economic update 2018 - nelligan law · 2019. 4. 17. · dawn morewood, cfp,cim,mba vice president...

RBC Dominion Securities Inc.

ECONOMIC UPDATE 2018

Changes to Rate of Return Expectations

Clementine Van Veen, CIM Vice President & Portfolio Manager

Patricia Cullen, CFP, CIM, FCSI Associate Portfolio Manager

Dawn Morewood, CFP, CIM, MBA Portfolio Manager, Financial Planner

November 21,2018 MPCD WEALTH MANAGEMENT 2

GDP GROWTH OF MAJOR REGIONS

POLICY RATES

Source: RBC GAM

Rate definitions: U.S.= Fed Funds rate; Canada= Overnight rate; Europe = Eurozone policy rate; United Kingdom= Base rate; Japan= Overnight call rate.

Current

October 2018

Forecast

August 2019

U.S 2.00% 2.63%

Canada 1.75% 2.00%

Europe -0.40% -0.20%

United Kingdom 0.75% 1.00%

Japan -0.07% -0.10%

• Financial conditions around the world are becoming increasingly tight, nudging inflation

higher and encouraging less accommodative central-bank policy. In the United States,

inflation is now at or above the Fed’s 2.0% target rate across a variety of measures,

prompting a cycle of gradual rate hikes. We expect two more Fed hikes over the next year.

• The Bank of Canada and the Bank of England have also been tightening, but with less

intensity than the Fed. In Europe and Japan, central banks continue to stimulate their

economies with substantial bond-buying programs, leading to negative interest rates.

However, the ECB plans to halt bond purchases at the end of 2018 and may seek to lift

interest rates above record-low levels in the second half of 2019.



INFLATION RATES

*EM Includes China

FIXED INCOME

Long-term interest rate forecastsCurrent

October 2018

Forecast

August 2019

U.S. 10-Year Bond 3.14% 3.00%

Canada 10-Year Bond 2.49% 2.50%

Germany 10-Year Bond 0.39% 0.75%

United Kingdom Gilt 1.44% 1.75%

Japan 10-Year Bond 0.13% 0.15%

Source: RBC GAM

• After remaining stuck in a narrow range over the summer, yields on developed-world

government bonds have surged. The U.S. 10-year bond yield, which had fluctuated

between 2.80% and 3.00% since February, finally broke through the upper end of its

trading range and now sits above our modelled estimate of equilibrium.

• Our models continue to suggest that the long-term direction for bond yields is higher,

paced by a gradual upward reversion in real interest rates. Valuation risk is greatest in

European and Japanese bonds, where yields remain far below our modelled estimates

of equilibrium.


•

The global economy is experiencing a mild slowdown as a result of tightening monetary

conditions as well as challenges in emerging markets and Europe.

• Although economists have been adjusting their estimates lower since the start of 2018,

expectations nonetheless remain quite good by post-crisis standards.

• Leading indicators appear to confirm this view. Although moderating somewhat outside

of the United States, they still remain relatively strong, which is consistent with decent

economic growth. The U.S. economy in particular has been accelerating and is now

growing at its fastest pace in many years, helped in large part by the Trump

Administration’s fiscal stimulus package.

THE ECONOMY

As of October 31, 201830

35

40

45

50

55

60

65

2008 2010 2012 2014 2016 2018 2020

Global purchasing managers' indices

JPMorgan Global Mfg. PMI

U.S. ISM Mfg. PMI

China Mfg. PMI

Euro Area Mfg. PMI

Source: Haver Analytics, RBC GAM

Previous ISM Peak Feb 2011: 59.2

ISM Peak Aug 2018: 61.3


EQUITY MARKETS

Equity market forecastsCurrent

October 2018

Forecast

August 2019

% Growth Return

Not incl dividends

S&P 500 Index 2712 3000 10.6%

S&P/TSX Composite Index 15027 17000 13.2%

MSCI Europe Index 122 137 12.3%

FTSE 100 Index 7128 8000 12.2%

Nikkei Index 21920 24400 11.3%

MSCI Emerging Markets Index 956 1125 17.7%Source: RBC GAM

• After peaking in January, 2018, many major equity markets have struggled to regain their footing.

Emerging market (EM) equities in particular have fallen nearly 20% from their highs, as

protectionism, a stronger U.S. dollar, and troubles in specific EM countries have diminished investor

demand for EM stocks. The U.S. equity market has proven quite resilient. The S&P 500 Index

climbed to new highs in the summer, but the recent jump in yields and a sharp reversal in risk

preference have triggered a broad-based pullback.

• Nonetheless, underlying company fundamentals remain strong and have been bolstered by recent

tax cuts. In the second quarter, earnings grew at a year-over-year rate of 25%, while revenues

climbed 10% and figures for the third quarter are tracking of 25% and 8%, respectively. Continued

earnings growth will be critical to sustaining further advances in equities, as rising interest rates and

inflation are likely to weigh on price-to-earnings ratios, which are already elevated.


INDEX RETURNS – CANADIAN $


November 21,2018November 23, 2018 MPCD WEALTH MANAGEMENTLegal entity / line of business | Presentation Title 9

ECONOMIC UPDATE SUMMARY

In our view, the global macroeconomic backdrop still favours

risk assets such as equities, since expanding economies will

likely continue to drive revenues and corporate profits higher,

although at a slower pace.


RBC Capital Markets

RBC Capital markets is a global investment bank providing

services in banking, finance and capital markets to corporations,

institutional investors, asset managers and governments globally.

Locations span 70 offices in 15 countries across North America,

the UK, Europe and the Asia-Pacific region.

RBC Capital Markets sets RBC Strategic Asset Allocation

profiles.


RBC Strategic Asset Allocation – Very Conservative model


Historical Performance %

(Jan 1990 to Dec 2017)

Long-term Return Forecast

% (5 to 10 year horizon,

before fees)

Return (annualized) 7.19 Return (annualized) 3.3

Risk (standard deviation) 4.19 Risk (standard deviation) 4.5

RBC Strategic Asset Allocation –Balanced Model


Historical Performance %

(Jan 1990 to Dec 2017)

Long-term Return Forecast

% (5 to 10 year horizon,

before fees)

Return (annualized) 8.15 Return (annualized) 5.2

Risk (standard deviation) 7.34 Risk (standard deviation) 8.0

MPCD WEALTH MANAGEMENT

November 21,2018 15

Clementine Van Veen, CIM

Vice President & Portfolio Manager

613-566-7674

Dawn Morewood, CFP,CIM,MBA

Vice President & Portfolio Manager

613-566-3631

Patricia Cullen, CFP, CIM, FCSI

Associate Portfolio Manager

613-721-8771

MPCD WEALTH MANAGEMENT

Disclaimer

**Rates [and/or yields] as of October 31, 2015. Rates [and/or yields] are subject to change and availability. This

commentary is based on information that is believed to be accurate at the time of writing, and is subject to change. All

opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of

this report, are subject to change without notice and are provided in good faith but without legal responsibility.

Interest rates, market conditions and other investment factors are subject to change. Past performance may not be

repeated. The information provided is intended only to illustrate certain historical returns and is not intended to

reflect future values or returns. RBC Dominion Securities Inc. and its affiliates may have an investment banking or

other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned

herein either for their own account or the accounts of their customers. RBC Dominion Securities Inc. and its affiliates

also may issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC

Dominion Securities Inc. or its affiliates may at any time have a long or short position in any such security or option

thereon. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are

affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of

RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of

Canada. Used under licence. © 2015 Royal Bank of Canada. All rights reserved.


economic update 2018 - nelligan law · 2019. 4. 17. · dawn morewood, cfp,cim,mba vice president...

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