The poem by Robert Frost may adequately describe the divergence in global markets in the first half of 2024. In contrast to most of the world, the U.S. economy continues to post solid growth despite inflation remaining above target and a central bank that appears set to keep monetary policy at restrictive levels. As RBC Global Asset Management notes, the performance of the U.S. economy has helped to push the global economy to modest growth for the first half of 2024, but headwinds remain in the form of higher interest rates and geopolitical risk¹. The resiliency of the global economy has diminished, but not eliminated, fears of recession. However, if we take a more nuanced look at the global economy, signs of regional divergence in both economic growth and central bank policies begin to appear. While faring slightly better than the Eurozone and United Kingdom, the Canadian economy continues to show some weakness with stagnant GDP and poor productivity. Further abroad, China’s economy continues to face challenges due to elevated sub-national debt and a highly leveraged housing market.

Global equity indexes continue to post solid returns in the first half of 2024 albeit slightly lower than in 2023. The S&P/TSX remains positive year-to-date despite benign domestic economic growth. Energy and material sectors have helped offset weakness in the financial sector. European equity markets have posted solid gains aided by macroeconomic factors and a less restrictive monetary policy from the European Central Bank. Emerging market equities continue to lag other developed markets as challenges facing the Chinese economy and weakness in its real estate market weigh heavily on the index. This weakness is slightly mitigated by strength in India, which now makes up almost 20% of the Emerging Market Equity Index.

Global fixed income indices are essentially flat to slightly lower for the first half of 2024. Market participants are expecting global central banks to begin cutting rates, and to some respect we have already seen some regional monetary policy easing. However, the pace and duration of the more accommodative policy is still in question as inflation remains persistent. Another concern for fixed income investors remains sovereign and sub-sovereign debt levels. Stimulative fiscal policies in developed economies, in combination with higher rates, is an increasing concern for bond investors as a higher proportion of government revenue will need to be allocated to simply covering interest on the newly issued debt on a go forward basis.

Solid asset class returns were reflected year-to-date across all five of our Standard and Responsible Investing portfolios. Our Standard and Responsible Balanced, Growth and Aggressive Growth portfolios all posted returns in excess of 4% after-fees reflecting the strength in global equity markets.

As we look forward to the second half of 2024, there are some strategic asset allocation changes that are being made across most of our portfolios. The changes reflect the analysis of the RBC InvestEase Investment Committee in consultation with our partners at RBC Global Asset Management and RBC Capital Markets. We are increasing our strategic allocation to equities by 5% and reducing exposure to fixed income by the same amount. The change is predicated more by a constructive outlook for equities than any concern over fixed income valuations, and therefore there will be no changes to our very conservative portfolio (nor to the allocation of our Aggressive Growth portfolios, which do not have an allocation to fixed income). Within our equity allocation we are reducing domestic equity exposure and increasing our allocation to international equities, primarily U.S. equities. This change reflects the developing divergence in performance between the U.S. index and Canadian index on a currency neutral basis.