25124396 Global Investment Outlook the Year Ahead RBC Global Asset Management

8/8/2019 25124396 Global Investment Outlook the Year Ahead RBC Global Asset Management

1/75

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 1

THE GLOBAL INVESTMENT OUTLOOK RBC Investment Strategy Committee

NEW YEAR 2010


2/75

T HE RBC I NVESTMENT S TRATEGY C OMMITTEE

The RBC Investment Strategy Committee consists of senior investment professionals drawnfrom individual client focused business units within RBC Financial Group. The Committee

regularly receives economic and capital markets related input from internal and externalsources. Important guidance is provided by the Committees regional advisors (North America, Europe, Far East), from the Global Fixed Income & Currencies Subcommittee andfrom the global equity sector heads (nancials and healthcare, consumer discretionary and consumer staples, industrials and utilities, energy and materials, telecommunicationsand technology). From this it builds a detailed global investment forecast looking one yearforward.

The Committees view includes an assessment of global scal and monetary conditions,projected economic growth and ination, as well as the expected course of interest rates,major currencies, corporate prots and stock prices.

From this global forecast, the RBC Investment Strategy Committee develops specicguidelines that can be used to manage portfolios.

These include:

the recommended mix of cash, xed income instruments, and equities

the recommended global exposure of xed income and equity portfolios

the optimal term structure for xed income investments

the suggested sector and geographic make-up within equity portfolios

the preferred exposure to major currencies

Results of the Committees deliberations are published quarterly in The Global Investment Outlook.

an

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE


3/75

EXECUTIVE SUMMARY 2 The Global Investment Outlook Daniel E. Chornous, CFA Chief Investment Ofcer, RBC Global Asset Management

Allan Seychuk, CFA Economist & Institutional Portfolio Manager,Phillips, Hager & North Investment Management Ltd.

Sarah Riopelle, CFA Portfolio Manager,RBC Asset Management Inc.

ECONOMIC & CAPITAL MARKETS FORECASTS 4 RBC Investment Strategy Committee

RECOMMENDED ASSET MIX 5 RBC Investment Strategy Committee

CAPITAL MARKETS PERFORMANCE 8 Milos Vukovic, MBA, CFA V.P. Investment Policy, RBC Asset Management Inc.

GLOBAL ECONOMIC OUTLOOK 10 Patricia Croft Chief Economist, RBC Global Asset Management

GLOBAL INVESTMENT OUTLOOK 16Global Economy on the Path to Normalcy Daniel E. Chornous, CFA Chief Investment Ofcer, RBC Global Asset Management

Allan Seychuk, CFA Economist & Institutional Portfolio Manager,Phillips, Hager & North Investment Management Ltd.

GLOBAL FIXED INCOME MARKETS 43 Robin Gullason, CFA V.P., Fixed Income Portfolio Advisory Group, RBC Dominion Securities Inc.

CURRENCY MARKETS 50Dagmara Fijalkowski, MBA, CFA Head, Global Fixed Income and Currencies (Toronto and London),RBC Asset Management Inc.

REGIONAL EQUITY MARKET OUTLOOK

United States 60 Raymond Mawhinney Senior V.P., U.S. & Global Equities, RBC Asset Management Inc.

B rad Willock, CFA V.P. & Senior Portfolio Manager, RBC Asset Management Inc.

Canada

62 Stuart Kedwell, CFA Senior V.P. & Senior Portfolio Manager, RBC Asset Management Inc.

Europe 64 Dominic Wallington Chief Investment Ofcer, RBC Asset Management UK Limited

Asia 66 Yoji Takeda Director & V.P., Asian Equities, RBC Investment Management (Asia) Limited

RBC INVESTMENT STRATEGY COMMITTEE 68

DISCLAIMER 71

C ONTENTS

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE


4/75

2 THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

E XECUTIVE S UMMARY

DANIEL E. CHORNOUS, CFAChief Investment Ofcer RBC Global Asset Management

ALLAN SEYCHUK, CFAEconomist & Institutional Portfolio Manager

Phillips, Hager & North Investment Management Ltd.

SARAH RIOPELLE, CFA Portfolio Manager RBC Asset Management Inc.

OUTLOOK HINGES ONSELF-SUSTAINING RECOVERY

The deepest U.S. recession since theGreat Depression came to an endsometime this past spring or early summer. New sources of economicgrowth are surfacing. Home pricesare no longer falling, and bothbuyers and builders are re-emerging. While we are uncomfortable with the sheer volume of homesmoving through the foreclosurepipeline, the fact remains that theroot of the credit crisis the bustin housing is nally stabilizing.Inventory re-stocking is anotherpotential source of growth in thecoming quarters. As companiessee the economy stabilize andsales pick up, they will haveless and less motivation to pareinventories. In fact, before long,inventory levels will have to be

rebuilt in order to meet demand.

The main economic issue is how close the U.S. is to a self-sustaining recovery. In our view, even in theabsence of government support,the likel ihood of the economy fall ing back into recession is low given the building and broadening momentum in the sources of

growth. Despite this relatively optimistic longer-term outlook, wed be the rst to agree that somekey conditions for a self-sustaining recovery remain somewhatelusive. In particula r, the U.S. jobmarket remains weak and creditavailability continues to be severely constrained for all but the largestand most creditworthy borrowers. Additionally, there are broaderconcerns about the ability of authorities to reduce their supportfor the economy without tipping it back into recession, and how they go about timing their efforts.Finally, the bal looning debt burdencasts a long, dark shadow over thefuture potential of the U.S. economy and for many major industrializednations in Europe and Asia.

MODEST GROWTH,

CONTAINED INFLATION

We have raised our U.S. growthforecast to -2.60% for 2009 and1.80% for 2010. Our expectationfor growth in Canada is loweredto -2.50% in 2009, whi le the 2010forecast remains unchanged at2.00%. We expect U.K. GDP todecline by 4.20% in 2009, with a

recovery to growth of 1.10% next year. Finally, we have boosted our2009 GDP forecast for Japan to-5.50%, increasing to +1.00% in 2010.

Ination remains low andcontained. However, there areseveral signs that suggest todaysbenign ination environmentmay not last beyond 2010. As last years sharp drop in energy pricesfalls out of the yearly inationgures, headline CPI is expected torebound into positive territory. Inaddition, the rebound in commodity prices and the added impact froma falling dollar raising the costof imports are both expected topush ination upward. We willbe monitoring these metricsclosely for signs that the trillionsin global monetary and scalstimulus are pushing expectationsfor future price growth higher.

SHORT-TERM WEAKNESS,BUT DOLLAR SHOULD FINDSUPPORT IN MEDIUM TERM

The U.S. dollar has continuedto grind lower as dollar-bearishstories dominate the media. Thelist of negative arguments is long

T HE ECONOMIC RECOVERY IS WELL UNDERWAY AND THE NECESSARY PRECONDITIONS FOR A SUSTAINED REBOUNDCONTINUE TO FALL INTO PLACE. EPIC DOSES OF MONETARY AND FISCAL STIMULUS HAVE YET TO HAVE THEIR FULL

IMPACT ON THE ECONOMY AND WILL REMAIN IN PLACE, SUPPORTING MARKETS, FOR SEVERAL MORE QUARTERS.

DESPITE THE IMPRESSIVE REBOUND IN EQUITY AND CREDIT MARKETS SINCE MARCH, MEMORIES OF THE CRISIS

REMAIN FRESH AND MANY INVESTORS ARE MAINTAINING A VERY CAUTIOUS STANCE. DESPITE THE RECOVERY

IN PRICES SINCE MARCH, EQUITY MARKET VALUATIONS REMAIN UNUSUALLY ATTRACTIVE. THE WINDOW OF

OPPORTUNITY REMAINS OPEN, AS THE GLOBAL ECONOMY REMAINS ON THE PATH TO NORMALCY, AND WE HAVE

NOTCHED OUR EXPOSURE TO STOCKS SLIGHTLY HIGHER TO TAKE EVEN GREATER ADVANTAGE OF IT .


5/75


EXECUTIVE SUMMARY DANIEL E. CHORNOUS, CFA ALLAN SEYCHUK, CFA SARAH RIOPELLE, CFA

and well disseminated, with themarket positioned for further dollar weakness. While sheer momentummay push the greenback lower inthe short term, it should nd somesupport in the medium term. Many developed-market cur rencies aregetting extremely overvalued. At thesame time, many emerging-marketgovernments continue to preventtheir domestic currencies fromappreciating, and in the process

are accumulating large foreign-exchange reserves. This cannotcontinue indenitely, and emerging-market currencies will eventually have to appreciate. In the meantime,the negative correlation betweenthe dollar and the stock market in2009 should be put to the test oncethe Fed begins a new tightening cycle. In anticipation of that change,currencies will be very sensitiveto shifting rate expectations in2010. Fed hikes should supportthe dollar in the medium term.

EXPECT SHORT RATES TOREMAIN AT RECORD LOWSFOR NOW

Given the fragility of the recovery,central banks are widely expectedto hold short-term interest ratesat rock-bottom levels for at leastthe next six months in North

America, Europe and Japan.Monetary authorities will want tobe condent that the recovery isself-sustaining before beginning the long trek back to a neutralpolicy setting. In our view, they arelikely to delay as long as possibleprovided ination expectationsremain stable. Eventually, withthe return of sustained growth

and condence in the recovery,pressure will build for central banksto send a message about vigilanceregarding future ination. We look for the rst, minor rate hikes tobegin in mid-2010, but the bulk of the move in global short rates abovecurrent levels remains a 2011 story.

EXPECT LONG-BOND YIELDS TO DRIFT HIGHER

As the threat to the nancial systemdissipates and economic growthis gradually restored, we expectbond yields to move higher. A risein ination expectations and thedemand for real returns presenta risk to xed-income markets andset the stage for very limited total-return prospects for governmentbonds in the quarters ahead. Welook for U.S. 10-year yields to reach4.25%, while yields in the U.K.are forecast to be 4.75%. Yields inCanada are expected to be 4.00%,and our forecast for the Eurozoneis unchanged at 3.75%. We expectJapanese yields to rise to 1.75%.

EQUITY VALUATIONSREMAIN ATTRACTIVE

Equity markets have spent the pasteight months in one of the strongest

and most impressive ralliessince the 1930s. Unfortunately,many investors have stayed onthe sidelines, waiting for anappropriately sized correction as anentry point, only to watch marketsclimb inexorably higher. While we dont deny that there is a risk of correction, we are increasing our overweight in equities for two

key reasons. First, while earningshave already rebounded sharply on aggressive cost-cutting, they do not yet reect the increase insales volumes that we think willoccur with the improving economy.Second, U.S. stocks remain very attractively valued and are closeto their greatest discount to fairvalue in a half-century. Globalequity markets appear to beeven more deeply undervalued.

Though the current economicenvironment is characterizedby a higher-than-usual level of uncertainty, we are condentmarkets will eventually valuecompanies based on their earningspower through the cycle insteadof during an economic trough.

INCREASE OVERWEIGHT INEQUITIES, LOWER CASH

We have increased our overweightin equities by 2.5 percentagepoints to 62.5%, sourcing thefunds from cash and leaving xed-income exposure unchanged. Thisreects our view that market andeconomic signals are still pointing to greater rewards from equities,given attractive valuations, relativeto other asset classes. We remainunderweight bonds versus thebenchmark, as we believe that the

most likely longer-term direct ionfor yields is higher, while near-term total return prospects seemlimited. For a balanced globalinvestor, we recommend an assetmix of 62.5% equities (allowedrange 40% to 70%), 35% bonds(allowed range 30% to 60%), withthe balance of 2.5% in cash.


6/75


Source: RBC AM

E CONOMIC & C APITAL M ARKETS F ORECASTS

ECONOMIC FORECAST (RBC INVESTMENT STRATEGY COMMITTEE)

UNITED STATES CANADA EUROPE UNITED KINGDOM JAPAN CHINA

NEW YEAR2010

CHANGEFROM

FALL 2009NEW YEAR

2010

CHANGEFROM

FALL 2009NEW YEAR

2010

CHANGEFROM

FALL 2009NEW YEAR

2010

CHANGEFROM

FALL 2009NEW YEAR

2010

CHANGEFROM

FALL 2009NEW YEAR

2010

CHANGEFROM

FALL 2009

REAL GDP

2008A 1.10% 0.50% 0.80% 0.70% -0.70% 9.00%

2009E -2.60% 0.10 -2.50% (0.50) -3.80% 0.20 -4.20% (0.30) -5.50% 0.50 9.00% 0.50

2010E 1.80% 0.50 2.00% N/C 0.80% 0.30 1.10% (0.20) 1.00% 0.50 10.00% 0.40

CPI

2008A 3.80% 2.40% 3.30% 3.60% 1.30% 5.90%

2009E -0.40% N/C 0.40% (0.30) 0.50% N/C 2.00% 0.60 -1.20% N/C -0.70% N/C

2010E 1.90% 0.10 1.70% N/C 1.00% N/C 2.00% N/C -0.25% N/C 2.50% N/C

A = ACTUAL E = ESTIMATE

* GDP weighted average of Germany, France and Italy.

TARGETS (RBC INVESTMENT STRATEGY COMMITTEE)

NOV. 2009FORECAST NOV. 2010

CHANGE FROMFALL 2009

1-YEAR TOTAL RETURNESTIMATE (%)

CURRENCY MARKETS AGAINST USD

USDCDA 1.06 1.12 (0.03) (5.5)

EUROUSD 1.50 1.35 0.07 (9.9)

USDJPY 86.29 105.00 (3.00) (18.1)GBPUSD 1.64 1.58 0.03 (3.8)

FIXED INCOME MARKETS

U.S. Fed Funds Rate 0.25 0.75 N/C 0.5

U.S. 10 Year Bond 3.20 4.25 N/C (3.2)

Canada Overnight Rate 0.24 1.00 N/C 0.6

Canada 10 Year Bond 3.22 4.00 0.25 (0.8)

Eurozone Repo Rate* 0.47 1.25 0.25 0.9

Eurozone 10 Year Bond* 3.48 3.75 N/C 2.5

U.K. Base Rate 0.50 1.25 0.25 0.9

U.K. 10 Year Gilt 3.52 4.75 0.50 (2.9)

Japan Overnight Call Rate 0.13 0.10 N/C 0.1 Japan 10 Year Bond 1.27 1.75 N/C (1.9)

EQUITY MARKETS

S&P 500 1096 1200 50 11.8

S&P/TSX Composite 11447 12500 750 12.0

MSCI Europe 1422 1575 100 14.6

FTSE 100 5191 5550 150 10.7

Nikkei 9274 10750 (750) 17.6


7/75


GLOBAL ASSET MIX BENCHMARK

POLICY PAST

RANGENEW YEAR

2009SPRING

2009SUMMER

2009FALL2009

NEW YEAR2010

CASH 5.0% 1.5% 16% 7.5% 5.0% 5.0% 5.0% 2.5%

BONDS 40.0% 25% 54% 32.5% 35.0% 35.0% 35.0% 35.0%

STOCKS 55.0% 36% 65% 60.0% 60.0% 60.0% 60.0% 62.5%

REGIONAL ALLOCATION

GLOBAL BONDS CWGBI*NOV. 2009PAST

RANGENEW YEAR

2009SPRING

2009SUMMER

2009FALL2009

NEW YEAR2010

North America 25.4% 9% 46% 18.7% 24.3% 25.4% 19.9% 22.9%

Europe 45.0% 40% 90% 48.6% 42.1% 49.5% 50.6% 50.0%

Asia 29.6% 0% 29% 32.6% 33.6% 25.1% 29.6% 27.1%Note: Based on anticipated 12-month returns in $US hedged basis

GLOBAL EQUITIES MSCI**NOV. 2009PAST

RANGENEW YEAR

2009SPRING

2009SUMMER

2009FALL2009

NEW YEAR2010

North America 52.6% 15% 60% 55.0% 56.0% 56.0% 53.0% 53.5%

Europe 32.1% 30% 70% 31.0% 30.0% 31.0% 33.0% 33.0%

Asia 15.4% 10% 39% 14.0% 14.0% 13.0% 14.0% 13.5%

GLOBAL EQUITY SECTOR ALLOCATION

MSCI**NOV. 2009

RBC ISCFALL 2009

RBC ISCNEW YEAR 2010

CHANGE FROMFALL 2009

WEIGHT vs.BENCHMARK

Energy 11.38% 11.00% 13.00% 2.00 114.24%

Materials 7.15% 8.00% 8.50% 0.50 118.88%

Industrials 10.44% 10.50% 10.75% 0.25 102.97%Utilities 4.56% 3.25% 3.00% (0.25) 65.79%

Consumer Discretionary 9.28% 10.25% 9.50% (0.75) 102.37%

Consumer Staples 10.33% 10.00% 10.25% 0.25 99.23%

Health Care 9.88% 9.75% 8.25% (1.50) 83.50%

Financials 20.95% 21.00% 20.75% (0.25) 99.05%

Information Technology 11.60% 13.00% 13.00% N/C 112.07%

Telecom. Services 4.43% 3.25% 3.00% (0.25) 67.72%

Asset mix the allocation withinportfolios to stocks, bonds and cash should include both strategic andtactical elements. Strategic asset mix addresses the blend of the majorasset classes offering the risk/returntradeoff best suited to an investorsprole. It can be considered to bethe benchmark investment plan thatanchors a portfolio through many business and investment cyclesindependent of a near-term view of the prospects for the economy and related expectations for capitalmarkets. Tactical asset allocationrefers to ne tuning around thestrategic setting in an effort to addvalue by taking advantage of shorterterm uctuations in markets.

Every individual has differing returnexpectations and tolerances forvolatility, so there is no one size tsall strategic asset mix. Based on a35-year study of historic returns and

the volatility of returns (the rangearound the average return within which shorter-term results tend tofall), we have developed ve broadproles and assigned a benchmark strategic asset mix for each. Theseproles range from income throughbalanced to aggressive growth. Itgoes without saying that as investorsaccept increasing levels of volatility,and therefore greater risk that theactual experience will depart fromthe longer-term norm, the potentialfor returns rises. The ve prolespresented below may assist investorsin selecting a strategic asset mix bestaligned to their investment goals.

Each quarter, the RBC InvestmentStrategy Committee publishes arecommended asset mix based onour current view of the economy andreturn expectations for the majorasset classes. These weights are * Citigroup World Global Bond Index **MSCI World Index Source: RBC Investment Strateg y Committee

R ECOMMENDED A SSET M IX

further divided into recommendedexposures to the variety of globalxed income and equity markets.Our recommendation is targetedat the Balanced prole where thebenchmark setting is 55% equities,40% xed income, 5% cash.

A tactical range of +/- 15% aroundthe benchmark position allowsus to raise or lower exposure to

specic asset classes with a goalof tilting portfolios toward thosemarkets that offer comparatively attractive near-term prospects.

This tactical recommendation for theBalanced prole can serve as a guidefor movement within the rangesallowed for all other proles. If, forexample, the recommended current

Continued on next page...


8/75


RECOMMENDED ASSET MIX

ASSET CLASSBENCH-MARK

RANGELAST

QUARTERCURRENT

RECOMMENDATION

CASH & CASH EQUIVALENTS 5% 0-15% 5.4% 2.8%

FIXED INCOME 75% 55-95% 71.0% 72.2%

TOTAL CASH & FIXED INCOME 80% 65-95% 76.4% 75.0%

CANADIAN EQUITIES 10% 5-20% 11.8% 12.6%

U.S. EQUITIES 5% 0-10% 5.9% 6.3%

INTERNATIONAL EQUITIES 5% 0-10% 5.9% 6.1%TOTAL EQUITIES 20% 5-35% 23.6% 25.0%


RANGELAST

QUARTERCURRENT

RECOMMENDATION

CASH & CASH EQUIVALENTS 5% 0-15% 5.2 % 2.6%

FIXED INCOME 60% 40-80% 54.9% 55.4%

TOTAL CASH & FIXED INCOME 65% 50-80% 60 .1% 58.0%

CANADIAN EQUITIES 15% 5-25% 17.1% 18.2%

U.S. EQUITIES 10% 0-15% 11.4% 12.1%

INTERNATIONAL EQUITIES 10% 0-15% 11.4% 11.7%

TOTAL EQUITIES 35% 20-50% 39.9% 42.0%

equity exposure for the Balancedprole is set at 62.5% (i.e.: 7.5% above itsbenchmark of 55% and part way towardits upper limit of 70% for equities), that would imply a tactical shift of + 5.02%to 25.02% for the Income prole (i.e.:a proportionate adjustment abovethe benchmark equity setting of 20% within the allowed range of +/- 15%).

The value-added of tactical strategiesare, of course, dependent on the degreeto which the expected scenario unfolds.

Regular review of portfolio weightsis an essential part of the ultimatesuccess of an investment plan as itensures that current exposures arealigned with the level of long-term

VERY CONSERVATIVE

CONSERVATIVEConservative investors will pursue modest incomeand modest capital growth with reasonable capitalpreservation, and be comfortable with moderate

uctuations in the value of their investments. Theportfolio will invest primarily in xed-incomesecurities with some equities to achieve moreconsistent performance and provide a reasonableamount of safety. The prole is suitable for investorswho plan to hold their investment over the mediumto long term (minimum ve to seven years).

Very Conservative investors will seek income withmaximum capital preservation and the potential formodest capital growth, and be comfortable with smalluctuations in the value of their investments. Thisportfolio will invest primarily in xed-income securitiesand a small amount of equities to generate income whileproviding some protection against ination. Investorswho t this prole generally plan to hold their investmentfor the short to medium term (minimum one to ve years).

RETURN VOLATILITY

35-YEAR AVERAGE 10.2% 7.8%

LAST 12 MONTHS AVERAGE 12.8% 7.3%

RETURN VOLATILITY



1. Average Return: The average total return produced by the asset class over the period 1973 2008, based on monthly results.

2. Volatility: The standard deviation of returns. Standard deviation is a statistical measure that indicates the range around theaverage return within which 2/3 of results will fall into, assuming a normal distribution around the long-term average.

...Continued from previous page

returns and risk tolerances bestsuited to individual investors.

Anchoring portfolios with a suitablestrategic asset mix, and placing boundaries dening the allowed range fortactical positioning imposes a disciplinethat can limit the damage caused by swings in emotion that inevitably accompany both bull and bear markets.


9/75


RECOMMENDED ASSET MIX


RANGELAST

QUARTERCURRENT

RECOMMENDATION

CASH & CASH EQUIVALENTS 5% 0-15% 5.0% 2.5 %

FIXED INCOME 40% 20-60% 35.0 % 35.0 %

TOTAL CASH & FIXED INCOME 45% 30-60% 40.0 % 37.5 %

CANADIAN EQUITIES 20% 10-30% 21.8% 23.0 %

U.S. EQUITIES 20% 10-30% 21.8% 23.0 %

INTERNATIONAL EQUITIES 15% 5-25% 16.4% 16.5 %

TOTAL EQUITIES 55% 40-70% 60.0% 62.5 %


RANGELAST

QUARTERCURRENT

RECOMMENDATION


FIXED INCOME 25% 5-40% 21.2 % 21.1 %


CANADIAN EQUITIES 25% 15-35% 27.1 % 27.7 %

U.S. EQUITIES 25% 15-35% 27.0 % 27.7 %

INTERNATIONAL EQUITIES 20% 10-30% 21.7 % 21.3 %TOTAL EQUITIES 70% 55-85% 75.8 % 76.7 %


RANGELAST

QUARTERCURRENT

RECOMMENDATION


FIXED INCOME 0% 0-10% 0.0 % 0.0 %


CANADIAN EQUITIES 35% 20-50% 35.7 % 36.5 %

U.S. EQUITIES 30% 15-45% 30.7 % 31.3 %

INTERNATIONAL EQUITIES 30% 15-45% 30.6 % 30.2 %

TOTAL EQUITIES 95% 80-100% 97.0 % 98.0 %

BALANCED

AGGRESSIVE GROWTH

GROWTH

The Balanced portfolio is appropriate for investorsseeking balance between long-term capital growthand capital preservation, with a secondary focus onmodest income, and who are comfortable with moderateuctuations in the value of their investments. More thanhalf the portfolio will usually be invested in a diversiedmix of Canadian, U.S. and global equities. This prole issuitable for investors who plan to hold their investmentfor a medium to long-term (minimum ve to seven years).

Investors who t the Growth portfolio prole willseek long-term growth over capital preservationand regular income, and be comfortable withconsiderable uctuations in the value of theirinvestments. This portfolio primarily holds adiversied mix of Canadian, U.S. and global equitiesand is suitable for investors who plan to invest forthe long term (minimum seven to ten years).

A ggressive Growth investors seek maximum long-termgrowth over capital preservation and regular income,and are comfortable with signicant uctuations

in the value of their investments. The portfolio isalmost entirely invested in stocks and emphasizesexposure to international equities. This investmentprole is suitable only for investors with a high risktolerance and who plan to hold their investmentsfor the long term (minimum seven to ten years).

RETURN VOLATILITY



RETURN VOLATILITY



RETURN VOLATILITY




10/75


EXCHANGE RATES (USD RETURNS)PERIODS ENDING NOVEMBER 30, 2009

CurrentUSD

3 months(%)

YTD(%)

1 year(%)

3 years(%)

5 years(%)

USDCAD 1.0556 -3.55 -13.21 -14.77 -2.57 -2.31

USDEUR 0.6663 -4.53 -6.98 -15.42 -4.10 -2.41

USDGBP 0.6079 -1.06 -11.31 -6.35 6.11 3.04

USDJPY 86.4496 -7.11 -4.73 -9.54 -9.27 -3.43

The U.S. dollar declined againstall four major currencies betweenSeptember 1, 2009, and November30, 2009. The greenback droppedmost against the yen, depreciating 7.1%, while posting declinesof 4.5% against the euro, 3.6%versus the Canadian dollar and1.1% against the British pound.Over the latest 12-month period,the U.S. dollar has fa llen 15.4%versus the euro, 14.8% versus the

Canadian dollar, 9.5% versus the yen and 6.4% against the pound.

Global equity markets turned inanother decent three months inthe period ended November 30,2009, adding to the years already signicant gains. Most global xed-income markets also performed well, with the continued declinein the U.S. dollar helping to fuelthe gains. The DEX UniverseBond Index, a measure of theperformance of the broad Canadianbond market, returned 2.2% thepast three months, measured inlocal currency. During this period,the Citigroup World GovernmentBond Index gained 5.0% in U.S.dollar terms. The European bondmarket gained 5.7% measured by the Citigroup Europe Total ReturnIndex, while Japanese bonds gained8.4% measured by the CitigroupJapan Total Return Index, both in

U.S. dollar terms. U.S. bonds, asmeasured by the Citigroup U.S. TotalReturn Index, returned 2.1%. During the past 12 months, Europeanbonds have performed best, gaining 24.5%, while Japan gained 13.4%and the U.S. 2.2%, with declinesin the U.S. dollar accounting formost of the differences. The S&P/TSX Composite Index returned 6.1%in the latest three-month period,

C APITAL M ARKETS P ERFORMANCE MILOS VUKOVIC, MBA, CFAV.P. Investment Policy RBC Asset Management Inc.

Source: Bloomberg/MSCI

CANADA (CAD $ BASIS)PERIODS ENDING NOVEMBER 30, 2009

Fixed Income Markets: Total Return3 months

(%) YTD(%)

1 year(%)

3 years(%)

5 years(%)

DEX Universe BondIndex 2.19 6.93 10.01 5.40 5.75

U.S. (USD $ BASIS)PERIODS ENDING NOVEMBER 30, 2009


(%) YTD(%)

1 year(%)

3 years(%)

5 years(%)

Citigroup US 2.08 -1.15 2.23 6.77 5.61

Barclays Capital Agg. Bond IndexTR 2.86 7.61 11.63 6.40 5.49

GLOBAL (USD $ BASIS)PERIODS ENDING NOVEMBER 30, 2009


(%) YTD(%)

1 year(%)

3 years(%)

5 years(%)

Citigroup WGBI 5.02 10.07 17.04 8.47 5.99

Citigroup Europe 5.68 14.11 24.54 8.14 6.36Citigroup Japan 8.40 5.79 13.43 12.88 5.28

in line with other major equity markets, while the 12-month return was 27.8%. Gains in the largestcompanies in the index, based onmarket capitalization, were weakerat 4.9% for the three-month periodand 24.7% in the past 12 months.The smallest companies in the

index posted a return of 17.4% forthe recent three-month period and62.4% for the 12-month period, asmeasured by the S&P/TSX Small CapIndex. The S&P 500 Composite Index gained 7.9% over the three monthsended November 30, 2009, pushing gains over the past 12 months to25.4%. The period September 1,2009, to November 30, 2009, wasalso good for U.S. mid cap and small

cap stocks, though outperformanceversus the S&P 500 reversed.The S&P 400 index, a measure of performance for mid cap, climbed5.0% during this period, while theS&P 600 index, a gauge of small capperformance, gained 1.8%. SinceDecember 1, 2008, the S&P 400 has

gained 35.5%, and the S&P 600 hasgained 22.6%. Over the past threemonths, the Russell 3000 ValueTotal Return Index gained 5.9%,compared with an 8.6% returnfor the Russell 3000 Growth TotalReturn Index. The Russell value-tilted index has underperformed itsgrowth counterpart on a one-yearbasis, with the value index recording

Note: all changes above are expressed in US dollar terms

Note: all rates of return presented for periods longer than 1 year are annualized


11/75


CANADA (CAD $ BASIS)PERIODS ENDING NOVEMBER 30, 2009

Equity Markets: Total Return3 months

(%) YTD(%)

1 year(%)

3 years(%)

5 years(%)

S&P/TSX Composite 6.09 31.22 27.75 -0.67 7.60

S&P/TSX 60 4.94 29.10 24.67 0.13 8.77

S&P/TSX Small Cap 17.35 52.50 62.36 -5.42 1.17

Source: Bloomberg/MSCI

GLOBAL EQUITY SECTORS (USD $ BASIS)PERIODS ENDING NOVEMBER 30, 2009

Sector: Total Return3 months

(%) YTD(%)

1 year(%)

3 years(%)

5 years(%)

Energy 10.28 24.72 20.46 -0.50 8.46

Materials 13.67 57.22 66.04 2.49 10.30

Industrials 6.89 24.39 30.67 -5.73 2.24

Utilities 2.14 3.31 7.94 -3.09 7.34

Consumer Discretionary 5.71 34.36 42.32 -7.87 -0.42

Consumer Staples 9.37 20.49 23.12 3.91 7.66

Health Care 7.72 16.47 25.07 -1.46 3.84

Financials 0.63 32.53 34.89 -16.76 -4.15

Information Technology 6.41 44.21 48.41 -2.35 1.90

Telecommunication Services 7.31 12.54 18.73 -1.61 2.44

a gain of 19.2%, compared with a35.1% rise for the growth measure.

Most major global equity indicescontinued to climb, albeit at aslower pace than in the previousthree-month period. The MSCI World Index gained 6.3% in thethree months ended November30, 2009. Gains for major worldregions ranged from a loss of 5.2%for the MSIC Japan to a 13.9% gain

for the MSCI Emerging MarketsIndex. The MSCI UK led the majorEuropean markets, returning 7.1%in the th ree-month period, followedby MSCI Germany at 6.9%. In the12-month period, the MSCI UK Index rose 35.6%, and the MSCIGermany climbed 39.5%, measuredin U.S. dollars. The MSCI Europereturned 40.8% in the period, whilethe MSCI Emerging Markets made aremarkable recovery, gaining 85.1%.

All 10 global equity sectors haveposted positive returns since the lastpublication of the Global Investment Outlook, with the Materials sectorperforming best. This was followedby Energy and Consumer Staples, which returned 10.3% and 9.4%,respectively. The laggards were theFinancials sector, which gained lessthan 1% after two strong quarters,and Utilities, which returned 2.1%.Since December 1, 2008, the Utilities

sector performed worst, with a gainof 7.9%. The TelecommunicationServices sector was next, with again of 18.7%. The best performing sectors for the 12-month period were Materials and InformationTechnology, which returned66.0% and 48.4%, respectively.

* Net of Taxes

GLOBAL (USD $ BASIS)PERIODS ENDING NOVEMBER 30, 2009


(%) YTD(%)

1 year(%)

3 years(%)

5 years(%)

MSCI World* 6.31 27.70 31.79 -5.56 2.41

MSCI EAFE* 4.58 29.91 37.72 -5.52 4.13

MSCI Europe* 6.43 33.81 40.83 -5.55 4.48

MSCI Pacic* 1.01 22.58 31.77 -5.46 3.41

MSCI UK* 7.13 39.63 35.61 -7.11 2.50

MSCI France* 5.83 28.79 39.78 -5.03 4.94

MSCI Germany* 6.85 23.66 39.49 -1.96 7.35

MSCI Japan* -5.17 5.44 14.01 -9.85 0.04

MSCI Emerging Markets* 13.90 71.72 85.12 5.29 15.70

U.S. (USD $ BASIS)PERIODS ENDING NOVEMBER 30, 2009


(%) YTD(%)

1 year(%)

3 years(%)

5 years(%)

S&P 500 7.91 24.07 25.39 -5.79 0.71

S&P 400 5.01 29.27 35.53 -3.96 2.86S&P 600 1.75 15.59 22.64 -7.39 0.13

RUSSELL3000 Value 5.94 17.17 19.23 -8.94 -0.04

RUSSELL3000 Growth 8.63 32.40 35.13 -3.08 1.66

NASDAQ Composite Index 6.75 35.98 39.65 -4.10 0.46

CAPITAL MARKETS PERFORMANCE MILOS VUKOVIC, MBA, CFA

Note: all rates of return presented for periods longer than 1 year are annualized


12/75


G LOBAL E CONOMIC O UTLOOK PATRICIA CROFT,Chief Economist RBC Global Asset Management

GLOBAL RECOVERY EXPANDING KEY ISSUE ISSUSTAINABILITY

The world economic recovery continues to unfold, supportedby a powerful inventory cycle andepic policy responses enacted by governments and central banksin the wake of the nancial crisis.Led by China, most developed and

developing economies returnedto growth in the third quarter. Thelist included much of ContinentalEurope, Japan, Brazil, Russia,Canada and the U.S., although theU.K. was the notable exception tothis trend as real GDP fell again.Financial conditions continue toimprove as evidenced by the strong global equity rally, which has beenpowered by emerging markets, rmercommodity prices, narrower creditspreads and a urry of M&A activity.

With recovery now underway,the debate has shifted to thesustainability of the economicrebound and the critical issue of exit strategies. The crucial challenge will be for central bankers andgovernments to unwind the massivepolicy stimulus put in place during the crisis without inadvertently triggering new problems. If stimulusis withdrawn too quickly, the risk of

a double dip in the economy risesconsiderably. However, if policy wereto remain too loose for too long, therisk of higher ination and assetbubbles increases signicantly.

Evidence of a V-shaped recovery in world trade and industrial productionabounds, while leading indicatorshave also moved sharply higherfrom extremely depressed levels.

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

1998 2000 2002 2004 2006 2008 2010 2012

A n n u a l

% C h a n g e

-12.0

-10.0-8.0-6.0-4.0-2.00.02.04.06.0

A n n u a l

% C h a n g e

Industrial production (LHS) Leading economic indicator (RHS)

Source: Organization for Economic Cooperation & Development

EXHIBIT 1. OECD Leading Economic Indicator and Industrial Production

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10

A n n u a

l % C h a n g e

Taiwan Korea Thailand Singapore

Source: National Statistical Agencies

EXHIBIT 2. AsiaIndustrial Production

In November, the OECD raised theoverall 2010 growth forecast for its 30member countries to 1.9% from 0.7%.Industrial production has rebounded

strongly in Asia, in particular, led by countries with strong trading tiesto China such as Taiwan and SouthKorea, and Latin American output isalso recovering. Production is playing catch up, driven by an increase indemand coupled with low levelsof inventories, which were slashedduring the deep synchronizedglobal recession as demand andcredit dried up. Further gains in

production will require evidence of a sustainable economic recovery,supported by stronger domesticdemand rather than by government

policy action (exhibits 1 and 2).

WHERE DO WE GOFROM HERE?

While the recovery itself isuncontestable, debate rages as to where the world economy is headedin 2010 rarely has there been such adivergence of opinion in th is regard.


13/75


GLOBAL ECONOMIC OUTLOOK PATRICIA CROFT

Key to the recovery is the outlook for the G2 China and the U.S.Chinas economy has reboundedquickly, supported by sizeable andtimely government stimulus thathas resulted in soaring growth inmoney supply and bank credit,raising some concerns of a possiblebubble in residential real estate andstrains on the banking system. Netexports remain a drag on growth, with strength centered in xed

investment and consumer spending.In our view, Chinas recovery isdurable we expect real GDP growththis year of around 9%, followedby a 10% gain in 2010 (Exhibit 3).Chinese policy is increasingly directed at shifting the source of economic growth away from exportsand toward domestic demand. Therecent softening of the governmentsstance in considering a gradualappreciation in the renminbiis in line with this objective.

ODDS OF A DOUBLE DIP QUITE LOW

While Chinas recovery appearsto be on track, this is not the casein the U.S. In our view, there arefour scenarios that may play outover the next 12 to 18 monthsfor the U.S. economy (Exhibit 4).The rst scenario is the dreaded

double dip a short recovery f roma prolonged recession followed by a relapse into economic decline.This outcome is certainly possiblebut not highly probable, and we would assign odds of less than 10%that a renewed recession takeshold. Double dips are quite rare andrequire two elements: either a shock to the economic system or a policy mistake. We feel a policy mistake is

0

2

4

6

8

10

12

14

16

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

C u m u l a t

i v e

% C h a n g e /

Q o Q

A n n . Source: National Bureau of Statistics of China, PH&N

EXHIBIT 3. China Real GDP Growth

Actual Output

Boom

Bust

Trend Output

4. GrowthRecession

2. Stagnation

1. Double-DipRecession

Time

Output

Source: Financial Times

Green Shoots

3. RobustRecovery

EXHIBIT 4. The Great Debate

the single largest risk to the outlook and will adjust our probabilitiesas the cycle proceeds. However,authorities are keenly aware of the

complexity and importance of thetask at hand and have committedto sustaining growth at any cost.

A second scenario is an era of economic stagnation a la Japan, whereby the U.S. economy recovers and then treads water fora prolonged period. Once aga in,this is possible, but unlikely (a 10%probability), as U.S. ofcials have

aggressively responded to the creditand economic crisis and have madeit clear that they will maintain theiraccommodative stance for some

time. For example, the governmentrecently extended the $8,000 rst-time homebuyers tax credit to April2010 and is applying it to ex isting homeowners who wish to tradeup. Unemployment insurancebenets have also been extendedto people who have exhaustedexisting state and federal benets.


14/75



BASE CASE: A HALF-SPEED RECOVERY

Our base case, and the scenario withby far the highest odds of unfolding (60%), is the growth recession oras we called it the half-speedrecovery. Economic growth willcontinue to be restrained by numerous challenges including the weak labour market, deleveraging,credit restraint and the inevitable

policy reversal that we foreseebeginning in earnest in 2011.These same factors will weigh onthe recovery in Europe, while the weaker pound should prove to be apositive factor for the U.K. Japan'seconomy expanded by just 1.3%in the third quarter and remainsin the gr ip of deation, which theBank of Japan predicts will persistfor the next two years. In contrast,Canadas economic prospects arerelatively bright, in part owing tothe health of the country's nancialsystem and manageable scaldeterioration, but chal lenges lieahead. The strength of the Canadiandollar is a major source of concernfor the Bank of Canada, threatening both the export sector and thebanks ination projections.

Upside risks to our base caseforecast are also evident, andthe fourth scenario captures this

possibility in the form of a robustrecovery. This possibility is unlikely (20% odds), however, becausenumerous obstacles stil l stand inthe way of a powerful upturn.

The economic recovery couldbe strong and durable if theunemployment rate was to quickly decline, house prices were to postpositive gains versus year-ago

START ENDCUMULATIVE % CHANGE HOURS

WORKED PRODUCTIVITY GDP EMPLOYMENT

AUG-57 APR-58 3.1 3.4 N/A 1.6

APR-60 FEB-61 0.5 1.4 N/A 0.5

DEC-69 NOV-70 0.2 0.8 -3.9 2.8

NOV-73 MAY-75 2.4 1.5 -6.7 2.0

JAN-80 JUL-80 2.2 0.6 -3.0 -1.1

JUL-81 NOV-82 2.6 2.8 -5.6 -0.8

JUL-90 MAR-91 1.4 1.0 -2.1 -0.7

MAR-01 SEP-01 0.4 0.6 -1.2 2.4

DEC-07 SEP-09 3.0 5.2 -8.6 6.2

AVERAGE -1.7 -2.0 -4.4

EXHIBIT 5. U.S. RecessionsCompanies Quick to Shed Labour This Cycle

levels and credit to become morereadily available, particularly for small and medium-sizedbusinesses. A positive feedback loopis underway, with higher equity prices and modest house-price gainssupporting some improvement inconsumer condence, net worthand consumer spending from very depressed recessionary lows. A robust recovery is plausible andin line with the strong historicalcorrelation between the depthsof the economic downturn andthe strength of the subsequentrecovery. However, economic cyclesassociated with nancial crisestend to exhibit lackluster recoveries,in part as the provision of creditremains constrained, and the

cost of the increased federal debtburden weighs on the economy.

CHALLENGES: LABOURMARKET, CREDIT

AVAILABILITY AND EXIT STRATEGIES

We will monitor three key areas toassess any shift in the probabilities

of the economic scenarios: the U.S.labour market, central-bank exitstrategies and the availability of credit (for details see page 26). TheU.S. unemployment rate climbedto 10% in November 2009 from lessthan 5% before the downturn, with7.2 million net job losses during therecession. This is the most severeincrease in the unemploymentrate and the greatest numberof job losses in any recession of the postwar period. The trueunemployment rate (including involuntary part-time workers anddiscouraged workers who haveleft the labour force) is a daunting 17.2%. The average duration of unemployment sits at a record 28.5 weeks and the average workweek at

a near record low 33.2 hours. Long-term unemployment (dened asbeing out of work for six months ormore) accounts for a record one-third of total unemployment.

Companies were very quick toshed labour as the recession took hold and may be quite cautiousabout stafng up in a hal f-speedrecovery (Exhibit 5). However,

Source: BEA, BLS


15/75



initial claims for unemploymentinsurance peaked in the spring and are trending lower whilemonthly job losses are subsiding.The drop in payroll employmentaveraged 104,000 per month inthe four months ended November,compared to losses averaging 560,000 per month in the rst half of the year. However, absorbing new entrants into the workforcerequires an estimated 100,000

job gains per month, suggesting the unemployment rate will risefurther. Indeed, claims have yetto fall into the range consistent with gains in employment. Thesoft labour market remains amajor impediment to growth.

The silver lining in the weak labour market is the remarkably strong productivity performance.This cycle was unprecedented a deep recession with a largedrop in employment and hours worked resulted in a sharp gainin productivity. This came at theexpense of labour income, however,as hourly compensation (whichincludes wages and benets) fellto 0.5% year on year in the thirdquarter, a record low. Strong productivity growth is a signicantbenet to corporate prot marginsand earnings, but this will wane ascompanies begin to add to payrolls.

MARKETS AHEAD OFTHEMSELVES IN PRICING INSPRING FED TIGHTENING

Central bank exit strategies arecontingent in large part on theoutlook for ination and inationexpectations. We feel condent theFederal Reserve and the Bank of

0

2468

101214161820

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

%

Fed Funds Rate Unemployment Rate

Unemploymentpeaks in Dec '70 andagain in Aug '71, Fed

starts hiking byAugust '71

Unemploymentpeaks in May '75,Fed starts hiking

by May '76

Unemploymentpeaks Dec '82,

Fed starts hiking byMar '84

Unemploymentpeaks

Jun '92, Fed startshiking by Mar '94

Unemploymentpeaks Jun '03,

Fed starts hiking byJul '04

Source: Federal Reserve, BLS, PH&N

EXHIBIT 6. Fed Hikes and the U.S. Unemployment Rate

England, along with the Bank of Japan and the European CentralBank, will undertake a timely reduction in the elevated levels of assets currently on their balancesheets. To date, central bankershave been extremely transparentin communicating their intentionsin this regard. The critical issue forthe economy and capital marketsis the timing of interest rate hikes,particularly for the Federal Reserve.The Reserve Bank of Australia hasalready increased overnight ratesthree times as the economy isgrowing strongly and ination hasbecome a greater concern. Norway and Israel have followed suit.Markets are currently pricing in oneFed rate hike in the rst half of next

year, but we feel this is premature.Core ination in the U.S. stoodat 1.7% as of October and is set tomove lower owing to considerableexcess capacity and a yawning output gap. As well, h istorically theFed does not raise interest ratesuntil roughly a year after the peak in the unemployment rate (Exhibit6). This would place the timing of arate increase in late 2010. It will be

critical to monitor 2-year Treasury yields as a harbinger of Fed ratehikes. Two-year yields have tradedin a narrow range of 70 to 90 basispoints since the start of the year,in tune with the Federal Reservesstated intention to keep interestrates low for a prolonged period.

To date, ination expectationsremain fairly well anchored,although the spread betweennominal and real yields on 5-yearTreasury bonds has begun to rise.Gold prices have soared to recordhighs and are elevated not only inU.S. dollars but also when pricedin other major currencies. This isan indication that the rise in goldis not related solely to concerns

of a weaker U.S. dollar, but alsoto a desire for diversicationinto hard assets by investors andcentral banks. It may also be anindication of longer-term inationconcerns. Real interest rates aredeep in negative territory in every G-7 country except Japan (exhibits7 8). Historically, there is a strong correlation between gold pricesand negative real interest rates.


16/75



BOND YIELDS AREULTIMATELY HEADED HIGHER

AS DEBT CONCERNS MOUNT

Investors should bear in mind thatat some point, the Federal Reserve will begin to raise interest rates andbond yields will move higher. A recentBank Credit Analyst report pointsout that the economy will probably run into headwinds at bond-yieldlevels that are lower than in the past.

For example, the bursting of thetech bubble coincided with 10-yearTreasury yields of about 6.50% whilethe real estate bubble burst whenbond yields touched 5.25% (Exhibit9). If this trend persists, it suggeststhat the tipping point for the U.S.economy may occur at much lower yields this time around. This isconsistent with concerns surrounding a potential debt crisis a doubling of the debt-to-GDP ratio in a four-yeartime frame signicantly increases thedebt burden and the sensitivity of the economy to rising interest rates.

Indeed, a critical factor that may restrain growth in many developedeconomies over the near term isthe substantial increase in federalgovernment indebtedness in theaftermath of the recession and globalcredit crisis. According to the IMF,gross debt-to-GDP ratios are set torise dramatically in countries such

as the U.S., U.K. and Japan, whereasthe increase in Canada and Chinais expected to be much less severe.Indeed, while the credit crisis is now largely behind us, a funding crisislies ahead for countries such as theU.S. and U.K. (Exhibit 10). Much of the deterioration in scal balances isstructural in nature, and a credibledecit-reduction plan to reverse largestructural decits will be required.

EXHIBIT 8. Real Short-Term Interest Rates

EXHIBIT 7. Real Short-Term Interest Rates

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2000 2002 2004 2006 2008 2010 2012

%

Canada US

Source: Datastream-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000 2002 2004 2006 2008 2010 2012

%

UK Eurozone

Source: Datastream

Canada and the United States United Kingdom and Eurozone

-0.5

0.0

0.5

1.0

1.5

2.0

2000 2002 2004 2006 2008 2010 2012

%

Source: Datastream0.0

1.0

2.0

3.0

4.0

5.0

6.0

2000 2002 2004 2006 2008 2010 2012

%

Source: Datastream

Japan China

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1980 1985 1990 1995 2000 2005 2010 2015

%

Source: Federal Reserve

Double Dip

S&L CrisisMid-CycleSlowdown/Mexican Pesocrisis Tech Bubble

BurstReal EstateBubble Burst

EXHIBIT 9. U.S. 10-Year Treasury Bond Yield


17/75



The issue could otherwise continueto play out in currency markets, with investors pushing down thepound and U.S. dollar even more.

In summary, economic recovery isunderway and despite considerableheadwinds, the odds of a double dipremain quite low. Financial conditionshave improved markedly, setting thestage for positive feedback loops. Inthe near term, ination is a non-issue,and central bankers in North Americahave clearly stated their intentionto keep short-term interest rates atlow levels for an extended period.These factors provide fundamentalsupport for global equity markets.Bond yields are ultimately headedhigher, but not until the FederalReserve signals an interest rate hikeis at hand. Monitoring the labourmarket and 2-year Treasury yields will be critical in this regard.

COUNTRY

FISCAL BALANCE GROSS GOVERNMENT DEBT

2007 2009 2010 2014 2007 2009 2010 2014

CANADA 1.6 -4.9 -4.1 0.0 64.2 78.2 79.3 68.9

CHINA 0.9 -3.9 -3.9 -0.8 20.2 20.2 22.2 20.0

GERMANY -0.5 -4.2 -4.6 0.0 63.4 78.7 84.5 89.3

INDIA -4.4 -10.4 -10.0 -5.7 80.5 84.7 85.9 78.6

JAPAN -2.5 -10.5 -10.2 -8.0 187.7 218.6 227.0 245.6

U.K. -2.6 -11.6 -13.2 -6.8 44.1 68.7 81.7 98.3

U.S. -2.8 -12.5 -10.0 -6.7 61.9 84.8 93.6 108.2

EXHIBIT 10. Fiscal Balances and General Government Debt(as a share of GDP)

Source: IMF World Economic Outlook, October 2009 Update


18/75


19/75


BUT HAS NOT GOTTEN AHEAD OF ITSELF

To make the argument that the

market recovery has gotten wellahead of itself, one would need tomake some or all of the following arguments. One, the renewedeconomic growth evident worldwideis a mirage which will fade uponcloser inspection. Two, the r isksfacing the key U.S. economy areinsurmountable. Three, markets arepriced inappropriately for current

at these times that we need to havefaith that markets will eventually recover, and take on more risk.

THE REBOUND HAS BEENFASTER THAN EXPECTED

There are concerns that the recovery in equity markets has occurred "tooquickly. Gains since the markettroughed in March are more than

double the expected return basedon the prior 12 bear markets. Thisargument dwells excessively on how far markets have moved instead of why the rebound has been so strong.Recall that only a year ago, thereseemed a very real possibility thatthe global nancial system wouldcollapse and that major companies(and even whole industries) facedextinct ion. A large contingentsection of listed equities werebeing priced to reect a reasonablethreat of bankruptcy, or at least along and wrenching downsizing.Fast-forward to now and thosefears have largely dissipated.Business conditions, while stillsubdued in many sectors, are slowly improving and ofcial supportis being gradually and prudently dismantled. As a result, equitiesthat were most dependent on thelight at the end of the tunnel areonce again priced as going concerns

that will benet from the expectedeconomic recovery and expansion.It is no wonder weve seen a sharpsnapback in stock prices; a morenormal economic environmenthas returned (Exhibit 2). Toofast does not mean too far.

GLOBAL INVESTMENT OUTLOOK DANIEL E. CHORNOUS, CFA ALLAN SEYCHUK, CFA

0%

5%

10%

15%

20%

25%

30%

0.0% 0.5% 1.0% 1.5% 2.0%Average Qrtrly GDP Growth for the 4 Quarters Following Bull Market Onset

% I n c r e a s e

O v e r 1 s t

Y e a r o f

B u l l

M

a r k e t

Source: RBC AM

EXHIBIT 3. Bull Markets: 1 st Year Recovery vs. GDP First Year Returns as a Function of GDP

40

50

60

70

80

90

100

1 5 9 13 17 21 25 29 33 37 41 45Months Since Peak of Prior Bull Cycle

I n d e x e

d R e t u r n

L e v e

l s

Bear Market Low

3 Month10.9%Return

13 Months, -28.0%Return

FromMarket Peak

6 Month21.0%Return

9 Month28.7%Return fromLow

12 Month 30.3%Return fromLow

All LossesRecaptured

24 Month39.6%Return fromLow

Current Cycle8 Months of Increase,62%Return FromMarket Trough

18 Months of Decline,56.7%Below Prior Peak Source: RBC AM

EXHIBIT 2. Bear Markets and Recoveries Average Duration and Returns

conditions. Four, an external shock is on the way that will change thecurrent environment for the worse.

NEW SOURCES OF ECONOMICGROWTH ARE SURFACING

The deepest U.S. recession since theGreat Depression came to an endsometime this past spring or early summer. Real GDP growth for theJuly-to-September quarter came inat a healthy 3.5%, powered by gains


20/75


from a year ago, even steady priceperformance for the next year wouldproduce a sharp V-shaped recovery in the S&P/Case-Shiller home price

index chart shown in Exhibit 5.

EXCESS HOUSING INVENTORY OVERHANG IS CLEARING

With home prices no longer falling,buyers and builders alike arere-emerging. Home sales are upabout 10% year over year and despite

in a wide range of areas. Oftentimesinvestors get caught up in thenuances of the economic data, but atthis point in the cycle pretty muchthe only thing that matters is thatrecovery is in fact at hand, at whichpoint equity investors can begin toprice in the upside of the economiccycle without much regard for whenstrong growth appears (exhibits3 and 4). So the only relevanteconomic issue right now is how

close the U.S. is to a self-sustaining recovery. Once government supportis removed, will the economy grow on its own or slide back into recession? In our view thelikelihood of a double dip (denedas a return to negative rates of GDPgrowth) is low, given the building and broadening momentumin the sources of growth.

Counter-intuitively, housing is onearea we look to for renewed growthin the quarters ahead. Recenthousing news has been negative.Construction is losing some of itsprior momentum and the tally of delinquencies and foreclosurescontinues its troubling upwardmarch. But af ter a four-year periodin which housing consistently subtracted from overall economicgrowth, residential constructionmanaged a sharp 23% jump inactivity in the third quarter as sales

and starts picked up off cycle lows,adding about 0.5 percentage pointto overall GDP growth. House pricesare nally creeping higher again,up just over 3% in the ve monthssince the April low. Of the 20 citiestracked by the Case/Shiller index,only Las Vegas continues to put innew lows. Though average pricesnationally are still down about 9%


0%

10%

20%

30%

40%

50%

60%

70%

-60%-50%-40%-30%-20%-10%0%10%20%30%40%S&P 500 Under/Overvaluation at Onset of Bull Market

%

I n c r e a s e

O v e r 1 s t

Y e a r o f

B u l l M a r

k e t

1998

19601966

1990

1974

1987

20021970

19621978

1982

Source: RBC AM

Current Cycle Projectionfrom Trendline

Actual Current CycleRecovery as at Nov 30

EXHIBIT 4. Bull Markets: Valuations vs. 1 st Year Recovery First Year Returns as a Function of Valuations at Onset

-25-20-15-10-505

10152025

1988 1992 1996 2000 2004 2008 2012

Y o Y % C h a n g e

10 City Composite 20 City Composite

Source: Standard & Poors

Most recent plot: Sept. 2009

EXHIBIT 5. S&P/Case-Shiller Home Price Index 10 and 20 City Composite Indices

some volatility, housing starts appearto have found a bottom. Modestgrowth in homebuilding and realestate commissions will start to feed

through on the positive side of theGDP ledger. Will it last? The sharp45% year-over-year drop in thesupply of homes available for salesuggests that the excess inventory overhang is starting to clear albeitat rock-bottom prices (Exhibit 6). While were uneasy with the sheervolume of homes moving through theforeclosure pipeline, the fact remains


21/75


that the root of the credit crisis thebust in housing is nally stabilizing.The recovery will be sluggish androcky, and price growth will bedampened by bank-sponsored realestate re sales for many quarters,but at least the direction is right.

PRODUCTION IS TOO LOWRELATIVE TO SALES

Another source of growth in thecoming quarters is expected to comefrom inventory re-stocking. A notablefeature of this recession was thespeed with which inventories shot upand then collapsed in relation to sales(Exhibit 7). A reduction in inventoriessubtracts from GDP, but a smallerreduction in inventories from onequarter to the next actually adds toGDP. As companies see the economy stabilize and sales pick up, they willhave less and less motivation to pareinventories. In fact, before long, justto meet demand, inventory levels will have to be rebuilt (Exhibit 8).This has already started to bolstergrowth and will be increasingly additive in the quarters ahead.

REPLACEMENT DEMAND ANDSTRONG EXPORTS SHOULDSPUR NEW INVESTMENT

Investment in productive capacity is another area that is ripe for apick-up. While U.S. rms continueto slash spending on structures,they have started to increase outlayson capital equipment. There is agood reason to be optimistic onthis f ront. Capital depreciates overtime, and after six consecutivequarters of cuts to investment


2.0

4.0

6.0

8.0

10.0

12.0

1990 1995 2000 2005 2010 2015

M o n

t h s

Source: National Association Of Realtors

Last Plot: 6.8 Mths

EXHIBIT 6. U.S. Housing Month's Supply of Homes on the Market Existing Single Family Homes

1.2

1.3

1.4

1.5

1.6

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: U.S. Census Bureau

EXHIBIT 7. U.S. Inventories/Sales Ratio Total Business

12800

12900

13000

13100

13200

1330013400

13500

2007 2008 2009 2010Real GDP Final Sales

Source: BEA, TD Newcrest

EXHIBIT 8. United States Sales/Production Gap


22/75


spending some replacementdemand is to be expected.

The weaker U.S. dollar and recovering global economy have already causeda sharp rebound in U.S. exports.Structurally, the large amount of idle manufacturing capacity andthe surplus of available workerscreate compelling reasons to bring some types of production back onshore. Meanwhile, somewhatlower consumer spending growthin the years ahead suggest importgrowth could run below growth inexports, making net trade anotherpotential source of growth.

Finally, as credit markets recover wecan expect rock-bottom borrowing costs to begin to have their typically powerful stimulative effect on theeconomy. Although the lift from new borrowing will be muted this cyclegiven the emphasis on deleveraging,

the encouraging rebound in the ISM suggests ultra-low interest rates are beginning to work . Exhibit 9 showsthe tight historical correlationbetween the level of the fed fundsrate and manufacturing activity. Thesevere credit crunch of late 2008/early 2009 distorted the usual relationshipbetween the level of short-terminterest rates and economic activity as lending channels simply closed.Beginning in mid-summer, a morenormal relationship reappeared.Barring additional shocks, theepic easing in monetary policy will have its targeted impact.

CONSUMER SPENDING WILLRECOVER TO NORMAL LEVELS

Another source of potential upsidesurprise comes from consumerspending, an area we have discussed


303540455055606570

1998 2000 2002 2004 2006 2008 2010 2012

012345678

%

ISM Diffusion Index (LHS) Fed Funds Rate (Inverted, Adv 6 Months) (RHS)

Source: Institute for Supply Management

EXHIBIT 9. U.S. ISM Manufacturing Index and the Fed Funds RateFed Funds Inverted and Advanced Six Months

8 3888

205

738

0

100

200

300400

500

600

700

800

900


23/75


1.0

0.6

1.72.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

All Households Bottom 80% Top 20% Top 10% Top 5 %

Percentile of Income

Source: Parker, J.A. and Annette Vissing-Jorgenson, 2009. "Who Bears AggregateFluctuations and How?" NBER Working Paper 14665.

EXHIBIT 11. U.S. Consumption Growth Betas Sensitivity to Total Consumer Spending Growth

the bottom 80% and over 80 timesthe bottom quintiles (Exhibit 10).

HIGHER-INCOMEHOUSEHOLDS DRIVE OVERALLSPENDING

This concept becomes especially interesting when applied tobehaviour. It makes intuitive sensethat households that earn more,

spend more. These households arealso better able to carry debt if they desire. Finally, asset-rich householdsare not necessarily required to savea portion of their paychecks in the way that an average worker might. And because the amounts savedand spent by the richest Americansare so large in aggregate, they overwhelm the amounts saved andspent by the rest of the population.

These intuitive predictions arebrought to life by data from theannual Consumer ExpenditureSurvey (CES), which is conductedby the Bureau of Labor Statistics. According to the most recent survey using 2007 data, the top 20% of earners account for 39% of totalconsumer spending and 43% of discretionary spending. So morethan $4 of every $10 in shoppingcomes from the wallets of this smallgroup, while the remaining 80% of

households contribute less than $6.

Even more striking, the change inconsumption by the highest-incomequintile was ve times as largeas the change in consumption of the remaining 80% of consumers(Exhibit 11). This makes sense bonuses, dividends and otherforms of var iable compensationmake up a large share of total


50%

66%

39%28%

22%

99%

0

0.2

0.4

0.6

0.8

1

1.2Debt to Net Worth Debt to Assets

Lowest 20% of Earners Bottom 80% of Earners Top 20% of Earners

Source: Federal Reserve Survey of Consumer Finances, 2007

EXHIBIT 12. Debt Ratios by Income Level

compensation for h igh-incomeearners, and these payments canbe especially volatile. In contrast,the bottom three quintiles

generally have a pretty good ideaof their annual income well inadvance, commit that income tocertain steady expenditures suchas mortgage payments and thelike, and have little exibility.

WIDE DISPERSION INHOUSEHOLD BALANCE-SHEET HEALTH

Our contribution to this line of thinking this quarter has to do withthe state of household balancesheets on the eve of the crisis and what has likely happened since. By decomposing and analyzing thedata, we know that towards the endof 2007 (the eve of the recession)balance sheets within the uppermostquintile of U.S. earners were inexcellent shape (Exhibit 12).


24/75


We then used the Federal ReservesSurvey of Consumer Financesto construct an estimate of the composition of assets by income quintile. As expected,the principal residence makes upthe largest chunk of total assetsfor all households. However, theuppermost income quintile holdsa higher percentage of total assetsin nancial assets than does theremaining population. Exhibit

13 depicts the estimated averageholdings by major type of asset. A clear pattern emerges from thedata. The share of wealth heldin real estate declines as incomerises. The average share of stocks,bonds and holdings of pooledinvestment and retirement accountsrises with income. Finally, averageownership of business equity also rises sharply with income.

FINANCIAL MARKET RECOVERY HELPS WEALTHY HOUSEHOLDS THE MOST

Given our estimates of the relativeimportance of each asset classto the various income quintiles, we can derive an estimate of how each income quintile has beenaffected by the nancial crisisand the subsequent recovery. By plugging in the performance of each asset class from the survey period in 2007 through the marketand economic trough in early 2009and ending with the recovery todate, we nd that the dollar valueof this recovery has been sizeableand dramat ic at the upper end of the income distribution. Given theoverrepresentation of nancia land business interests in the


0%

10%

20%

30%

40%

50%

60%

Real Estate Stocks Bonds Cash Pooled Inv +Ret Accounts BusinessEquity All Else

Bottom 80% Top 20% Top 10%

Source: Federal Reserve Survey of Consumer Finances, 2007

EXHIBIT 13. Composition of Balance Sheet Assets Average Holdings, by Major Type of Asset

portfolios of Americas wealthiesthouseholds, this snapback makessense. The disparity with theaverage household wil l persist untilresidential real estate prices stage amore meaningful increase, whichis not likely to occur for some time.

The implications of stratifying U.S. households are clear. Higher-income households spend more.Due to their nancial heft,they drive the behaviour of thebroader U.S. spending and saving aggregates. During the downturn,their assets took a signicant hitand their sources of income and wealth were thrown into question. With their income more volatilethan the average, their spending is similarly more volatile. The

wealthy cut spending dramatically during the credit crisis but now have the ability to resume spending at a more normal level given therecovery that is underway. Althoughrelatively small in numbers, thespending and saving patterns of this portion of the population willdetermine the scale and durability of the economic cycle ahead.

ARE THE OBSTACLESTO FULL RECOVERY INSURMOUNTABLE?

Despite this relatively optimisticlonger-term outlook, wed be the rstto agree that some key conditionsfor a self-sustaining recovery remainsomewhat elusive. In particular,the U.S. job market remains weak and credit availability continues tobe severely constrained for all butthe largest and most creditworthy borrowers. Additionally, there arebroader concerns about the ability of authorities to reduce their supportfor the economy without tipping it back into recession, and how they go about timing their efforts.Finally, the ballooning debt burden

casts a long dark shadow over thefuture potential of the U.S. economy,and for many major industrializednations in Europe and Asia.

Of these challenges, the labourmarket may be the most crucial,at least in the near term. Theeconomy as measured by GDPmay already be recovering, but


25/75


0.0

2.0

4.0

6.0

8.0

10.012.0

14.0

16.01970 1975 1980 1985 1990 1995 2000 2005 2010 2015

%

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Y o Y % C h a n g e

Fed Funds Rate (Inverted, Adv 18 Mos) Non-Farm Employment (RHS)

Source: ISI Portfolio Strategy

EXHIBIT 15. United States Non-Farm Employment and the Fed Funds Rate

the economy as measured by jobcreation is not. Ultimately, creating new jobs is the key to creating adurable recovery, not to mentiona lasting rebound in prots.

THE U.S. JOB MARKET IS STILLWEAK

Novembers payroll survey unveiledsome very good news as only 11,000 jobs were lost, a gure too small in

the context of the U.S. labour force tobe considered statistically differentfrom zero. Average monthly joblosses over the past three monthssit just under 90,000, signicantprogress from the peak rate of over700,000 lost jobs per month last winter. However, the total numberof jobs lost this recession continuesto mount and has reached 7.2million, or 5.2% of pre-recessionlevels, the most severe labourmarket environment since the GreatDepression. Most of the detailsremain grim. Hours worked hit arecord low in October, a sign thereis still simply not enough work outthere. At 10%, the unemploymentrate sits just shy of the 1982 post-warhigh of 10.8%. The average durationof unemployment hit a record high of about six months. And not everyoneexiting unemployment is doing so with a new job frustrated, many arequitting the job market altogether.

The labour force participation rateslid to a 23-year low in October. When we combine the unemployed with these discouraged workers andthose working part-time that wantto work full-time, we nd that nearly one in ve working-age U.S. citizensare currently directly affected by the weak job market. This is likely the key reason consumer sentiment readingssuffered a setback in November and


250300350400450500550600650700

1990 1995 2000 2005 2010 2015

Source: BLS, Haver Analytics

Median: 355

Last Plot: 497 Peak:March 27,2009

EXHIBIT 14. U.S. Initial Unemployment Claims Filed Four-Week Moving Average

remain fragile. However, as we havealready highlighted, average levelsof sentiment matter less than doescondence at the upper end of the

income and wealth distribution.

BUT HAS SHOWN RECENT SIGNS OF STABILIZATION

The more recent employmenttrends are mixed. Initial claimsfor unemployment insurance havedeclined sharply from their Marchpeak, so fewer people are losing their jobs (Exhibit 14). The manufacturing

ISM employment sub-index shot upto 53.1 in October, the highest levelin 3 years and a sign that factoriesare nally creating jobs again (likely

due to production catching up withsales as outlined previously). Thereading eased to 50.8 in November.

We are very encouraged by theseearly signs of stabilization in jobsas they signal that, again, super-stimulative monetary policy isnally starting to kick in. Exhibit 15shows the tight historical correlationbetween the fed funds rate and non-


26/75


farm employment. That relationshiphas been missing in action as thenormal transmission mechanismbetween ofcial borrowing costsand economic activity werebroken by the credit crisis. Thiscorrelation appears poised tore-assert itself in the months ahead.

Unfortunately, the employmentcomponent of the non-manufacturing ISM continues to

languish below 50, suggesting thatthe fa r larger, non-export-relatedsectors of the U.S. economy have yet to move into hiring mode(Exhibit 16). We suspect the scartissue from the crisis is tilting hiring managers toward pessimism when they should be anticipating an eventual recovery (though itsunderstandable that smaller rms will avoid hiring until new work actually comes in the door!).

This is common in the early stages of every cycle and is why productivity tends to shoot up just as recessions end. Firms needto see work volumes pick up (asthey are now) before committing to adding employees, and more work done by the same number of people pushes productivity higher. At some point the job market willstop deteriorating and turn positive.This will be a hugely important

signal to the 90% of workers stillemployed, as they will then view their jobs as safe and returnto more normal consumptionpatterns. Given the strong positiverelationship between employmentand real consumer spending (Exhibit 17), an end to job cuts anda return to hiring is a necessary precondition for a healthy recovery.


20

30

40

50

60

70

1998 2000 2002 2004 2006 2008 2010 2012

ISM Manufacturing Employment Sub-Index ISM Non-Manufacturing Employment Sub-Index

Source: Institute for Supply Management

EXHIBIT 16. U.S. ISM Employment Indices Manufacturing and Non-Manufacturing Employment Sub-Indices

-6.0

-4.0

-2.00.0

2.0

4.0

6.0

8.0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Y o Y %

C h a n g e

Non-Farm Employment Real Personal Consumption

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Citigroup

EXHIBIT 17. United States Real Consumer Spending and Non-Farm Employment

-40

-20

0

20

40

6080

100

1990 1995 2000 2005 2010 2015

Q o Q

% C h a n g e

Mortgage Loans to Individuals Commercial & Industrial Loans

Source: Federal Reserve, Haver Analytics

EXHIBIT 18. Senior Loan Ofcer Survey on Bank Lending Practices Loan Ofcers Reporting Tightening Standards


27/75


0

50

100

150200

250

300

350

400

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

$ U S B i l l i o n s

Source: FDIC, Haver Analytics

EXHIBIT 20. U.S. Bank Failures Total Assets of Failed/Assisted Institutions

CREDIT MARKETS HAVEHEALED BUT U.S. BANKINGSECTOR IS STILL IN CRISIS

The second major obstacle torecovery is the still-fragile state of lending. In an economy built oncredit, lending channels are stillnot functioning normally. Thelatest Fed survey of senior loanofcer revealed that banks are, on

balance, still tightening lending standards on all major types of loans to businesses and households,the ninth consecutive quarter thatstandards have been raised (Exhibit18). Though we are encouragedthat fewer and fewer banks aretightening standards, we need tosee greater credit availability inorder for consumers and smal lbusinesses to become major playersin the recovery. We are not yet atthat stage. Instead, U.S. commercialbanks appear to be hoarding capitalas free reserve balances have shotup to an all-time high (Exhibit 19).

A huge challenge to the recovery is coming from the fact that U.S.regional banks continue to fail in worrying numbers (Exhibit 20). TheFed backstopped the money-centrebanks in 2008 and, as a result, theglobal nancial system was savedfrom collapse. Now, the problems

have shifted to smaller regionalbanks. Instead of being too big tofail many are nding out theyretoo small to save and are being taken over and closed by the FDIC.Indeed, the FDIC has emptied itsdepositor-protection fund and hasgone cap in hand to the broaderbanking sector for a three-yearadvance on their annual fees.


REGIONAL BANKS ARETHE LINCHPIN OF LOCALECONOMIES

Regional banks are important. They provide nancing for the smallbusinesses that are the backboneof the job market, businesses aboutas far from Wall Street capital as you can imagine. The souring of the real estate market has put many regional banks in tough shape, without enough capital to earntheir way back to health. While

these fai lures dont pose a systemicrisk to global markets, they aremore damaging than many peoplerealize. The disappearance of local

banking partners who understandtheir local customer base makes itmuch more difcult for the recovery to gain needed momentum.

Currently, many banks that stillhave free capital are making arational choice to earn risk-freemoney by borrowing at ultra-low short-term interest rates and buying longer-term U.S. government

-200

0

200

400

600

800

1000

1990 1995 2000 2005 2010 2015



EXHIBIT 19. U.S. Commercial Banks Free Reserve Balances


28/75


bonds, and pocketing the spread.This serves two crucial purposes:it upgrades the quality of bank balance sheets and restores bank nances. Without this balance-sheetrepair, the U.S. nancial system would remain shaky. In time, theeconomic recovery will atten the yield curve and this risk-free trade will disappear, with the result thatbanks will return to their usualrole as credit intermediaries.

AND A LOT IS AT STAKE INTHEIR RETURN TO HEALTH

The peak in impaired loans alwayscomes af ter stock-market bottoms,as businesses and households thathave grimly held on through thedownturn nally throw in the towel.So the continuing rise in bad debtsis not surprising. Having said that,at some point the trajectory shouldstop rising and reverse. If thisdoesnt happen soon and spur anuptick in credit availabil ity, lending activity and, ultimately, hiring we will be forced to re-evaluate ourassumptions for this recovery.

DEMAND FOR CREDIT REMAINS WEAK AS FIRMSSELF-FINANCE

So far, the lack of credit availability doesnt seem to have mattered allthat much to the recovery becauseloan demand is still falling. TheFed survey revealed that demandfor most major categories of loanscontinued to weaken in the threemonths to October (Exhibit 21).The sole bright spot was demandfor residential mortgages from


0

20

40

60

80

100

1990 1995 2000 2005 2010 2015

%

0.0

2.0

4.06.0

8.0

10.0

12.0

14.0

T i m e s

I n t e r e s t

E a r n e d

Debt-Equity (LHS) Interest Coverage (RHS)

Source: U.S. Federal Reserve / Royal Bank of Canada

EXHIBIT 22. U.S. Corporate Balance Sheets

-80

-60

-40

-20

0

20

40

60

80

1990 1995 2000 2005 2010 2015

Q o Q

% C h a n g e

Commercial & Industrial Loans Mortgage Loans to Individuals Consumer Loans

Source: Federal Reserve, Haver Analytics

EXHIBIT 21. Senior Loan Ofcer Survey on Bank Lending Practices Loan Ofcers Reporting Stronger Demand for Loans

prime borrowers, testament to thenascent housing-market recovery.

It may seem odd that the recovery

has taken root without supportfrom credit, but exhibits 22 and 23explain how businesses have beenself-nancing so far. As rms cutinventories, the demand for termloans and lines of credit declined.More importantly, balance sheets of Corporate America were in relatively good shape going into the creditcrisis and remain fairly healthy (Exhibit 22). Given the recovery in

prots alongside the dearth of new investment, internally generatedfunds exceed capital expenditures,reducing the need to obtain as much

external nancing (Exhibit 23).

For companies that do want to turnto capital markets for funding, thepunitive spreads of last winter havenarrowed dramatically, and may have room to narrow further if the yield curve is any guide (Exhibit24). Lower corporate spreads andreceptive capital markets haveunleashed a torrent of new stock and


29/75


-2.0

-1.0

0.0

1.0

2.0

3.01990 1995 2000 2005 2010 2015

%

1.0

2.0

3.0

4.0

5.0

6.0

7.0

%

U.S. 10-2 Spread (Lt, Inv, Adv 30 Months) Moody's Baa-10 year T-bond Spread (Rt)

Source : RBC AM

EXHIBIT 24. U.S. Yield Curve vs. Investment Grade Spreads

bond issuance, including a revivalin the IPO market. Exhibit 25 showsthat creditworthy corporationshave had little trouble tapping markets for new funding. In fact,corporate bond issuance has set anew record high in 2009. Finally,U.S. productivity growth is surging,driving protability higher, atheme we will return to shortly.

2010 WILL SEE THEBEGINNING OF THE END OFHISTORIC STIMULUS

The third and nal major hurdle forhouseholds, businesses and capitalmarkets relates to monetary andscal policy exit strategies. Thereis still great concern that many of the worlds major economies andnancial markets cannot standon their own w ithout support.Many investors are seeking greaterclarity on these issues beforefully committing to the recovery.Unfortunately, they may not get it.

NAVIGATING EXIT STRATEGIESIS WHERE WE FLY ON A WING

AND A PRAYER

Timing the removal of the massivepolicy easing to minimize the risk of ination without pushing the

economy into reverse is high ly complicated, to say the least, andis an area where the most powerfuland sophisticated central banks andgovernments have little experience.On the scal side, there are fearsthis yea rs $1.6 tri llion U.S. budgetdecit is but the rst in a long string of trillion-dollar decits thatthreaten to push the U.S. federalpublic debt-to-GDP ratio from its


0

50

100

150

200

250

300

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

6 - M o n

t h C u m u l a t

i v e

S u m

( $ U S B i l l i o n s

)Source: Federal Reserve

EXHIBIT 25. United States Corporate Debt Issuance New Debt Security Issues, Non-Financials

-400

-300

-200

-100

0

100

200

300

400

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015



EXHIBIT 23. United States Corporate Funding Gap Corporate Expenditures Less Internally Generated Funds


30/75



current 41% to towards 80% withina decade (Exhibit 26). Of course, justa few months ago the main concern was that not enough was being done, and that perhaps a secondstimulus package was needed. Soif were waiting for scal policy signals that are unambiguously pleasing to markets, well be waiting a long time. Having said that, theObama Administration must signalits willingness to slow and reverse

the scal trend in order to preservethe worlds faith that Americasdebts can be honoured withouta sharper drop in the dollar.

FISCAL SPENDING A LONGWAY FROM RUNNING DRY

Our perspective on the scal issuelies more in its direct impacts onthe economy and capital markets. While fears of higher taxes latermig

Documents

25124396 Global Investment Outlook the Year Ahead RBC Global Asset Management