The Canada-based firm said the global economy should rise faster than long-term trend rates in 2022 although the upswing will prove bumpier than in 2021. outlined its views for 2022. Other major wealth management groups are also setting out asset allocation ideas. Firms are thinking about inflation risks, West-China relations and disruptions to supply chains caused by the pandemic. At the time of writing, there are concerns about the COVID variant, aka omicrom and how serious or not it will be.

“Equities should be the asset class of choice once again in 2022. We recommend holding a moderate overweight position in equities,” Frédérique Carrier, head of investment strategy, said.

Canada’s biggest bank’s new year recommendation is a moderate overweight position on “worthwhile” global equities. It also predicts moderate earnings growth, supported by above-average GDP growth and strong consumer and business capital spending.

The comments appeared in an RBC report entitled The long-term investment landscape: Where to from here.

Influences include major policy reforms by China, such as its regulatory crackdown on technology, banking and real estate – which provoked controversy and market gyrations in recent months. Other background factors include levels of public and private debt in countries (deemed by the bank not to be a significant risk factor), and green energy transformation. 

RBC acknowledged that central banks are preparing to raise interest rates, but maintained that equity markets will typically perform well following the first rate hike. It added that even though interest rates will inch higher, they will remain low by historical standards.

Beyond 2023, emergency COVID-19 policy-driven effects should quickly wane, it said, leaving growth in the labour force and increases in productivity to drive the economic bus, pointing to an extended period of slow GDP growth – perhaps slower than in the decade following the financial crisis.

Corporate competition
This should lead into a period of intense corporate competition and even greater corporate concentration. Carrier said: “Equities can be rewarding in such an environment. But owning the right ones and avoiding the challenged will be even more essential ingredients of success. Stock selection will be key to portfolio performance.”

As the two-year-long saga of the global pandemic hopefully nears an end, the report said there have been “seismic shifts” in the corporate bond landscape following unprecedented central bank intervention and a notable increase in corporate debt loads in response to the crisis.

Happily, overall the trajectory of the world’s major economies will be shaped by a normal progressive business cycle and the remaining effects of the policies put in place to contend with the pandemic, RBC Wealth Management said.

Carrier continued: “Corporate debt levels have risen, but they can’t simply be looked at in isolation – it’s all relative. Debt levels haven’t strayed too far from long-term trends relative to GDP. Debt is up, but liquidity is improved with record cash on balance sheets, and interest costs are down. Companies could emerge from the pandemic in far better financial positions despite rising debt loads.

“Investors should have exposure to both investment-grade and speculative-grade corporate bonds as part of a well-diversified bond portfolio. Over the near term, we see few credit risks for US corporate bond markets, and little risk that the increased debt levels will act as the potential source of the next crisis.”

Green energy
The green energy transformation could represent a “grand economic realignment” affecting various sectors; at least rivalling the industrial and information revolutions, if not surpassing them, the firm said. RBC Wealth Management said this could benefit firms in the space (such as solar, wind, other renewables, batteries, assorted infrastructure, etc).

“This as an important investment theme and we anticipate it will attract capital from institutional and individual investors. That said, investors should maintain a pragmatic approach given the serious gaps between net-zero ambitions and potential outcomes. For now, we would focus on opportunities that are likely to find their way to market in the next five to 10 years," Carrier said.

China’s “economic revolution”
Developments in China are likely to have economic consequences beyond its borders, according to RBC, as Chinese President Xi Jinping seeks to implement a more inward-looking policy mix in order to foster a broader, more balanced domestic economy and regain China’s competitive edge in the international wealth management.

As reported in the summer, Beijing moved against sectors such as after-school, for-profit education services, and has restricted the variable interest entity (VIE) structures commonly used by Chinese companies in other sectors to list overseas and raise foreign capital. The moves sent Chinese equities down sharply, although they have since recovered some ground. A number of wealth managers retreated from Chinese equity exposure. Renowned investor George Soros also warned about Western firms' investment exposures to the country.

Carrier said that in spite of its economic might, China is challenged by two trends that have become entrenched over the past decade – a persistent decline in the working-age population, and a decreasing rate of productivity growth.

She added: “We believe that the policy response to these challenges may entail profound political and economic changes.”

The report explores how China is attempting to adapt to meet these challenges, and the implications for investors in the coming decade.