November 9, 2012

All values in U.S. dollars unless otherwise noted.Priced as of November 9, 2012, market close

(unless otherwise stated).For Important Disclosures, see pages 5-6.

Equity Scorecard – November 9, 2012

» Equities stumbled and safe-haven bonds rallied as the war over taxes and

spending cuts began in Washington and as Europe’s challenges bubbled back

up to the surface. Greece re-appeared on the radar screen.

» It’s time to stop cheering or bemoaning the U.S. election results. The fiscal cliff

is more important for financial markets and economies across regions. (page 3)

» Global Roundup: Updates from Canada, Europe, and Asia Pacific. (pages 3-4)

Global Insight WeeklyRBC Wealth Management

Author Kelly Bogdanov – San Francisco, United States kelly.bogdanov@rbc.com; RBC Capital Markets, LLC

Index (local currency) Level 1 week MTD YTD

S&P 500 1,379.85 -2.4% -2.3% 9.7%S&P/TSX Comp 12,196.80 -1.5% -1.8% 2.0%FTSE All Share 3,014.98 -1.8% -0.3% 5.5%Hang Seng 21,384.38 -3.3% -1.2% 16.0%

Dow (DJIA) 12,815.39 -2.1% -2.1% 4.9%NASDAQ 2,904.87 -2.6% -2.4% 11.5%Russell 2000 795.02 -2.4% -2.9% 7.3%STOXX Europe 600 270.27 -1.7% 0.0% 10.5%German DAX 7,163.50 -2.7% -1.3% 21.4%Nikkei 225 8,757.60 -3.2% -1.9% 3.6%Straits Times 3,009.56 -1.0% -0.9% 13.7%Shanghai Comp 2,069.07 -2.3% 0.0% -5.9%Brazil Bovespa 57,357.71 -1.8% 0.5% 1.1%

ContributorsAdrian Brown & Lucy So – Toronto, Canada adrian.brown@rbc.com, lucy.so@rbc.com; RBC Dominion Securities Inc.

Frédérique Carrier – London, UK frederique.carrier@rbc.com; Royal Bank of Canada Investment Management (UK) Ltd.

Jeff Musial – Hong Kong, China jeff.musial@rbc.com; RBC Dominion Securities Inc.

Note: Equity returns do not include dividends.

Global Insight Monthly Now AvailableThe November edition includes RBC’s latest thoughts about the economy, equities, fixed income, commodities, and currencies. It also discusses how the global earnings cycle could be at or near a trough and includes the following article:

Handicapping the Fiscal CliffOur U.S. economics team offers a scenario analysis for the impact of the “fiscal cliff” negotiations on the U.S. economy in 2013. For now, at least, a recession is not the likely outcome.

Speak to your rbC Advisor to request a copy of this publication if you have not already received one.

2 gLoBAL InSIgHT weeKLy – noveMBeR 9, 2012

Markets & the EconomyMarket Scorecard – November 9, 2012

Source: Bloomberg. Note: Bond yields in local currencies. Copper and Agricul-ture Index data as of Thursday’s close. Dollar Index measures USD vs. six major currencies. Currency rates reflect market convention (CAD/USD is the excep-tion). Currency returns quoted in terms of the first currency in each pairing. Data as of 9:30 pm GMT 11/9/12.

Examples of how to interpret currency data: CAD/USD 1.00 means 1 Canadian dollar will buy 1.00 U.S. dollars. CAD/USD 2.0% return means the Canadian dollar rose 2.0% vs. the U.S. dollar year to date. USD/JPY 79.48 means 1 U.S. dollar will buy 79.48 yen. USD/JPY 3.3% return means the U.S. dollar rose 3.3% vs. the yen year to date.

Govt Bonds (bps chg) Yield 1 week MTD YTDUS 2-Yr Tsy 0.258% -2.4 -2.3 1.9US 10-Yr Tsy 1.613% -10.2 -7.7 -26.3Canada 2-Yr 1.083% 1.6 0.9 12.7Canada 10-Yr 1.716% -5.5 -6.9 -22.5UK 2-Yr 0.247% -0.8 -1.7 -8.0UK 10-Yr 1.735% -12.0 -11.7 -24.2Germany 2-Yr -0.033% -3.8 -7.1 -17.7Germany 10-Yr 1.348% -10.2 -11.4 -48.1 Commodities (USD) Price 1 week MTD YTDGold (spot $/oz) 1,731.45 3.2% 0.6% 10.7%Silver (spot $/oz) 32.61 5.5% 1.1% 17.1%Copper ($/ton) 7,628.75 -0.4% -1.7% 0.5%Oil (WTI spot/bbl) 86.07 1.4% -0.2% -12.9%Oil (Brent spot/bbl) 110.25 3.2% -0.2% 1.4%Natural Gas ($/mlnBtu) 3.31 -2.4% -5.7% 11.1%Agriculture Index 483.62 0.7% -0.2% 11.3% Currencies Rate 1 week MTD YTD

US Dollar Index 81.03 0.5% 1.4% 1.1%CAD/USD 1.00 -0.6% -0.2% 2.0%USD/CAD 1.00 0.6% 0.2% -1.9%EUR/USD 1.27 -0.9% -1.9% -1.9%GBP/USD 1.59 -0.8% -1.4% 2.3%AUD/USD 1.04 0.5% 0.1% 1.8%USD/CHF 0.95 0.9% 1.8% 1.1%USD/JPY 79.48 -1.2% -0.4% 3.3%EUR/JPY 101.05 -2.1% -2.3% 1.4%EUR/GBP 0.80 -0.1% -0.5% -4.0%EUR/CHF 1.21 -0.1% -0.1% -0.9%USD/SGD 1.22 -0.1% 0.3% -5.6%USD/CNY 6.24 0.0% 0.1% -0.8%USD/BRL 2.05 0.7% 0.8% 9.6%

Stocks stumbled across regions as attention shifted toward U.S. fiscal cliff risks and Europe’s nagging challenges. Most safe-haven government bonds traded higher and yields fell.

Following the U.S. election, traders indicated fiscal cliff uncertainties began to jolt equity markets on Wednesday and also impacted Thursday’s session—never mind the risks have been well known for many months.

Portfolio repositioning for tax purposes may have exacerbated the U.S. selloff.

President Barack Obama’s decisive electoral-college victory combined with the Democratic Party’s stronger-than-expected Senate and House wins increase the possibility capital gains and dividend taxes could be raised on high-income households as a part of a forthcoming fiscal cliff agreement. And high-income Americans are disproportionate owners of equities.

But another issue on the other side of the Atlantic may have actually triggered Wednesday’s global downdraft.

European Central Bank (ECB) President Mario Draghi acknowledged the Eurozone crisis has begun to drag down the once stalwart German economy.

Again, this is nothing investors didn’t already know.

German data have dripped lower week after week, including manufacturing activity, business sentiment, and GDP growth—not to mention a 1.2% year-over-year drop in September industrial production, which was reported the day before Draghi spoke.

Nevertheless, as the ECB president, his statements carry sufficient weight. They hit the German stock market (DAX) on Wednesday,

and other markets took that cue and sold off, including in North America.

Investors seemed to interpret Draghi’s comments as a warning the economic strains caused by the Eurozone crisis could at least linger or even deepen.

On the same day, the European Commission lowered its 2013 GDP growth forecasts across the region (see chart).

Uncertainty about Greece’s fate also played a role in the equity rout.

Its government passed an austerity bill by a 153-128 vote amid a general strike, massive public protests, and some violence. Eurozone finance ministers were expected to disperse €31.5 billion ($40.1 billion) in aid soon after the vote, but deferred the decision for at least another week or until later this month.

Exhibit 1: Europe Downgraded its GDP Forecasts

1.0%1.7% 1.3%

0.4%0.0%

-0.5%

-1.4%

-4.2%

-0.3%

0.4%0.8%

0.1%

Euro Area* Germany France Italy Spain Greece

Spring ForecastAutumn Forecast

European Commission 2013 Real GDP Forecasts

Source: rbC Wealth management, european Commission* euro Area (aka eurozone) refers to 17 countries that use the euro currency and are bound by other agreements.

3 gLoBAL InSIgHT weeKLy – noveMBeR 9, 2012

Markets & the Economy

the broader market have performed well during periods of high and low tax rates.

But there could be an initial adjustment period for dividend-paying stocks if the Obama tax hike is implemented, especially for high-yielding stocks. According to our national research correspondent, roughly 67% of dividend payments on individual tax returns go to households with adjusted gross income of $200,000 and above, many of which would be subject to the tax hike. These households may find other investments, such as municipal bonds, more appealing from a tax standpoint and alter their portfolio mix.

We don’t anticipate a mass exodus out of U.S. dividend-paying stocks. The overwhelming majority of dividend payments (roughly 70%) don’t show up on individual tax returns. These dividends are paid to pension funds, insurance reserves, and private trusts. Or, they are accrued passively within individuals’ tax-sheltered 401K and IRA accounts. As long as these accounts remain sheltered, they would not be impacted.

Price-to-earnings (P/E) multiples—what investors are willing to pay for every dollar of earnings— ultimately tend to play the greatest role in the market’s performance over time, not solely investment tax rates.

Global RoundupCanada• The S&P/TSX index ended the week in negative

territory, as oil dropped as much as 4% intraweek. The Energy and Health Care sectors led the declines, while Materials outperformed.

• The week was filled with earnings releases, with positive results from Westshore Terminals, Sunlife Financial, Kinross, and Magna International. Meanwhile, a handful of companies reported negative results including:

Exhibit 2: Capital Gains and Dividend Tax Rates Under Various Scenarios

2012 Rates

2013 Rates in "Fiscal Cliff"

Scenario*

President Obama's Proposal

2012 Rates

2013 Rates in "Fiscal Cliff"

Scenario*

President Obama's Proposal

$0 – $17,500 0% 10% 0% 0% 15% 0%$17,500 – $59,300 0% 10% 0% 0% 15% 0%$59,300 – $71,000 0% 20% 15% 0% 28% 15%$71,000 – $143,350 15% 20% 15% 15% 28% 15%$143,350 – $218,450 15% 20% 15% 15% 31% 15%$218,450 – $241,900 15% 20% 15% 15% 36% 15%$241,900 – $390,050 15% 23.8%** 23.8%** 15% 39.8%** 39.8%**$390,050 and above 15% 23.8%** 23.8%** 15% 43.4%** 43.4%**

Taxable Income (Joint Filers)

Long-term Capital Gains Tax Rates Qualified Dividends Tax Rates

Source: Tax Policy Center, RBC Wealth Management* In “fiscal cliff” scenario, the Bush tax cuts would expire to these levels if current law is not changed** Includes the 3.8% investment tax in the Affordable Care Act (Obamacare)

It’s Time to Move OnAs tempting as it may be to marinate in the U.S. election results and analyze what they may or may not mean for financial markets and the economy, it’s time to move on. The fiscal cliff and debt ceiling outcomes should have a greater impact on markets across regions and the U.S. and global economies.

Fiscal cliff press conferences and news reports have the potential to jostle equity markets in either direction in the coming weeks and months. As we’ve stated previously, the American legislative process is almost always noisy and messy. Investors should expect heightened volatility and whippy headline-driven trading patterns throughout the fiscal cliff and debt ceiling negotiations, at the very least.

We anticipate a partial resolution will ultimately materialize in which some tax increases and spending cuts will hit and others won’t. This could constrain nominal GDP by roughly 1.4% at best or 2.4% at worst, in our assessment. Our economist believes such an agreement would enable U.S. real

GDP to limp along at a 1.3% growth rate in 2013 (see the Global Insight monthly report for details).

More uncertain is whether such a resolution would represent merely a short-term deal or a comprehensive “grand bargain.” It’s also unclear how long it would take to get there (we believe there’s a real possibility negotiations could stretch into the first quarter), and whether the debate itself would damage financial markets in the interim.

One of the major stumbling blocks within the fiscal cliff has always been and continues to be the Bush-era tax cuts. President Obama and the Democratic-led Senate want to extend them for most Americans, except for so-called “wealthy” households in the top two tax brackets. In contrast, the Republican-led House of Representatives seeks to extend the Bush-era rates (the 2012 tax levels) for everyone.

If Obama’s capital gains tax hike were to hit the highest two brackets, we doubt it would have a long-term impact on the market. The U.S. stock market has performed well (and poorly) at various capital gains rates.

However, if the powers-that-be don’t soon send a clear message about whether 2013 capital gains rates will be raised, high-income households may decide to front-load capital gains in 2012 at the low Bush-era rates (see table). The longer this aspect of the debate rages without a resolution, the more likely high-income households will capture gains, which could constrain the stock market.

Regarding dividend taxes, the overall level doesn’t tend to drive the performance of dividend-paying stocks over the long term. Historically, dividend payers and

4 gLoBAL InSIgHT weeKLy – noveMBeR 9, 2012

Global Roundup

Canadian Natural Resources, Agrium, Keyera, PennWest, and CML Healthcare. Inter Pipeline and Telus increased their dividends, while investors began to question the sustainability of PennWest’s and CML Healthcare’s dividends.

• In M&A, Franco Nevada announced it has entered into an agreement with Penn West Petroleum to acquire a net royal interest in Weyburn Oil, a Saskatchewan oilfield, for C$400 million.

• Canadian government bond yields moved marginally lower across the yield curve with longer-dated bond yields falling more than shorter-dated yields, resulting in a flatter yield curve. The move lower in Canadian yields was muted in comparison to U.S. Treasury yields, which posted a more-notable decline.

• Housing starts for October were 204.1K, less than the 210.0K expected by consensus estimates and below September’s 225.2K reading. Statistics Canada’s New Housing Price Index rose by 2.4% on a y/y basis in September, slightly ahead of the 2.3% consensus forecast.

• Canada’s trade deficit narrowed unexpectedly as exports rose by 1.9% in September while imports were unchanged. A 4.2% increase in energy exports and prices were largely responsible for the increase in exports. The trade deficit was reported at $826 million in September versus $1.5 billion in August.

• Coming up: September Manufacturing Sales (Nov 15); October Existing Home Sales (Nov 15); September International Securities Transactions (Nov 16).

Europe• The Bank of England left the bank rate at

0.5% and maintained the size of the Asset Purchase Facility unchanged at £375B. The Monetary Policy Committee’s (MPC) decision was probably influenced by better economic data from the U.S., evidence of a soft landing

• The Reserve Bank of Australia (RBA) surprised investors with an announcement that it will maintain its cash-rate target at 3.25%, citing higher-than-expected prices and a more-positive global macroeconomic environment. The Aussie dollar rallied on the news. Central banks in Korea and Indonesia also maintained rate stability at 2.75% and 5.75%, respectively.

• Casino operators reported falling profits as gamblers from China spent less during the recent economic slowdown. Melco Crown Entertainment Ltd. (6883.HK) saw profit decline 7.4%, while Sands China (1928.HK) saw net income decrease 6.4% despite rising revenues. Meanwhile, Galaxy Entertainment Group Ltd. (27.HK) fell the most in over three months as investor Permira Advisers LLP decided to sell its 5.94% stake in the company through a private placement.

• HSBC Holdings plc announced that it will probably face criminal charges due to allegations that it broke anti-money laundering laws in the U.S., causing the bank to allocate $800M toward likely probe costs.

• Coming up: Chinese M2 growth (consensus 14.5% y/y), Chinese export growth (consensus 10.0% y/y), Japan Q3 GDP (expected -0.9% q/q), Hong Kong Q3 GDP (consensus 0.6% q/q).

in China, and aggressive ECB action. It was also probably driven by scepticism about the efficiency of Quantitative Easing (QE). The Funding for Lending Scheme, whereby U.K. banks are encouraged to lend to households and companies, now seems like the preferred policy tool. The monetary stance is already extremely accommodative, so rather than do more of the same, the MPC probably judges that it is more appropriate to improve the efficiency of what has already been done.

• This pause in QE is potentially bad news for Chancellor George Osborne and for the gilt market. The former will need to finance the deficit by wooing the private sector, now that the Bank of England is no longer dominating demand. The gilt market will have to contend not only with the absence of the largest buyer, but also with an increase in supply as the government is likely to overshoot borrowing requirements for 2013 due to lacklustre growth.

• Coming up: Greek Parliamentary vote (Nov 11); Eurogroup meeting (Nov 12); U.K. CPI (Nov 13); U.K. unemployment rate, Euro area industrial production (Nov 14); Euro area GDP (Nov 15).

Asia Pacific• Asian equities fell across the board. The Hang

Seng and the Nikkei declined over 3% as markets pulled back in response to negative European headlines and an approaching U.S. fiscal cliff.

• China’s non-manufacturing Purchasing Mangers’ Index (PMI) rose to 55.5 from 53.7 in October, while industrial output rose 9.6%, greater than the 9.4% forecast. In addition, October inflation came in near a three-year low at 1.7%, giving policymakers increased room for action. Following on the positive manufacturing PMI, these data points support our view of a recovering Chinese economy and provide a shifting economic backdrop for the country’s leadership transition, which began Thursday.

Exhibit 3: Chinese Consumer Inflation (CPI) Year-over-Year % Change

-2%0%2%4%6%8%

10%

2000 2002 2004 2006 2008 2010 2012

Source: bloomberg, monthly data series through october 2012

5 gLoBAL InSIgHT weeKLy – noveMBeR 9, 2012

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Rating Count % Count %Buy (TP/O) 777 50.19 256 32.95Hold (SP) 692 44.70 176 25.43Sell (U) 79 5.10 8 10.13

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6 gLoBAL InSIgHT weeKLy – noveMBeR 9, 2012

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