
2.8
Nonfarm payroll employment,
120 employment
political career to date and now
total private (millions)
wavering 2.6
115
appears to be belatedly tacking 2.4
110 2.2
somewhat closer to the political
105 2.0
centre where many voters sit.
100 1.8
Moreover, it is not unreasonable 1.6
95
to believe that his supporters are 1.4
90 1.2
being undercounted in the polls
85 1.0
due to a mix of bashfulness and 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
media distrust, and any bout of bad Total private (LHS) Temporary help services (RHS)
economic news or sour financial Source: BLS, Haver Analytics, RBC GAM

markets between now and the

November 8 election would also Exhibit 22: Democrats lead in Presidency and Senate
increase his prospects with voters.
100 95%
Let us be clear that Clinton remains 90
78%
Probability of winning (%)

80
by far the more likely victor, but 69%
70
the race is not quite done yet. 60
From a policy perspective, she can 50
best be thought of as a status-quo 40 31%
30 22%
candidate, likely to extend most
20
of President Obamas legacy of 10 5%
centre-left policies. Her most striking 0
policy differences with Obama are White House Senate House
Democratic Republican
a declining appetite for free trade Source: pivit.io, RBC GAM
and perhaps more hawkish military
inclinations.
Exhibit 23: Odds of U.S. rate hike have risen
In contrast, Trump offers a political
philosophy that splices strands of
70
populism and authoritarianism.
Probability of Fed rate hike (%)
60%
60
From an economic perspective, his
promise of a large infrastructure- 50
spending program and sizeable 40 36%

tax cuts would be quite stimulative 30
in the short run (if delivered),
20
conceivably enabling faster
10
economic growth for a few years. Of
course, such largesse does not come 0
September 2016 December 2016
cheap: analysis from a bipartisan Note: As of 8/29/2016. Source: Bloomberg, RBC GAM
policy think tank argues his platform
would send the U.S. public-debt-to-
that a Trump administration could of the fraying U.S. infrastructure.
GDP ratio sharply higher over the
bring. Of course, presidents are With interest rates so low, such
next decade.
rarely able to achieve their full an effort could be financed on
On the other hand, Trumps legislative agenda. Congress exerts the cheap.
proposals to clamp down on illegal considerable sway, and the prospect
aliens, restrict immigration and of a split Congress means that Central banks still front
reduce the breadth of free trade either president would struggle to and centre
could induce a significant economic implement bold legislative changes. The Fed continues to press forward
drag over the medium run. with its plan to nudge the fed funds
We continue to hold out hope
rate higher. Expectations are again
Financial markets appear to prefer that the eventual winner is able
congealing around this prospect,
a Clinton victory, fretting over the to push through a moderate-sized
to the point that a rate hike is
additional policy uncertainty and infrastructure program that would
considered more likely than not by
medium-term economic damage help the economy and restore some
the end of 2016 (Exhibit 23).

The logic behind this expectation

is twofold. First, the U.S. economy Exhibit 24: Massive quantitative easing continues
appears to be operating close to its
BoE
full potential, as demonstrated by 12 Central bank begins
Collective monetary base

an unemployment rate below 5.0%, 10
bond buying of around $1.2 ECB
trillion per year from 2011 to
begins
core inflation around 2.0% and 2016 Fed
(US$ trillions)
8
broadening wage pressures. Second, QE3
SNB
BoJ
6 intervention
the Fed has now clearly signaled its Fed Fed begins
4 QE2
tightening intention in speeches by QE1 BoE
Chair Yellen and Vice Chair Fischer. 2 QE
We peg the odds of a rate increase 0

by year-end at around 65%. 2007 2009 2011 2013 2015 2017
Note: U.S. Fed, BoE, ECB, BoJ and SNB balance sheets combined using PPP exchange rates. Shaded
area represents forecast. Source: Bank of England, Bank of Japan, Federal Reserve Board, European
Another Fed rate increase, however Central Bank, Swiss National Bank, Haver Analytics, OECD, RBC GAM
limited, would be consequential

given the U.S. central banks enthusiasm for further excursions the U.K. fiscal response is to
outsized influence on global into the world of negative interest Brexit, and it is conceivable that
markets. While we believe a rates after the market response the U.S. squeezes off a round of
modicum of Fed tightening is was tepid to their initial forays. infrastructure spending with a new
justified and thus at worst benign to Were another major crisis or president in place. But the bulk of
risk assets, we must not completely recession to arrive within the next the worlds nations remain firmly on
forget that financial markets few years, we continue to believe the sidelines.
struggled in the months after the that helicopter money would be
last rate increase. seriously contemplated by some U.S. economy in two parts
central banks (most obviously, The U.S. economy continues to
Despite its importance, the
Japan) since the tools promise of a grind along. The countrys first-
Fed is not currently much of a
more powerful and better targeted half economic performance was
trendsetter for the other major
economic stimulus would outweigh underwhelming, but the start of the
central banks. Globally, many
the threat of higher inflation for a second half has been somewhat
central banks are still focused on
country that has long suffered from better. Still, we are tracking just
delivering prior quantitative-easing
insufficient inflation. 1.50% economic growth for 2016
commitments (Exhibit 24), and
some are continuing to build on Many international bodies continue and project 1.75% for 2017. It
those promises. The BOE has been to call for a new round of fiscal is some consolation that, in the
buying corporate bonds anew since stimulus as a means of taking present environment of slow
Brexit, while the Bank of Japan (BOJ) pressure off over-worked central productivity growth and changing
increased the clip of its asset buying bankers. We support any such demographics, this rate of growth
in the spring. The European Central effort, so long as the stimulus constitutes on or even slightly
Bank (ECB) is pressing forward with is implemented in areas with above potential economic growth. In
its own bond-buying extravaganza. high fiscal multipliers (such as other words, the U.S. economy can
Thus, there are still powerful infrastructure spending). Some continue nibbling away at any last
downward forces on yields at work. countries are already aboard this remnants of economic slack.
effort, such as Japan and Canada. It The goods-producing sectors tend
As for other policy levers, central
remains to be seen how aggressive to receive a disproportionate share
banks have shown a diminished

of the attention when efforts are

made to evaluate the amount of Exhibit 25: Low office-vacancy rate implies little service-sector slack
slack remaining. It is also useful to
25
consider the more elusive service
% of U.S office properties vacant

sector. We find that it, too, has little
20
remaining slack as evidenced by a
number of metrics including the low 15
U.S. office-vacancy rate (Exhibit 25).
10
Close to prior cycle
Unsurprisingly, then, wage pressures low
are beginning to mount. We care 5
less about the absolute rate of wage
0
growth, and more about whether 1986 1992 1998 2004 2010 2016
wages are outpacing productivity. Source: Haver Analytics, RBC GAM
Indeed, this is now happening to a
significant degree (Exhibit 26). Given
the hawkish Fed implications, we Exhibit 26: U.S. real wages are substantially outpacing productivity
continue to anticipate another leg of
the U.S. dollar secular bull market. 3
wages >productivity
Rapid growth and
U.S. real unit labour cost
The U.S. economy remains highly 2 large mismatch

(YoY % change)
differentiated. Consumer growth is 1

strong, while business investment
is weak (Exhibit 27). This difference 0
is somewhat understandable: -1
consumers have already restored
-2
their savings rates to respectable
levels and are now deploying the -3 wages < productivity
1990 1995 2000 2005 2010 2015
2016
proceeds of strong hiring and
Note: YoY % change of 4-quarter moving average. Source: Haver Analytics, RBC GAM
improving wage growth. In contrast,
business investment is undermined
by the drop in oil-related capital Exhibit 27: U.S. consumer spending remains solid while business
expenditures, generally weak foreign investment fades
demand and uncertainty about the 15
path for public policy going forward. 10
Looking ahead, the gap between
5
YoY % change
consumer and business spending

0
could start to narrow as the rate of
-5
hiring dips, car-buying stabilizes
-10
at a lower level, oil prices edge
-15
higher and foreign demand recovers
somewhat. -20
2002 2004 2006 2008 2010 2012 2014 2016
PCE Business investment
Note: Year-over-year percent change of U.S. real personal consumption expenditure and real business
investment. Source: BEA, Haver Analytics, RBC GAM

Eurozone politics in focus

Exhibit 28: Eurozone business lending has stopped improving
The Eurozone economy may be
slowing slightly, and now looks to be
5
operating within a 1.00% to 1.50% 4
Bank loans (YoY % change)

3
growth band. Our growth forecast for
2
2016 remains unchanged at 1.50%. 1
0
Primarily in response to Brexit, we
-1
have slightly downgraded the outlook -2
-3
for 2017 to 1.25%. Like the U.S.,
-4
Europes pace of growth shows little -5
-6
sign of picking up.
-7
Aug-09 May-11 Feb-13 Nov-14 Aug-16
Despite the considerable efforts Households Businesses
of the ECB, there has been some Source: European Central Bank, Haver Analytics, RBC GAM
recent evidence of tightening credit

conditions on the continent (Exhibit
28). This is a risk to growth if the Exhibit 29: Migrant movement into Europe is lower than last year
trend continues. On the other hand,
250
we continue to anticipate a weaker
Number of migrants (thousands)
euro, which could help boost growth. 200
Although some political pressures 150 EU deal with

Turkey slows
are fading for instance, migrant migration
100
inflows to Europe are down sharply
compared with a year ago (Exhibit 50
29), and some polls suggest the
shock of Brexit has actually reduced 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
the separatist inclinations among 2015 2016
Note: Data shows migration by sea. Data for migration by land is not readily available and
some remaining EU members represented less than 4% of overall migration. Source: UNHCR, RBC GAM
European political risks continue to
be both large and relevant in our
estimation. Exhibit 30: Japanese growth teetering
12
Japan is all about the yen
(QoQ % change annualized)
8
Japan remains a country of Abenomics
contradictions. The economy is 4

Real GDP
sputtering, alternating between 0

quarters of growth and decline
-4
(Exhibit 30). And yet its labour
market is now tight as a drum -8
(Exhibit 31). This disconnect is only -12

possible when a country has an
-16
extremely low economic speed limit. 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Cabinet Office of Japan, Haver Analytics, RBC GAM

There is no denying that the

countrys latest bout of economic Exhibit 31: Labour shortage in Japan becomes more severe
pain has centred around the yens
appreciation over the past year, 1.5 Tight labour market to push
1.4 wages and inflation higher
Ratio of active job openings to

much as Japans earlier success with 1.3
Abenomics was largely the result 1.2
1.1
of extreme currency weakness
applicants
1.0
(Exhibit 32). The strengthening yen 0.9
has damaged corporate profits, and 0.8
0.7
can be seen on the expenditures 0.6
side of the ledger in scaled-back 0.5
0.4
machinery orders. 0.3
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
We look for the yen to relinquish Source: MHLW, Haver Analytics, RBC GAM
some of its recent strength, but
only a little, and the country still
needs further structural reform to Exhibit 32: Japanese yen strengthens
boost sustainable growth. After
this summers successful elections, 70 120
Nominal effective exchange rate

Prime Minister Abe appears in a
trade-weighted Japanese yen

80 110
U.S. dollar-Japanese yen
better position for such reforms. The 90

spot exchange rate
100
question is whether he will deploy
100
his newfound political capital in 90
110
that direction, or instead focus on 80
120
re-militarization.
130 70
We have left our Japanese growth 140 60
forecasts unchanged at 0.50% for 2000 2002 2004 2006 2008 2010 2012 2014 2016
USD-JPY spot exchange rate (LHS) Nominal effective exchange rate (RHS)
2016 and 1.00% for 2017. The Source: J.P. Morgan, Haver Analytics, RBC GAM
positive influences of a recently
announced fiscal-stimulus program
and additional monetary stimulus are Exhibit 33: Prices in Japan have risen in recent years
roughly offset by a more muscular
currency. The delay of Japans next 101
Japan core CPI (2000=100)
100
sales-tax increase to 2019 from 2017 2.6% higher since
99
is one reason that we are able to the trough
98
anticipate a growth uptick in 2017. 97
96
For all of the public criticism of 95
94
Japans inflation-revival efforts, it 93
must be acknowledged that the 92 3.4% higher
since the trough
country has at least achieved a 91
2000 2002 2004 2006 2008 2010 2012 2014 2016
partial victory. The rate of inflation Core CPI, adjusted for tax hikes Core CPI
remains well shy of +2% per year, but Note: CPI adjusted to exclude the estimated effect of sales tax hikes. Source: BoJ, Ministry of
Internal Affairs and Communication, Haver Analytics, RBC GAM
core prices have at least escaped

from the prior interminable downdraft

(Exhibit 33). Deflation is over; the Exhibit 34: Chinas inevitable slowdown
issue now is whether a proper
15 4
level of inflation can assert itself.
(standard deviations from

14
Economic Activity Index

A key test will be if inflation can be 3
13
historical norm)
sustained now that the yen is no 2
China GDP growth

12
(YoY % change)
11
longer providing artificial assistance. 1
10
We are monitoring a slight decline in 9 0
prices in 2016, but pencil in a 1.0% 8 -1
7
increase for 2017. -2
6
5 -3
China finds its feet 1995 1998 2001 2004 2007 2010 2013 2016
GDP Growth (LHS) Economic Activity Index (RHS)
As the generator of roughly one-third Note: Index constructed using sixteen proxies for real economic activity in China.
Source: Bloomberg, Haver Analytics, RBC GAM
of global economic growth, China
matters hugely. For years, we have
looked for and gotten a steady
Exhibit 35: Chinese trade is finally flattening out
deceleration in Chinese economic
growth as the country loses prior
70
important tailwinds such as its high 60
level of competitiveness and the 50
China trade in goods
40
(YoY % change)
advantage of a rapidly globalizing 30

world. Ultimately, we are still in the 20
10
slowdown camp, but acknowledge 0
that the Chinese economy has -10
-20
recently managed to stabilize its -30
growth rate in the mid-6% range -40
2000 2002 2004 2006 2008 2010 2012 2014 2016
(Exhibit 34). This has prompted us to
Exports Imports
slightly upgrade our 2016 and 2017 Note: Year-over-year % change of 3-month moving average of goods exports and imports.
Source: State Administration of Foreign Exchange, Haver Analytics, RBC GAM
growth forecasts for China to 6.5%
and 6.0%, respectively.
Much as global trade now looks Exhibit 36: Chinese consumer spending still slower than usual
to be flattening after a period of
deceleration, Chinese trade has 5
(standard deviations from
4
Consumer Activity Index
managed a partial recovery (Exhibit

3
historical norm)
35). This is of disproportionate 2

importance to China given its heavy 1
reliance on exporting. 0
-1
The country continues to make a -2
gradual transition toward a more -3
-4
consumer-oriented model, though -5
consumer-spending growth is also 1996 2000 2004 2008 2012 2016
Note: Index constructed using nine proxies for Chinese consumer activities. Source: CNBS, CAAM,
arriving more slowly than expected Tsinghua UnionPay, MNI, Westpac, Bloomberg, Haver Analytics, RBC GAM
(Exhibit 36).

We recently published an Economic

Compass on Chinas housing market, Exhibit 37: Housing sector is a crucial part of Chinas GDP
which represents a startling 19%
of the countrys GDP (Exhibit 37). 12
10.6%
Several factors point to worrying
10 Housing is 19% of
excesses in the market, none more GDP
8
starkly than the fact that 29% of 7.0%
% of GDP
Chinese homes are vacant (Exhibit 6
38). However, the true story is
4
somewhat more nuanced than this:
2 1.3%
On a flow basis, Chinas pace of 0

Residential investment Related industries Housing wealth effect
new-home completions is not
Note: Current (2015) contribution to GDP of the housing sector in China.
obviously running ahead of new Source: China National Bureau of Statistics, Haver Analytics, RBC GAM
demand.
On a stock basis, China has
far more urban households Exhibit 38: Elevated share of Chinese housing stock is unoccupied
than occupied urban homes.
Presuming that households will
seek out their own dwellings as
the country grows richer, China 7%
may actually have too few homes 29% of housing 2% Sold and occupied
71%
even after factoring in the high stock is Sold but unoccupied
unoccupied 20% Completed but unsold
initial vacancy rate.
Excess under construction
As such, Chinas housing market
constitutes a real risk, but perhaps
Note: Share of Chinese housing (in units) by status in 2015. Completed but unsold unavoidably includes both
a slightly less worrying one than we new and existing units for sale. Excess under construction (in units) measured as floor space under
construction less floor space completed estimated based on the historical relationship of housing under
had previously assumed. construction and completion. Source: China Household Finance Survey, Credit Suisse, CICC, Haver
Analytics, RBC GAM
Chinas main problem is its high
and rising debt load. While this
is partially a function of the Exhibit 39: Potential Chinese bank losses worrisome
aforementioned housing market, it is
just as crucially linked to struggling 3.5 28% 30
$3.2T
heavy industries, an underdeveloped
(% of bank assets / GDP)
3.0
Potential bank losses
25
Potential bank losses
stock market and a government that 2.5

(US$ trillion)
Current bank capital 20

has been dead-set on sustaining 2.0 = 7.7% of bank
assets 15
rapid economic growth even when 1.5 $1.3T 11%
10%
this could only be achieved through 1.0
10
waves of new credit. We estimate 0.5 4% 5
that Chinese banks will eventually 0.0 0
have to write off between US$1.3 US$ trillion % of bank assets % of GDP
(LHS) (RHS) (RHS)
trillion and US$3.2 trillion in loan Low estimate High estimate
losses representing between 11% Source: Haver Analytics, RBC GAM

and 28% of Chinese GDP (Exhibit

39). This amount is just barely Exhibit 40: RBC GAM GDP forecast for emerging markets
manageable given the Chinese
8 7.5% 7.5%
governments history of assistance 6.5%
6.0%
Annual GDP growth (%)

and financial clout. 6
4 2.75% 2.75%
Fortunately, recent government 2.75% 2.75%
2 1.5%
statements have suggested that 1.0%
Chinas era of excessive credit 0

expansion could be starting to come -0.25%
-2
to an end. This is bad news from an
-4 -3.0%
economic-growth perspective, but
good news from a risk perspective. India China South Korea Mexico Russia Brazil
2016 2017
Of course, the debt threat wont go
Source: RBC GAM
away overnight.
Emerging markets stabilize Exhibit 41: Brazils economic malaise may be bottoming
Emerging-market leading indicators
3
have improved somewhat over
Number of standard deviations
the past quarter, and we have 2
responded by revising our emerging- 1

from norm
market growth forecasts a little

0
higher (Exhibit 40).
-1
There are several reasons for our
-2
slightly more optimistic outlook:
-3
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
We suspect that emerging-market Business Confidence Index Consumer Confidence Index Industrial production
growth is finally bottoming after Source: CNI, FGV, IBGE, Haver Analytics, RBC GAM
many years of deceleration.
Growth is unlikely to return to
prior norms, but the bulk of the Exhibit 42: Chinese corporations on borrowing binge
decline may now be over.
China, the behemoth of the 185
emerging-market basket, has 165

Nonfinancial corporate debt
done a bit better. 145

(% of GDP)
Resource-oriented emerging 125
economies appear to be 105

bottoming now that commodity 85
prices have risen from their lows. 65
Brazil is an example that seems
45
poised for a return to some 1995 1998 2001 2004 2007 2010 2013 2016
semblance of growth in the next China EM ex China
Source: IIF, IMF, RBC GAM
year (Exhibit 41)

The combination of improved

global risk appetite and an ever- Exhibit 43: Global oil inventory is too high
strengthening search for yield
has flooded emerging-market 3200
465 MM
nations with additional capital, 3000
barrels
OECD crude oil inventory

over
decreasing their cost of funding norm
(million barrels)
and increasing their ability to 2800
drive business investment. 2600

Emerging-market corporate debt
2400
risks, while still high, are less
worrying when one disentangles 2200
them geographically and
2000
recognizes that the bulk of the 1995 1998 2001 2004 2007 2010 2013 2016
increase in emerging-market Source: IEA, RBC GAM
corporate debt is in China rather

than spread across a host of
smaller, more vulnerable nations Exhibit 44: Canadian oil production back to normal after wildfires
(Exhibit 42).
5.0
Emerging-market equity
Canadian crude oil production
4.8
valuations remain cheap, 4.6
motivating our own equity 4.4
(million b/d)
overweight in the sector. 4.2

4.0
To be clear, it is rarely a one-way 3.8
street with emerging markets. 3.6
3.4 Production dropped 600,000 b/d in
Potential headwinds exist in our May due to Fort McMurray fire EIA
3.2 forecast
expectation that the U.S. dollar 3.0
will again rise, the risk that a Fed 2010 2011 2012 2013 2014 2015 2016 2017
Crude oil production (historical) August 2016 forecast
rate hike could dim the flow of
Source: EIA, RBC GAM
emerging-market-bound capital and
the fact that global trade is unlikely
2017. The levels of aggregate supply Canada continues to grapple with
to resume soaring as it did across
and demand in the global market the tail end of the global oil shock.
the halcyon first decade of the
continue to inch toward one another, The problem is not the countrys
millennium. Emerging markets are
with sizeable help from falling U.S. production of oil this is still near
also unavoidably among the more
crude production. But risks remain. record highs once the Fort McMurray
vulnerable sectors in the event of a
U.S. production has lately stabilized fires are adjusted for (Exhibit 44).
major shock to the global economy.
for at least the moment, indicating Rather it is that oil prices remain
Nevertheless, for now, they are
that the normalization process is too low for energy-sector capital
looking somewhat better.
slowing. And the world is still expenditures to return to pre-plunge
awash in oil inventories the result levels.
Canada still struggles
of earlier production excesses
We continue to anticipate moderately (Exhibit 43). Our Canadian composite leading
higher oil prices over the next year, indicator continues to point to
with a target of US$60 by the end of subdued economic growth. Indeed,

the country suffered a few months

of falling GDP even before the Fort Exhibit 45: Canadian economy remains soft
McMurray wildfires undermined
second-quarter performance (Exhibit 0.6 Initial oil
Real GDP growth (MoM % change)

45). The fires effects have since shock
Fort McMurray
0.4 fire and
been largely unwound, but the rebound
damage was done in the form of 0.2
a 1.6% decline in second-quarter
0.0
annualized GDP. The third quarter
should manage to claw back a -0.2
sizeable chunk of this weakness, but -0.4 New bout

of weakness
underlying growth remains poor. One
-0.6
sign of the residual softness is in Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16
the employment figures, which were Source: Statistics Canada, Haver Analytics, RBC GAM
late in signaling Canadas economic

weakness but have since made up
for lost time (Exhibit 46). Exhibit 46: Canadian job market remains dismal
Canadas economic performance 2.2

remains highly variable by region. 2.0
Oil-producing Alberta and its 1.8
Canadian employment
(YoY % change)
brethren remain in recession, 1.6

1.4
while export-oriented Ontario,
1.2
British Columbia and Quebec have 1.0
benefited from the weaker Canadian 0.8
dollar and respectable U.S. demand 0.6
(Exhibit 47). 0.4
0.2
2011 2012 2013 2014 2015 2016
Looking ahead, our expectation
Source: Statistics Canada, Haver Analytics, RBC GAM
for a further depreciation of the
Canadian dollar should help restore
competitiveness and get exports Exhibit 47: Ontario holding up, Alberta struggles
moving. Similarly, oil prices that
are higher than a year ago should
Monthly GDP (YoY % change)
8 Ontario faring
slightly diminish the pain of the oil 6 well
sector. But Canadas housing sector 4

is suddenly looking more vulnerable 2
0
as some of the most toppish
-2
markets have begun to unwind and -4
regulators have resumed policies -6 Alberta unusually
that may dampen housing demand -8 weak
2002 2004 2006 2008 2010 2012 2014 2016
(Exhibit 48). In all of this, the Bank of
Ontario GDP proxy Alberta GDP proxy
Canada appears likely to remain on Note: Monthly provincial GDP estimated from available monthly economic variables, combined via
principal component analysis and then regressed against annual provincial GDP. Source: Haver
the sidelines. Analytics, RBC GAM

Inflation to edge higher

Exhibit 48: Threats to Canadas housing boom
Global inflation remains low by
historical standards. But this is
at least partially an illusion, as it Threat Higher Economic Parabolic home Tighter
interest rates recession price increase regulations
represents the remnants of the
commodity shock depressing Hurts Increases Prices out Constrains
affordability unemployment buyers access to or
headline inflation rates. Core desirability of
Higher mortgage What goes up home buying
inflation rates are much closer to default rate must come
Why
normal, as they are better able to down Actions
convey general economic conditions. spanning
Tentative signs national and
While economic growth has been of falling sales regional govts
slow, potential growth rates have in hot markets
Near-
been slower yet, meaning that term risk LOW MEDIUM HIGH HIGH
capacity pressures are building.
Source: RBC GAM
In this unusual environment, slow
growth is not incompatible with
higher inflation (Exhibit 49). Exhibit 49: Slow growth and higher inflation not incompatible
We anticipate a gradual
normalization of headline-inflation
rates as they shake off the prior Higher
effects of the commodity shock
Mutually
inflation
and converge toward current core compatible
inflation readings (Exhibit 50). when
With this forecast, we are a little potential
above the market consensus. This Poor
growth rate
expectation is grounded in our economic very low
outlook for moderately higher oil growth
prices, in our belief that economic Source: RBC GAM
slack is almost gone in the U.S. and

has faded somewhat elsewhere, and
that wage pressures are beginning Exhibit 50: RBC GAM CPI forecast for developed markets
to increase. Also, our general view 3.0 2.75%
that the U.S. dollar will strengthen
2.5 2.25%
CPI (YoY % change)
should nudge inflation higher in 2.0%

2.0 1.75%
most countries. 1.5%
1.5 1.25%
The U.K. represents something of 1.0% 1.0%
1.0
a special case given its sharp Brexit- 0.5%
0.5
influenced currency depreciation,
and so we expect faster inflation 0.0
of 2.75%. -0.5 -0.25%

Canada U.S. U.K. Eurozone Japan
2016 2017
Source: RBC GAM

Emerging-market inflation is also

Exhibit 51: Implied fed funds rate
fairly low, and could prove less 12-months futures contracts
responsive to the upward trend
375
given the strong possibility of La 325
Basis points (bps)

Nina-related food deflation over the 275
next year. 225
175
125
The great rate debate 75
25
The world remains trapped in
-25
Jun-15
Jul-15
Nov-15
Dec-15
Jan-16
Jun-16
Jul-16
Nov-16
Dec-16
Jan-17
Jun-17
Jul-17
Nov-17
Dec-17
May-15
Aug-15
Sep-15
Aug-16
Sep-16
Oct-15
Feb-16
Mar-16
Apr-16
May-16
Oct-16
Feb-17
Mar-17
Apr-17
May-17
Aug-17
Sep-17
Oct-17
an extraordinarily low interest-
rate environment given the slow Market-implied forecast as of August 31, 2016 FOMC median projections as of Sep 2014
FOMC median projections as of Dec 2014 FOMC median projections as of Mar 2015
economic growth and low inflation FOMC median projections as of Jun 2015 FOMC median projections as of Sep 2015
FOMC median projections as of Dec 2015 FOMC median projections as of Mar 2016
discussed above, as well as an aging FOMC median projections as of June 2016
Source: Bloomberg, U.S. Federal Reserve, RBC GAM
population, high income inequality,
elevated debt loads and a shortage
of safe assets. Seven years following
Exhibit 52: Central banks and uncertainty drive yields lower
the financial crisis, investors are
perhaps starting to realize that the 3
slow-growth, low-inflation world
Government bond yield (%)
is structural in nature and will 2

therefore define the environment
going forward too. 1
The Fed has slowly been coming

0
around to the view that interest rates
may remain lower for longer and that
-1
their estimate of neutral level for the 1M 3M 6M 9M 1Y 3Y 5Y 7Y 10Y 15Y 20Y 25Y 30Y
U.S. Canada U.K. Germany France Italy Japan
fed funds rate should be reduced.
Source: Bloomberg, Haver Analytics, RBC GAM
The evolution in the Feds view
can be seen in Exhibit 51, which
plots the FOMCs projected level of the horizon to suggest that a sharp these unusually low levels, but any
interest rates for every quarter over upward adjustment in interest rates near-term adjustment will be limited
the past seven quarters. Had interest by the Fed is necessary. We continue given the current low speed limit on
rates followed the September 2014 to look for a single Fed hike over the economic growth (Page 40).
projections, the fed funds rate next year.
The yield on U.S. 10-year Treasuries
would have been over 2.0% by now
Bond yields move lower is slightly below our models
compared with todays actual setting
estimate of equilibrium. Exhibit
of 37.5 basis points. The bottom Global bond yields fell to record lows
53 breaks down our 10-year bond-
line in the chart represents market- during the quarter, with some bond
yield model into its components of
implied projections for the fed funds markets characterized by negative
inflation premia and real rates of
rate and illustrates that investors yields even at the longer end of the
interest. While inflation is currently
have been right to price in a lower- yield curve (Exhibit 52). Our models
close to the level forecast by the
for-longer interest rate scenario. project that yields will rise from
model, the real rate of interest is
Looking forward, there is little on

roughly 75 basis points below what

Exhibit 53: U.S. 10-year bond yield
the model estimates as appropriate. Fair-value estimate composition
The model incorporates investors
adaptive expectations by assigning United States United States
CPI Inflation Real 10-year T-bond yield
more weight to recent experience
16 12.0
and, as low interest rates persist, 14 36-month Centred 10.0
the model gradually recalibrates its 12 Last Plot: 1.0%
12-Month Forecast: 1.6% 8.0
expectation of normal downward. 10
6.0
8
Note that the equilibrium bands +1 SD
6
+
%
4.0 Last Plot:
%
move higher with time, as the model 4
2.0
0.5%
2
begins to incorporate higher inflation 0 0.0
-1 SD Average: 2.1%
and a return in the real rate of -2 -2.0
12-Month Forecast: 1.26%
-4
interest to its long-term average by 1960 1966 1973 1980 1986 1993 2000 2006 2013 2020
-4.0
1960 1970 1980 1990 2000 2010 2020
36-month Centred CPI Inflation Actual Monthly CPI Inflation Real T-Bond Yield Real 10-Year Time Weighted Yield
the end of 2020. In our view, bond Source: RBC GAM, RBC CM Source: RBC GAM, RBC CM
yields are not likely to rise as quickly
as the model suggests, at least in
the short term. While a bit more
U.S. 10-year T-bond yield
inflation and a Fed rate hike or two 16 Equilibrium range
could prompt bond yields to move 14
higher, a return to historically normal 12
rates appears quite unlikely over the 10
forecast horizon. 8
6
%
Stocks extend gains 4
We saw further gains in global 2
equities over the quarter, supported 0

1980 1985 1990 1995 2000 2005 2010 2015 2020
by improving credit markets, better-
Last Plot: 1.58% Current Range: 1.07% - 2.85% (Mid: 1.96%)
than-expected economic data and Source: RBC GAM, RBC CM
low interest rates, allowing stocks
to mostly shrug off what many
investors had assumed would be Exhibit 54: Global stock-market composite
the widespread negative impact of Equity-market indexes relative to equilibrium
Brexit. A number of equity indexes 100
rest near all-time highs and yet 80
% above/below fair value
remain below our estimates of fair 60

value (Page 41). Our global stock-
40
market composite has moved closer
20
to equilibrium since last quarter but Last Plot: -14.4%
0
continues to signal that there is still
-20
room for further gains (Exhibit 54).
-40
Many investors have voiced surprise -60
at the stock markets buoyancy 1980 1985 1990 1995 2000 2005 2010 2015 2020
in recent quarters, given that Source: RBC GAM

valuations appear elevated relative

Exhibit 55: S&P 500 Index
to the historic norm. In a world Normalized valuation metrics as of August 2016
of extremely low interest rates,
2.5 Market is expensive
though, investors are prepared 2.0 1.45
to pay a higher price for higher- 1.5 1.16
0.85 0.81 0.67
1.0
returning risky assets. As a result, 0.5 0.17 Market is slightly expensive
Z-score
we are not surprised that equity 0.0
-0.5 Market is slightly cheap -0.22
valuations have risen, and point -1.0
-1.5 -1.00
out that some of the most popular -2.0 Market is cheap
metrics for valuing stocks ignore the -2.5
-2.36
-3.0
critical inverse relationship between Average Market Tobin's Q 12-M 12-M Shiller P/E RBC GAM Equity risk Fed
cap U.S. trailing forward (CAPE) fair value premium model
interest rates and inflation, on the GDP P/E P/E
one hand, and the present value of Notes: Historical data from Jan 1956 for 12-M Trailing P/E, 12-M Forward P/E, Equity risk premium,
Shiller P/E and Fed model. Historical data from Mar 1956 for market cap U.S. GDP. Historical data
future earnings, on the other. Exhibit from Jan 1960 for RBC GAM fair value. Source: Haver Analytics, RBC CM, RBC GAM
55 plots, in standard deviations

(z-score), the distance that eight
popular valuation metrics lie above Exhibit 56: Standardized S&P 500 fair-value bands
or below their historical average.
The results vary widely depending
on whether interest rates and/or
inflation are incorporated into the S&P 500 most overvalued 4
calculation. Metrics that are driven +1 SD
3
solely by unadjusted P/E ratios FV
suggest that the market is expensive 2
-1 SD
(high z-score), whereas those that S&P 500 most undervalued 1
are a function of interest rates and/
or inflation indicate that the stock
market is still attractively priced 1960 1967 1974 1981 1988 1995 2002 2009 2016
(low z-score). The average of the
eight measures indicates that stocks
are roughly in line with the historical Exhibit 57: S&P 500 Index
norm. Our proprietary fair-value Return prospects by valuation zone
metric, a multi-factor model that 1-year
incorporates current and forecast 1-year average 1-year
Data average Batting return in Max return
levels of interest rates, inflation, and Valuation set return average^ win* loss STD
corporate profitability, suggests that
stocks are slightly below fair value. (S&P 500 most overvalued) 4 -0.7% 50.0% 14.8% (27.5%) 17.0%
1 SD Above
Historically, the S&P 500 has 3 3.4% 62.1% 13.0% (41.4%) 15.6%
Equilibrium
performed better when it trades 2 12.0% 85.5% 16.0% (44.8%) 13.8%
below fair value than when it is 1 SD Above
above fair value, and the January (S&P 500 most undervalued) 1 14.7% 80.2% 19.9% (12.8%) 16.3%
correction created the right backdrop
*Win = Periods where returns are above 0%. ^Batting average = Incidence of winning in any
for this years rally by easing given period. Source: RBC GAM

valuations. Exhibit 56 shows that

stocks fell decidedly below fair value Exhibit 58: Crude oil and the U.S. dollar
in early 2016, as indicated by the
120 65
horizontal dotted line at the centre 110
70
of the chart. Even now, stocks trade 100
in a range that historically generates 90 75
the second-highest 1-year average 80 80

$US 70
returns, the highest batting average 85
60
(incidence of positive monthly 50 90
returns) and the lowest volatility 40
95
(standard deviation of returns) of 30
the four valuation zones that weve 20 100
2011 2012 2013 2014 2015 2016 2017
identified (Exhibit 57). Interestingly, NYMEX crude oil (LHS) U.S. trade weighted major currency dollar (RHS, inv.)
the low volatility that weve seen Source: Bloomberg, RBC GAM
recently is consistent with current
market valuations.
Exhibit 59: Corporate bond spread (inverted) vs. S&P 500 earnings
Ceiling on earnings may 0 100
be lifting 100 80
60
While valuations may be supportive 200
40
Y/Y % change
of equities in the current 300 20
Basis points
environment, earnings growth will be 400 0

500 -20
critical to sustaining any meaningful -40
600
advance in stocks. Fortunately, the -60
700 -80
two largest headwinds to corporate
800 -100
profits since the end of 2014 1980 1985 1990 1995 2000 2005 2010 2015 2020
the collapse in oil prices and the Baa corporate yield minus 10-year T-bond yield (inverted, LHS)
S&P 500 earnings (RHS)
strengthening U.S. dollar have
Source: RBC CM, RBC GAM
moderated and should allow for
corporate profit growth to resume
(Exhibit 58). One sign that earnings Exhibit 60: S&P 500 Index
growth may rebound from last years Actual and bottom-up consensus earnings-growth estimates
decline is a significant narrowing 14% 12.8%
in credit spreads. Exhibit 59 plots 12%
9.9% 9.6%
the inverse of the corporate-bond 10% 8.7%
YoY % change
spread against the year-over-year 8% 6.9%

change in S&P 500 earnings and 6%
4.1%
suggests that the two are correlated. 4%
While the recent narrowing in 2% 0.7%
credit spreads hasnt yet been 0%

-2% -0.5%
accompanied by an increase in
2014 2015 2016F 2017F
earnings, the deterioration in profits S&P 500 Index S&P 500 Index excluding Energy
appears to have ended. In fact, a Note: actual data for 2015 and prior, bottom-up consensus estimates for 2016 onward. Based on a
bottom-up aggregation of current index constitutents. Source: Bloomberg, RBC GAM

look at S&P 500 earnings growth

Exhibit 61: E arnings estimates and alternative scenarios for valuations and
excluding the Energy sector reveals outcomes for the S&P 500 Index
that non-Energy earnings have been
CONSENSUS
rising despite earnings weakness at
the overall index level (Exhibit 60). 2016 2016 2017 2017
Top down Bottom up Top down Bottom up
Looking forward, analysts expect
P/E $118.1 $117.5 $128.3 $133.0
earnings to deliver double-digit
growth in 2017. +1 Standard Deviation 22.2 2617.8 2603.2 2844.0 2946.5
+0.5 Standard Deviation 20.1 2373.3 2360.1 2578.3 2671.3

Potential scenarios Equilibrium 18.0 2128.8 2116.9 2312.7 2396.0
for equities -0.5 Standard Deviation 16.0 1884.3 1873.7 2047.0 2120.8
To gauge the potential for equities,
-1 Standard Deviation 13.9 1639.7 1630.6 1781.4 1845.6
we look at a range of scenarios for
Source: RBC GAM
earnings and P/E multiples for the
S&P 500 Index (Exhibit 61). The
market would finish 2016 close to Exhibit 62: Value to growth relative performance
where it is now, assuming a P/E of 18 S&P 500 Value Index / S&P 500 Growth Index
(the level consistent with current and
6%
forecasted interest rates, inflation 4%
Cumulative relative performance
and corporate profitability), along 2%

with a top-down S&P 500 consensus 0%
earnings estimate of US$118.10. -2%
-4%
Next year, however, there is room for
-6%
decent gains, given the current top- -8%
down S&P 500 consensus earnings -10%
estimate of US$128.30 and using -12%
the equilibrium P/E. In that scenario, -14%
2013 2014 2015 2016 2017
the index would rise to 2313 by the Source: Bloomberg, RBC GAM
end of next year, generating a 9%
total return from the close on August
Value stocks have outperformed companies usually benefit more
31. These both assume that equity
growth stocks since the end of than large caps when the economy
market valuations rise no further
January (Exhibit 62) in what appears is improving because smaller
than to their normal level relative
to be a reversal of the trend that companies are also frequently more
to current and anticipated interest
had been in place for two and a half sensitive to changes in economic
rates, inflation and corporate
years. Investors tend to favour value growth. Exhibit 63 plots the relative
profitability.
over growth stocks when economic strength of small-, mid- and mega-
prospects are improving because cap stocks relative to the S&P 500
Styles suggest optimistic value stocks, which generally trade large-cap Index. The chart shows
outlook at cheaper valuations, tend to be that small and mid-cap stocks have
The recent improvement in economic more reliant on the economys outperformed significantly since
data has been reflected in the pulse to drive their businesses. January, while the largest companies
relative strength of value stocks Small and mid-cap stocks have also have underperformed. These trends
since the early-2016 correction. outperformed. Stocks of smaller-

suggest that the bull market in Exhibit 63: Relative strength to S&P 500 Index
equities still has some momentum. Rebased to 100 as of Jan. 1, 2015
105
U.S. election market impact
104
103
We mentioned earlier that the
102
November U.S. presidential election 101
could have a significant impact 100
on financial markets over the next 99
98
few months. A look at how stock
97
markets performed during past U.S. 96
elections may provide a basis as 95
for what to expect this time around. Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
S&P 100 Mega Cap Index S&P 600 Small Cap Index S&P 400 Mid Cap Index
The average performance of the Dow
Jones Industrial Average Index (DJIA)
going back to 1900 and covering
29 presidential cycles suggests Exhibit 64: U.S. presidential election year
that markets perform better in Dow Jones Industrial Average
election years when the incumbent 20%
party wins (Exhibit 64). So far this
Cumulative price return
15%
year, markets are tracking the 10%
favoured scenario (for equity market 5%
performance) of an incumbent 0%
party win by Hillary Clinton, the -5%
Democratic Party candidate. -10%
Further analysis breaks down the -15%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
performance of stocks depending 2016 2017
on which party controls the White Current cycle (2016) Average of all election years
Average of years when incumbent party wins Average of years when incumbent party loses
House and Congress (Exhibit 65).
Note: based on daily data back to Jan 1, 1900. Source: Ned Davis Research, Bloomberg, RBC GAM
The best gains, on average, occur
when the U.S. government was
made up of a Democratic president, Exhibit 65: U.S. government composition and performance of Dow Jones
Industrial Average
Republican House of Representatives
and Democratic Senate. While a Control of Control of % gain/ % of
President
House Senate annum time
Clinton victory appears to be priced
Republican Republicans Republicans 7.03 22.5
into markets, we acknowledge that
Republican Democrats Democrats 2.44 19.1
a Trump win is a real possibility and
Republican Republicans Democrats (10.68) 1.7
that it could have potential negative
consequences for financial markets. Republican Democrats Republicans (2.92) 8.7
Democrat Republicans Republicans 8.72 10.1
Democrat Democrats Democrats 7.17 34.6
Democrat Republicans Democrats 10.37 3.5
Democrat Democrats Republicans N/A 0.0
Notes: based on daily data back to January 1, 1900. Source: Ned Davis Research

Asset mix maintaining Exhibit 66: U.S. 10-year Treasury

overweight stocks and Required move in yields for break-even return against 30-day T-Bill
underweight bonds 50
Improving economic data, narrowing 45
credit spreads, stabilizing corporate 40
Basis points (bps)

profit estimates and constructive 35
market breadth during the past 30 Last plot: 13 bps
quarter have been well-received 25
by financial markets. However, 20

15
the recent experience of better-
10
than-expected economic data is
5
not likely to persist. Risks have 2009 2010 2011 2012 2013 2014 2015 2016 2017
indeed diminished, but have not Source: RBC CM, RBC GAM
disappeared. The possibility of an
economic downturn is arguably increase in yields. For example, Reflecting the balance of
higher than it was as we recognize it takes only a 13-basis-point opportunities and risks, our asset
that the business cycle is aging, increase in the U.S. 10-year yield to mix continues to tilt toward stocks
so it would be prudent to temper completely offset coupon income and away from bonds. Our equity
expectations. Key risks to the global over the next 12 months (Exhibit 66). position remains five percentage
economy and financial markets We forecast negative total returns points above our strategic neutral
include the impact of Brexit, the for 10-year sovereign bonds across position, although a bit below
upcoming U.S. election, elevated all major developed regions over the its prior peak. We continue to
debt levels in China, potential year ahead and remain underweight underweight fixed income and hold
Fed rate hikes and geopolitical fixed income as a result. a slight overweight cash position
instability. While there are many to serve as a buffer against the
reasons for concern, our base case Expected returns for equities are possibility of further equity-market
scenario is one where the economy much more compelling. Exhibit volatility. For a balanced, global
is able to handle these challenges 67 shows prospective returns for investor, we currently recommend an
and continue to grow, albeit slowly. various asset classes should they asset mix of 60% equities (strategic
move to our estimate of fair value neutral position: 55%) and 37%
In our view, even slow economic over specified time frames. As
growth should be sufficient to allow fixed income (strategic neutral
mentioned, forward returns are low position: 43%), with the balance
for a modest increase in interest or even negative across fixed-income
rates, which will act as a headwind in cash.
markets for most periods. However,
for fixed-income investments. if equities rise to equilibrium, stock
Coupons are so low that they do gains could be in the double digits
little to cushion against capital in the next few years and in the high
losses resulting from even a slight single digits over longer time frames.

EXHIBIT 67: Asset-class forward returns
1-year 2-year* 3-year* 5-year* 10-year* 15-year* 20-year*

Current forward forward forward forward forward forward forward
Asset class return1 return return return return return return return
U.S. Treasury Bill 0.05%
U.S. 10 Year Treasury Bond -3.46% -7.22% -4.44% -2.83% -1.24% -0.01%
Canada 10 Year Government Bond -10.96% -13.50% -7.82% -5.30% -3.04% -1.26%
German 10 Year Government Bond -9.96% -11.52% -7.28% -5.78% -4.22% -2.98%
U.S. Investment Grade Bond** -4.38% -6.32% -3.08% -1.36% 0.31% 1.61%
Canada Investment Grade Bond** -7.64% -8.47% -4.24% -2.26% -0.46% 0.97%
Europe Investment Grade Bond** -9.58% -9.98% -5.82% -4.32% -2.76% -1.47%
U.S. High Yield Bond*** -4.23% -0.97% 2.24% 3.86% 5.36% 6.50%
U.S. Stocks (S&P 500) Total Return 7.35% 22.09% 17.69% 13.76% 11.77% 10.22% 9.64% 9.33%
Canadian Stocks (TSX) Total Return 33.20% 26.95% 14.45% 12.83% 11.20% 9.88% 9.37% 9.10%
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.
***Credit Suisse High Yield Index STW, assuming long-term reversion to normal spread to T-bond, evenly through to end date
Source: RBC GAM, Bloomberg

GLOBAL FIXED INCOME MARKETS

U.S. 10-Year T-Bond Yield Eurozone 10-Year Bond Yield
Equilibrium range Equilibrium range
16 18
14 16
12 14
10 12
10
8
%
%
8
6
6
4
4
2
2
0 0
1980 1985 1990 1995 2000 2005 2010 2015 2020 1980 1985 1990 1995 2000 2005 2010 2015 2020
Last Plot: 1.58% Current Range: 1.07% - 2.85% (Mid: 1.96%) Last Plot: 0.35% Current Range: 1.02% - 2.18% (Mid: 1.60%)
Source: RBC GAM, RBC CM Source: RBC GAM, RBC CM
Japan 10-Year Bond Yield Canada 10-Year Bond Yield

Equilibrium range Equilibrium range
14 18
12 16
10 14
12
8
10
6
%
8
%
4
6
2
4
0 2
-2 0
1980 1985 1990 1995 2000 2005 2010 2015 2020 1980 1985 1990 1995 2000 2005 2010 2015 2020
Last Plot: -0.06% Current Range: 0.07% - 0.91% (Mid: 0.49%) Last Plot: 1.02% Current Range: 1.45% - 3.06% (Mid: 2.25%)
Source: RBC GAM, RBC CM Source: RBC GAM, RBC
U.K. 10-Year Gilt

Equilibrium range
18
16
Our models project that yields
14
12
will rise from these unusually
10
low levels, but any near-term
%
8
6 adjustment will be limited given
4
2 the current low speed limit on
0
1980 1985 1990
Last Plot: 0.64%
1995 2000 2005 2010 2015 2020
Current Range: 0.37% - 2.37% (Mid: 1.37%)
economic growth.
Source: RBC GAM, RBC CM

GLOBAL EQUITY MARKETS

S&P 500 Equilibrium S&P/TSX Composite Equilibrium
Normalized earnings and valuations Normalized earnings and valuations
5120 Aug. '16 Range: 1712 - 2860 (Mid: 2286) Aug. '16 Range: 15165 - 22880 (Mid: 19023)
25600
Aug. '17 Range: 1947 - 3253 (Mid: 2600) Aug. '17 Range: 14429 - 21770 (Mid: 18100)
2560
Current (31-August-16): 2171 12800 Current (31-August-16): 14598
1280
6400
640
3200
320
160 1600
80 800
40
400
1960 1970 1980 1990 2000 2010 2020
1960 1970 1980 1990 2000 2010 2020
Source: RBC GAM Source: RBC GAM
Japan Datastream Index Eurozone Datastream Index

5760 Aug. '16 Range: 1677 - 3667 (Mid: 2672)
1040
Aug. '17 Range: 1758 - 3843 (Mid: 2800)
2880 Current (31-August-16): 1410
520
1440
720
260
360
130 Aug. '16 Range: 294 - 875 (Mid: 584)
Aug. '17 Range: 304 - 906 (Mid: 605) 180
Current (31-August-16): 422
65 90
1980 1985 1990 1995 2000 2005 2010 2015 2020 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: Datastream, Consensus Economics, RBC GAM Source: Datastream, Consensus Economics, RBC GAM
U.K. Datastream Index Emerging Market Datastream Index

26880 Aug. '16 Range: 4498 - 8937 (Mid: 6718) Aug. '16 Range: 244 - 448 (Mid: 346)
Aug. '17 Range: 6069 - 12060 (Mid: 9064) 640 Aug. '17 Range: 251 - 462 (Mid: 356)
13440 Current (31-August-16): 5036 Current (31-August-16): 234
6720 320
3360 160
1680
80
840
40
420
210 20
1980 1985 1990 1995 2000 2005 2010 2015 2020 1995 2000 2005 2010 2015 2020
Source: Datastream, Consensus Economics, RBC GAM Source: Datastream, RBC GAM

GLOBAL FIXED INCOME MARKETS
Exhibit 1: Japanese government has been borrowing to keep the

Soo Boo Cheah, MBA, CFA
economy afloat
Senior Portfolio Manager
RBC Global Asset Management (UK) Limited 250
Government
Suzanne Gaynor Debt
200
V.P. & Senior Portfolio Manager
% of Japan GDP
150
100
Economists have long associated
rising fiscal stimulus with 50 Household
higher bond yields as increased Debt
0
government spending generally 1995 1999 2003 2007 2011 2015
leads to faster economic growth, Source: IIF
rising inflation and higher debt
levels. Higher fiscal spending is also
tools have become lasting features The heavy and prolonged
thought to have a crowding-out
of todays debt-dependent economy. intervention by global central banks
effect whereby large government
Interest rates near zero have allowed has driven up the wealth of people
borrowings shrink the availability
private borrowers to service their who hold stocks, bonds and real
of capital for private borrowers,
debt loads, while quantitative easing estate. But critics have blamed
forcing them to pay relatively
has propped up asset prices and central-bank policies in part for the
high interest. These days, with
prevented a deflationary spiral. populism and anti-establishment
investors turning more strident in
views that led U.K. voters to cut
their criticism of monetary policy The U.S. Federal Reserve (Fed) ties with the EU in a referendum
and major elections in the U.S. and ceased bond purchases in October during the summer and Republicans
Germany taking place against a 2014, but has since managed to to choose Donald Trump as their
backdrop of social discontent, the raise its policy rate only once and presidential candidate. Regardless
pressure is on governments to rev up also refrained from attempting to of whether Trump or Democrat
fiscal spending. Now is the time to shrink its US$4.4 trillion balance Hillary Clinton wins the presidency,
examine what impact a jump in fiscal sheet. The European Central Bank we expect fiscal spending in the
stimulus could have on bond yields. (ECB) also succumbed to the U.S. to escalate to address social
appeal of asset purchases when discontent and economic inequality.
Lets start with a review of how
Eurozone deflationary risks jumped In Europe, most governments have
monetary policy fell out of favour. In
in recent years. The ECB embarked been backing away from the fiscal
the 10 years preceding the financial
on quantitative easing in March austerity in place since the financial
crisis, economic growth relied on
2015 and the program has been crisis, and this shift in attitude
ever-expanding private debt, so the
extended through March 2017 to has been contributing to economic
collapse of private-sector balance
include purchases of corporate growth in the region since 2014.
sheets in 2008 made central-bank
bonds. Countries including Japan, Further government spending across
purchases of financial assets
Switzerland and Sweden are major economies could help reverse
necessary to prevent the implosion
experimenting with negative interest slow economic growth around the
of the banking system.
rates on deposits in an effort to globe and aid in calming the rise of
However, what were at the time stimulate lending and spending. political populism.
considered temporary monetary

Global Fixed Income Markets | Soo Boo Cheah, MBA, CFA | Suzanne Gaynor
Japans experience demonstrates

convincingly that ramping up fiscal Exhibit 2: Global government-debt profile starting to resemble Japans
spending does not necessarily lead
to increased interest rates. In fact, 90
ballooning government spending Government
80
in Japan has been accompanied by
% of Global GDP
falling interest rates over the past 70
two decades. Exhibit 1 illustrates
that Japanese household debt as 60
a percentage of GDP has flat-lined Household

50
since the bursting of the countrys Debt
asset bubble in the 1990s, while 40
government spending fueled by debt 1999 2003 2007 2011 2015
Source: IIF
sales sustained economic growth.
The global economy seems to

be trapped in a Japanese-style Exhibit 3: The 10-year Treasury yield tends to fall when government
spends more
escalation of government debt as
500
the private sector takes a vacation
US10-year yield 12-mos change

400
from adding to its overall debt levels 300
(Exhibit 2). Global household debt 200
100
has stopped rising as a percentage 0
(bps)
of GDP and governments have -100
-200
been borrowing to keep economies
-300
expanding, albeit weakly. Signaling -400
a similar trend, our research shows -500
-8 -7 -6 -5 -4 -3 -2 -1 0
that 10-year Treasury yields have U.S. Government incremental spending % GDP
frequently fallen in periods when 12-mos change in Budget Balance % GDP (1970 - 2016)
1970 - 1999 2000 - 2016
governments went on borrowing Source: Bloomberg
binges. Exhibit 3 illustrates that

the yield on the 10-year Treasury periods of slow growth and the Fed with weak institution tends to be
bond has decline two-thirds of the will be accommodative the very especially inflationary.
time when government spending circumstances in which yields tend
increased. The crowding-out effect, to decline. We believe therefore that with
it turns out, does not appear to apply global economic growth slow and
in the U.S. and other developed We must stress that not all inflation low, government bond
economies with strong regulatory countries enjoy this privilege, and yields will likely stay near the levels
environments. This may be because bond investors will likely penalize of the past two years. Japans 2
the theory fails to take into account countries with weak institutions by decades of lost economic growth are
the fact that higher U.S. government requiring higher yields. This is due a reasonable template for what is to
spending generally occurs during to the elevated risks of currency come for the other major economies.
periods of weak economic growth, depreciation and the fact that Over the intermediate term, the odds
and often recession. Inflation will government spending in countries of higher Treasury yields stem from
naturally be relatively weak in higher inflation as the labour market

continues to improve, economic

Exhibit 4: Long-term real interest rate looks fairly priced in Japan, but
slack contracts and central banks expensive elsewhere
appear to be scaling back their
4
penchant for easing.
Real Long-term Interest Rates

(5y5y OIS - Inflation Swaps)
3
2
Direction of rates
1
The focus of financial markets over
the next year will likely shift to fiscal 0
stimulus from aggressive monetary -1

easing. This change could at first lift -2
the 10-year U.S. yield to the cycle -3
highs of about 2.50% posted in the 2009 2010 2011 2012 2013 2014 2015 2016
R* USD R* EUR R* GBP R* JPY
summer of 2015, as this is the first
Source: Bloomberg
level of technical resistance. We
expect central banks in Europe and
U.S. The Fed continues to seek the In our view the most likely outcome
Japan to refrain from cutting already
economic daylight required to raise is that 10-year yields will remain
negative deposit rates further, but
the fed funds rate, suggesting that in a range, but with some volatility
to maintain and possibly expand
short-term rates are too low for an driven by regulations that limit the
asset-purchase programs. We also
economy operating at full capacity size of bank balance sheets. The
continue to believe that the Fed
and with a targeted inflation rate 10-year Treasury yield could rise
intends to keep its tightening bias
of at least 2%. We expect one rate to 2.00% sometime over the next
intact and expect one policy-rate
hike over the next 12 months, one 12 months, 0.25% lower than our
hike by the end of 2016. Investors
less than in our previous forecast, previous forecast.
will be presented with better yield
to reflect the age of the current U.S.
levels to accumulate government Germany Trust among Germans
business cycle, and decrease our fed
bonds as economic optimism revives in the ECB is the lowest of the
funds forecast to 0.75% from 1.00%.
on fiscal spending. Eurozones core countries and
This aligns with the Fed habit of
continuously lowering its projected continues to decline. We suspect
From a valuation standpoint,
pace of monetary tightening. The Fed that it was the imposition of negative
todays thin yields mean that global
can talk all it wants about tightening, deposit rates that is contributing
government-bond prices are rich. Our
but economic reality may not to this deterioration in sentiment.
calculations show the U.K. rate is the
support significant action. However, a majority of Germans
most expensive at about 200 basis
still favour the continuation of the
points below fair value, followed by
Near-term optimism surrounding Eurozone. The lack of confidence
Europe at 80 basis points and the
fiscally induced global economic in the ECB and affection for the
U.S. at 60 basis points. Interestingly,
growth as well as expectations that single currency are not necessarily
only Japan is close to fairly valued on
the ECB and Bank of Japan (BOJ) at odds, and we think that the
this measure (Exhibit 4). Researchers
will stop pursuing further negative ECB will do its best to narrow this
at both the Bank of England (BOE)
deposit rates should allow bond polarization, which is the last thing
and the Fed estimate that long-term
yields to head higher. However, that Chancellor Merkel needs ahead
real interest rates across the major
uncertainty about Novembers of next years federal elections. With
economies should be around 0%,
presidential election adds to rising populism and heightened
rather than at current negative
downward pressure on bond yields. political risk throughout the euro
real yields.

area, we believe the ECB will step INTEREST RATE FORECAST: 12-MONTH HORIZON
back from policies that have in some Total Return calculation: Aug. 24, 2016 Aug. 23, 2017
cases pushed interest rates deep U.S.
into negative territory. Banks are Horizon
also a consideration for the ECB, as 3-month 2-year 5-year 10-year 30-year return (local)
negative interest rates are making Base 0.75% 1.20% 1.60% 2.00% 2.60% (0.70%)
it almost impossible for weaker Change to prev. quarter (0.25%) (0.40%) (0.30%) (0.25%) (0.30%)
banks to weather high levels of non- High 1.25% 1.75% 2.25% 2.50% 3.00% (3.54%)
performing loans. We raise our ECB Low 0.38% 0.50% 0.60% 1.00% 1.70% 5.18%
deposit-rate forecast to negative Expected Total Return US$ hedged: (0.40%)
0.40%, compared with our previous
GERMANY
forecast of negative 0.50%. Our
Horizon
forecast for the 10-year yield falls to 3-month 2-year 5-year 10-year 30-year return (local)
0.30%, a 0.20% reduction from our Base (0.40%) (0.20%) 0.10% 0.30% 0.60% (2.73%)
previous forecast of 0.50%. Change to prev. quarter 0.10% (0.10%) 0.00% (0.20%) (0.50%)
High 0.00% 0.40% 0.60% 0.75% 1.25% (8.73%)
Japan We expect the BOJ to
Low (0.50%) (0.50%) (0.75%) (0.50%) (0.16%) 1.80%
continue engaging in asset
Expected Total Return US$ hedged: (1.66%)
purchases and stay put on deposit
rates, leaving them at negative JAPAN
0.10%. Prime Minister Abe recently Horizon
3-month 2-year 5-year 10-year 30-year return (local)
announced a 28 trillion (US$280
billion) stimulus package. The Base (0.10%) (0.10%) (0.05%) 0.00% 0.45% (0.32%)
Change to prev. quarter 0.30% 0.25% 0.25% 0.20% 0.15%
amount was impressive on the
High 0.00% 0.05% 0.10% 0.20% 0.80% (4.75%)
surface, but in reality only 7.5
Low (0.20%) (0.20%) (0.25%) (0.25%) 0.25% 2.71%
trillion represented new spending.
Expected Total Return US$ hedged: 1.00%
JGB yields rose after a combination
of the fiscal disappointment; the fact CANADA
that the government said it would Horizon
finance the spending with longer- 3-month 2-year 5-year 10-year 30-year return (local)
term bonds, for which demand is Base 0.50% 0.90% 1.00% 1.50% 2.00% (2.20%)
relatively low; and the intention Change to prev. quarter 0.00% (0.10%) (0.25%) (0.25%) (0.35%)
of the BOJ to suspend, at least High 0.75% 1.25% 1.50% 2.00% 2.40% (5.93%)
temporarily, its pursuit of even more- Low 0.00% 0.00% 0.10% 0.50% 1.15% 6.69%
aggressive easing. At this time, JGBs Expected Total Return US$ hedged: (1.90%)
may be the only major bonds that U.K.
are fairly priced.
Horizon
3-month 2-year 5-year 10-year 30-year return (local)
We are increasing our yield forecast
Base 0.25% 0.50% 0.75% 1.00% 1.60% (3.95%)
for the 10-year JGB to 0.00% from
Change to prev. quarter (0.50%) (0.50%) (0.75%) (1.00%) (1.10%)
negative 0.20%.
High 0.25% 0.75% 1.25% 1.50% 2.00% (9.31%)
Canada The Canadian economy Low 0.00% 0.00% 0.10% 0.25% 1.25% 1.94%
clearly stumbled in the second Expected Total Return US$ hedged: (3.12%)
quarter, with lower oil production Source: RBC GAM

due to wildfires in Alberta and a nowhere close to raising rates. The that the BOE will lower rates again
surprise drop in exports leading to tone from the BOC suggests a high in the near term given that fiscal
a decline in GDP. Rebuilding efforts threshold for further easing, and stimulus is probably in the pipeline.
in Alberta should provide a boost in markets currently have priced in We expect gilt yields to rise from
the third quarter, but the Canadian no chance of a rate cut over the their current rich valuations, and our
economy is growing modestly at next year. 12-month forecast for the 10-year
best. We dont expect to see any gilt is at 1.00%, a big drop from
Bank of Canada (BOC) rate hikes We have lowered our expectations 2.00% last quarter before Brexit.
until the end of 2017, and the BOC for the 10-year government bond We forecast that the BOE policy rate
might even lower rates sometime to 1.50% from 1.75% while leaving remains unchanged at 0.25% over
this year if the economic rebound our forecast for the BOC policy rate the next 12 months.
is weaker than expected. The BOC unchanged at 0.50%.
has been worried about overheated U.K. The BOE, aware that the U.K. Regional preferences
housing markets in Vancouver and decision to leave the EU has left We are maintaining our
Toronto, but a new tax imposed on the domestic economy vulnerable, recommendation from previous
Vancouver property buyers from lowered its policy rate on August 4 quarter to overweight Japanese
abroad should help cool prices. while committing to the purchase government bonds by five
Canadian bonds continue to attract of 60 billion (US$79 billion) of percentage points and underweight
foreign money due to the allure government bonds and 10 billion of German bunds by a similar amount.
of Canadas stable financial and corporate bonds. BOE Governor JGBs are neutrally priced, while
political system, good market Mark Carney also launched a German bunds do not yet reflect the
liquidity and relatively high yields. program making it easier for banks rising odds that the ECB will scale
We expect Canadian bonds to to lend to small and medium-sized back purchases of German bonds
outperform U.S. fixed income since businesses. and pause on driving short-term
we continue to believe that the Fed interest rates further into negative
In response, longer-dated gilt yields territory. Our view on the U.S.
will hike rates at least once in the fell to historically low levels. We
next 12 months, while the BOC is remains neutral.
are skeptical of the markets view

CURRENCY MARKETS
Dagmara Fijalkowski, MBA, CFA Exhibit 1: U.S. trade-weighted dollar

Head, Global Fixed Income & Currencies
(Toronto & London)
RBC Global Asset Management Inc. 145 8 yrs 6 yrs 10 yrs 7 yrs 9 yrs 5 yrs
135 -26% +67% -47% +43% -40% +41%
Daniel Mitchell, CFA 125
Portfolio Manager
115
105
Taylor Self, MBA 95
Analyst 85
75
65
71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16
After appreciating for three straight U.S. trade-weighted dollar
years, the U.S. dollar has moved Source: Federal Reserve, Bloomberg
sideways for the past 18 months.

Dollar bulls are understandably
Exhibit 2: Comparison of previous U.S. dollar bull markets
disappointed by the greenbacks
performance, and some are even 1.60
switching to a bearish view,
1.50
proclaiming that a multi-year
1.40
downtrend has begun. Indeed, the
U.S.-dollar bear camp is growing. We 1.30
caution that turning points for the 1.20

U.S. dollar are exceptionally difficult 1.10
to predict, a task made even harder
1.00
when so many long-term factors -1,000 -500 0 500 1,000 1,500 2,000 2,500
remain supportive. The acquisition Days into bull market
1978 - 1985 1994 - 2002 2011 - Present
of U.S. companies by foreigners, the
Note: Values indexed to 1 at begining of bull market. Source: Federal Reserve, Bloomberg
substantial overseas appetite to own
U.S. financial assets and a rate of
behaviour of the greenback over the 2015, expectations for the path
economic growth that is expected
past year and a half is disappointing, of U.S. monetary policy stood in
to outpace much of the developed
it is hardly unusual (Exhibit 2). We stark contrast to those of Japan
world all portend continued demand
remain bullish on the U.S. dollar, and Europe. These days, however,
for the U.S. dollar. This year marks
although less so, acknowledging the expectations for tighter policy from
the fifth of the current U.S. dollar
aging of the U.S. dollar cycle. the U.S. Federal Reserve (Fed)
cycle, while U.S. dollar bull markets
are much more modest. Monetary
last seven years on average and Over the past few years, we have policymakers have been challenged
involve an appreciation of between pinpointed diverging monetary by a high degree of uncertainty
40% and 60%. As is clear from policies among the worlds central regarding developments in China
Exhibit 1, the U.S. dollar is like any banks as the primary driver of U.S. and the rest of the world. Another
other financial asset in that it does dollar strength. As the rate of dollar complication for the Fed is that
not gain or lose value in a straight appreciation reached its zenith in investors have been driving the U.S.
line. So while the range-bound

Currency Markets | Dagmara Fijalkowski, MBA, CFA | Daniel Mitchell, CFA | Taylor Self, MBA
dollar higher when they believe that

higher rates are coming, and the Exhibit 3: U.S. economic-growth differential with major trading partners
simple rise in the greenback makes
6%
tightening less necessary. 140
4%
Monetary policy remains 120 2%
extraordinarily accommodative
0%
considering the state of the U.S. 100
economy. Unemployment is below -2%
80
5% and several measures of wage -4%
growth are near pre-crisis levels.
60 -6%
Whats more, most measures of 83 86 89 92 95 98 01 04 07 10 13 16
U.S. Trading partner growth differential (RHS) USD Index (LHS)
core inflation are at or near the 8Qtr MA of growth differential
Feds 2% target. Nevertheless, Source: Westpac
headline GDP growth remains

sluggish, stirring questions over the slack. Canada, China and Japan, to join the International Monetary
economys ability to stomach higher name a few countries, have already Funds Special Drawing Rights
short-term interest rates. Money announced or implemented spending (SDR) basket in October. Following
markets have been very reluctant programs, and both U.S. presidential a shift in August 2015 in the way
to price even one hike over the candidates are campaigning for China manages its currency, many
next 12 months, which strikes us greater infrastructure spending. The investors believed that a sudden and
as too dovish and leaves open the president of the Federal Reserve substantial devaluation was only a
possibility that the Fed might hike Bank of San Francisco, John matter of time. Our view was, and
sooner than markets expect. Williams, has also called for greater still is, more sanguine.
government spending, a sentiment
Indeed, conviction regarding the We agree that the currency will
echoed recently by Fed Chair Janet
need for tighter monetary policy weaken, but only gradually. Even
Yellen and G20 leaders. With low
in the U.S. has abated, and other though the currency regime has
interest rates so prevalent, we
major central banks are finding that changed to allow greater fluctuations
believe that differences in economic
extraordinary measures such as in the renminbi, the currency
growth rates, rather than interest-
negative interest rates and asset remains a government policy tool.
rate differentials, are set to become
purchases are much less potent But while policymakers seem open
a greater focus for currency markets.
than expected. These programs also to continued currency weakness,
This development reinforces a theme
come with consequences that may declines will be orchestrated in a
we have identified in past editions
outweigh their perceived benefits. way that is minimally disruptive to
of the Global Investment Outlook:
All of this is to say that the potential global financial markets. Among the
faster growth in the U.S. compared
for diverging monetary policies factors that we expect to weigh on
with other countries would provide
to serve as the primary driver of the renminbi are continued capital
support for the U.S. dollar (Exhibit 3).
the U.S. dollar rally seems much outflows and the fact that the
diminished. Chinese currency is still modestly
An eye on the renminbi
overvalued to the tune of 5% to 10%.
As monetary policy fades as the We have also been keeping an
primary stimulant of economic eye on the travails of the Chinese Critically, Chinese capital outflows
growth, there is a growing call renminbi, which is set to formally are much more muted than they were
for fiscal measures to take up the

last year, when domestic businesses

were scrambling to repay offshore Exhibit 4: International claims on China
debts. With much of those liabilities
1,000
having been repaid (Exhibit 4),
900
currency markets are no longer 800
exhibiting stress. Chinese reserves 700
have stabilized and authorities are 600
500
continuing to emphasize reforms
400
aimed at encouraging greater 300
inflows. This may prove successful 200
considering the relatively high yields 100
0
offered by Chinese bonds as well 2004 2006 2008 2010 2012 2014 2016
as the fact that foreign holdings Other Trade Credits Currency & Deposits Loans
of government debt are minimal Source: SAFE, Macrobond
(Exhibit 5). A steady, but orderly,

depreciation of the renminbi implies
a lighter tailwind for the U.S. dollar Exhibit 5: Foreign ownership of Chinese bonds
versus emerging-market currencies.
60%
Some of these currencies had
weakened substantially in recent 50%
years and their attractive yields will 40%

entice investors during periods of 30%
low volatility. 20%
10%
The euro
0%
It has been over a year and
Indonesia
S. Africa
Mexico
India
Brazil
Malaysia
Thailand
Korea
China
a half since the euro traded
meaningfully outside the 1.05 to
Source: J.P. Morgan
1.15 range against the U.S. dollar
(Exhibit 6). The primary reason
for the euros inertia may be that
Exhibit 6: EUR-USD exchange rate
investors are underestimating
the risks that continue to reside 1.45
in Europe. Correspondingly, the 1.40
monetary machinations of the 1.35
European Central Bank (ECB) and 1.30
ECB President Mario Draghi have 1.25
1.20
retreated from the front pages. Even
1.15
when concerns about the future
1.10
of Europe have come to the fore, 1.05
as was the case during the U.K. 1.00
referendum on EU membership, 0.95
Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16
they have quickly retreated. The
Source: Bloomberg

referendum does not seem to have

been the much-feared harbinger of Exhibit 7: Eurozone basic balance of payments
Euroscepticism. Notwithstanding
600
market volatility following Brexit,
concerns that populist efforts 400
12-month sum (EURbn)

would spread to the continent were 200
eased by Spanish elections that, 0
on balance, indicated a status quo -200

result rather than a revolt against -400
Brussels. -600
-800
We acknowledge that there are 2000 2002 2004 2006 2008 2010 2012 2014 2016
forces supporting the euro. Economic Net portfolio flows Net foreign direct investment
Current account Basic Balance
activity in the Eurozone, while not Source: Eurostat
spectacular, has been decidedly
steady. Inflation, though it continues going forward and take on currency The yen
to fall short of the ECBs 2% goal, risk. This development will be We now turn to what has proven
has stabilized at a positive rate. increasingly negative for the euro. to be the most difficult currency to
Moreover, this lacklustre headline
The second potential catalyst comes forecast the yen. It has been nearly
inflation number belies the fact that
in the form of political risks, which four years since the announcement
weaker oil prices continue to exert a
seem to have faded for now but of Abenomics, an ambitious
significant drag on consumer prices.
could come home to roost for the package of monetary easing, fiscal
The second euro-supportive issue
euro over the next 12 months. Later measures and structural reforms.
is that the threat of a Greek default
this year, the Italian government So far, the program has failed to
and related debt-market contagion
faces a referendum on Senate alter the long-term trajectory of the
have receded. New catalysts are
reform that has been transformed Japanese economy; the country
needed to provide fresh impetus
into a vote on the governments is still saddled with an enormous
for a weaker euro, especially since
competence. In 2017, the U.K. is debt load, low wage growth, anemic
valuations offer little guidance on
expected to formally start EU divorce inflation and economic growth
the direction of the single currency.
proceedings by invoking Article 50 that has fallen far short of target.
The first of these catalysts may be and Germans will head to the polls We recognize that the quality of
QE-induced portfolio outflows, which to pass judgment on the recent delivery from the political side of
have not yet been as negative for tenure of Chancellor Angela Merkel. the reform equation has left much
the euro as we had expected. While to be desired. However, for believers
these outflows have more than In summary, large and persistent in the power of central banks, it is
offset the Eurozones large current- capital outflows from the Eurozone, an inescapable fact that the results
account surplus (Exhibit 7), the fact changing hedging behavior and have been sobering.
that they are hedged means that rising political risks lay a solid
foundation for our belief that Excluding the impact of a
they have had little negative impact
Europes single currency will weaken. consumption-tax hike in 2014, core
on the euro to date. This substantial
We expect the euro to reach parity inflation in Japan has risen at an
activity, however, has forced the
with the U.S. dollar over the next annualized pace of just 1% since
cost of hedging much higher, making
12 months. 2013, a far cry from the Bank of
Europeans likelier to shun hedges
Japans (BOJ) goal of 2%. Indeed,

since Abenomics began we have

yet to witness a single 12-month Exhibit 8: Japans nominal effective exchange rate
period over which prices rose by
560
2%. Meanwhile, after an initial rise,
540
expectations for future inflation
520
have dropped near previous lows.
500
What is more, the government has
480
considered the economy too weak to 460
bear the brunt of another proposed 440
hike in the consumption tax. The 420
increase, originally scheduled for 400
October 2015, has been postponed Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16
indefinitely. JPY NEER JPY NEER at announcement of QQE

Source: Bloomberg
Adding insult to injury, the yen is

now stronger on a trade-weighted results of Abenomics have been review. While we do not expect
basis than it was in April 2013, underwhelming. significant changes in policy, the
when the BOJ launched quantitative BOJs recent record of catching
easing and Abenomics debuted The BOJs fecklessness was perfectly investors off-guard means that
(Exhibit 8). Attempts to engineer typified by its monetary policy we will be watching closely. In the
a weaker yen, an unspoken pillar meeting at the end of July when it meantime, the Japanese central bank
of Abenomics, have been running disappointed investors. The BOJ continues to conduct an enormous
up against the fact that the nearly doubled ETF purchases, amount of quantitative easing
currency is already undervalued. and kept interest rates and bond against a backdrop of paltry new
At the start of Abenomics, the purchases unchanged. In the run- issuance and a very flat government
yen was near a trade-weighted up to the meeting, expectations yield curve.
30-year low. Investors believed for even more easing had been
at the time that a determined running quite high, with rumours The net result of this backdrop has
government, in conjunction with of coordinated fiscal and monetary been to spur substantial portfolio
a willing central bank, could stimulus. Governor Kurodas outflows by Japanese investors
make it happen. It turned out, efforts to warn investors away from searching for positively yielding
however, that policymakers have expecting further easing measures bonds. As with Europeans, Japanese
repeatedly missed opportunities failed because he had, months investors used to be able to achieve
to demonstrate their resolve, earlier, denied negative interest a significant yield pickup by
turning the currency tailwinds of rates were being considered just switching from Japanese government
Abenomics into headwinds. The prior to their implementation. All of bonds into U.S. Treasuries without
BOJ now owns nearly 40% (and this serves to highlight the fact that taking any currency risk (Exhibit
climbing) of the government-bond not only has the BOJ disappointed, 9). However, the massive volume
market, is a top-10 shareholder of but that the Japanese central bank of outflows and the corresponding
most Japanese companies through has a credibility problem. hedging of U.S. dollar risk mean
ETF purchases, and is imposing that this yield advantage has been
The next event to watch for comes erased in a way that is similar
negative interest rates on banks.
on September 21, when the BOJ to Europe. Going forward, we
To even the untrained eye, the
publishes its comprehensive policy believe that Japanese investors will

continue to have an appetite for

Exhibit 9: Hedged U.S. 10-year bonds compared with Japanese 10-year
foreign bonds, which will still look bonds
attractive against the paltry yields
3.0%
on offer at home, but that they may
need to accept more currency risk 2.5%
on these investments. The other 2.0%

source of outflows from Japan has Yield
1.5%
been outward direct investment, 1.0%
as Japanese companies have either 0.5%
moved a greater share of their
0.0%
operations offshore or acquired
-0.5%
foreign businesses. On a net basis, 2012 2013 2014 2015 2016
outward direct investment totaled 14 U.S. 10-year treasury (hedged to yen) Japan 10-year government bond
trillion yen over the 12-month period Source: Bloomberg
ended in June, almost fully offsetting

Japans current-account surplus over
the same period (Exhibit 10). Exhibit 10: Japans basic balance of payments
We continue to expect yen weakness 60
over a 12-month time horizon

12-month sum (JPYtrn)
40
driven mostly by changes in the
20
nature of the outflows. However,
0
experience has shown us that
there is a meaningful risk that the -20
BOJ and the government will fail to -40

deliver on the necessary reforms
-60
and policy initiatives required to 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Net portfolio flows Net foreign direct investment
generate higher growth and inflation. Current account Basic balance
As such, our conviction regarding a Source: Bank of Japan, Ministry of Finance
weaker yen is lower. We forecast the

yen to reach 110 per dollar over the Going forward, we expect an easing anyones guess. Initial indications
12-month forecast period. bias from the Bank of England suggest that the two sides remain
(BOE), as well as the countrys large far apart in their visions. The impact
The pound current-account deficit, to continue on economic activity is also unclear,
It would be an understatement to to weigh on the pound. though the range of outcomes must
simply remark that things have be skewed towards weaker rather
With regards to the impact of the than stronger growth.
changed for the U.K. The vote to
Brexit vote, we still have more
leave the EU has had immediate
questions than answers. The U.K. The economy already showed
implications for the pound, as the
has yet to invoke Article 50, which signs of a slowdown even before
currency depreciated 10% in the
would mark the formal start of exit the referendum. In response to the
week following the event. This
negotiations with Brussels, and just economic shock, the BOE delivered
reaction is consistent with the
what the U.K.s new relationship a decisive round of monetary
long-term political and economic
with the continent will look like is easing at its August meeting, and
uncertainty generated by the result.

clearly indicated that more was

on the way. The combination of Exhibit 11: Current-account balances (% of GDP)
measures included a rate cut, an
25%
expansion of quantitative easing and
20%
facilities supporting loans to small
15%
and medium-sized businesses. In
10%
contrast to the recent experience
5%
of the BOJ and the ECB, the pound
0%
responded in the manner expected
-5%
for monetary easing: it depreciated.
-10%
Belgium
Japan
Russia
Ireland
Turkey
Indonesia
Italy
Norway
Brazil
Colombia
Australia
S.Africa
Portugal
Hungary
Germany
Netherlands
U.K.
Mexico
India
Poland
Spain
Malaysia
China
Sweden
U.S.
Korea
Switzerland
Taiwan
Singapore
Philippines
Concerns about inflation, which
had previously preoccupied several
members of the Monetary Policy Source: Bloomberg
Committee have been relegated to
the sidelines by the more pressing
issue of supporting economic Exhibit 12: U.K.s basic balance of payments
activity. Comments by BOE Governor
25%
Carney that inflation will be of
4-quarter rolling sum, % of GDP
20%
secondary concern in coming months 15%
will likely be negative for the pound. 10%
5%
0%
The other thing that the vote to
-5%
leave the EU has brought to the -10%
fore is the U.K.s yawning current- -15%
-20%
account deficit. At over 5% of GDP,
-25%
the deficit is worse than those of 1987 1990 1993 1996 1999 2002 2004 2007 2010 2013 2016
serial deficit-runners Turkey and Net porfolio flows Current account
Net foreign direct investment Basic balance
South Africa, and is almost as bad Source: Office for National Statistics
as Colombias (Exhibit 11). It is
important to recognize that not all
arrive (Exhibit 12) and may be more against its U.S. counterpart over the
current-account deficits are created
fickle as a result of the vote. next year. The expected benefits of a
equal. What is often more important
lower Canadian dollar have, by
than the magnitude of a deficit is Going forward, we expect the and large, not yet materialized,
how it is funded. We are generally prospect of further easing to keep leaving economic activity mixed
less concerned with countries that the pound on a depreciatory path at best. In addition, the funding
fund deficits with incoming foreign as the BOE battles lacklustre of the current-account deficit is a
direct investment, which tends to be economic growth. We forecast the risk to the loonie, and a worsening
a long-term capital flow. The U.K., in pound to decline to 1.25 over the trade balance is doing nothing to
contrast, has been relying heavily on next 12 months. ameliorate the situation.
what Carney has referred to as the
kindness of strangers. These are The loonie This lack of adjustment leads us to
inward portfolio-investment flows believe that the loonie is just not
We continue to forecast that the
that can leave as quickly as they cheap enough to spur the necessary
Canadian dollar will lose ground

changes. According to our PPP

Exhibit 13: Canadian manufacturing employment and USD-CAD
valuation model, the Canadian dollar exchange rate
is only moderately undervalued.
We would have to see values closer 2,500
1.75
to 1.50 to say definitively that 2,300 1.60
the loonies weakness was at the 2,100 1.45
extremes that would have a large 1.30
1,900
impact on non-energy exports. 1.15
1,700
1.00
While the economy managed to
1,500 0.85
outperform the expectations of
many in the aftermath of the global 1,300 0.70
76 81 86 91 96 01 06 11 16
oil-price collapse, this should not be
Manufacturing Employment, SA 000s 2yr Lag (LHS) USD-CAD (RHS)
taken as a portent that the economy Source: Statistics Canada, Bloomberg
is in robust health. In fact, growth
has been quite sluggish. Non-energy
exports, which should be receiving a Exhibit 14: Relative Canada-U.S. labour competitiveness
boost from a weaker loonie, have not
shown signs of taking up the slack 30
Wage competitiveness (%)
from the energy sector (Exhibit 13). 20

U.S. more competitive
The disappointing result only serves 10
0
to underscore the fact that the global
-10
financial crisis, followed by years of
-20
Canadian-dollar strength, did not
-30
just cause manufacturing companies
-40
to retrench, but resulted in the Canada more competitive
-50
outright destruction of capacity. 1981 1986 1991 1996 2001 2006 2011 2016
Similar results were brought about Real USD Nominal USD
Note: Competitiveness measured as gap between Canadian and U.S. inflation-adjusted unit
by a decade of poor Canadian labour labour cost. Source: Haver Analytics, RBC GAM
competitiveness, which has only
recently started to turn (Exhibit 14). will eventually need to accelerate policy and further cuts are a
This type of damage will take several as well. Aside from non-energy probability rather than a possibility.
years of a significantly weaker loonie manufacturing, concerns about
to repair. the state of the Canadian housing A decline in energy exports, coupled
market are also growing, propelled with the lack of improvement in
Absent an uptick from exports, non-energy exports on the back of a
by the recent imposition of a foreign
the Bank of Canada (BOC) has weaker loonie, means that Canadas
buyers tax in the Vancouver region.
been content to stay its hand in balance-of-payments profile is also
The direct and indirect impacts of
pursuing easier monetary policy, deteriorating. A worsening trade
any wobble in house prices would
citing the expected impact of balance has paralleled steady
extend well beyond the real estate
increased government spending. and substantial direct investment
sector. At any rate, it is more likely
This will provide a modest boost to outflows, which are only being
than not that the BOC will remain
the economy over the next couple partially offset by the appetite of
cautious in its approach to the
of years, but the private sector foreign investors for Canadian bonds
eventual tightening of monetary

(Exhibit 15). Inflows into the other

investment category, such as bank Exhibit 15: Canadas basic balance of payments
deposits, are also plugging the
10%
funding gap at the moment. Neither
4-quarter rolling sum (% of GDP)

8%
of these sources is particularly 6%
robust, and some adjustment will 4%
be necessary in the form of currency 2%
0%
weakness.
-2%
-4%
We also do not think that a
-6%
resurgence in oil prices will -8%
create a long-term life line for the 2000 2003 2006 2009 2012 2015
Current account Net portfolio flows
Canadian dollar. Nor would further Net foreign direct investments Basic balance
weakness in crude necessarily lead Source: Statistics Canada
to loonie weakness. It is our belief
that the Canadian economy is in
Summary enormous financial outflows and
the middle of an adjustment that rising hedging costs should exert
We continue to expect the U.S. dollar
extends beyond the oil sector and downward pressure on the yen and
to resume its rising trend. While
its dependents. As we have shown the euro. Meanwhile, the pound will
central-bank policy divergence may
previously, the Canadian dollar does be dogged by questions surrounding
be losing importance, factors such
not solely depend on the trajectory the countrys exit from the EU.
as relative economic-growth rates
of oil, and neither does our forecast. Canadas economic adjustment has
will likely emerge to support the
We expect the loonie to weaken to been only slight thus far, and we
argument for additional U.S. dollar
1.44 over the next year. expect further loonie weakness.
strength. In Japan and Europe,

REGIONAL OUTLOOK U.S.
Ray Mawhinney UNITED STATES RECOMMENDED SECTOR WEIGHTS

Senior V.P. & Senior Portfolio Manager
RBC Global Asset Management Inc. RBC GAM INVESTMENT BENCHMARK
STRATEGY COMMITTEE S&P 500
August 2016 August 2016
Brad Willock, CFA
V.P. & Senior Portfolio Manager Energy 6.0% 7.0%
Materials 3.0% 2.9%
Industrials 11.0% 10.0%
The U.S. stock market continued to Consumer Discretionary 12.3% 12.2%

march higher over the three-month Consumer Staples 10.5% 10.1%
period, extending the recovery Health Care 14.0% 14.6%
which began early in the year. In the Financials 16.0% 16.3%
quarter ended August, the S&P 500 Information Technology 22.5% 21.1%
rose over 4%, setting an all-time Telecommunication Services 2.0% 2.7%
high two weeks prior to the end of Utilities 2.8% 3.3%
the quarter. The only excitement Source: RBC GAM
during the period occurred following
the surprising outcome of the Brexit
S&P 500 EQUILIBRIUM
vote, after which the S&P 500 Normalized earnings and valuations
plunged 113 points in two days
but recovered all of the losses 5120 Aug. '16 Range: 1712 - 2860 (Mid: 2286)
Aug. '17 Range: 1947 - 3253 (Mid: 2600)
within eight days. The general stock 2560
rebound this year has been driven by 1280
better-than-expected U.S. economic
640
data, a continued pause in the U.S.
dollars long-term rally, stabilization 320
in emerging-market economic data 160
and a sense that the negative
80
implications of the Brexit decision
40
were more local than global. These
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
forces combined to reduce the Source: RBC GAM
likelihood of an imminent crisis that
could have negatively impacted the added on average 175,000 jobs per will likely hit an all-time record given
U.S. economic outlook. In response, month over the past six months and the recent new high in the stock
corporate-bond spreads tightened the unemployment rate remains market. Importantly, there appear
and stocks marched higher as below 5%. Wages are now rising to be few excesses in the economy,
the worst-case scenario appeared at a 2.4% pace, and those with the as credit standards have remained
increasingly less likely. courage to change jobs are being relatively tight, except in auto loans,
rewarded with average increases of and the share of borrowing done by
Although the global growth outlook
4%. In addition, household credit those with the lowest credit scores
continues to be uninspiring,
growth is running at about 5%, home has been small since the financial
business activity in the U.S. appears
prices have risen over 5% a year for crisis. Overall, the U.S. economy
to be improving. The job market
several years and household wealth appears to be grinding ahead and,
remains robust as the economy has

Regional Outlook U.S. | Ray Mawhinney | Brad Willock, CFA
given the favourable setup for legs. These stocks suffered through Another sector that presents an
housing and the prospects for future an 18-month period of U.S. dollar opportunity is Financials, where
wage growth, it does not appear strength that began in mid-2014 as recent relative returns have been
that the end of the economic cycle commodity prices turned down and 60% correlated with changes in
is imminent. In fact, according to the global growth slowed. This group interest rates, a relationship that has
Federal Reserve Bank of Atlantas trades at an average P/E of 12.5 and emerged just twice since the Great
real-time GDP forecast, the U.S. has staged a bit of a recovery since Depression. Of note, the largest
is on track to produce growth of February, when expectations of a regulated financial companies sport
about 3.5% in the current quarter, slower pace of rate hikes by the a total shareholder yield (dividends
exceeding that of most other U.S. Federal Reserve caused the U.S. plus buybacks) of between 6%
developed economies. dollar to weaken and commodity and 8% compared to the market
prices to stabilize and recover average of 4%. If interest rates move
The S&P 500 currently trades at somewhat. What is clear is that the higher, these stocks have significant
roughly 17 times 12-month forward U.S. dollar is a key determinant potential for higher valuations, but
earnings estimates, in line with of the markets future. Assuming patience will be required.
our estimate of fair value. While the greenback remains range-
many investors are arguing over bound, value stocks could stage a While we may be late in the business
whether the overall market is significant rally. cycle, we believe that the global
cheap or expensive, we believe economy and markets should
the discussion should focus on the We see a number of opportunities continue to trudge forward with the
distribution of stock valuations. The among value stocks. The most strength of the U.S. just enough to
most expensive stocks have steady obvious are in the Energy sector, offset the weakness of Japan and the
and predictable earnings, offer where a historic bust has resulted Eurozone. The worlds central banks
high dividend yields, exhibit low in industrywide writedowns of more have done most of the heavy lifting
price volatility and trade like bond than 10% greater than during the during the recovery and there is now
proxies (their prices rise when bond mid-1980s oil crash. The sector is speculation that fiscal authorities
yields fall). These stocks have been cheap and there was fortunately a may become more engaged in
in high demand because of aging supply response last year, when the the fight to promote economic
demographics, too much debt and rig count and production were cut. growth. If this trend catches on,
too little growth. In a world where Globally, the supply of and demand the business cycle should continue
over half of all government debt for oil should come into balance later and value stocks would have their
yields less than 1%, these stocks this year. While inventories are high, day. However, if the politicians
are seen as a good source of income the price of oil should gradually disappoint, investors should
despite trading at an average P/E of climb, pulling energy stocks with it. expect mid-single digit earnings
22. On the other hand, the cheapest Most energy companies have done growth to drive modest returns over
stocks are mostly drawn from what they can to adapt, but some the next year.
cyclical sectors, where the worry is help from OPEC would really boost
that the economic cycle is on its last the odds of success.

REGIONAL OUTLOOK CANADA
Stuart Kedwell, CFA CANADA RECOMMENDED SECTOR WEIGHTS

Senior V.P. & Senior Portfolio Manager
RBC Global Asset Management Inc. RBC GAM INVESTMENT BENCHMARK
STRATEGY COMMITTEE S&P/TSX COMPOSITE
Energy 19.5% 20.0%
Strength in the S&P/TSX Composite Materials 12.0% 13.1%
Index continued in the latest three- Industrials 10.0% 9.0%
month period, beating the total
Consumer Discretionary 6.5% 6.2%
return of the S&P 500 Index and
Consumer Staples 4.0% 4.4%
outperforming many of its global
Health Care 0.5% 0.9%
counterparts. The total return for
Financials 36.0% 35.5%
the S&P/TSX was 4.5%, versus a
4.1% rise in the S&P 500 and a Information Technology 4.0% 2.9%
3.1% increase in the MSCI World Telecommunication Services 5.0% 5.4%
Index. The Canadian dollar was Utilities 2.5% 2.7%
effectively flat during the quarter, Source: RBC GAM 0.0% 1.0%
finishing the period at 76.3 U.S.
cents. Notwithstanding significant S&P/TSX COMPOSITE EQUILIBRIUM
volatility before and after the Brexit Normalized earnings and valuations
vote in late June, equity markets
were buoyed by investors looking for 25600 Aug. '16 Range: 15165 - 22880 (Mid: 19023)
Aug. '17 Range: 14429 - 21770 (Mid: 18100)
alternatives to longer-term interest 12800
rates that keep plumbing new lows.
6400
With dividend yields surpassing
bond yields by meaningful amounts 3200
in many cases, investors focused
1600
on the attractiveness of equities
relative to fixed income rather than 800
on absolute valuations, which remain 400

at elevated levels. 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: RBC GAM
Gold stocks were the best-performing
area of the S&P/TSX again in the Canadian banks were the sectors forecast for both Canada and the
three-month period, finishing up strongest performers, as concerns U.S. Our forecast for 2017 growth
10% following last quarters move about credit provisions on energy now sits at 1.50% for Canada and
of more than 14%. Gold stocks loans continued to recede and 1.75% for the U.S. Given this modest
outpaced bullion, which was up 7%. capital-markets activity was strong. expectation of economic growth, we
The price of oil eased after its strong Insurance companies were negatively are not expecting any move higher
rally last quarter, as the inventory of impacted by soft financial results and in terms of interest rates from the
crude remained elevated. The price the further drop in interest rates. Bank of Canada. That said, we do
of West Texas Intermediate crude expect one interest-rate increase in
fell 9%. The Financials sector lagged Our expectations for economic the U.S. The weakening Canadian
the index due to company-specific growth around the world continue dollar is providing a tailwind to parts
and macroeconomic concerns, to be ratcheted downwards, with of the Canadian economy, but the
most notably affecting insurers. The 0.25% removed from the growth

Regional Outlook Canada | Stuart Kedwell, CFA
weakness is not likely to be enough hopes for Canadian stock-market from raising prices as readily as they
to drive a meaningful acceleration outperformance rest with further did last year. This development could
in growth. strength in energy prices. The sector lead to lower profit margins and
is aided by current pricing still below valuations, and eventually to stock
We continue to believe that there will the marginal cost of new supply, underperformance. The same could
be more Canadian-dollar weakness while the case for prices exceeding be said in the Telecommunication
over the intermediate term. Even in the marginal cost of production is not Services sector, where strong share
the near term, the desire of the U.S. as robust. gains mean that investors are
Federal Reserve to increase interest required to pay healthy valuations
rates and uncertainty regarding oil After a strong period of performance, for businesses that may experience
prices suggest that the Canadian the focus for bank investors continues pressures on free cash flow.
dollar wont strengthen much beyond to shift towards the drivers of growth.
the $1.25 level of purchasing power While energy losses could continue, Oil prices remain difficult to forecast
parity. The domestic economys they have likely crested as a point in the short run but are still below our
reliance on housing and questions of concern. Looking into 2017, estimate of the marginal cost. Large
about the ability of consumers to consensus estimates target 4%-5% companies with long-life reserves
maintain their spending remain key profit growth, which is reasonable and strong balance sheets are set to
points of discussion. Furthermore, we for the environment we envision. deliver attractive levels of free cash if
have not seen any significant upturn Slowing loan growth, net-interest- and when crude prices bounce back
in manufacturing, and the price of margin pressure and regulatory to the US$65-US$70 level.
crude must move significantly higher impacts continue to be headwinds.
In this environment, reasonable Many commodity sectors have
to justify restarting massive oil-sands
dividend yields coupled with modest stabilized or rallied so far this
developments.
dividend growth are attractive to year. One area that has remained
S&P/TSX earnings estimates for longer-term investors. The focus subdued is agriculture, with the price
2017 are now over $900, which is on the housing market is likely to of corn falling again this quarter.
a considerable uptick versus 2016. intensify in the coming months given In Canada, fertilizer companies
Key to this increase is a substantial the acceleration in house-price gains have been the most impacted with
improvement for the Energy and and government scrutiny. In the latest Potash Corp. prudently cutting its
Materials sectors, with expectations quarter, some banks struck a note of dividend for the second time given
for the remainder of the earnings caution and began to pull back from the protracted bottoming process
pool in line with historical levels. the housing market. in the potash cycle. That said, the
Importantly, in the last three months, companys current share price trades
the estimate for 2017 earnings has Valuations in some sectors that at a meaningful discount to the
flat-lined after a period of steady traditionally exhibit stable earnings replacement cost of its assets, and
decline. Looking to 2017, both the have reached levels that would be potash gross margins are at cyclically
S&P 500 and S&P/TSX carry similar near the top end of historical ranges. low levels relative to history. With
valuations. Broadly speaking, For example, profit margins and a dividend more in line with cash
Canadian financial stocks are earnings multiples in the Consumer flow, the ingredients for a longer-
attractively valued but not outliers Staples sector have risen, suggesting term investment in Potash Corp. look
when compared to U.S. sector it is time for selectivity. Grocery interesting. Mergers often happen at
valuations. The non-financial, non- companies dominate the Consumer the tops and bottoms of cycles, and
energy sectors have valuations that Staples sector in Canada, and there so it wasnt surprising that late in the
are slightly elevated relative to their are signs that competition and a period Agrium and Potash Corp. said
U.S. peers. As has been the case, stronger loonie are preventing them they had held merger discussions.

REGIONAL OUTLOOK EUROPE
James Jamieson EUROPE RECOMMENDED SECTOR WEIGHTS

Portfolio Manager
RBC Global Asset Management (UK) Limited RBC GAM INVESTMENT BENCHMARK
STRATEGY COMMITTEE MSCI EUROPE
Energy 6.0% 6.8%
Contrary to market expectations,
Materials 7.0% 7.5%
U.K. voters chose to leave the EU in
Industrials 14.0% 12.9%
late June, setting a precedent and
giving rise to grievances across the Consumer Discretionary 11.0% 10.5%
soon-to-be 27-member trading bloc. Consumer Staples 16.5% 16.1%
The anti-EU stance expressed in the Health Care 14.5% 13.5%
referendum was not unique to the Financials 18.0% 20.0%
U.K., and the outcome could have Information Technology 5.0% 4.3%
been the same in many countries Telecommunication Services 4.0% 4.5%
across Europe. Our view is that the Utilities 3.5% 4.0%
result illustrated disillusionment Source: RBC GAM
with the incumbent system rather
than any considered dissatisfaction
with EU membership. This conflation EUROZONE DATASTREAM INDEX EQUILIBRIUM
Normalized earnings and valuations
goes some way to explaining the
success of Euroskeptic populist 5760 Aug. '16 Range: 1677 - 3667 (Mid: 2672)
parties. The election of these parties Aug. '17 Range: 1758 - 3843 (Mid: 2800)
2880
would present a threat to Europes Current (31-August-16): 1410
future, as would their ability to 1440
influence mainstream political 720

parties to become more sympathetic
to their ideas. 360
180
Ordinarily, currency moves would not
serve as our first point of reference, 90
but the impact of extreme foreign- 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: Datastream, Consensus Economics, RBC GAM
exchange fluctuations on investment
flows and earnings-per-share
revisions make it an appropriate With U.K. equities instantly and first time in three years. The only
place to begin. The 12% drop in significantly cheaper for U.S. dollar significant signs of post-Brexit stress
sterling since the Brexit vote is not investors, buying support entered have occurred in the real estate
so surprising. But the relatively small the market quickly after the June market, where redemptions have
3.5% drop in the euro versus the 23 vote. The MSCI Europe has been suspended by some property
U.S. dollar is interesting because recovered almost all of the losses companies, and in Italian banking,
it is in part this stability that leads incurred after the vote in euro terms. which initially came under pressure
Europeans to be supportive of the However, allocations to Europe have ahead of the July stress tests by the
common currency. The problem is not returned to pre-Brexit levels, European Central Bank.
that you cant have the euro without and global asset allocators are
further integration of the EU. now underweight Europe for the

Regional Outlook Europe | James Jamieson
From a top-down perspective, the Brexit brings a future wracked policies decided in Brussels. In the
consequences of the U.K.s vote to with uncertainty. As one would same month, Italians will decide
leave the EU are not yet visible in the expect, the reaction to this new whether to approve the
regional statistics, with measures of environment has resulted in higher most extensive changes to the
economic activity largely unchanged equity-risk premiums in the U.K., countrys constitution in seven
since the referendum. For example, with the extent of the change decades. The significance of the
money-supply indicators remain a function of financial leverage Italian vote is more subtle, but
healthy, while the composite and return profiles. In spite of perhaps carries even higher stakes,
Purchases Managers Index indicates high contagion risk, Europes because its failure could culminate
that GDP growth continues to be risk premium excluding the U.K. in the resignation of Prime Minister
stable for now. However, it should be continues to fall on a relative basis. Renzi and would likely lead to the
noted that measures of expectations We think Europe should face a higher populist Eurosceptic 5* Movement
have begun to turn down, and we hurdle rate and have adjusted our coming to power.
therefore find ourselves waiting for analysis accordingly.
some guidance on the direction of Our investment process attempts
economic data. The important point The good news is that European to identify high-return businesses
is that it is not just the investment equities were cheap before and they that exhibit stability across the
community that is waiting for cues remain cheap, even when revised economic cycle. Such companies are
on where the European economy is to discount lower corporate profits. predominantly global leaders with
headed. So, too, are corporations, The equity-to-bond yield spread has the culture and financial resources
which want more visibility to inform widened further, which signifies the to expand through time. The
their capital-allocation decisions, relative value of European equities multinational operations of these
and governments and central banks, versus bonds. businesses provide diversification
which are searching for guidance to in a portfolio sense, but also the
Apart from the Bank of England last flexibility to manage cyclicality by
inform their policy decisions. month, there has been an absence allocating capital to the parts of the
Regional earnings revisions of policy response following Brexit. world where returns are highest.
after Brexit have been driven However, expectations of stimulus
predominantly by foreign-exchange have increased, which is serving to The consistency of this approach
shifts, and do not yet reflect the support the stock market. We can means that Brexit has not
dampening effect that Brexit have no idea what shape or form or culminated in high levels of turnover
could have on economic activity. size such initiatives would take as in the portfolios. Instead, trading
Companies relying on domestic decision makers will have to react has occurred at the edges in an
growth have been harder-hit based on economic conditions. attempt to position for medium-term
than their internationally focused developments rather than chase
Several events on the horizon short-term gains. To this end, we
counterparts, which will benefit could give a clue to the direction of
from the drop in sterling. As a result, have reduced our already small
European politics, and therefore the exposure to mid-cap stocks and
many of the market drivers have regions economies. Hungarians will
followed currency patterns, with concentrated our banking exposure
vote October 2 on whether to accept entirely back into Scandinavia.
domestically focused mid-cap stocks EU-dictated migrant quotas, and the
underperforming international vote is an important read on member
equities. Meanwhile, valuations have states willingness to fall in line with
come back into greater focus.

REGIONAL OUTLOOK ASIA
Mayur Nallamala ASIA RECOMMENDED SECTOR WEIGHTS

Head & Senior Portfolio Manager RBC GAM INVESTMENT BENCHMARK
RBC Investment Management (Asia) Limited STRATEGY COMMITTEE MSCI PACIFIC
Energy 2.0% 2.8%
Asian markets drifted lower early Materials 5.5% 6.1%
in the period but rallied strongly Industrials 13.0% 12.5%
after the U.K. voted to leave the Consumer Discretionary 14.0% 13.3%
EU (Brexit) in late June. The Asian Consumer Staples 7.0% 6.6%
region appears in many ways to be Health Care 6.0% 5.2%
the biggest beneficiary of Brexit. Financials 26.0% 27.6%
Fund flows into the region have
Information Technology 17.0% 17.0%
improved sharply, especially for
Telecommunication Services 6.5% 5.7%
emerging markets, due in part to
Utilities 3.0% 3.1%
asset allocators seeking alternatives
Source: RBC GAM
to uncertainty in Europe and U.S.
financial markets at all-time highs.
There is a virtuous cycle that occurs JAPAN DATASTREAM INDEX EQUILIBRIUM
on the back of large flow-driven Normalized earnings and valuations
moves: local currencies tend to
stabilize or rise against the U.S. 1040
dollar, which usually supports
local equity markets. As one would 520
expect, economies where demand is
driven domestically (southeast Asia 260
and India) have performed much
better than countries with a greater 130 Aug. '16 Range: 294 - 875 (Mid: 584)
reliance on exports (northern Asia). Aug. '17 Range: 304 - 906 (Mid: 605)
This has been particularly true in the 65
case of Japan, where returns in 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: Datastream, Consensus Economics, RBC GAM
local currency were minimal during
the period.
Japan desired impact appears to have led
Across the region, the Materials the central bank to pare aggressive
Prime Minister Shinzo Abes
sector continued to perform monetary policy in the near term.
economic strategy is under
strongly, and we saw a rebound in The ruling Liberal Democratic Party
increasing pressure as evidenced
the Consumer Discretionary and strengthened its hold on
by the unwanted and sustained
Information Technology sectors. parliament in July elections, and
rise in the yen, even though a weak
The Health Care and Energy sectors policy stimulus be it a renewed
currency was considered a core
have lagged after a strong start to monetary push or the potential for a
policy of Abenomics. While inflation
the year. large fiscal program remains a key
continues to be below the Bank of
ingredient in the outlook for Japans
Japans (BOJ) target, the failure of
equity market.
negative interest rates to have the

Regional Outlook Asia | Mayur Nallamala
After buying up a significant portion January, when a modest devaluation India has announced a replacement
of the Japanese government-bond almost led to a panic. In addition for the well regarded outgoing
market, the BOJ is expanding its to fund flows being supportive for Reserve Bank of India Governor
ownership of local equities via financial markets, there has been Raghuram Rajan. The new governor,
ETF purchases. The program itself reasonably supportive economic and Urjit Patel, is an able technocrat who
began in 2010, but ETF purchases policy newsflow from Asias largest will likely cause few ripples among
have continued to sharply increase economy, further allowing the ruling-party elite, but is also
over time and are now slated to for markets to grind higher over likely to maintain recent central-
rise to 6 trillion yen (US$60 billion) the period. bank mandates aimed at tackling
annually in the year ended July. It inflationary threats to the economy.
is easy to wonder about how long While reform efforts continue, Financial markets have continued
extraordinary monetary measures on-the-ground progress remains to perform reasonably well, helped
will continue and what the end slow, and the way forward is fraught by the first decent monsoon in
game is, but for now the government with danger in an environment three years. The rains have helped
is making increasingly desperate where global growth continues to rural incomes and consumption to
attempts to keep a semblance of be weak. Turning off the credit taps recover.
optimism in place regarding the by imposing more stringent loan
efficacy of Abenomics. standards could cause a significant In Australia, Prime Minister Malcolm
market disruption. However, there Turnbulls plan to buttress his
We are increasingly concerned are encouraging noises being coalition majority by dissolving
about the outlook for Japan. There made about the removal of excess both houses of parliament the
remain significant risks that the capacity in heavy industry, as well first double dissolution since
extremely positive changes that as a cleaning-up of bad loans. More 1987 - backfired as the ruling party
have happened over the past few encouragingly, new-credit formation eked out a one-seat majority in
years will not be enough to bolster has slowed in recent months, and a the House of Representatives. The
inflation or lead to more robust continuation of this trend would be a country has continued to struggle
economic growth, especially in the long-term positive in addressing the with political deadlock since the end
face of a sharply appreciating yen. massive leverage issue that exists. of John Howards tenure as prime
Among the positive changes have minister in 2007. Mining stocks
been significantly higher female Southeast Asian markets have continue to perform well, bolstering
participation in the labour force, continued to perform well given a overall market returns. The Reserve
a necessity given the countrys weaker trade-weighted U.S. dollar, Bank of Australia cut its benchmark
rapidly aging population; improved as well as increasingly supportive interest rate to a record low of 1.50%
corporate governance; and economic monetary policy from the regions in early August. The move aided
incentives offered under Abes central banks. In Indonesia, a stocks in the interest-rate-sensitive
reforms. decision by the president to include Financials sector, as most banks
opposition politicians in the cabinet have bolstered net interest margins
and the start of a tax-amnesty
Asia-Pacific excluding Japan by declining to pass on lower rates
program have revived animal to customers.
Brexit has distracted from a renminbi spirits and strengthened consumer
depreciation that has occurred confidence. Elsewhere, Thais voted
largely under the radar. The Chinese in a referendum to approve a new
currency now trades lower against constitution that will usher in a new
the U.S. dollar than it did in early election process.

REGIONAL OUTLOOK EMERGING MARKETS
EMERGING MARKET DATASTREAM INDEX EQUILIBRIUM

Christoffer Enemaerke Normalized earnings and valuations
Associate Portfolio Manager
RBC Global Asset Management (UK) Limited Aug. '16 Range: 244 - 448 (Mid: 346)
640 Aug. '17 Range: 251 - 462 (Mid: 356)
320
Emerging-market equities gained
15% between January and August, 160
extending a rebound that followed
almost five years of range-bound 80
performance.
40
About a third of the gains came

20
from an overall rise in emerging- 1995 2000 2005 2010 2015 2020
market currencies versus the U.S. Source: Datastream, RBC GAM
dollar. The greenback has weakened

since January, leading to a strong The rebound in commodity prices has actually fallen in each of the
rebound in prices for oil and other has largely reversed the negative past three years, a potential support
commodities that account for a impact that they have had on for profit margins and returns on
relatively large proportion of growth emerging-market earnings. In four investment. The recovery in ROEs
in some commodity-exporting of the past five years, corporate would reverse a long period of
emerging markets. earnings actually grew at low declines from 15% in 2011 to the
double-digit rates excluding the current 10.5%. The current level has
Brazil has been the best-performing
impact of the Energy and Materials historically marked a cyclical low.
emerging market, with a remarkable
sectors measured in local
62% U.S.-dollar return so far in Over the past 40 years, differences
currencies. The Energy and Materials
2016. Progression toward the in growth rates between emerging
sectors used to represent 50% of
impeachment of President Dilma and developed markets have been
the total net profits. However, the
Rousseff on corruption charges was a major long-term indicator of
contribution has fallen to 10%, and
among the developments taken the attractiveness of emerging-
other more domestically focused
positively by investors. On the other market equities. Between 2010
sectors such as the Financials,
hand, Chinas stock market was one and 2015, emerging-market growth
Industrials and consumer sectors
of the worst-performing, up about rates slowed relative to those
have increasingly taken over. In
6% since January, due to weaker- in developed markets, and this
our view, the declining impact of
than-expected macroeconomic data. appears to have been one of the
the resources sectors on emerging-
market earnings should help main factors for underperformance
From a sector perspective, Materials
stabilize net profit margins. of emerging-market equities in this
and Energy have been the best
period. Emerging-market equities
performing so far this year, as they
Another potential positive for have outperformed those in
benefited from the weaker U.S.
earnings are signs that corporations developed markets when the growth
dollar and the recovery in commodity
have been reducing capital differential expanded and it is
prices. The Industrials, Health Care
investments since 2014 after big therefore worth highlighting that the
and Consumer Discretionary sectors
increases between 2010-2013, World Bank forecasts that relative
were the weakest performers.
Emerging-market capital spending growth will start to favour emerging

Regional Outlook Emerging Markets | Christoffer Enemaerke
markets starting this year, driven by The fall in the U.S. dollar since the The consumer and Industrials
an improvement in growth in most beginning of the year has been sectors are attractive given their
areas other than China. a positive for emerging-market dependence on emerging-market
equities. Valuations of emerging- domestic economic growth. On the
Central-bank policies could also market currencies are cheap and other hand, we are less optimistic
have a positive impact on emerging- most countries have built up about companies in the Energy
market equities. First, inflation foreign-exchange reserves to cover and Materials sectors, which tend
has been slowing across emerging short-term financing needs. Only to have relatively poor corporate
markets, which could allow for more the Chinese renminbi still appears governance and invest in low-return
accommodative policies. Moreover, expensive. Looking ahead, any projects. We are taking a more
interest rates in many emerging further U.S. dollar strength will likely positive view of cyclical areas based
markets (unlike developed markets) be against other developed-market on relatively attractive valuations
are higher than inflation, which gives currencies rather than emerging- and expectations that countries
their central banks added flexibility market ones. will shift their emphasis to fiscal
to lower rates. Even if the U.S. measures from monetary policy to
Federal Reserve does raise interest One outlier is the Chinese renminbi. stimulate economies.
rates this year, we would expect the Notwithstanding the fact that the
increases to be gradual and not have currency has slipped to its lowest Positioning among countries is
a significant negative impact on level against the U.S. dollar since broadly neutral with the exception
emerging markets. mid-2010, the renminbi still looks of underweight positions in China,
expensive on an inflation-adjusted, South Korea and Russia, where
Valuations for emerging-market trade-weighted basis. To be sure, corporate governance tends to be
equities have increased, but remain widespread concerns surrounding relatively poor, and an overweight
relatively supportive even after the a sharp devaluation of the Chinese position in India, where we find
strong rally in the first half of the currency have subsided. The forces many high-quality companies with
year. The price-to-book ratio has driving the rapid rundown of Chinas good corporate governance.
risen to 1.50 from 1.33 at the end of foreign-exchange reserves in
January, but the current valuation is 2015 and early 2016, such as the
still well below the 10-year mean of repayment of foreign-currency debt
1.90. Valuations are also supportive by onshore corporations, seem to
compared with those for developed- have been largely exhausted. Going
market equities, with the emerging- forward, we expect the renminbi to
market P/B ratio at a more than 30% experience a gradual and managed
discount to developed markets, depreciation.
compared with the average discount
of 17% since 2000.

RBC GAM INVESTMENT STRATEGY COMMITTEE
Members
Daniel E. Chornous, CFA

RBC Global Asset Management
Chair, RBC GAM Investment Strategy Committee
Dan Chornous is Chief Investment Officer of RBC Global Asset Management Inc., which has total assets under management of $378 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 Head, Global Fixed Income & Currencies
Vice President and Portfolio Manager (Toronto and London)
RBC Global Asset Management RBC Global Asset Management
Stephen is a fixed-income portfolio manager and Head of the Quantitative As Head of Global Fixed Income & Currencies at RBC Global Asset
Research Group, the internal team that develops quantitative research Management, Dagmara oversees 15 investment professionals in Toronto and
solutions for investment decision-making throughout the firm. He is also London, with more than $40 billion in assets under management. In her
a member of the PH&N IM Asset Mix Committee. Stephen joined Phillips, duties as a portfolio manager, Dagmara looks after foreign-exchange hedging
Hager & North Investment Management in 2002. The first six years of his and active currency-management programs for fixed-income and equity funds,
career were spent at an investment-counselling firm where he quickly rose to and co-manages several of the firm's bond portfolios. Dagmara chairs the
become a partner and fixed-income portfolio manager. He then took two years RBC Fixed Income & Currencies Committee. She is also a member of the
away from the industry to begin his Ph.D. in Finance and completed it over RBC GAM Investment Policy Committee, which determines the asset mix for
another three years while serving as a fixed-income portfolio manager for a RBC balanced products, and the RBC GAM Investment Strategy Committee,
mutual-fund company. Stephen became a CFA charterholder in 1994. which establishes global strategy for the firm.
Stuart Kedwell, CFA

Senior Vice President and Eric Lascelles
Senior Portfolio Manager Chief Economist
Stu began his career with RBC Dominion Securities in the firms Generalist Eric is the Chief Economist for RBC Global Asset Management Inc. (RBC GAM)
program and completed rotations in the Fixed Income, Equity Research, and is responsible for maintaining the firms global economic forecast and
Corporate Finance and Private Client divisions. Following this program, he generating macroeconomic research.He is also a member of the
joined the RBC Investments Portfolio Advisory Group and was a member of the RBC GAM Investment Strategy Committee, the group responsible for the firms
RBC DS Strategy and Stock Selection committees. He later joined RBC Global global asset-mix recommendations.Eric is a frequent media commentator
Asset Management as a senior portfolio manager and now manages the RBC and makes regular presentations both within and outside RBC GAM.Prior
Canadian Dividend Fund, RBC North American Value Fund and a number of to joining RBC GAM in early 2011, Eric spent six years at a large Canadian
other mandates. He is co-head of RBC Global Asset Managements Canadian securities firm, the last four as the Chief Economics and Rates Strategist.His
Equity Team. previous experience includes positions as economist at a large Canadian
bank and research economist for a federal government agency.

Ray Mawhinney
Hanif Mamdani Senior Vice President and
Head of Alternative Investments Senior Portfolio Manager
Hanif Mamdani is Head of both Corporate Bond Investments and Alternative Ray leads the U.S. Equity team in Toronto and brings a wealth of expertise to
Investments. He is responsible for the portfolio strategy and trading execution his role, having specialized in U.S. equities since 1984. He joined the firm
of all investment-grade and high-yield corporate bonds. Hanif is Lead Manager in 1992 and is involved in managing several of the firm's U.S. equity funds.
of the PH&N High Yield Bond Fund and the PH&N Absolute Return Fund (a Ray is also a member of the RBC GAM Investment Policy Committee, which
multi-strategy hedge fund). He is also a member of the Asset Mix Committee. determines asset mix for balanced products, and the RBC GAM Investment
Prior to joining the firm in 1998, he spent 10 years in New York with two global Strategy Committee, which establishes a global asset mix covering mutual
investment banks working in a variety of roles in Corporate Finance, Capital funds, as well as portfolios for institutions and high-net-worth private clients.
Markets and Proprietary Trading. Hanif holds a master's degree from Harvard Ray graduated from the University of Manitoba with a bachelor's of commerce
University and a bachelor's degree from the California Institute of Technology degree in finance, with honours.
(Caltech).
Martin Paleczny, CFA Sarah Riopelle, CFA

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

Head, Quantitative Investments
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 ADVISORY COMMITTEE
>> Philippe Langham >> Stuart Morrow, CFA >> Martin Paleczny, CFA
Senior Portfolio Manager, Portfolio Manager, U.S. Equities & V.P. & Senior Portfolio Manager,
Emerging Markets Vice President Global Equity Research Asset Allocation & Derivatives
RBC Global Asset Management (UK) RBC Global Asset Management Inc. RBC Global Asset Management Inc.
Limited
>> Mayur Nallamala >> Dominic Wallington
>> Ray Mawhinney Head & Senior V.P., Asian Equities Chief Investment Officer,
Senior V.P. & Senior Portfolio Manager, RBC Investment Management (Asia) RBC Global Asset Management (UK)
U.S. & Global Equities Limited Limited
GLOBAL FIXED INCOME & CURRENCIES ADVISORY COMMITTEE
>> Dagmara Fijalkowski, MBA, CFA >> Suzanne Gaynor >> Eric Lascelles
Head, Global Fixed Income & Currencies V.P. & Senior Portfolio Manager, Global Chief Economist
(Toronto and London) Fixed Income & Currencies RBC Global Asset Management Inc.
>> Soo Boo Cheah, MBA, CFA

Senior Portfolio Manager,
Global Fixed Income & Currencies
RBC Global Asset Management (UK)
Limited

DISCLOSURE
This report has been provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be
reproduced, distributed or published without the written consent of RBC Global Asset Management Inc. (RBC GAM Inc.). In
Canada, this report is provided by RBC GAM Inc. (including Philips, Hager & North Investment Management). In the United
States, this report is provided by RBC Global Asset Management (U.S.) Inc., a federally registered investment adviser. In Europe
and the Middle East, this report is provided by RBC Global Asset Management (UK) Limited, which is authorised and regulated
by the UK Financial Conduct Authority. In Asia, this document is provided by RBC Investment Management (Asia) Limited, which
is registered with the Securities and Futures Commission (SFC) in Hong Kong.
RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC GAM Inc., RBC Global Asset
Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, RBC Alternative Asset Management Inc., the asset
management division of RBC Investment Management (Asia) Limited, and BlueBay Asset Management LLP, which are separate,
but affiliated subsidiaries of RBC.
This report has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where
appropriate, be distributed by the above-listed entities in their respective jurisdictions. Additional information about RBC GAM
may be found at www.rbcgam.com.
This report is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should
not be relied upon for providing such advice. The investment process as described in this report may change over time. The
characteristics set forth in this report are intended as a general illustration of some of the criteria considered in selecting
securities for client portfolios. Not all investments in a client portfolio will meet such criteria. 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
implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its
affiliates assume no responsibility for any errors or omissions.
All opinions and estimates contained in this report constitute RBC GAMs 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
by law, neither RBC GAM nor any of its affiliates nor any other person accepts any liability whatsoever for any direct or
consequential loss arising from any use of the outlook information contained herein. Interest rates and market conditions are
subject to change.
Return estimates are for illustrative purposes only and are not a prediction of returns. Actual returns may be higher or lower than
those shown and may vary substantially over shorter time periods. It is not possible to invest directly in an unmanaged index.
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 (09/2016)
/TM Trademark(s) of Royal Bank of Canada. Used under licence.
RBC Global Asset Management Inc. 2016.

RBC Global-Investment-outlook SEP 2016

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THE GLOBAL

EXECUTIVE SUMMARY 2 CURRENCY MARKETS 47

GLOBAL FIXED INCOME MARKETS 42

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 1

Downside risks have Speed limit for economic

2 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 3

ECONOMIC FORECAST (RBC GAM INVESTMENT STRATEGY COMMITTEE)

UNITED UNITED EMERGING

TARGETS (RBC GAM INVESTMENT STRATEGY COMMITTEE)

4 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 5

GLOBAL ASSET MIX

BENCHMARK PAST FALL NEW YEAR SPRING SUMMER FALL

CASH 2.0% 1.0% 16% 2.0% 1.0% 3.0% 3.0% 3.0%

BONDS 43.0% 25.0% 54.0% 36.0% 37.0% 37.0% 37.0% 37.0%

STOCKS 55.0% 36.0% 65.0% 62.0% 62.0% 60.0% 60.0% 60.0%

CWGBI* PAST FALL NEW YEAR SPRING SUMMER FALL

MSCI** PAST FALL NEW YEAR SPRING SUMMER FALL

GLOBAL EQUITY SECTOR ALLOCATION

Energy 6.52% 5.79% 4.77% (1.02) 73.2%

6 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

At RBC GAM, we have a team dedicated to setting and

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 7

8 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 9

The Citigroup Japanese Government The S&P 400 Index, a measure of

10 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 11

GLOBAL EQUITY SECTORS

12 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

Eric Lascelles Exhibit 1: An uptick in global manufacturing

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 13

markets are unusually complacent

CBOE Market Volatility Index

Merrill Lynch Option Volatility

Currency Volatility Index

Citi U.S. Economic Surprise Index

earlier enthusiasm. To be clear,

remain more likely than not,

14 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

U.K. consumer confidence

U.K. Composite PMI

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 15

place. It is conceivable that during

economic damage from Brexit 4

point to the loss of 2% to 3% of -2

decade relative to if the U.K. had -6 Central

beyond British shores has been

Upcoming geopolitical risks 350

16 I THE GLOBAL INVESTMENT OUTLOOK Fall 2016

later. Spain continues to struggle

inequality, feeble economic growth, E Netherlands 86

We do not look for a Eurozone

THE GLOBAL INVESTMENT OUTLOOK Fall 2016 I 17

economic growth remains low for

In short, it is unlikely that global Source: RBC GAM

growth is about to break completely

moderately downward this quarter, 104

But it is more fundamentally based 100

16), and also because the winning

In contrast to the developed-world 2.0

1.5% 1.5% 1.5% 1.5%

Business-cycle risks 0.0