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© 2015 Morningstar, Inc. All rights reserved.

CPMS

2016 Q3 Canadian Market Review

2

Areas of Focus

1. Market Performance

2. Best sectors and stocks

3. Single factor analysis & model performance

4. Market fundamentals & outlook

3

S&P/TSX Composite Performance 2016 Q3 (Price Change)

13600

13800

14000

14200

14400

14600

14800

15000

July August September

The market experienced volatility in September but ended 4.7% higher for the quarter.

+3.7% +0.1% +0.9%

+4.7%

4

S&P/TSX Composite Performance 2016 Q3 versus Brent Oil

Large dip in the index in early September is somewhat correlated to oil prices.

5

S&P/TSX Composite Performance 2016 Q3 versus Gold

Volatility in Mid/Late September may have been impacted by the dip in Gold prices.

6

Q3 Market Performance (Total Return)

July August September Q3

S&P/TSX Composite 3.9% 0.3% 1.2% 5.5%

S&P/TSX 60 3.9% 0.6% 1.2% 5.8%

S&P/TSX Small Cap 5.5% -3.6% 3.1% 4.9%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Larger caps ended the quarter outperforming small caps.

7

July August September Q3

S&P/TSX Composite 73% 48% 61% 69%

S&P/TSX 60 78% 52% 57% 72%

S&P/TSX Small Cap 63% 43% 64% 64%

0%

20%

40%

60%

80%

100%

Market Breadth (% of stocks with a positive total return)

A greater percentage of larger stocks had a positive return over the quarter.

8

GICS Sectors: 2016 Q3 Total Returns

Sector Sector

Weight

Q3

Return

Q3

Breadth Best Performer % Worst Performer %

10 Energy 20.7% 6.2% 78% (39/50) Parkland Fuel Corp. +39 Baytex Energy Corp. -26

15 Materials 13.1% -1.1% 56% (31/55) Ivanhoe Mines Ltd. +126 First Majestic Silver -23

20 Industrials 8.8% 10.8% 76% (19/25) Brookfield Business LP +41 Bombardier Inc. -7

25 Consumer Discretionary 5.2% 8.9% 74% (17/23) Sleep Country Canada +31 Corus Entertainment -7

30 Consumer Staples 4.1% 6.3% 63% (7/11) Saputo Inc. +19 North West Company -11

35 Health Care 0.8% 9.0% 100% (4/4) Valeant Pharmaceutical +24 Chartwell Retirement +1

40 Financials 33.1% 5.9% 85% (22/26) Element Financial Corp. +20 Alaris Royalty Corp. -21

45 Information Technology 2.9% 12.1% 67% (8/12) Kinaxis Inc. +29 Sierra Wireless Inc. -14

50 Telecommunications 5.3% 2.8% 75% (3/4) Rogers Communications +7 Manitoba Telecomm -1

55 Utilities 2.7% 0.7% 64% (9/14) Superior Plus Corp. +12 Just Energy Group Inc. -14

60 Real Estate 2.7% -1.5% 45% (10/22) Altus Group Limited +32 Boardwalk REIT -9

S&P/TSX Composite 69% (169/246) Ivanhoe Mines Ltd. +126 Baytex Energy Cop. -26

Technology and Industrials were the outperformers for Q3. Materials and the new Real

Estate sector were the laggards.

9

Q3 BEST & WORST PERFORMERS Top and bottom 50 excluding takeovers and stocks in bottom ½ of CPMS Universe

on average monthly volume

10

Q3’s 50 Best Performing Stocks

11

Q3’s 50 Best Performing Stocks

Lower earnings estimate

revisions

Higher expected EPS growth

Expensive valuation metrics

During Q3,

The 50 Best shared some of

the following attributes:

High Cash Flow to Debt

Poor growth metrics

Higher earnings and price

volatility

Lower expected yields

12

Q3’s 50 Worst Performing Stocks

13

Q3’s 50 Worst Performing Stocks During Q3,

The 50 Worst shared some of

the following attributes:

Lower profitability metrics

Positive earnings surprise and

revisions that got worse over

the quarter

Poor P/E and P/CF ratios

Higher earnings volatility

Higher initial price momentum

Lower debt to equity ratios

14

Which fundamentals did the market reward during Q3?

At the start of the period, we equally weighted the best 50

stocks using each of the most commonly used CPMS

factors separately and measured their performance.

15

Single Factor Analysis

Expected growth for next year and price-to-sales factors delivered outperformance in Q3. Net

profit margin and quarterly sales momentum underperformed.

The CPMS universe was limited to stocks better than D+ for market float and trading volume.

16

STYLE ANALYSIS

17

CPMS Model Strategy Returns: Q3 2016

A majority of the model strategies underperformed the benchmark for the quarter. Asset Growth, D10

Dividend/Asset Growth were the largest gainers while Industry Relative and Core 20 were the laggards.

Style Portfolios Jul Aug Sep Q3

Asset Growth 5.7% 1.2% 1.0% 8.1%

D10 Dividend/Asset Growth 3.6% 1.8% 2.1% 7.7%

Triple 10 6.3% -1.0% 1.7% 6.9%

Income 5.1% -1.3% 2.7% 6.5%

Predictable Growth 2.6% 3.4% 0.4% 6.5%

S&P/TSX Composite Total Return 3.9% 0.3% 1.2% 5.5%

Value 3.5% -0.5% 1.6% 4.6%

Dividend Growth 2.2% 1.1% 0.9% 4.3%

Bargain 4.8% -5.7% 4.6% 3.4%

Triple 5 1.1% 1.6% 0.3% 3.1%

D10 Earnings Momentum/Value 7.2% -5.6% 1.5% 2.7%

Momentum 7.6% -7.6% 3.2% 2.6%

Earnings Value 2.3% -0.4% 0.3% 2.3%

Dangerous 1.4% -1.3% 1.5% 1.7%

Earnings Momentum 9.2% -7.9% 1.1% 1.7%

Industry Relative 4.1% -4.8% 2.0% 1.1%

Core 20 4.3% -5.1% -0.5% -1.5%

18

MARKET FUNDAMENTALS &

OUTLOOK

19

Valuations & Profitability

P/B vs. ROE (net of T-bills): CPMS Median

The margin between ROE and P/B remains strong but valuations have moved up.

20

Earnings

Year-over-year earnings growth (Median & Average - CPMS Universe)

Median and average earnings have moved up from last quarter; average earnings growth is

predicted to improve and jump into positive territory.

21

Earnings

Year-over-year earnings growth of the TSX Composite

Year over year Composite earnings are negative and have remained unchanged relative to the

prior quarter. Actual earnings have moved lower over the quarter.

22

Estimate Revisions & Earnings Surprise

Average earnings surprise have moved up slightly and into positive territory. Estimate revisions

continue to trend higher and are positive.

23

GICS Sectors: 2016 Q3 Overview

Sector Current

P/B

Expected

ROE

Expected

EPS Growth

Earnings

Surprise

Estimate

Revisions

10 Energy 1.0x -1.0% -11.7% 0.9% 13.7%

15 Materials 1.6x 1.6% 16.2% 0.2% 9.0%

20 Industrials 2.3x 12.2% -2.0% 0.4% 1.5%

25 Consumer Discretionary 2.0x 14.8% 3.9% -0.4% -1.3%

30 Consumer Staples 2.6x 14.3% 2.9% 1.3% -4.2%

35 Health Care 3.8x -0.6% -3.9% -0.8% -1.9%

40 Financials 1.3x 11.4% 3.4% 1.7% -2.7%

45 Information Technology 2.4x 10.8% 0.2% 0.5% -1.5%

50 Telecommunications 3.7x 21.0% -1.7% 2.1% -4.7%

55 Utilities 1.6x 8.8% 7.8% 0.5% 7.0%

60 Real Estate 1.0x 7.9% -0.1% -0.1% -0.8%

Earnings are expected to grow healthily for Materials and Utilities while the outlook for Energy

earnings is to decline. Estimates have been revised downwards in greater degree for Consumer

Staples and Telecomm.

24

OTHER CONSIDERATIONS

25

The Asset Mix Decision

There remains a positive spread between the Composite yield and the bond yield.

26

Economic Outlook

Unemployment has increased over the quarter. Capacity utilization has declined while

inflation appears relatively unchanged from end of last quarter.

27

Technical Analysis

Technicals appear to have moved more into overbought territory.

28

Technical Analysis

Longer and shorter term technicals have moved higher. The composite

remains above both the 50 and 200 day moving averages.

29

Historic Performance – Q4

-30%

-20%

-10%

0%

10%

20%

30%

57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

% T

otal R

eturn

77% % positive

14 # negative quarters

46 # positive quarters

Q4 Q1 Q2 Q3 Q4

Average 3.6% 1.9% 0.7% 3.7%

Median 3.7% 2.2% 1.9% 3.8%

Std Dev 7.1% 7.9% 9.1% 7.7%

S&P/TSX Composite 4th

Quarter Performance: 1957 to 2015

30

Historic Performance – Q4

GICS Sector Q4 (October – December) Performance: 1988 to 2015

Return (%) Energy Materials Industrials

Consumer

Disc.

Consumer

Staples

Health

Care Financials I.T. Telecom Utilities

Median 0.4% 3.3% 6.0% 5.3% 4.5% 4.4% 6.9% 8.0% 7.2% 4.9%

Std Dev 10.6% 10.2% 9.6% 7.3% 6.4% 14.8% 9.5% 24.7% 14.6% 8.0%

% Positive 52% 63% 74% 74% 89% 56% 93% 81% 81% 85%

Looking back to 1988, we present the median return, standard deviation

and probability of a profitable quarter for all sectors in Canada.

31

Fundamental Summary

FUNDAMENTALS:

Valuations: P/B multiples have rose over the quarter but remain low relative to long-term

history.

Profitability: High Return on Equity is expected in many sectors; Energy and Materials are

the exceptions.

Earnings Growth: Year-over-year growth is mixed across sectors.

ASSET MIX DECISION: Equity yields are more compelling than ten year bonds.

TECHNICAL ANALYSIS: Technicals are in overbought territory and trending upwards.

ECONOMICS ANALYSIS: No apparent capacity constraints, the unemployment rate has increased.

Inflation remains below BOC targets.