Global Outlook 2019 Opportunities and Risks in an aging … · 2019. 4. 1. · Source: RBC Wealth...

For internal use only

Global Outlook 2019

Opportunities and Risks in an aging economic cycle

Alan Robinson – Global Portfolio Analyst, Portfolio Advisory Group – U.S. Equities

March 2019 | RBC Capital Markets, LLC / Portfolio Advisory Group – U.S.

All values in U.S. dollars and priced as of market close, March 22, 2019, unless otherwise noted

For Important Disclosures, see slide 23

Rough year for global stock markets

March 20192

-6.2%

-11.6%-13.0% -13.2% -13.6%

-17.8%

S&P500

CanadaS&P/TSX

U.K.FTSE

All-Share

STOXXEurope

600HangSeng

JapanTOPIX

ShanghaiComp

2018 performance of select equity indexes

24.6%Source - RBC Wealth Management, Bloomberg; data through 12/31/18; data in local currencies.

RBC Capital Markets, LLC / Portfolio Advisory Group - U.S. | 2019 Outlook

Short-term market: S&P 500 – 11 years

March 20193

Chart courtesy of StockCharts.com and RBC Wealth Management


2018: The good, the bad, and the ugly

March 20194

2018

Economic activity

• U.S. growth accelerated, while

• Global growth slowed

• China slowdown significant

• No recession

Monetary policy

• Fed led the pack with increases and the continued unwinding of

the balance sheet

• Unwinding of global stimulus underway, although unevenly

• Financial conditions tightening

Rates

• Moved higher before pulling back at year end (2.68%)

• Yield Curve flattened further

• 3-5 year inverted for 1st time since 2007

Volatility

• Spiked to more “normal” levels

Equity Market Performance

• No place to hide

Trade/tariffs/geopolitics

• Captured headlines


Indicators signaling “late” and “end” of cycle

March 20195

U.S. business cycle scorecard – 17 factorsStart of

cycle

Early

cycle

Mid

cycle

Late

cycle

End of

cycleRecession

Inventories

Consumer durables

Housing

Prices

Bonds

Monetary policy

Equity profitability

Leverage

Economic trend

Credit

Sentiment

Business investment

Employment

Equity direction

Economic slack

Volatility

Cycle age

Votes for each stage of biz cycle 0 2 9 13.5 6.5 0

Source – RBC Global Asset Management Legend: = most likely stage of business cycle; = alternative interpretation. Data as of 2/12/19.


March 20196

Bull market speed check

No recession

EPS: Positive but slowing

Valuation reasonable

Monetary policy on hold

Investor sentiment: Neutral

Fundamentals remain positive, but

we expect 2019 to be a year of

increased volatility and skepticism.

Volatility is likely here to stay

Over or just bruised?


Recession Scorecard – Risk limited

March 20197

Scorecard of our favorite U.S. economic indicators

Global Portfolio Advisory Committee: Economic Indicator Scorecard

Indicator Status

Yield Curve (1-Year to 10-Year) - ✓ -

Unemployment Claims - ✓ -

Unemployment Rate ✓ - -

Conference Board Leading Index ✓ - -

ISM New Orders minus Inventories ✓ - -

Fed Funds vs. Nominal GDP Growth ✓ - -

Expansion Neutral Recessionary

Bull markets are born in pessimism, grown in skepticism, and die in euphoria.

Where are we?Source - RBC Global Portfolio Advisory Committee (GPAC).


Valuation more reasonable

March 20198

Below 5- & 20-year averages

16.4x15.8x

18.2x18.5x

14.4x

12x

14x

16x

18x

20x

5 Year… 20 Year… 12/31/17 1/26/18 12/31/18

S&P 500 forward price-to-earnings (P/E) ratio

Source - RBC Wealth Management, FactSet; data as of 12/31/18


Time for a pause…?

March 20199

0%

1%

2%

3%

4%

5%

6%

7%

1997 2000 2003 2006 2009 2012 2015 2018 2021Federal funds rate Treasury 10-year yield

Fed Rate Forecast Projection 10Y Bloomberg Consensus Forecasts

Projected

Fed Funds

Rate: 3.35%

6.50%

5.25%

3.35%

Source: RBC Wealth Management, Bloomberg Consensus data, Federal Reserve Summary of Economic Projections, data as of 1/10/19.

Fed Funds Rate & U.S. Treasury 10-Yr Yield


The corporate foundation is sturdy

March 201910

S&P 500 annual earnings per share & estimates

EP

S (

$)

$132

$171

70

80

90

100

110

120

130

140

150

160

170

'10 '11 '12 '13 '14 '15 '16 '17 '18E '19E

Underlying earnings growth

Forecast including tax cuts$163

Source: RBC Wealth Management, RBC Capital Markets US Equity Strategy, Thomson Reuters I/B/E/S;

2018 - 2019 data are RBC Capital Markets estimates, data as of November 2, 2018.

Actual results in gray; RBC estimates in blue


Pessimism was near extremes in December

March 201911

S&P 500 returns typically strong from these levels

Shaded bars represent U.S. recessions

Source - RBC Wealth Management, Bloomberg; data through 12/20/18


Return to normal volatility

March 201912

Source - RBC Wealth Management, Bloomberg data through 12/24/18

Year# of days with moves

greater than +/- 1%

# of days with moves

greater than +/- 2%

50 Year Avg. 59 13

2018 63 19

2017 8 0

2016 48 9

2015 72 10

2014 38 6

2013 38 4

2012 50 6

2011 96 35

2010 76 22

2009 117 55

2008 134 72


Key to U.S. economic growth: Consumers

March 201913

U.S. consumers can remain buoyant

Source - RBC Global Asset Management, RBC Wealth Management.


Employment – Current cycle lows

March 201914


0.0

2.0

4.0

6.0

8.0

10.0

12.0

01/0

1/4

8

02/0

1/4

9

03/0

1/5

0

04/0

1/5

1

05/0

1/5

2

06/0

1/5

3

07/0

1/5

4

08/0

1/5

5

09/0

1/5

6

10/0

1/5

7

11/0

1/5

8

12/0

1/5

9

01/0

1/6

1

02/0

1/6

2

03/0

1/6

3

04/0

1/6

4

05/0

1/6

5

06/0

1/6

6

07/0

1/6

7

08/0

1/6

8

09/0

1/6

9

10/0

1/7

0

11/0

1/7

1

12/0

1/7

2

01/0

1/7

4

02/0

1/7

5

03/0

1/7

6

04/0

1/7

7

05/0

1/7

8

06/0

1/7

9

07/0

1/8

0

08/0

1/8

1

09/0

1/8

2

10/0

1/8

3

11/0

1/8

4

12/0

1/8

5

01/0

1/8

7

02/0

1/8

8

03/0

1/8

9

04/0

1/9

0

05/0

1/9

1

06/0

1/9

2

07/0

1/9

3

08/0

1/9

4

09/0

1/9

5

10/0

1/9

6

11/0

1/9

7

12/0

1/9

8

01/0

1/0

0

02/0

1/0

1

03/0

1/0

2

04/0

1/0

3

05/0

1/0

4

06/0

1/0

5

07/0

1/0

6

08/0

1/0

7

09/0

1/0

8

10/0

1/0

9

11/0

1/1

0

12/0

1/1

1

01/0

1/1

3

02/0

1/1

4

03/0

1/1

5

04/0

1/1

6

05/0

1/1

7

06/0

1/1

8

UNEMPLOYMENT RATE -2SD -1SD average +1SD +2SD


March 201915

0

20

40

60

80

100

120

140

160

02

/01

/67

05

/01

/68

08

/01

/69

11

/01

/70

02

/01

/72

05

/01

/73

08

/01

/74

11

/01

/75

02

/01

/77

05

/01

/78

08

/01

/79

11

/01

/80

02

/01

/82

05

/01

/83

08

/01

/84

11

/01

/85

02

/01

/87

05

/01

/88

08

/01

/89

11

/01

/90

02

/01

/92

05

/01

/93

08

/01

/94

11

/01

/95

02

/01

/97

05

/01

/98

08

/01

/99

11

/01

/00

02

/01

/02

05

/01

/03

08

/01

/04

11

/01

/05

02

/01

/07

05

/01

/08

08

/01

/09

11

/01

/10

02

/01

/12

05

/01

/13

08

/01

/14

11

/01

/15

02

/01

/17

05

/01

/18

CONSUMER CONFIDENCE INDEX

CCI -2 SD -1 SD AVERAGE +1 SD +2 SD


Consumer confidence


Duration of the economic recovery

March 201916

0

10

20

30

40

'91 '09(current)

'61 '82 '01 '75 '70 '54 '58 '80

Qu

art

ers

of d

ura

tio

n

U.S. economic expansions, quarters of duration

Average: 23.4 quarters



Shallow economic recovery

March 201917

51.7%

42.8%

38.4%

23.3% 23.3%

17.2% 16.0%

12.6% 11.5%

4.4%

0%

10%

20%

30%

40%

50%

'61 '91 '82 '75 '09(current)

'01 '70 '54 '58 '80

Rea

l G

DP

gro

wth

(%

)

U.S. economic expansions, real GDP growth

Average: 24.1%



Yield curve: Flirting with inversion

March 201918

The recent flattening bears watching, is it different this time?

19 bps

-300 bps

-200 bps

-100 bps

0 bps

100 bps

200 bps

300 bps

400 bps

'78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Recession Yield curve (2s10s) Average spread of 96 bps



Much more than a trade dispute

March 201919

Heat map of cumulative tariff pain

Green is modest impact; red is high impact

Month

s

Quart

ers

Years

Perm

anent

Slightly

negative

Negative

Trade

war

Siz

e o

f ta

riff

Duration

... but how long tariffs last is just as relevant.

Entirefocus is on size

of tariff ...

• To date, the U.S. has

implemented 5%–25% tariffs

on $250B of Chinese goods.

• China has responded with

$160B of its own taxes on

U.S. goods.

• But this is much more than a

trade dispute. It is primarily a

clash over national security,

underpinned by ideological

differences.

Source – RBC Global Asset Management


U.K. & European equities

March 201920

• Should the U.K. secure a soft (or even no) Brexit, and therefore maintain the status

quo—our base case—stocks should rally and valuations should re-rate upward.

Should Brexit negotiations fail, and the U.K. leave without a transition, the currency

would likely weaken and equity prices may fall due to higher perceived risk.

U.K.: Brexit will set the tone

• European equities should continue to be supported by modestly improving

fundamentals, including cyclical low unemployment as well as stronger capital

investment and lending environments, while a weak currency should underpin

exports. Forward-looking P/E valuations near 13x are not demanding, trading below

long-term averages, and EPS should growth should pick-up to around 8% in 2019

Europe: Fundamentals stabilizing


Equity: Value stocks over Growth stocks

March 201921

0.9x

1.0x

1.1x

1.2x

1.3x

1.4x

1.5x

Dec '08 Dec '10 Dec '12 Dec '14 Dec '16 Dec '18

Value more expensive

Growth more expensive

+2 S.D.

Average

-1 S.D.

-2 S.D.

+1 S.D.

Source: RBC Wealth Management, FactSet; Weekly data through 12/21/18


Dividends should remain in demand

March 201922

Demographics positive for dividends – % of U.S. population over 65 years of age

Four reasons why dividend stocks should remain in demand

• Current low interest rate environment & need for income

• Potential for a growing income stream

• Dividends reduce market risk & can enhance performance

• Earnings growth & dividend growth = share price appreciation

Source - Census Bureau Population division; 2015–2050 are estimates


23

Disclosures

RBC Capital Markets, LLC / Portfolio Advisory Group - U.S. | 2019 OutlookMarch 2019

All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No

part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed

by the responsible analyst(s) in this report.

Important disclosures

In the U.S., RBC Wealth Management operates as a division of RBC Capital Markets, LLC. In Canada, RBC Wealth Management includes, without limitation, RBC

Dominion Securities Inc., which is a foreign affiliate of RBC Capital Markets, LLC. This report has been prepared by RBC Capital Markets, LLC. which is an indirect

wholly-owned subsidiary of the Royal Bank of Canada and, as such, is a related issuer of Royal Bank of Canada.

In the event that this is a compendium report (covers six or more companies), RBC Wealth Management may choose to provide important disclosure information by

reference. To access current disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?EntityID=2 to view

disclosures regarding RBC Wealth Management and its affiliated firms. Such information is also available upon request to RBC Wealth Management Publishing, 60

South Sixth St, Minneapolis, MN 55402.

References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by RBC

Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio:

Dividend Growth (RL 8), the Guided Portfolio: ADR (RL 10), and the Guided Portfolio: All Cap Growth (RL 12), and former lists called the Guided Portfolio: Large

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Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on a Recommended

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24

Disclosures


As of December 31, 2018

Rating Count Percent Count Percent

Buy [Top Pick & Outperform] 876 54.92 234 26.71

Hold [Sector Perform] 642 40.25 111 17.29

Sell [Underperform] 77 4.83 7 9.09

Investment Banking Services

Provided During Past 12 Months

Distribution of Ratings - RBC Capital Markets, LLC Equity Research

Explanation of RBC Capital Markets, LLC Equity Rating System

An analyst's "sector" is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock

represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector average.

Ratings

Top Pick (TP): Represents analyst’s best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio.

Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over

12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Restricted (R): RBC policy precludes certain types of

communications, including an investment recommendation, when RBC is acting as an advisor in certain merger or other strategic transactions and in certain other

circumstances. Not Rated (NR): The rating, price targets and estimates have been removed due to applicable legal, regulatory or policy constraints which may

include when RBC Capital Markets is acting in an advisory capacity involving the company.

Risk rating

The Speculative risk rating reflects a security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or

limited operating history that result in a higher expectation of financial and/or stock price volatility.

Valuation and Risks to rating and price targetWhen RBC Capital Markets, LLC assigns a value to a company in a research report, FINRA Rules and NYSE Rules (as incorporated into the FINRA Rulebook) require that the basis for the valuation and the impediments to obtaining that valuation be described. Where applicable, this information is included in the text of our research in the sections entitled “Valuation” and “Risks to rating and price target”, respectively.

March 201925

DisclosuresThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of RBC Capital Markets, LLC, and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets, LLC and its affiliates

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Disclosures and Disclaimer


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Global Outlook 2019 Opportunities and Risks in an aging … · 2019. 4. 1. · Source: RBC Wealth...

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