Uncertainty remains the watchword for investors as we look ahead to 2024. Last year proved very resilient for many asset classes as both stocks and bonds recovered from a very volatile 2022; however, as we look ahead to 2024, many headwinds to global growth remain prevalent.

The catalyst for this uncertainty revolves around potential aftershocks from the dramatic rise in inflation and subsequent monetary tightening policies implemented by global central banks to tame the rise in prices for goods and services. As RBC GAM notes, historically recessions have lagged monetary tightening by 18-24 months.^{legal bug 1}

Equity markets exhibited a strong rebound from 2022. This is largely based on stronger than expected corporate profitability as companies appear to have successfully passed on higher input costs to consumers without a commensurate impact to demand for goods and services. However, a deeper analysis of these broader returns indicates that much of the strength in index performance is attributed back to only a handful of companies. The lack of breadth in return attribution is not necessarily a harbinger for things to come, but may imply that the index performance remains on shaky footing.

For years, investors would be forgiven for paying little attention to the fixed income allocation of their portfolios as interest rates remained at historical lows. Interest rates are now near their highest since 2007, having risen dramatically over the past year. Both the pace and magnitude of the increases have been unprecedented; however, we may be nearing a plateau and this situation provides fixed income investors with the prospect of improved performance over the next 12 months.

RBC InvestEase Investment committee is maintaining our current overall asset allocation (i.e. mix of equity and fixed income) across our five standard and five responsible investing portfolios. While the overall allocation remains unchanged, we are making a change in the composition of our fixed income asset class. We are reducing our allocation to Canadian and Global Government bonds and using the proceeds to initiate a position in U.S. and Canadian Corporate bonds. While the backdrop for government bonds remains favorable, we believe that for the first time in years, corporate bond spreads (the additional return provided to investors for investing in corporate bond issues over the returns available on government bonds) have widened to a degree sufficient for investors to be adequately compensated for the additional risk.^{legal bug 2}

In conclusion, this committee remains watchful for heightened volatility and the potential for recession going into 2024. We are maintaining our current overall asset allocation and making a small change to the composition in the fixed income allocation within our portfolios.