Strategy: The Investment Outlook

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Strategy: The Investment Outlook

Introduction Strategy: The Investment Outlook Spring 2015 Volume 35, Number 2 RBC Capital Markets’ (RBC CM) Strategy publication is the outcome of senior representatives of the firm regularly meeting to compare and contrast their views on the investment outlook. Strategy consists of three parts: first, the consensus strategy resulting from these discussions; second, a series of tactics designed to capitalize on this strategy; and third, some of the working papers that guided us to our conclusions.

At times, the views of individual analytic disciplines will differ from the group’s consensus. These divergences will be apparent in the working papers. We believe readers will want to be aware of the full range of views shaping Strategy and have, therefore, included commentary that may appear to be at odds with the consensus view of the committee.

All prices are as of market close February 27, 2015 ET, unless otherwise noted.

All values are in Canadian dollars unless otherwise noted.

Investment Strategy Equity Selection Committee Matt Barasch (Chair), J. Allworth, J-F Dion, N. Downey, C. McAlpine, and J. Mirza.

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Table of Contents Click on titles to be taken to that section.

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Recommended Asset Mix ............................................................ 4 57.5% Equities, 35% Bonds, 7.5% Cash

Recommended Equity Weights ................................................... 5

Benchmark Returns ..................................................................... 6 Bish Koziol (Quantitative Research Associate)

Stock Selections and Updates ...................................................... 8 Investment Strategy Equity Selection Committee

The Economy ............................................................................ 26 Headwinds temper global growth outlook

Dawn Desjardins (Assistant Chief Economist, RBC Economics)

Quantitative Research ............................................................... 39 Valuations in Canada continue to rise Chad McAlpine, CFA, CMT (Quantitative Research)

Trend & Cycle ............................................................................ 41 TSX short-term oversold – Buy the dip Javed Mirza, CFA, CMT (Analyst, Technical Research – Trend & Cycle)

Fundamental Equity Weightings ................................................ 54

Global Equity Coverage Universe .............................................. 61

Required Disclosures ................................................................. 62

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Recommended Asset Mix 57.5% Equities, 35% Bonds, 7.5% Cash By definition, most portfolios are constructed to achieve specific objectives. This definition implies that, in a general publication such as this, it is difficult to address the requirements of every type and class of investor.

One way of partially overcoming this difficulty is to recognize that many portfolios have limits placed on the proportion of assets that can be committed to the equity markets. This being the case, a recommended asset mix could be expressed in terms of the proportion of the minimum/maximum range allowed for equities. Investors with different constraints should be able to translate a certain recommended equity exposure to levels more appropriate for their own portfolios.

This approach is used to translate our general asset-mix recommendations into weightings appropriate for two hypothetical portfolios with differing equity constraints. For example, the weighting of equities in our hypothetically balanced portfolio can vary between 40% and 60%—a minimum/maximum range of 20 percentage points. If we were to recommend an equity exposure of 25%, then this would mean that only five percentage points of the possible 20 should be committed to equities (i.e., 25% of the account’s individually defined minimum/maximum range, or a total equity weighting in the balanced portfolio of 45%). Similarly, a portfolio in which equity exposure could vary between 0% and 100% (such as the growth portfolio) should be no more than 25% equities.

Asset Class Ranges

High/Low Constraint Present Position Balanced (%) Growth (%) Asset Class Balanced (%) Growth (%) 20/0 100/0 Cash 1.5 7.5 60/40 100/0 Bonds 47.0 35.0 60/40 100/0 Stocks 51.5 57.5 Past Range: Growth Portfolio Asset Class Highest %: Date Lowest %: Date Cash 40%: Q2-Q3/87 0%: Q3/91, Q1/92, Q3/92-Q1/93, Q1-Q2/95 Bonds 55%: Q1/92-Q3/92 10%: Q4/86-Q3/87 Stocks 70%: Q4/86-Q1/87 40%: Q2/92, Q1/94-Q4/94

Source: RBC Capital Markets

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Recommended Equity Weights S&P/TSX Weight (%) RBC Capital Markets As of As of Recommended Weight (%) 11/28/2014 02/27/2015 Previous Current ENERGY 21.6 20.8 23.0 23.0 Energy Equipment & Services 1.0 0.8 2.0 2.0 Oil, Gas & Consumable Fuels 20.6 20.1 21.0 21.0 MATERIALS 10.4 11.7 10.0 8.0 ↓ Chemicals 3.0 3.5 1.0 1.0 Other* (Construction Materials, Containers & Packaging) 0.2 0.2 0.0 0.0 Metals & Mining ex. Gold and Steel* 2.5 2.5 2.0 2.0 Gold 4.1 4.8 4.0 3.0 Steel 0.1 0.1 1.0 1.0 Paper & Forest Products 0.4 0.5 2.0 1.0 INDUSTRIALS 8.7 8.5 10.0 11.0 ↑ Capital Goods 1.8 1.6 2.0 2.0 Commercial & Professional Services 0.7 0.7 2.0 2.0 Transportation 6.2 6.2 6.0 7.0 CONSUMER DISCRETIONARY 6.4 6.6 8.0 9.0 ↑ Automobiles & Components 1.6 1.7 2.0 2.0 Consumer Durables & Apparel 0.5 0.6 2.0 2.0 Consumer Services 0.9 0.9 0.0 1.0 Hotels, Restaurants & Leisure 0.9 0.0 1.0 Media 2.1 2.1 2.0 2.0 Broadcasting & Cable TV 0.1 0.1 0.0 0.0 Other* (Advertising, Cable & Satellite, Movies & Entertainment, Publishing) 2.0 2.1 2.0 2.0 Retailing 1.2 1.2 2.0 2.0 CONSUMER STAPLES 3.4 3.7 3.0 3.0 HEALTH CARE 3.5 4.7 5.0 6.0 ↑ FINANCIALS 36.7 34.5 36.0 35.0 ↓ Banks 23.8 21.4 21.0 20.0 Diversified Financials 1.4 1.4 3.0 3.0 Insurance 6.9 6.7 8.0 8.0 Real Estate 4.7 5.0 4.0 4.0 INFORMATION TECHNOLOGY 2.1 2.5 1.0 1.0 Software & Services 1.6 1.9 1.0 1.0 Technology Hardware, Semiconductors* 0.5 0.6 0.0 0.0 TELECOMMUNICATION SERVICES 4.9 4.8 3.0 3.0 UTILITIES 2.2 2.2 1.0 1.0 * RBC Capital Markets estimates Source: RBC Capital Markets

Spring 2015 5


Benchmark Returns Bish Koziol (Quantitative Research Associate)

Equities in Canada and the US gained over the past three months. The S&P/TSX Composite rose 4.1% while the S&P 500 gained 2.3% over the same period. Year to date, the Canadian Index is up 4.5%, versus 2.6% for the S&P 500. In Canada, Health Care was the top performing sector during the quarter, gaining 40.1%. Information Technology and Materials followed with 18.0% and 16.1% gains respectively. In the US, Consumer Discretionary led all sectors by advancing 5.8%, followed by Materials at 4.7%. Both the Energy and Financial sectors declined during this same time period in Canada and the US.

The 30-year US Treasury Bond continued its advance, gaining 6.6% during the quarter. For the past 12 Months, the 30-year US Treasury Bond has risen 24.6%. In Canada the Long GOC Bond gained 11.4% over the past three month and 26.1% on a 12-month trailing basis.

All style indices posted positive returns during the quarter on both sides of the border. Momentum was the highest positive gainer in Canada with a 4.6% return. In the US, Growth had the largest advance, with a 4.7% return.

Benchmark Returns (period from November 28, 2014 to February 27, 2015)

Canada (C$) 3-Month 12-Month 5-Year Trailing YTD Trailing Cpd Ann Asset Classes (Total Return) S&P/TSX Composite 4.1 4.5 10.3 8.6 S&P/TSX 60 3.9 4.6 12.7 8.6 S&P/TSX Completion 4.6 4.4 3.8 8.8 S&P/TSX Smallcap 3.4 3.7 -5.9 3.5 Long GOC Bond 11.4 9.2 26.1 11.2 10 Year GOC Bond 6.8 6.0 14.0 7.0 5 Year GOC Bond 3.5 3.2 6.4 4.3 3 Month Canada T-Bill 0.3 0.2 0.9 0.9 DEX Bond Universe 5.1 4.5 10.4 6.0 CDN$/US$ exchange -8.8 -7.2 -11.6 -3.4 S&P/TSX Composite Group Indices (Total Return) Energy -0.3 -0.7 -9.3 2.7 Materials 16.1 14.9 -3.7 -4.9 Industrials 2.1 2.4 21.9 20.9 Consumer Discretionary 9.6 7.1 36.5 22.0 Consumer Staples 12.3 3.8 47.4 23.4 Health Care 40.1 39.2 50.2 56.3 Financials -1.9 1.1 13.8 13.0 Information Technology 18.0 12.4 37.5 -0.5 Telecommunication Services 2.2 2.5 16.2 18.9 Utilities 3.0 4.9 16.8 10.5 Income Trust Index 0.6 0.4 9.2 16.4 High Dividend Index 1.9 1.3 16.1 N/A REIT Index 0.8 0.5 9.7 15.4 RBC Canadian Style Total Return Indices RBC Canada Style Diversified Index 0.5 1.7 5.2 12.3 RBC Canada Value Index 0.3 -0.3 1.6 11.4 RBC Canada Growth Index 3.9 3.8 0.8 8.5 RBC Canada Momentum Index 4.6 5.2 10.6 12.8 RBC Canada Predictability Index 2.3 1.1 15.8 15.3

United States (US$) 3-Month 12-Month 5-Year Trailing YTD Trailing Cpd Ann Asset Classes (Total Return except where noted) S&P 500 2.3 2.6 15.5 16.2 S&P 400 4.8 3.9 11.1 17.0 S&P 600 5.2 2.3 7.8 17.6 Dow Jones Industrial Average 2.3 2.2 13.7 14.8 NASDAQ Composite Price Return 3.6 4.8 15.2 17.3 NASDAQ 100 Price Return 2.4 4.8 20.1 19.5 Russell 1000 2.6 2.9 14.9 16.4 Russell 2000 5.5 2.5 5.6 16.0 30 Year US Treasury Bond 6.6 3.4 24.6 10.9 10 Year US Treasury Bond 2.0 1.9 8.4 5.3 5 Year US Treasury Bond 0.2 1.0 1.6 2.1 3 Month US T-Bill 0.0 0.0 0.0 0.1 S&P 500 Group Indices (Price) Energy -1.2 -1.5 -9.1 6.7 Materials 4.7 5.7 9.3 11.1 Industrials 1.0 1.3 10.5 14.4 Consumer Discretionary 5.8 5.1 14.2 20.2 Consumer Staples 1.4 2.9 19.3 13.1 Health Care 3.8 5.4 21.6 18.1 Financials -0.1 -1.7 12.7 10.7 Information Technology 1.9 3.7 20.4 15.2 Telecommunication Services -2.3 4.2 7.5 9.1 Utilities -1.7 -4.8 12.6 9.2 RBC US Style Total Return Indices RBC US Style Diversified Index 3.5 3.1 16.7 19.4 RBC US Value Index 1.1 0.5 14.3 15.9 RBC US Growth Index 4.7 4.1 15.0 16.9 RBC US Momentum Index 4.3 3.6 16.3 17.8 RBC US Predictability Index 4.1 3.2 17.6 17.8

Source: RBC Capital Markets Quantitative Research

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Strategy: The Investment Outlook – Stock Selections and Updates

Stock Selections and Updates Investment Strategy Equity Selection Committee

We continue to emphasize a portfolio approach to stock selection. Our Strategy Focus List includes names that our three distinct approaches to security selection (fundamental, technical, and quantitative analysis) suggest have the best return potential given the industry exposure constraints outlined on page 5. This implies that, through regular revision, several stocks may be removed from the Focus List even though one or more of our various disciplines still suggest that those stocks have good return potential.

Since its inception at year-end 1984, our Strategy Focus List has outperformed the S&P/TSX Composite with a compound annual return of 14.6% compared to 9.0% for the market.* Over the past three months, the Focus List provided a total return of 5.5% compared to 4.1% for the S&P/TSX (before transaction costs). Exhibit 1 compares the value of a $10,000 investment in the Strategy Focus List at inception and rebalanced quarterly to reflect changes in the list. Also plotted is the value of an equivalent investment in the S&P/TSX Composite. We show our Spring 2015 Strategy Focus List in Exhibit 3 with specific recommendations summarized on the following pages.

Please see our Fundamental Equity Weightings section, beginning on page 54. Fundamental Equity Weightings assign weightings for stocks in the S&P/TSX according to their relative attractiveness, as determined by our fundamental research analysts only. The success of this technique over time is reflected in its compound annual growth rate of 11.3% since inception in mid-1986, compared to 8.4% for the S&P/TSX over the same period.*

Strategy Focus List total pre-tax returns Exhibit 1: RBC Capital Markets Strategy Focus List versus S&P/TSX Composite

$0$50,000

$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000$500,000$550,000$600,000$650,000$700,000

1984 1988 1992 1996 2000 2004 2008 2012

RBC CM Strategy Focus List = $621,908

S&P/TSX Index = $134,663

Note: Based on $10,000 invested in December 1984. Source: RBC Capital Markets

Strategy Focus List historical returns Exhibit 2: Last Eight Quarters Total Return (%)*

Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 Q1/15 RBC Strategy Focus List 4.5 2.4 9.6 4.4 4.8 6.7 0.1 5.5 S&P/TSX Equity Index 3.2 0.8 6.4 6.9 3.5 7.8 -5.0 4.1 Source: RBC Capital Markets; * Compound annual growth rate, 1984 to present. Note: Past performance is not necessarily indicative of future performance. Performance returns do not take into consideration management fees or other account expenses, which would lower actual returns.

Spring 2015 8


Spring 2015 Focus List stock selections and updates Exhibit 3: Strategy Focus List stocks

Sym. Stock Price as of Weights Weighting Change (02/27/2015) (%) from Last Quarter Agrium Inc. AGU US$115.53 5.0 Alimentation Couche-Tard ATD.B $48.24 2.5 ARC Resources Ltd.* ARX $24.15 2.5 Bank of Nova Scotia, The BNS $66.81 5.0 Brookfield Asset Management Inc. BAM US$54.28 5.0 Canadian National Railway Company CNR $86.35 5.0 Canadian Natural Resources Ltd. CNQ $36.36 2.5 Decreased from 5.0% Canadian Pacific Railway Limited CP $234.10 2.5 New this quarter Canadian Real Estate Investment Trust REF.UN $46.80 2.5 Dollarama Inc. DOL $62.52 5.0 Industrial Alliance Insurance and Financial Services Inc. IAG $42.45 2.5 Loblaw Companies Ltd. L $63.79 2.5 MacDonald, Dettwiler and Assoc. Ltd. MDA $98.49 2.5 Magna International Inc. MGA US$108.96 5.0 Manulife Financial Corporation MFC $21.77 5.0 Methanex Corporation MEOH US$54.30 2.5 Metro Inc. MRU $34.72 5.0 National Bank of Canada NA $48.11 5.0 Pembina Pipeline Corporation PPL $39.98 2.5 New this quarter Restaurant Brands International Inc.* QSR US$44.23 5.0 Increased from 2.5% Saputo Inc. SAP $36.32 2.5 Suncor Energy Inc. SU $37.53 5.0 TELUS Corporation T $44.44 2.5 Toromont Industries Ltd. TIH $31.20 5.0 Toronto-Dominion Bank TD $54.80 5.0 Total 100.0 Stocks added to the Spring 2015 Focus List: Canadian Pacific Railway Limited (2.5%), Pembina Pipeline Corporation (2.5%) Stocks removed from the Spring 2015 Focus List: CAE Inc. (2.5%), Canadian Western Bank (2.5%) * In an intra-quarter update on December 16, 2014, we added a 2.5% position in Restaurant Brands International Inc. (QSR) and reduced the position in ARC Resources Ltd. (ARX) to 2.5% from 5.0%. At the time of this publication, one or more analysts that were responsible for the preparation of this report, or their household members, held a long position in the common shares of Canadian Pacific Railway. Source: RBC Capital Markets Equity Selection Sub-Committee

Agrium Inc. (NYSE: AGU) Andrew D. Wong – Associate Analyst, RBC Dominion Securities Inc.

Agrium is a well-diversified crop input company with US$16 billion of revenues in 2014. The company’s retail division operates North America’s largest agricultural retail network and has extensive reach in Australia and Canada. Agrium Wholesale has significant operations that produce nitrogen fertilizers, along with sizeable operations that produce phosphate and potash fertilizers.

Agrium has built the most diverse, vertically integrated agricultural input business. We believe the company has a clear path to strong (Continued on next page.)

125 WEEKS 12OCT12 - 27FEB15HI-25JAN13HI/LO DIFF

105.487 -44.02%

LO-3OCT14 59.051

CLOSE 75.927

AGRIUM Rel. S&P 500

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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-27FEB15LO/HI DIFF

116.650 51.12%

LO-2AUG13 77.190

CLOSE 115.530

AGRIUM

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85.00 90.00 95.00 100.00 105.00 110.00 115.00

PEAK VOL.VOLUME

13778.1 4638.7 4000

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earnings growth, from both its retail and wholesale businesses, that will translate to robust cash flows with lower volatility. We expect that the retail business will grow through organic improvements (higher margins, proprietary products, and cost efficiencies) and inorganic growth (Viterra, tuck-ins and bolt-ons).

We have an Outperform rating on the shares. We arrive at our US$130 price target by attributing an equal weighting to our sum-of-the-parts (SOTP) EV/EBITDA and DCF valuation. Our SOTP EV/EBITDA analysis applies a multiple based on a SOTP analysis of our 2016E EBITDA and equity earnings. We apply a 7.0x multiple to the Nitrogen segment, a 7.5x multiple to Phosphate, and an 8.5x multiple to Potash and Retail. These multiples are in line with the company’s peers. Our DCF valuation uses a 6.6% real discount rate for Nitrogen cash flows through 2024, 8% for Nitrogen cash flows beyond 2024, and 8.5% for the rest of the business.

Potential price target impediments include: 1) unpredictable weather events in North America or international markets that can have an adverse effect on demand for agricultural inputs, 2) currency fluctuations having an effect on earnings as Agrium has operations in the US, Canada and other countries, 3) volatile nutrient prices, which can have a significant effect on Agrium’s profitability, 4) changes in the price of fertilizer product inputs such as natural gas, sulphur and others, which can affect Agrium’s earnings, and 5) the possibility that Agrium may not realize its targeted synergies with respect to its retail acquisitions, which could result in lower margins than we forecast.

Alimentation Couche-Tard (TSX: ATD.B) Irene Nattel – Analyst, RBC Dominion Securities Inc.

Alimentation Couche-Tard is the third-largest convenience store retailer in North America and is the leader in the Canadian convenience store industry. Since the acquisition of Statoil Fuel & Retail in 2012, ATD is also a leader in convenience store and road transportation fuel in Scandinavia and the Baltic states, with a growing presence in Poland. With the early 2015 acquisition of The Pantry, Couche-Tard operates a network of more than 7,800 stores located across North America, operating in 40 states in the US and all 10 Canadian provinces, while its European network comprises 2,240 stores across Scandinavia, Poland, the Baltics and Russia. In addition,

about 4,600 Circle K stores operate in 12 other countries worldwide under licensing agreements, bringing the total number of stores in ATD’s global network to over 14,600.

ATD continues to deliver solid results from underlying operations, with a more favourable economic climate in the US and lower gas prices across North America acting as a modest tailwind to sales volumes. ATD has been very active as an industry consolidator and has demonstrated an ability to significantly enhance the profitability of acquisitions post-transaction. Although ATD is doing a good job of delivering improving results from existing operations, we expect ATD to remain an active consolidator with potential transactions of varying sizes across geographies, the most recent of which is The Pantry, a chain of 1,500 c-stores in the US Southeast for US$1.7b. While potential acquisitions are not reflected in our forecasts or price target, we incorporate a share buyback to our numbers in order to deploy excess balance sheet capacity. Share buyback has historically proven a conservative proxy for earnings upside from acquisitions.

With estimated consolidated free cash flow in the range of $1.1-$1.4 billion annually over our forecast horizon, ATD is well positioned to continue to aggressively de-lever the balance sheet, or, alternatively, to fund incremental acquisitions/share buyback. Adjusted debt/EBITDAR of 2.01:1 at quarter-end was down from prior quarter of 2.23:1 and down 1.5 turns on EBITDAR relative to the 3.58:1 immediately post-SFR. Even after the PTRY acquisition, net debt/EBITDA is forecasted to decline to 0.8x by the end of F16. Our calculations around potential borrowing capacity indicate ATD has the ability to add incremental debt in excess of $3.0B, plus further incremental borrowing capacity based on EBITDA added through acquisitions.

Potential catalysts for share price appreciation from current levels will likely be: 1) additional potential accretive acquisitions; 2) better-than-anticipated margin performance and improvements in performance from the PTRY assets; and 3) actual consumer spending trends that prove more favourable than currently anticipated.

125 WEEKS 12OCT12 - 27FEB15

HI-30JAN15LO/HI DIFF

251.441 170.74%

LO-25JAN13 92.873

CLOSE 234.645

ALIMENTATION COUCHE TARD INC SV Rel. S&P/TSX COMPOSITE INDEX

120.00

180.00 240.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-30JAN15LO/HI DIFF

50.580235.93%

LO-30NOV12 15.057

CLOSE 48.240

ALIMENTATION COUCHE TARD INC SV

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45965.6 5048.4

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We have a Sector Perform rating on Alimentation Couche-Tard. Taking the midpoint of 20x mid-F2017E EPS ($52) and 11x mid-F2017E EBITDA ($52) drives our price target of $52. The P/E multiple is higher than the long-term average consumer products P/E multiple (15x) while the EV/EBITDA multiple is a premium to the one-year forward trading multiples of peers Casey’s General Stores (NASDAQ: CASY) and CST Brands (NYSE: CST), reflecting anticipation of potential M&A activity. We believe the multiples are also appropriate relative to our c-store coverage universe based on relative investment attributes.

Impediments to our price target include actual economic performance that is worse than currently anticipated, which could result in earnings and share price being below expectations. As well, US gas margins that differ significantly from estimates would affect earnings, either positively or negatively, and similarly, fluctuations in the CAD/US$ exchange rate would impact earnings. We also note that potential acquisitions could affect our price target.

ARC Resources Ltd. (TSX: ARX) Michael Harvey, P.Eng. – Analyst, RBC Dominion Securities Inc.

ARC Resources Ltd. is the successor company to ARC Energy Trust, which was established in July 1996 through an IPO at $10/unit and which underwent conversion from an income trust to a corporation in December 2010. ARC’s current production is approximately 118,000 boe/d weighted 60% to natural gas and 40% to oil and liquids. The company’s key assets are the northeastern BC Montney, Ante Creek, Pembina, Redwater, along with interests in southeastern Saskatchewan and Manitoba. ARC’s focus in 2015 will be toward the Montney in northeast BC, with the company expected to further reduce its budget later in 2015 in response to low oil prices. The next

growth phase in northeastern BC will be at Sunrise, where the company’s 60 mmcf/d gas plant will start-up late 2015, bringing regional capacity to 120 mmcf/d.

We have an Outperform rating on the shares. Our base case price target of $30 is modelled on our NAVPS plus risked upside approach and maps to multiples of 2.4x NAV and 14.1x 2015E DACF. Our estimate of ARC’s NAVPS is based on a long-term crude oil price of $84/bbl and discount rate of 8.5%. We note that ARC’s NAVPS is highly levered to North American natural gas pricing.

The most significant risks to our price target are unexpected changes in crude oil and natural gas prices. The valuation of oil and gas assets is also subject to risk with respect to reservoir performance, including initial production rates, declines, and expected recovery factors. Other risks include the effect of foreign exchange and government legislation as it relates to royalties, income taxes and environmental policy.

Bank of Nova Scotia, The (TSX: BNS) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc.

Scotiabank is Canada’s most international bank and is an active corporate lender. Notable for a long track record as the low-cost Canadian producer, Scotiabank currently ranks third by market cap and by assets. The domestic bank contributes around 48% to earnings, international banking 28%, and wholesale banking 24%.

We have a Sector Perform rating and a $66 price target on the shares of BNS, as we believe the current valuation adequately reflects growth prospects in the International segment. We believe earnings growth in the International segment will face challenges over the

(Continued on next page.)


HI-21JUN13HI/LO DIFF

120.371 -34.19%

LO-23JAN15 79.213

CLOSE 81.720

ARC RESOURCES LTD Rel. S&P/TSX COMPOSITE INDEX

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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-20JUN14HI/LO DIFF

33.680-38.39%

LO-16JAN15 20.750

CLOSE 24.150

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112.560 -15.24%

LO-30JAN15 95.407

CLOSE 100.548

BANK OF NOVA SCOTIA Rel. S&P/TSX COMPOSITE INDEX

100.00 105.00 110.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-1AUG14 LO/HI DIFF

74.930 43.27%

LO-16NOV12 52.300

CLOSE 66.810

BANK OF NOVA SCOTIA

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Spring 2015 11


near term given recent plans for the bank to undergo restructuring in Latin America. Our price target is based on a P/E multiple of 11.0x our 2016 EPS estimate. The target multiple is closer to the midpoint of the target range of 10.0–11.5x that we use for the big Canadian banks, reflecting our view that growth at the bank's international division will be challenged.

Risks to our price target include the health of the overall economy, sustained deterioration in Latin America and in the capital markets environment, and greater than anticipated impact from off-balance sheet commitments. Additional risks include regulatory and political risk including tax rates, the potential for non-accretive acquisitions and/or related execution risk, deterioration in the Latin American political and economic climate, litigation risk, a rising Canadian dollar and rising business loan losses.

Brookfield Asset Management Inc. (NYSE: BAM) Neil Downey, CA, CFA – Analyst, RBC Dominion Securities Inc.

Brookfield Asset Management Inc. (BAM) is a specialist asset manager focused on high-quality property, power and infrastructure assets. The company has approximately US$200 billion of assets under management. We believe BAM now has the structure in place to grow its pool of managed capital by a meaningful amount over the long term. Key to this strategy has been the creation of three flagship listed funds for property, renewable power and infrastructure. BAM has maintained a solid financial position, with corporate liquidity of approximately US$2.1 billion as at Q4/14.

Fee-bearing managed capital is currently US$84 billion, up from US$79 billion at the outset of this year. The growth in fee-bearing AUM does not tell the whole story, however, as the profitability mix has improved (via shedding lower margin AUM and adding higher fee bearing funds) while at the same time the asset-management franchise is demonstrating significant operating leverage (fees are growing faster than the related costs of service). As such, asset management and services fees are now annualizing in excess of US$750 million (+24% year over year), including only modest incentive distribution receipts. With the net margin at 50%-plus, we estimate 2015 net income in excess of US$450 million and we believe the fee earning businesses have become very valuable (~US$10 billion).

Our US$62 price target equates to parity with our estimated intrinsic value one-year hence, implying a multiple of ~21x our 2016 operating FFO/share estimate.

Overall, we believe our target valuation is appropriate in light of BAM’s high-quality asset base and the growing profitability of its asset management platform. We believe there are few if any companies that are truly comparable to Brookfield Asset Management, and we continue to view BAM’s shares as a ‘core holding’. Based upon risk-adjusted relative return prospects, we rate BAM’s shares Outperform.

Impediments to our earnings estimates and price target include rising interest rates, which might negatively affect earnings at the company’s home-building operations and reduce the value of its long-dated assets (commercial properties, power generation, transmission, and infrastructure assets), a hard cyclical downturn in the commercial property sector (BAM’s largest industry exposure), and any economic shock that causes lending spreads to widen and/or loan-to-value ratios to decline, which could have a notable effect on BAM’s weighted-average costs of capital (and hence its equity value).


HI-13FEB15LO/HI DIFF

113.835 27.72%

LO-10JAN14 89.125

CLOSE 113.179

BROOKFIELD ASSET MANAGEMENT IN Rel. S&P 500

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55.390 76.60%

LO-16NOV12 31.366

CLOSE 54.280

BROOKFIELD ASSET MANAGEMENT IN

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Spring 2015 12


Canadian National Railway Company (TSX: CNR) Walter Spracklin, CFA – Analyst, RBC Dominion Securities Inc.

Canadian National Railway is our favourite name in the rail space due to the company’s best-in-class execution capabilities, strong growth prospects and solid management team.

Significant earnings growth potential creates upside in CNR shares: We expect CNR’s strategy of balancing operating and service excellence to drive meaningful earnings growth in the near term, and recent market share gains and superior operating performance reinforce our outlook. In light of the company’s strong near-term prospects, we expect the shares to benefit from a positive multiple re-rating as the market gains an appreciation for the earnings potential afforded by CNR’s best-in-class execution capabilities and new volumes coming on line.

Our $94 price target is based on a 19.5x P/E multiple applied to our 2016 estimate. This multiple is above the peer average, as we view CNR to be a best-in-class operation with a solid growth pipeline, which warrants a premium valuation. Based on CNR’s relative return to our price target compared to the other class-1 railroads in our coverage space, we rate CNR shares Outperform. Impediments to achieving our estimates and price target include 1) Significant re-regulation resulting from the ongoing review of the Canada Transportation Act; 2) Impairment of crude-by-rail economics due to persistent oil price weakness; 3) Severe network disruption and lower crop yields as a result of weather events; 4) Reduced cross-border freight activity due to unfavourable currency fluctuations; and 5) Lower industrial production and consumer demand on account of economic volatility throughout North America.

Canadian Natural Resources Ltd. (TSX: CNQ) Greg Pardy, CFA – Analyst, RBC Dominion Securities Inc.

Canadian Natural Resources (CNQ) has become a dominant independent in western Canada, with roots that stretch back to 1988, when Murray Edwards joined forces with Allan Markin to create a junior producer with a focus on medium- and low-risk development opportunities. Through successive stages of growth, which have involved both property and corporate acquisitions, CNQ has emerged as the largest natural gas and heavy oil producer in western Canada. Over the years, CNQ has made a series of larger strategic acquisitions. CNQ’s production is over two-thirds oil weighted and flows from western Canada, the UK North Sea and offshore West Africa (Côte d’Ivoire and Gabon). CNQ’s main growth driver is its Horizon (100% working interest) oil sands mining project.

We have an Outperform rating on Canadian Natural Resources Ltd. Our one-year price target is $43 per share. Our price target reflects an equal weighting toward a multiple of 1.0x our base NAV of $30.78 per share and a 2016E mid-cycle debt-adjusted cash flow multiple of 8.5x. The above-average multiples that we have chosen reflect CNQ’s superior execution capability, strong balance sheet and potential free cash flow generation in 2018 and beyond.

The most significant risks to our price target are unexpected changes in crude oil and natural gas prices. The ability to replace production and reserves in a cost-effective manner on a per-share basis also poses a risk to investors. The valuation of oil and gas assets is subject to risk with respect to reservoir performance, including production rates and expected recovery factors. Other risks include the effect of foreign exchange and government legislation as it relates to royalties, income taxes, and environmental policy.



161.862 64.44%

LO-2NOV12 98.435

CLOSE 158.721

CDN NATL RAILWAY CO. Rel. S&P/TSX COMPOSITE INDEX

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88.890113.04%

LO-26OCT12 41.725

CLOSE 86.350

CDN NATL RAILWAY CO.

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PEAK VOL.VOLUME

13619.9 6070.1 5000

10000


HI-27JUN14LO/HI DIFF

130.545 43.00%

LO-14DEC12 91.292

CLOSE 96.274

CDN NATL RES Rel. S&P/TSX COMPOSITE INDEX

100.00 110.00 120.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-4JUL14 LO/HI DIFF

49.570 84.41%

LO-16NOV12 26.880

CLOSE 36.360

CDN NATL RES

28.00

32.00

36.00

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PEAK VOL.VOLUME

47508.4 11549.4

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Spring 2015 13


Canadian Pacific Railway Limited (TSX: CP) Walter Spracklin, CFA – Analyst, RBC Dominion Securities Inc.

Canadian Pacific Railway has the most near-term earnings growth potential in our rail coverage space based on anticipated margin expansion and revenue growth from ongoing restructuring initiatives.

Strong financial targets reflect compelling upside: CP's financial guidance highlight a strategic shift from cost-cutting to revenue growth. The targets include: $10B revenue in 2018 (+11% four-year CAGR); “more than double” EPS by 2018 (+19% four-year CAGR); and $6B cumulative free cash flow by 2018. If these targets are achieved, we estimate EPS at $18.72 in 2018 and an upside share price valuation of $286 by applying an 18.5x P/E multiple and discounting

back for two years at 10%. Accordingly, we believe that CP shares offer attractive upside for investors with an optimistic growth outlook.

Our $223 price target for CP is derived by applying an 18.5x P/E multiple to our 2016 EPS estimate. This target multiple is above the peer average on account of CP's strong operating momentum and earnings potential. While we have strong conviction in CP's operating potential, we rate the shares Sector Perform due to our more conservative revenue assumptions compared to management guidance. However, we could see meaningful upside in CP shares, if the company's long-term growth targets are achieved. Impediments to achieving our estimates include: 1) significant re-regulation resulting from the ongoing review of the Canada Transportation Act; 2) persistent oil price weakness impairing crude-by-rail economics; 3) severe weather impacting crop quality and network fluidity; 4) unfavourable currency fluctuations impacting cross-border freight flows; and 5) economic volatility tempering industrial production and consumer demand throughout North America.

Canadian Real Estate Investment Trust (TSX: REF.UN) Neil Downey, CA, CFA – Analyst, RBC Dominion Securities Inc.

Canadian REIT (CREIT) holds a diversified portfolio of retail, office and industrial income-producing real estate located in nine provinces and one state. The REIT owns interests in more than 180 properties, with approximately 22 million sf of owned gross leasable area. The tenant base is also highly diversified, as no tenant accounts for more than 6% of total revenues. CREIT has one of the longer track records of any Canadian REIT (TSX-listed in September 1993). CREIT’s development pipeline (active and future) is approximately $600 million (at its share) and encompasses over 3 million sf of retail and industrial properties.

Over the long term, CREIT has an exceptional track record of delivering unitholder returns (estimated 15-year IRR in excess of 15%). We believe that CREIT’s low leverage (approximately 40% LTV) and low payout ratio (below 70% of 2015 estimated AFFO, equating to approximately $60 million of annual cash retention before drip participation) provide the REIT with greater than average flexibility to execute its business plan, regardless of the capital market ‘climate’. By way of example, CREIT was the only REIT to provide investors with an increase in its per unit distribution in 2008, 2009, and 2010 (during and in the aftermath of the Global Financial Crisis). Recent distribution increases include +4% (April 2013), +6% (May 2013) and +6% (February 2014).

Looking to the future, we note that CREIT has an active pipeline that includes 0.6 million sf currently under development (3.2 million sf for future development). All developments appear to be progressing well and once they are converted into income producing property status they should help drive 2015-2016 results.

Our $52 price target is derived via the application of ~10% premium to our NAV per unit estimate one year hence, which implies a 20x multiple to our 2016 AFFO/unit estimate. Our target valuation metrics represent moderate premiums to the


HI-3OCT14 LO/HI DIFF

229.179 129.48%

LO-19OCT12 99.870

CLOSE 215.522

CP RAILWAY Rel. S&P/TSX COMPOSITE INDEX

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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-3OCT14 LO/HI DIFF

247.560 189.24%

LO-26OCT12 85.590

CLOSE 234.100

CP RAILWAY

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PEAK VOL.VOLUME

5438.1 1565.4 2000

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HI-19APR13HI/LO DIFF

110.752 -21.32%

LO-4JUL14 87.135

CLOSE 89.827

CDN REIT Rel. S&P/TSX COMPOSITE INDEX

90.00

100.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-7NOV14 LO/HI DIFF

50.000 26.55%

LO-28JUN13 39.510

CLOSE 46.800

CDN REIT

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PEAK VOL.VOLUME

1194.6 906.1

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Spring 2015 14


average target multiples applied to the Canadian commercial-property REITs, which we believe is warranted by CREIT’s low financial leverage, longer than average history, proven management, high-quality (and improving) property portfolio, relatively large market capitalization and overall franchise value. CREIT remains one of our core REIT holdings. Based on relative risk and total return expectations, we reiterate our Outperform rating.

Impediments to the achievement of our price objectives primarily relate to the risks associated with the ownership of real property, which include but are not limited to general economic conditions, local real estate markets, credit risk of tenants, supply and demand for leased premises, competition from other leased premises, the trust’s above-average exposure to near-term lease expirations, and interest rate fluctuations.

Dollarama Inc. (TSX: DOL) Irene Nattel – Analyst, RBC Dominion Securities Inc.

Although the Canadian retail segment boasts several industry-leading performers, Dollarama is the only true organic growth story in the Canadian large-cap retail sector. Founded in 1994, the company has grown to over 900 locations across Canada and is Canada’s leading dollar store operator. Dollarama’s mission is simple: deliver value for its customers. The company’s goal is to exceed customer’s expectations around the quality and variety of products found at Dollarama at seven price points ranging from $0.77 to $3.00.

In Q3/F15, 69% of sales were generated by products priced higher than $1.00, which was up from 62% in Q3/F14 and reflected

maturation of the $2.50 and $3.00 price points. Dollarama’s key competencies begin with proprietary sourcing of product, with 51% of purchases in F14 sourced directly from overseas, and an estimated 85–90% of Dollarama’s offering is control brands and private label, with only 10–15% being national brands.

Dollarama consistently delivers industry-leading revenue growth and profitability, with an impressive EBITDA margin of 19.5% in F14, which was a gap of almost 500 basis points relative to its closest North American peer. Our forecasted annual EPS growth of 22% in F15-17 is driven by 1) same stores sales growth of 4–5%, 2) unit growth in the range of 8-9%, 3) operating leverage, 4) efficiency initiatives to drive EBITDA margin growth, and 5) consistent share buyback. In our view, Dollarama’s substantial free cash flow is likely to be deployed to a combination of annual dividend increases and share repurchases, with the company renewing its NCIB in conjunction with Q1 results. In our view, no other Canadian retailer offers comparable, consistent growth and earnings visibility in the current challenging retail environment. We believe that Dollarama’s positioning as an extreme value retailer substantially moderates the risk of near-term consumer spending concerns.

We have an Outperform rating on Dollarama. Our $70 price target is based on 22x LTM to F2017E (Jan 2017) EPS and 16x LTM to F2017E EBITDA, which are at the high end of the range of top-tier, growth-focused, large-cap, Canadian, consumer names and US dollar store retailers, and in our view is warranted by its above-average sales, earnings, and free cash flow growth. Impediments to our price target include a market shift to more cyclical names impeding valuation expansion and results that do not meet consensus expectations. Key risks that influence our forecasts include increased competition, minimum wage rate increases, a sustained decline in the Canadian dollar driving product cost inflation that management is unable to offset through adjusted offer/operating initiatives.


HI-12DEC14LO/HI DIFF

163.826 81.22%

LO-8FEB13 90.400

CLOSE 161.535

DOLLARAMA INC Rel. S&P/TSX COMPOSITE INDEX

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63.900128.26%

LO-21DEC12 27.995

CLOSE 62.520

DOLLARAMA INC

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10530.0 1723.5

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Spring 2015 15


Industrial Alliance Insurance and Financial Services Inc. (TSX: IAG) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc.

Created through a series of acquisitions and amalgamations, the Industrial Alliance Group (IAG) currently ranks as the fourth-largest publicly traded life and health insurance company in Canada. IAG remains primarily focused on the Canadian market, where it provides a wide range of protection and wealth management products through an extensive multi-channel distribution network.

We have an Outperform rating on IAG’s shares. We believe IAG is undervalued given it is trading at a discount to peers. IAG has increased its dividend twice since Q4/13. We view this as a positive

sign from the company with respect to future earnings power. We forecast solid core EPS growth in 2015 and 2016. On average, we estimate 8% YoY core EPS growth for IAG.

Our 12-month price target of $51 per share is based on a P/ E multiple of 12.0x our core 2016 EPS estimate. Our price target implies a multiple of 1.5x book value, which we view as fair given our ROE expectations of ~11% in 2015 and 2016.

Risks to our price target include persistently low interest rates, competition in the Canadian insurance market, deteriorating equity markets, adequacy of actuarial assumptions, changes to accounting and regulatory rules, and acquisition/execution risk.

Loblaw Companies Ltd. (TSX: L) Irene Nattel – Analyst, RBC Dominion Securities Inc.

Loblaw Companies Limited is Canada’s largest food distributor and is a leading provider of drugstore, general merchandise, and financial products and services. Loblaw and its franchisees currently operate over 1,050 stores across Canada. According to The Globe and Mail’s Top 1,000 Rankings, Loblaw, together with its franchisees, is one of Canada’s largest private-sector employers with more than 134,000 full-time and part-time employees. On a weekly basis, Loblaw serves more than 14 million customers across Canada, representing approximately 40% of the Canadian population. On March 23, 2014, Loblaw completed the previously announced acquisition of Shoppers Drug Mart for $12.4 billion. The combination of Shoppers Drug Mart,

the largest drug store retailer in Canada, and Loblaw solidifies Loblaw’s position as the largest retailer in Canada, with a combined store count in excess of 2,300, annualized revenues in excess of $45 billion, and combined annualized EBITDA in excess of $3.6 billion.

Since late 2012, Loblaw has become extremely proactive in terms of shareholder value creation: 1) dividend increased in Q4/12 by 4%, in Q2/13 by 9%, and in Q2/14 by 2%, 2) in Q2/13, it created and had an IPO for Choice Properties REIT, and 3) in Q1/14, the acquisition of Shoppers Drug Mart. At the same time, through early 2015, Loblaw appears to be making significant strides toward regaining revenue momentum, consistently delivering sector-leading same store sales growth despite the highly competitive retail climate.

Focus for 2014 was on successfully implementing SAP in stores representing a majority of and working through the preliminary stages of the Shoppers integration. Both were achieved and Shoppers synergies are currently running one quarter ahead of schedule. Looking to 2015, a combination of 1) accelerating underlying earnings growth at Loblaw as incremental expenses related to IT upgrades taper off, and as Loblaw begins to realize benefits from the multi-year IT and supply chain rebuild and upgrade, 2) anticipated synergies of $200 million from the Shoppers acquisition, and 3) pro forma free cash flow in excess of $1 billion annually applied to debt repayment should drive forecasted average annual economic earnings growth of 16% over the 2014-2016 period.


HI-6DEC13 LO/HI DIFF

169.988 69.99%

LO-12OCT12 100.000

CLOSE 128.986

INDUSTRIAL ALLIANCE INSURANCE Rel. S&P/TSX COMPOSITE INDEX

120.00 140.00 160.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-8NOV13 LO/HI DIFF

49.990 94.67%

LO-19OCT12 25.680

CLOSE 42.450

INDUSTRIAL ALLIANCE INSURANCE

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2411.2 898.8 1000

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125 WEEKS 12OCT12 - 27FEB15HI-12DEC14LO/HI DIFF

156.326 58.73%

LO-30NOV12 98.489

CLOSE 150.806

LOBLAWS Rel. S&P/TSX COMPOSITE INDEX

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66.880104.09%

LO-23NOV12 32.770

CLOSE 63.790

LOBLAWS

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22482.0 2984.4 9000

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Spring 2015 16


We have an Outperform rating on Loblaw Companies Ltd. Our $69 target is based on a sum-of-the-parts, EBITDA-based valuation methodology. Applying a 9x EBITDA multiple to forecasted 2016 adjusted EBITDA and taking the value of CHP at target of $11, less a 20% holding company discount, generates a price target of $69. Multiple of 9x is consistent with prior multiple on SC, a tick higher than the average long-term EV/EBITDA multiple for the consumer sector in Canada but a discount to the growth-oriented names in the space (e.g., DOL, ATD), consistent with Loblaw's current earnings growth outlook. The one-year price target on CHP is derived by applying a ~5% premium to estimated NAVPU one-year hence, which implies a ~15X target multiple to 2015E AFFO/unit estimate. This valuation reflects CHP's portfolio attributes, developing large cap liquidity, still to be established public market track record and a controlling shareholder discount.

As Loblaw executes on its renewal program, investment by management in pricing or other key expense factors or delays in surfacing benefits from SAP could have a negative impact on the company's earnings growth rate and share price going forward. Failure to realize forecasted synergies from the Shoppers Drug Mart acquisition could also negatively impact share price. Impediments to the achievement of CHP price target primarily relate to the risks associated with the ownership of real property, which include but are not limited to general economic conditions, local real estate markets, credit risk of tenants, supply and demand for leased premises, competition from other leased premises and interest rate fluctuations. The REIT's future growth is also dependent to a large extent on its ability to access the capital markets on a timely and cost-effective basis.

MacDonald, Dettwiler and Associates Ltd. (TSX: MDA) Steve Arthur, CFA – Analyst, RBC Dominion Securities Inc.

MacDonald, Dettwiler and Associates Ltd. (MDA) is the global market leader in commercial communications satellites, with ~35% market share. We see a number of growth drivers ahead, which should deliver our base case expectation of nearly 9% revenue growth and approximately 12–15% earnings growth over the next several years.

In particular, we expect revenue, earnings and share price to be driven by: 1) increased order intake of commercial communications satellites and sub-systems (we are tracking over 34 satellite opportunities targeting launch over the next several years that have yet to be awarded), 2) further penetration into new markets (i.e., the

US Government market — approximately half the global satellite market – and the small satellite market), 3) continued success with emerging market operators, 4) expanded service and product offerings in its surveillance and intelligence business, and 5) strategic acquisitions.

Industry consultants expect ~25 satellite orders per year from commercial satellite operators over the coming decade, which would be consistent with recent historical averages. Of these, we believe MDA should maintain roughly its one-third share. In addition, the US Government represents a large, long-term opportunity, in our view. Faced with growing budgetary constraints, US agencies need to consider lower-cost commercial options, thereby opening the door for MDA (SS/L) to bid commercial programs directly or to sell added capability to satellite operators that in turn sell services to the government. Emerging markets represent a high-growth area for communications satellites. MDA has had success in these regions, and we expect a higher level of bid activity.

MDA has a solid balance sheet and generates strong cash flows from operations. Net debt/EBITDA now stands at 2.2x and should move lower in coming quarters. MDA currently pays a dividend of $1.48 per share (1.5% yield).

Despite share price strength in recent months, MDA shares are attractively valued at roughly 13x 2016E EPS. We maintain our Outperform rating and $110 target price. The key impediment to achieving our forecasts and target price is a slower than expected flow of commercial communications satellite orders, as required to replenish the backlog and drive revenue in 2015 and beyond.


HI-12DEC14LO/HI DIFF

157.633 64.92%

LO-19OCT12 95.584

CLOSE 155.533

MACDONALD DETTWILER Rel. S&P/TSX COMPOSITE INDEX

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101.420 114.10%

LO-26OCT12 47.370

CLOSE 98.490

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1099.3 373.0

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Spring 2015 17


Magna International Inc. (NYSE: MGA) Steve Arthur, CFA – Analyst, RBC Dominion Securities Inc.

As a top-five global auto parts supplier, we see a number of drivers for Magna’s earnings growth and share price: 1) growth in global auto volumes, with moderate growth in North America, recovering volumes in Europe, and continued growth in developing regions, 2) continued, gradual margin improvement in Europe, 3) expansion in emerging markets, which is an area where the company has historically been underinvested, 4) a strong balance sheet that we expect will be put to work with acquisitions, dividend increases, and/or buybacks, and 5) attractive valuation levels.

US auto sales have largely completed their recovery from 2009 lows. While the pace of growth has moderated, we remain comfortable with our full-year 2015 forecast of 16.9 million units (up from 16.4 million in 2014), as the US returns to a long-term trend line of 16–17 million units annually.

European operations continue to be a focus for both Magna management and investors. Magna reported solid progress in operational improvements over the past two years, now with twelve consecutive quarters of profitability.

Sales and production appear to have started a modest recovery, which we expect will continue in the coming years. Coupled with operational improvements, we expect margins in the region to continue to move higher—almost doubling to around 4.5% by 2016E.

Magna continues to have a very strong balance sheet, with net cash of ~$225 million. The company is working to deploy excess cash, with a target leverage ratio of 1.0–1.5x adjusted debt to adjusted EBITDAR by the end of 2015E. We forecast this could represent up to $3.8 billion in capital to deploy on acquisitions and/or share buybacks. This is on top of a capital spending plan of ~$1.5 billion annually and annual dividend increases.

Magna’s shares have performed very well over the past 2+ years, supported by positive end-markets, strong financial performance and expanding industry multiples. However, the shares continue to trade at 5.8x 2016E EBITDA, which is a slight discount to the peer-group average of 6.3x. Given MGA’s solid growth profile and balance sheet, we believe MGA should trade at a modest premium to the peer group. We rate Magna shares Outperform with a US$127 target price. The key impediments to achieving our forecasts and target price are industry volumes, guided by macroeconomic factors. Stalled growth in North America and/or continued declines in Europe would negatively affect our outlook and expectations for the share price.

Manulife Financial Corporation (TSX: MFC) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc.

Manulife is Canada’s largest insurer, a leading global provider of financial protection and wealth management products and services. In 2014, Manulife generated 29% of core earnings in Asia, 23% in Canada, and 48% in the United States (excluding the corporate and other segment). Manulife is among the larger life insurers globally as measured by market capitalization.

We have an Outperform rating on MFC’s shares. The current valuation levels leave upside potential, in our view, given longer term ROE possibilities in a better environment.

We view the proposed acquisition of Standard Life's Canadian business deal as a modest positive, as the transaction is not punitive on capital, while the deal should strengthen MFC's Canadian operations and increase the company's earnings capacity beyond the current 2016 target. Investors in MFC shares should benefit from less volatile earnings than in recent years as earnings sensitivities to movements in equity markets and interest rates have declined significantly.


HI-8AUG14 LO/HI DIFF

189.603 89.60%

LO-12OCT12 100.000

CLOSE 170.152

MAGNA INTL INC Rel. S&P 500

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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-29AUG14LO/HI DIFF

114.480 168.73%

LO-16NOV12 42.600

CLOSE 108.960

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165.457 65.46%

LO-12OCT12 100.000

CLOSE 147.146

MANULIFE FINANCIAL CORP. Rel. S&P/TSX COMPOSITE INDEX

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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-5DEC14 LO/HI DIFF

23.090 98.20%

LO-16NOV12 11.650

CLOSE 21.770

MANULIFE FINANCIAL CORP.

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Spring 2015 18


Our 12-month price target of $24 per share is based on a P/ E multiple of 12.5x on our core 2016 EPS estimate. Our price target implies a price to book value multiple of 1.5x, which we view as fair given our ROE expectations of ~11% in 2015/2016.

Risks to our price target include persistently low interest rates, deteriorating equity markets, adequacy of actuarial assumptions, changes to accounting and regulatory rules, acquisition/execution risk, unfavourable political and/or economic developments in Asia, and appreciation in the Canadian dollar.

Methanex Corporation (NASDAQ: MEOH) Robert Kwan, CFA – Analyst, RBC Dominion Securities Inc.

Methanex is a global supplier of methanol, a liquid chemical primarily produced from natural gas, which the company sells to international markets. The shares have an attractive total return profile (i.e., yield plus dividend growth) and are attractive for investors seeking a pro-cyclical dividend growth story. With solid forecast demand growth from its use as a crude oil alternative (e.g., gasoline blending, methanol-to-olefins) coupled with a modest supply addition outlook that mostly includes higher marginal cost capacity, the long-term methanol market is attractive. Potential upside catalysts include higher methanol prices, a valuation bump for the new Geismar facilities if management moves forward with the creation of an MLP

(although we do not see this as likely), and additional favourable capital allocation activities including a greater-than-expected dividend increase and/or an additional share buyback.

Our price target for the shares is US$57.00 and our ranking is Sector Perform. Our price target is based on a 6.5x EV/EBITDA multiple applied to our forward EBITDA estimate. The multiple is a slight premium to historical valuations when methanol prices have been at current levels, but we believe a premium is warranted for management’s focus on capital allocation, which we see as being rewarded in the current market environment.

Impediments to our price target include: (1) political risk in jurisdictions where Methanex has facilities (e.g., Egypt); (2) availability and pricing of natural gas feedstock supply; (3) a sudden and severe slowdown of the Chinese economy, which currently accounts for roughly 40% of global methanol demand; and (4) the Gulf Coast relocation projects proceeding on materially different economics to those included in our valuation.

Metro Inc. (TSX: MRU) Irene Nattel – Analyst, RBC Dominion Securities Inc.

Metro Inc. is a leading food and pharmaceutical retailer in Quebec and Ontario. Metro and its franchisees operate over 800 food stores under multiple banners, including Metro, Metro Plus, Super C, Food Basics, and over 350 drugstores under the Brunet, Clini-Plus, Metro Ontario Pharmacies, The Pharmacy, and Drug Basics banners.

Metro has a long track record of delivering industry-leading profitability through rigorous focus on cost management and ongoing emphasis on in-store offerings. F2015 should continue to see enhanced flyer and promotional management as part of the Metro & Me loyalty program, and ongoing focus on cost control and improving

“fresh” offerings that should provide benefits through our forecast period and enable Metro to sustain its market position even as competition in food retail remains intense. MRU opened a new produce DC late in 2013, helping in-store assortment/freshness in the key produce and non-milk dairy categories. While the majority of the DC consolidation benefits (Continued on next page.)



184.983 86.41%

LO-19OCT12 99.235

CLOSE 126.191

METHANEX CP Rel. S&P 500

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O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-7MAR14 LO/HI DIFF

73.430160.39%

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CLOSE 54.300

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148.601 60.95%

LO-4JUL14 92.325

CLOSE 146.185

METRO INC. SV Rel. S&P/TSX COMPOSITE INDEX

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36.520 93.84%

LO-26OCT12 18.840

CLOSE 34.720

METRO INC. SV

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11808.3 3431.6

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Spring 2015 19


have already been realized, there is room to improve profitability, particularly in the meat category, which was only transferred to the new facility in late 2014. Incorporating meat into the new DC should help at the gross margin level, although SG&A costs are expected to creep up slightly Y/Y due to higher transportation costs. Metro has also proven its focus on shareholder value creation with a 20-year track record of annual dividend increases and consistent execution of share buybacks. Since 2007, Metro has reduced its share count by 29.2 million shares, or 26%. Consistent execution of share buyback is estimated to add 510 basis points to F07-F16 EPS CAGR.

Metro currently enjoys an extremely conservative capital structure, with net debt of only $925 MM as of Q1/F15 and 29% of capitalization. Factoring in the current $1.5 billion market value of Metro’s 32.2 million shareholding in Alimentation Couche-Tard (TSX: ATD.B), Metro is effectively debt free.

In conjunction with the Q4/F14 release, management once again reiterated its preference for a gradual increase in leverage through full execution of its existing NCIB and annual dividend increase, while maintaining some balance sheet capacity for selected acquisitions in food and drug retail.

We have an Outperform rating on Metro Inc. Our $35 target is generated by applying a 15x P/E and an 9x EV/EBITDA multiple to mid-F17 TTM forecasts and adding the estimated after-tax value of MRU’s investment in Alimentation Couche-Tard. The multiples are at the upper end of Metro’s historical average valuation band and reflect the company’s earnings outlook, conservative capitalization, and long track record of shareholder value creation. Potential acceleration in price competition in the Quebec and Ontario markets could impede the company’s ability to achieve our earnings growth forecast and target price. Conversely, successful redeployment of excess balance sheet capital could drive returns above our current target price.

National Bank of Canada (TSX: NA) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc.

National Bank is a Montreal-based, fully integrated, financial services company, and is the smallest of the big-six Canadian banks. In Q1/15, earnings were split among personal and commercial (40%), wealth management (19%), and capital markets (41%).

We rate NA's shares as Sector Perform as we believe the above-average loan growth in Canada P&C and improving revenue mix in Wholesale Banking is fairly reflected in the company's valuation. In our view, NA will continue to outperform peers in terms of loan growth in the Canadian P&C segment, but we believe this outperformance is adequately reflected in NA's current valuation. NA

is less exposed to Western Canada relative to its peers, which we view positively given ongoing weakness in energy prices.

Our 12-month price target of $49 is based on a P/E multiple of 10.0x our 2016E EPS estimate. The target multiple is at the low end of the target range of 10.0x-11.5x we use for the big Canadian banks, reflecting lower exposure to retail banking earnings.

Risks to our price target include the health of the overall economy and the Quebec economy in particular, sustained deterioration in the capital markets environment, integration risk of acquisitions, an unexpected acquisition, and a change in the competitive or political environment in Quebec. Additional risks include regulatory and political risk including tax rates, rising business loan losses, greater than anticipated impact from off-balance sheet commitments, additional write-downs related to ABCP, and litigation risk.


HI-7NOV14 LO/HI DIFF

121.292 25.84%

LO-29MAR13 96.388

CLOSE 104.033

NATL BANK OF CDA Rel. S&P/TSX COMPOSITE INDEX

100.00

110.00

120.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-21NOV14LO/HI DIFF

55.500 54.66%

LO-19APR13 35.885

CLOSE 48.110

NATL BANK OF CDA

36.00 38.00 40.00 42.00 44.00 46.00 48.00 50.00 52.00 54.00

PEAK VOL.VOLUME

12998.9 6695.8 5000

10000

Spring 2015 20


Pembina Pipeline Corporation (TSX: PPL) Robert Kwan, CFA – Analyst, RBC Dominion Securities Inc.

Pembina Pipeline is a pipeline and midstream company that operates oil and NGL pipelines, gas gathering and processing facilities and oil and NGL infrastructure and logistics businesses. We expect Pembina's shares to outperform its peers for the following key reasons: (i) a premium asset base supported by mostly fee-for-service/cost of service cash flows, (ii) we expect the company to raise dividends by roughly 5% in mid-2015 (iii) compelling value from new projects coming to fruition with a good line of sight into the growth profile into 2017 and (iv) we believe that Pembina has the best positioned assets to take advantage of development in the Montney and Duvernay (Kaybob, Edson, and Willesden Green). Potential upside

catalysts include additional project announcements (e.g., new gas plants to service the Duvernay, etc.) and additional volumes for the Phase III pipeline expansion.

Our $50.00 per share price target is based on a roughly 13.5x multiple of 2016E EBITDA, which is above the group average, reflecting the high proportion of cash flow derived from the oil pipeline business coupled with growth in the liquids system. Our target also includes roughly $7/share of upside from projects with contracts that are not expected to materially contribute until beyond 2016 (e.g., RFS III; Phase III expansion) as well as $2/share for the assumption that Pembina is able to contract the remaining capacity on its Phase III expansion. We have an Outperform rating on the stock.

Impediments to our price target include the level of throughput on the Alberta Pipelines, regulatory intervention, the ability to complete new projects on-time and on-budget, operational issues, reduced margins in the midstream and marketing segment, and a material increase in long-term interest rates.

Restaurant Brands International Inc. (NYSE: QSR) David Palmer – Analyst, RBC Capital Markets, LLC.

Our Outperform rating reflects our confidence that Burger King's purchase of Tim Hortons will result in efficiencies that will drive earnings growth beyond our original base case for Burger King as a stand-alone entity.

Burger King's 100% franchised business model offers stability and predictability of earnings and cash flows with low capital requirements and insulation from input costs. In addition, international unit growth has been accelerating—to 10% from 6% in 2011 and the company's domestic sales momentum seems to have improved in recent months. With the addition of Tim Hortons, we

believe the new company can create additional value by employing cost discipline, returning capital to shareholders, and accelerating international unit growth.

While the recent deal is said to be motivated by tax savings, we believe significant value can be created if 3G Capital were to establish control and implement its cost discipline on the combined entity. Having successfully completed refranchising, laid the groundwork for international licensing/ expansion, and communicated its intent to return capital to shareholders, we believe 3G Capital is beginning to recognize it may be nearing the end of its value creation opportunities with Burger King as a stand-alone entity. With overhead per store at Hortons nearly 2.5x (~$31k/ store) that of Burger King, We note that each incremental 200bp in warehouse margins and $5k/store reduction in overhead would add 3pp and 2pp to annualized EPS growth, respectively.

(Continued on next page.)


HI-12SEP14LO/HI DIFF

148.787 49.48%

LO-9NOV12 99.534

CLOSE 116.402

PEMBINA PIPELINE CORP Rel. S&P/TSX COMPOSITE INDEX

100.00

120.00

140.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-5SEP14 LO/HI DIFF

53.040 96.37%

LO-16NOV12 27.010

CLOSE 39.980

PEMBINA PIPELINE CORP

30.00

35.00

40.00

45.00

50.00

PEAK VOL.VOLUME

25247.2 5647.4 10000

20000



207.065 113.63%

LO-19OCT12 96.929

CLOSE 207.065

RESTAURANT BRANDS INTERN Rel. S&P 500

100.00 120.00 140.00 160.00 180.00 200.00


45.710229.44%

LO-19OCT12 13.875

CLOSE 44.230

RESTAURANT BRANDS INTERN

15.00

20.00

25.00

30.00 35.00 40.00

PEAK VOL.VOLUME

64058.4 6928.8 20000

40000

60000

Spring 2015 21


We believe this acquisition could potentially imply future global consolidation in fast food. In other sectors, 3G has tended to continue buying after its first deal. While synergies in restaurants are limited (and would be limited in this acquisition), Burger King will likely employ deep cost cutting, refranchising to 100% franchised mix, and debt leverage to create value. Our guess is that Burger King may be looking at THI as a cash flow play and conduit to future global deals.

Our US$46 price target equates to the present value of 28x our pro-forma 2018 EPS estimate of $1.97 for Restaurant Brands International or 39x our 2016 pro-forma EPS estimate of $1.17. Our DCF analysis also yields a $46 value based on a long-term growth rate of 1.7% and a weighted average cost of capital of 7.1%

Saputo Inc. (TSX: SAP) Irene Nattel – Analyst, RBC Dominion Securities Inc.

Since Saputo was founded in 1954, the company has grown into one of the largest milk processors in North America and one of the top 10 dairy processors globally. Through a series of acquisitions in the United States, Canada, Latin America, Europe and, most recently, Oceania, the company has demonstrated its expertise in integration and profit improvement. As the dairy industry continues to consolidate, this should facilitate the company's role as a substantial acquirer.

We believe Saputo offers investors an intriguing combination of defensiveness (even in a recession, people need to eat) and growth.

Through operational excellence and a disciplined approach to acquisitions, Saputo has delivered 20% average annual net income growth since its 1997 IPO. In addition, we believe SAP’s growth profile is improving with the maturation of acquisitions, strong by-product markets and improving milk/cheese price spreads. In combination, these factors should drive double-digit EPS growth over our forecast horizon. SAP also has a consistent track record of returning capital to shareholders in the form of consistent annual dividend increases and in the absence of acquisitions, share repurchases.

Our $38 price target is derived by applying a 19x P/E multiple and 12.5x EBITDA multiple to our F2017 forecasts. Multiples are consistent with recent multiple expansion best-of-breed US consumer foods peers. At current levels, valuation reflects value accretion of recent M&A, potential for additional selective transactions, dairy commodity pricing strength, Saputo’s industry-leading profitability and 15-year track record of annual dividend increases. We have an Outperform rating on the shares.

It should be noted that growth by acquisition in this mature industry continues to be integral to the company's long-term approach to value creation. Saputo has time and again demonstrated its ability to realize accretive acquisitions and management continues to actively seek new opportunities, either in the US or abroad. As we cannot model acquisitions that have yet to be made, particularly with regard to timing, our financial forecasts do not reflect potential acquisitions. Potential acquisitions would likely drive EPS growth higher than our conservative 11% EPS CAGR forecasts excluding acquisitions.

Earnings could be lower than currently projected if Saputo is unable to offset declines in cheese manufacturing profitability with incremental contribution from the production and sale of value-added dry whey and whey fractions. Also, Saputo has a strong track record of realizing value-enhancing acquisitions and management continues to actively seek new opportunities, either in the US or abroad. The timing, pricing, and magnitude of any acquisition could impact earnings and achievement of our price target, as could actual margin enhancement of acquisitions.



141.724 42.15%

LO-19OCT12 99.698

CLOSE 135.684

SAPUTO INC. Rel. S&P/TSX COMPOSITE INDEX

100.00 110.00 120.00 130.00 140.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-6FEB15 LO/HI DIFF

37.580 76.47%

LO-12OCT12 21.295

CLOSE 36.320

SAPUTO INC.

22.00

24.00 26.00 28.00 30.00 32.00 34.00 36.00

PEAK VOL.VOLUME

6352.5 2166.8 2000

4000

6000

Spring 2015 22


Suncor Energy Inc. (TSX: SU) Greg Pardy, CFA – Analyst, RBC Dominion Securities Inc.

As an integrated oil company, Suncor is the second-largest refiner in Canada, with three refineries and 364,000 b/d of processing capacity. In the United States, Suncor has 98,000 b/d of refining capacity at Commerce City, Colorado. Upstream-wise, over three-quarters of Suncor’s production is anchored by oil sands. Along with its legacy oil sands mines in Fort McMurray and Firebag in-situ operations, Suncor’s arsenal of some 24 billion barrels of proven, probable, and contingent resources also include its MacKay River (100% working interest) in-situ project, a 12% interest in the Syncrude oil sands joint venture, and a 40.8% interest in the Fort Hills project.

We have an Outperform rating on Suncor Energy Inc. Our one-year target price is $40 per share. Our price target reflects a 60% weighting toward a multiple of 1.0x our base NAV of $30.47 per share and a 40% weighting toward a 2016E debt-adjusted cash flow multiple of 10.0x. The multiples that we have chosen reflect Suncor’s strong balance sheet, above-average execution capability, extensive reserve life index, and production visibility secured by its vast oil sands resource base.

The most significant risk to our price target is unexpected changes in crude oil prices. The ability to replace production and reserves in a cost effective manner on a per share basis also poses a risk to investors. The valuation of oil and gas assets is subject to risk with respect to reservoir performance, including production rates and expected recovery factors. Suncor is also exposed to downstream margin volatility. Other risks include the effect of foreign exchange and government legislation as it relates to royalties, income taxes, and environmental policy.

TELUS Corp. (TSX: T) Drew McReynolds, CA, CFA – Analyst, RBC Dominion Securities Inc.

TELUS Corp. is the second-largest telecommunications provider in Canada, providing wireline, data, and wireless services to consumers, businesses and wholesale telecom providers. Our Outperform rating reflects our view that TELUS has the best combination of growth, a reasonable valuation and solid capital return potential within the group.

While macro factors (low bond yields, sector rotation) have stretched valuation in the near-term (FTM /EBITDA multiple of 8.0x), we believe double-digit NAV growth driven by both wireless and wireline, along with robust capital return commitments, help mitigate valuation risk.

Furthermore, we believe a potential increase in wireless competition should be manageable given: (i) superior customer service among large wireless incumbents; (ii) industry-leading postpaid churn underpinning wireless market share momentum; (iii) a proven ability to compete effectively in four-player wireless markets; and (iv) growth diversification given a growing wireline segment.

Our one-year price target of $43.00 for TELUS is based on the average of three approaches: (1) applying a 13.5x multiple to our blended two-year forward adjusted EPS estimates; (2) applying target EV/EBITDA multiples of 6.5x and 7.5x to our blended two-year forward EBITDA estimates for Wireline and Wireless segments, respectively; and (3) discounted FCF through 2018E factoring in a WACC of 8.5% and terminal growth rate of 1.5%. We believe our target multiples are consistent with the growth and risk profile of the company, and a low interest rate environment. Impediments to the shares reaching our one-year price target are: 1) a sustained increase in wireless competition from the new entrants resulting in higher churn and/or accelerated declines in postpaid ARPU; 2) an accelerated FTTH build, which would negatively affect FCF, in the face of higher than expected data demand and increased competition from cable; 3) the inability to realize additional cost savings to mitigate wireline margin pressure due to legacy declines and IPTV loading; 4) greater than expected telephony and television substitution; and 5) the emergence of irrational pricing in residential telephony, television, and/or Internet.


HI-13JUN14LO/HI DIFF

116.503 32.52%

LO-19APR13 87.912

CLOSE 92.892

SUNCOR Rel. S&P/TSX COMPOSITE INDEX

90.00

100.00

110.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-20JUN14LO/HI DIFF

47.180 71.56%

LO-19APR13 27.500

CLOSE 37.530

SUNCOR

28.00 30.00 32.00 34.00 36.00 38.00 40.00 42.00 44.00 46.00

PEAK VOL.VOLUME

39807.3 14244.3 10000

20000

30000


HI-19APR13HI/LO DIFF

116.919 -19.15%

LO-25JUL14 94.526

CLOSE 113.521

TELUS CORPORATION Rel. S&P/TSX COMPOSITE INDEX

99.00

108.00


45.140 52.91%

LO-28JUN13 29.520

CLOSE 44.440

TELUS CORPORATION

30.00

32.00

34.00 36.00 38.00 40.00 42.00 44.00

PEAK VOL.VOLUME

57756.7 6092.0 20000

40000

Spring 2015 23


Toromont Industries Ltd. (TSX: TIH) Sara O’Brien, CA, CFA – Analyst, RBC Dominion Securities Inc.

Toromont Industries Ltd. operates CAT Equipment Group, which sells, rents, and services a broad range of Caterpillar mobile equipment and industrial engines across one of CAT’s larger global dealer territories, which includes Ontario, Manitoba, Nunavut, Newfoundland and eastern Labrador. Toromont also runs CIMCO, an industrial and recreational refrigeration business.

We view Toromont as an attractive investment for longer-term holders. We believe that it will maintain its ‘best in class’ EBIT margin and its balance sheet strength, which we expect will allow for a large-sized acquisition over time. We like Toromont’s disciplined approach

to balancing growth and dividends. We do not account for acquisitions in our model but use a higher 15.5x P/E valuation (higher than its peers) on our F2016 EPS estimate to derive our $32 target price. We rate TIH shares as Sector Perform as we do not see any short-term positive catalyst for the stock. We continue to expect that longer-term investors will be rewarded with share gains from both organic initiatives as well as future acquisition growth, which we expect will push our long-term earnings growth rate beyond our current 10% range for the next two years.

We note that our price target is based on our estimates for the equipment group and the refrigeration group. Our earnings estimates could be negatively affected by macroeconomic trends and negative commodity prices, as well as company-specific risks such as strategy execution, labour relations, etc. Any change to our earnings estimates based on such factors could change our price target.

Toronto-Dominion Bank (TSX: TD) Darko Mihelic, CFA – Analyst, RBC Dominion Securities Inc.

Toronto-Dominion Bank is Canada’s second-largest bank by market capitalization and by assets. In Q1/15, TD Bank’s earnings mix was as follows: Canadian Personal and Commercial (64%), TD Ameritrade (4%), US Personal and Commercial (24%), and TD Securities (8%).

We believe that TD's stock is attractive as the bank should have above-average EPS growth; we expect its relative valuation to continue to improve. We rate TD Bank shares Outperform. We forecast strong 12% YoY average earnings growth for the US retail segment in 2015/2016. We remain optimistic on TD's Canadian retail business and forecast YoY net income growth of 8% in 2016.

Our 12-month price target of $56 is based on a P/E multiple of 11.5x our 2016E cash EPS, a premium to peers based on higher expected EPS growth.

Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment, the Canadian and US housing market, a failure of government programs, litigation and tax assessment risk, and greater than anticipated impact from off-balance sheet commitments. Additional risks include regulatory and political risk, including tax rates, an unexpected acquisition, weakening retail credit quality, and loss of domestic market share.



126.467 32.37%

LO-19OCT12 95.541

CLOSE 126.467

TOROMONT Rel. S&P/TSX COMPOSITE INDEX

100.00

110.00 120.00


31.260 67.97%

LO-26OCT12 18.610

CLOSE 31.200

TOROMONT

20.00

22.00

24.00

26.00

28.00 30.00

PEAK VOL.VOLUME

1789.4 579.8 500

1000

1500


HI-28NOV14LO/HI DIFF

117.708 20.38%

LO-11JAN13 97.781

CLOSE 108.350

TORONTO DOMINION Rel. S&P/TSX COMPOSITE INDEX

104.00

112.00

O N D J F M A M J J A S O N D J F M A M J J A S O N D J F2012 2013 2014HI-22AUG14LO/HI DIFF

58.200 49.14%

LO-16NOV12 39.025

CLOSE 54.800

TORONTO DOMINION

40.00 42.00 44.00 46.00 48.00 50.00 52.00 54.00 56.00

PEAK VOL.VOLUME

31607.0 19492.5 10000

20000

30000

Spring 2015 24



Spring 2015 25

Strategy: The Investment Outlook – The Economy

The Economy Headwinds temper global growth outlook Dawn Desjardins (Assistant Chief Economist, RBC Economics)

Forecasts for global growth were notched lower as the sharp drop in energy prices fuelled concerns about deflation resulting in financial market volatility weighing on confidence. Elevated concerns about geopolitical developments in the Ukraine, Middle East, and most recently, Greece also weighed on the outlook for world GDP. In mid-January, the IMF cut 0.3 percentage points off estimates for both 2015 and 2016 global growth. The world economy is expected to grow by 3.5% in 2015, mildly firmer than the 3.3% pace of the prior two years. Furthermore, 2016’s forecast was reduced to 3.7%, only modestly faster than the long-term average pace.

Exhibit 1: World GDP growth

% change

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Forecast

3.73.3 3.3

3.5

Source: International Monetary Fund, RBC Economics

Central banks – fighting the good fight! The prospect of another year of lacklustre growth and concerns about the repercussions of the drop in oil prices on inflation elicited a strong response from central banks. The ECB announced a larger than expected asset purchase program, with the prospect of more to come if growth and inflation do not accelerate. The Bank of Canada kicked off a round of policy rate cuts with the RBA, Riksbank, and the Danish central bank following suit. Some emerging economies also eased policy including the Peoples Bank of China and the Reserve Bank of India. The Bank of England made no change to policy although suggested the policy rate may remain at the current level for a more prolonged period than earlier estimated. While the US Federal Reserve is forecasted to raise the policy rate this year given the economy’s strong momentum and improved labour market conditions, it is working to limit volatility in financial markets through its communication strategy.

Spring 2015 26


Exhibit 2: International policy rates

%, eop

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Canada US UK Eurozone

Forecast

Source: Bank of England, European Central Bank, Federal Reserve, Bank of Canada, RBC Economics Research

Oil in the spotlight Outside the recession, oil prices trended higher for most of the decade, only to be cut in half from June 2014 to February 2015. The pace of decline accelerated in December 2014 and January 2015 with the price for a barrel of West Texas Intermediate (WTI) recording declines of about 20% each month. This was double the monthly clip recorded in October and November 2014. Producers reduced the number of active drilling rigs, but the supply of oil on world markets continued to exceed demand. Further reductions in supply are likely in the months ahead, and we expect this will see oil prices recover some of the recent losses. Oil and gas companies around the world announced cuts to investment, thereby setting up for a reduction in future supply, which should also underpin price gains. Our forecast assumes that the price of a barrel of WTI will remain in the low end of the recent trading range until mid-2015 and gradually recover thereafter. We look for the WTI price to average $53.00 per barrel this year and $77.00 per barrel in 2016.

Exhibit 3: West Texas Intermediate (WTI)

$US/bbl

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

Source: Energy Information Administration/Wall Street Journal, RBC Economics Research

Spring 2015 27


Slump in inflation will prove temporary Headline inflation rates across the globe are falling because of the drop in energy prices. A recovery in oil prices would translate into a rebound in these inflation rates; however, in the near term, investors and policymakers will be monitoring the inflation reports to discern if the energy-related declines are fuelling broader disinflationary trends. The euro area headline inflation rate was negative for three consecutive months. The core measure also drifted lower to stand at just 0.6% in January and February, meaning inflation continues to be a hotter issue for the ECB than the US and Canadian central banks, where the ex-energy readings have not eased. Furthermore, with growth in both Canada and the US expected to run at an above-potential pace in 2015, underlying inflation rates are unlikely to decline materially. Similarly, in Europe, acceleration in growth backed by the stimulative effects of the sharply lower euro, rock-bottom interest rates, and rise in disposable income related to lower gasoline prices are expected to prevent the inflation rate excluding energy from falling into negative territory.

Exhibit 4: International headline inflation

% change, year-over-year

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2010 2011 2012 2013 2014 2015 2016

UK Euro Zone Canada US

Forecast

Source: Statistics Canada, Bureau of Labor Statistics, OECD, Office for National Statistics, RBC Economics Research

Bond market yields suggest concerns are deep rooted The economic landscape is likely to improve throughout 2015; however, global bond investors appear sceptical that “everything is going to be OK.” Yields on government bonds fell sharply in the second half of 2014 and remain very low. In part, this reflects investors’ nervousness about the persistence of the risks to the global economy and worries that the downward pressure on inflation rates will prove to be long lasting. In many countries, the decline is also a product of central bank actions, given the renewed easing via policy rates and other measures. A big beneficiary of all this uncertainty has been the US dollar, which has gained 16% on the trade-weighted basis since January 2014. The currency’s rise reflects a combination of investors buying securities offering a higher yield, a strong economy, and safe-haven flows. We expect that the US dollar will continue to outperform, with the US Federal Reserve prepping for a rate increase while most other central banks keep maximum policy stimulus in place in the near term.

Spring 2015 28


Exhibit 5: Real broad trade-weighted exchange value of the US$

Mar/1973=100

50

60

70

80

90

100

110

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

Source: Federal Reserve Board, RBC Economics Research

The case for the US Fed to reduce policy stimulus Recent economic reports support the case for the Fed to raise the fed funds target from the current 0.00% to 0.25% range. The economy grew at a 2.4% pace in 2014 even after the weather-related contraction in the first quarter of the year. The labour market generated 3.3 million jobs in the 12 months ended February 2015, and the unemployment rate, at 5.5%, is approaching the level that is deemed to indicate full employment. Declines in the headline inflation rate due to lower energy prices are unlikely to deter the Federal Reserve from initiating the process toward normalization of monetary policy, because the ex-energy measure has held close to 2.0%. Policymakers have repeatedly stated the intention to “look through” the drop associated with energy prices, because this does not reflect underlying price pressures in the economy. Furthermore, the Fed views the relative stability in inflation expectations in survey-based measures as signalling that economic agents are discounting the energy-price shock when making its assumption about future inflation. These points were made clear in Chair Yellen’s testimony in late February. Our expectation is that the Fed will initiate the interest rate normalization process in the middle of this year and continue to raise the policy rate gradually to 1.0% at the end of 2015 and 3.0% at the end of 2016.

Spring 2015 29


Exhibit 6: US federal funds target rate

%

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

Source: Federal Reserve Board, US Treasury, RBC Economics Research

US real GDP is forecasted to post a strong 3.1% increase in 2015, which would be the fastest gain in a decade. Underpinning this projection is our assessment that 2015 will see broad-based acceleration in economic activity, with the consumer, government, and business all providing a lift to growth. Improvement in balance sheet health across all sectors, historically low interest rates, and access to capital are key building blocks for our call on growth this year. Falling oil prices are also providing a positive shock to the US economy. The firm fundamentals should allow for the pent-up demand for houses and autos generated during the downturn to be satisfied and support businesses’ efforts to alleviate capacity constraints via stronger investment. Governments are also facing improved fiscal health, which argues against any more restraint or job cut announcements in 2015.

Exhibit 7: US real GDP growth

Quarter-over-quarter annualized % change

-9

-7

-5

-3

-1

1

3

5

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

2013 2014 2015f 2016f Real GDP 2.2 2.4 3.1 2.9

Source: Bureau of Economics Analysis, RBC Economics Research

Spring 2015 30


Labour market turns up the heat The large increase in employment in 2014 reflected healthy acceleration in job creation in the second half of the year and continued in early 2015. In turn, the unemployment rate fell to 5.5% in February, underpinned by a general improvement in labour market conditions according to the Fed’s measure. Wage gains have been muted; however, continued above-trend growth and persistent increases in hiring are likely to exert upward pressure on wages as we proceed through 2015. We see this boost to income as augmented by the windfall generated by sharply lower energy costs. Our calculations suggest that on average, oil prices will be 43% lower in 2015 than in 2014. This would reduce the amount households spend on energy costs by about $120 billion. Even if 5% of this windfall is saved, we still estimate it would boost consumer spending by an amount equivalent to 0.7% of GDP.

Exhibit 8: US unemployment rate

%

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

Source: RBC Economics Research, Bureau of Labor Statistics

These positive factors also augur well for a pickup in housing market activity following a disappointing year for home sales in 2014. Sales of new and existing homes dropped in the first quarter of 2014 due to inclement weather conditions, and although the pace accelerated thereafter, the average level for all of 2014 was 2.7% below 2013’s level. Housing starts followed a similar pattern, but the recovery was more robust and resulted in a 7.7% increase in 2014. Home price gains averaged 5.0%, but with mortgage rates falling during the year, it did little to harm affordability, which remained significantly less constrained than prior to the recession. The strong state of household balance sheets and increases in employment mean financial institutions are willing to extend mortgage credit. Households have not shown a significant increase in appetite for these loans, however, given the uncertain geopolitical and financial market backdrop. As uncertainty eases, we expect confidence to improve resulting in a pickup in housing activity as 2015 progresses.

Spring 2015 31


Exhibit 9: US housing starts

Millions of Units

0.0

0.5

1.0

1.5

2.0

2.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

1.0

1.21.4

Source: Census Bureau, RBC Economics Research

US business investment to rise outside oil and gas US business balance sheets are in good shape, and lending standards continue to be very accommodative. The decline in energy prices has lowered the cost of production for the majority of US companies. Oil and gas companies are the obvious exception where lower revenues and deteriorating balance sheets will likely constrain the amount of available capital. Investment by oil and gas and closely related industries accounts for about 10% of all non-residential investment and is expected to decline markedly in 2015. Lower energy investment should serve to temper growth in investment this year to about 7%. Capacity utilization continued to rise in 2014, with the rate steadily approaching pre-recession levels. Another year of above-trend growth would further strain capacity in some industries, thereby resulting in a pickup in investment as companies work to meet demand.

Exhibit 10: US non-residential investment

% Change Year-over-year

-20

-15

-10

-5

0

5

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

Source: Bureau of Economics Analysis, RBC Economics Research

Spring 2015 32


US imports to grow helped by a stronger US dollar Positive growth fundamentals would also increase US appetite for imports, especially given the cost-advantage flowing from the appreciation of the US dollar. Demand for US exports, conversely, is likely to be more sluggish as a result of stilted growth in some of the US trading partners and the relative depreciation of the currencies. Our forecast implies increased imports of housing materials, machinery and equipment, and motor vehicles and parts. Canada is likely to be one of the big beneficiaries of rising US import demand.

Canada’s economy to weather oil price drop The sharp drop in energy price led to significant downgrades to Canadian growth forecasts for 2015. RBC shaved 0.3 percentage points off our forecast for real GDP growth to stand at 2.4%, although our projection remains at the high end of consensus expectations. While the drop in energy prices is clearly negative for the oil and gas sector, our forecast assumes that much of this weakening will be offset by strength in consumer spending and exports. Consumers should benefit from increased purchasing power due to the windfall accruing from lower gasoline prices, as is the case in the US. Furthermore, the pumping up of US growth and the weaker Canadian dollar (a by-product of the oil price decline) will underpin a solid gain in exports this year, in our view.

Exhibit 11: Canada real GDP growth

Quarter-over-quarter % change, annualized rate

-10

-8

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

2013 2014 2015f 2016f Real GDP 2.0 2.5 2.4 2.3

Source: Statistics Canada, RBC Economics Research

Exports to provide lifeline The performance of Canada’s export sector improved in 2014 with the volume increasing by 5.4%, which was the best showing in four years. More important was the broadening in export sales away from energy-related products toward industrial goods, consumer goods, transportation equipment, and building materials. These non-commodity goods make up more than 50% of Canadian exports, and we expect that the sharp rise in demand that began in late 2013 will continue at a sufficient pace to compensate for any pullback in demand for energy and other commodity products. The Canadian dollar’s depreciation is also a factor, because it makes Canadian products less expensive to US purchasers.

Spring 2015 33


Exhibit 12: Canada exports by sector

Indexed to 2007 Q2

60

70

80

90

100

110

120

130

2007 2008 2009 2010 2011 2012 2013 2014

Energy

Non-energycommodities

Non commodities


More Canadian dollar weakness ahead The factors that drove Canada’s currency to the lowest level since the recession include increased investor preference for US dollars, the plunge in oil prices, and diverging expectations about the direction of central bank policy, with the BoC having lowered its policy rate while the US Federal Reserve is primed to raise its rate. We estimate that about two-thirds of the Canadian dollar’s decline was due to the drop in oil prices, with the relative movement in monetary policy expectations and weakening in prices of other commodities accounting for the remainder. We see further downside for Canada’s dollar against the US dollar based on our view that the Federal Reserve will raise interest rates well before the Bank of Canada and that even if oil prices recover this year, the average price of WTI would be just $53.00 per barrel, or 43% lower than the 2014 average. As market expectations turn from rate cuts to rate hikes in Canada and assuming oil prices rise in 2016 to average $77.00 per barrel, we believe that Canada’s currency is likely to recover.

Exhibit 13: Canadian dollar forecast, end of period

USD/CAD

0.60

0.70

0.80

0.90

1.00

1.10

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

ParityForecast

2013 2014 2015f 2016f USD/CAD 0.94 0.86 0.75 0.78

Source: Bank of Canada, RBC Economics Research

Spring 2015 34


Consumers – more money in their pockets One of the consequences of lower energy prices is that households need to spend less to fill up their cars and heat their homes. We estimate that the drop in oil prices and corresponding fall in gasoline prices will pump up consumers’ purchasing power by $11 billion this year. Unlike US consumers, who are largely expected to spend these “extra” funds, we assume Canadian consumers will spend half of the energy-related savings, with some portion going to paying down debt and the rest toward saving. Even accounting for the import content in consumer goods, we estimate that consumption’s contribution to real GDP growth in 2015 should be boosted by 0.2 percentage points. Labour market conditions continue to improve, with the unemployment rate approaching pre-recession levels, although wage growth has been lacklustre. The outlook for employment is mixed, with energy-oriented provinces likely to see weaker conditions while job creation is likely to continue in most other regions.

Exhibit 14: Consumer expenditures in Canada

Quarter-over-quarter % change, annualized

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

2013 2014 2015f 2016f PCE 2.5 2.8 2.6 2.4


One factor that may act to restrain spending is the elevated level of debt on household balance sheets. In 2014, Canada’s household debt-to-income ratio climbed to an all-time high. On the plus side, the rise was accompanied by increased asset values and net wealth, and the cost to service the debt fell in line with interest rates. The persistence of low interest rates will likely keep households accumulating debt, in our view, although the pace is likely to remain moderate, and some may use the windfall from lower fuel prices to reduce their debt loads.

Housing market – location, location, location Canada’s housing market is expected to remain buoyant in 2015; however, we believe that the decline in oil prices means there will be significant diversity among regional markets. Favourable financing conditions and accelerating growth should support another year of gains in Ontario, BC, Manitoba, and Quebec. We expect activity in Alberta, Saskatchewan, and parts of Atlantic Canada conversely to weaken, thereby resulting in a modest increase in national resale sales of 1.7%. Prices are forecasted to rise 3.4% on average, which would be slower than 2014’s 4.6% gain. In 2016, resale activity is forecast to weaken across the board and prices to edge lower as increasing interest rates damage affordability.

Spring 2015 35


Exhibit 15: Existing Home Sales, 2014 and 2015

Annual % change

-2.8

-0.7

3.8

0.7

3.0

8.6

15.2

5.2

-1.0

3.4

4.7

0.7

-8.6

-15.7

10.5

1.7

-20 -15 -10 -5 0 5 10 15 20

ATLANTIC

QUE.

ONT.

MAN.

SASK.

ALTA.

B.C.

CANADA

2015 2014

Source: RBC Economics Research, CREA

Business investment decline on tap for 2015 The drop in energy prices resulted in a myriad of announcements by oil and gas companies of significant cutbacks in investment for 2015. Our monitoring suggests that capital spending by this industry will fall by as much as 25%, thereby resulting in a 1.0 percentage point drag on GDP growth this year. While this would be a significant hit to the economy, the outlook for investment by industries outside of oil and gas is much improved. Solid balance sheets, rising domestic and international demand, and the gradual rise in capacity utilization set up for spending on equipment and structures to increase by 7.5% outside of the oil and gas sector this year. This should cap the drag from business investment on real GDP growth to 0.3 percentage points. Investment is likely to recover in 2016, as energy prices rebound and businesses continue to expand capacity.

We project that the depressing effect of the downturn in the oil and gas sector will be largely offset by a ramping up of manufacturing activity. After more than a decade of the manufacturing sector shrinking relative to the size of the economy, activity levels started to climb, with manufacturing output increasing in four of the past five years. That still left output 7% below its 2009 peak at the end of last year; however, there are several factors that support our view that the recent momentum will be sustained in 2015. The pickup in US demand bodes well for the 50% of manufactured goods that are exported, especially given the historically strong correlation between a weakening in Canada’s currency and increased manufacturing sales. Importantly, manufacturing output makes up a greater share of real GDP than oil and gas, meaning the lift should compensate for a significant share of the drop in the energy sector. Although employment in manufacturing to date has not increased significantly from its recession low, with gains in output largely accounted for by improvement in productivity, it still accounts for a significantly higher share of total employment than the oil and gas industry, and we expect further production gains will eventually necessitate increasing headcounts in a more significant way.

Spring 2015 36


Exhibit 16: Canadian real GDP growth composition

Percentage points

-0.5

0.0

0.5

1.0

1.5

2.0

Consumerspending

Governmentspending

Residentialinvestment

Non-res.investment

Net externaltrade

Inventories

2014 2015 2016 Source: Statistics Canada, RBC Economics Research

Timing is everything On balance, we see the offsets to the pullback in oil and gas activity as sufficient to allow the economy to grow at an above-potential pace in 2015. We believe that job creation will continue, thereby resulting in a gradual decline in the unemployment rate and eventually upward pressure exerted on wages. This tightening in labour market conditions and the gradual elimination of the output gap should prevent the ex-energy inflation rate from falling and in turn prevent inflation expectations from shifting lower. The Bank of Canada cut the policy rate by 25 basis points in January 2015 to balance the risk that the sharp drop in oil prices would exert persistent downward pressure on growth and inflation. The Bank of Canada described the move as providing a measure of insurance against the downside risks to both inflation and stability in the financial system. Governor Poloz said that the rate cut provided the Bank with time to evaluate how the economy is coping with the oil price shock and to size the negative hit to growth. As discussed above, we see the hit to the economy as targeted, regional, and unlikely to derail the national economy this year. One of the key events to watch for, in our view, will be that the hole created by lower investment is eventually filled by firmer consumer spending and exports. We believe that as these offsets become increasingly evident, the need for monetary policy stimulus will recede, with the Bank likely to be in position to remove the “insurance” that it has put in place. We expect that this will occur in early 2016.

Spring 2015 37


Exhibit 17: Canada BoC overnight rate

%

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Forecast

Source: Bank of Canada, RBC Economics Research Forecasts

Spring 2015 38

Strategy: The Investment Outlook – Quantitative Research

Quantitative Research Valuations in Canada continue to rise Chad McAlpine, CFA, CMT (Quantitative Research)

Over the past few months, the recurring P/E multiple of the S&P/TSX Composite has risen to 22.5x, which is almost a full standard deviation above its historic average of 18.1x (Exhibit 1). It also represents the highest level that the index multiple has reached since August 2002.

Exhibit 1: S&P/TSX Composite – Price to Recurring Earnings

0

5

10

15

20

25

30

35

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: RBC Capital Markets Quantitative Research

By looking at past cycles, it’s clear that these lofty valuations rarely persist for more than several quarters. In order to return to more normal levels, either the price of the S&P/TSX Composite must fall, or earnings growth must exceed index price appreciation. Unfortunately, this time around a pullback in equity prices appears more likely than a resurgence of earnings growth. As it stands, consensus estimates project that index earnings will rise a mere 8.6% over the next 12 months, which is quite low by historic standards.

Exhibit 2: S&P/TSX Forecast Earnings Growth

-40

-20

0

20

40

60

80

100

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: RBC Capital Markets Quantitative Research, CPMS

Spring 2015 39

Strategy: The Investment Outlook – Quantitative Research

Furthermore, profitability for the constituents of the S&P/TSX as a whole has been declining since early 2012 and the aggregate Return of Equity of the index now stands at its lowest level in more than 10 years.

Exhibit 3: S&P/TSX Composite – Return on Equity (Recurring)

0

2

4

6

8

10

12

14

16

18

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: RBC Capital Markets Quantitative Research

In order to switch the direction of either of these negative trends, positive earnings estimate revisions are desperately needed. However, our Estimate Revisions Index paints a negative outlook based on both its level and trend.

Exhibit 4: S&P/TSX Composite – Estimate Revisions Index

-100

-80

-60

-40

-20

0

20

40

60

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Source: RBC Capital Markets Quantitative Research, CPMS

Our Estimate Revisions Index measures the weighted breadth of a group of stocks with positive versus negative earnings estimate revisions, and its trend tends to be a leading indicator of the actual level of estimate earnings for the group as a whole. As it stands, far more constituents of the S&P/TSX Composite have seen estimate downgrades versus positive revisions. Furthermore, the trend in this market barometer has been worsening since the beginning of 2014.

Spring 2015 40

Strategy: The Investment Outlook – Trend & Cycle

Trend & Cycle TSX short-term oversold – Buy the dip Javed Mirza, CFA, CMT (Analyst, Technical Research – Trend & Cycle)

We continue to believe that the current short-term pullback offers an attractive entry point into the ongoing intermediate-term upleg. This equity market rally will likely coincide with positive seasonality into April/May. Short-term quadrant balance data for the TSX Composite is bouncing from levels historically consistent with near-term lows. Both the TSX and S&P have scored higher highs and higher lows since bottoming in December, confirming intermediate-term uplegs. However, a close below 14,393 on the TSX would be a lower low and cause us to become more cautious (see pp. 42-44).

The Dow Jones Industrials recently scored new all-time highs; however, the Dow Jones Transports have failed to confirm these highs. A close below the December lows at 8,580 on the Dow Jones Transports would be a lower low, another technical negative. We highlight key levels on the charts of TFI and WJA (see pp. 45-46).

Commercial Hedger positions in Copper remain near levels typically consistent with intermediate-term lows, and suggest Copper and Copper equities should continue to rally with equity markets through the period of seasonal strength, ending in April/May (see pp.47-48).

Commercial Hedger long positions on Gold appear to be building positively and suggest that an intermediate-term low in Gold could develop in conjunction with positive seasonality, beginning in June/July. Gold and Gold stocks appear to have formed intermediate-term tops in late January/early February and the trend on Gold and Gold stocks is currently down (see pp. 49-50).

A close below the recent lows on both the Energy stocks and the Energy commodities would confirm a resumption of the intermediate-term downtrend. Energy and Energy stocks have come under pressure the last two weeks. We highlight key risk control levels on our two technical best ideas in the Energy space for 2015: SU and PEY (see pp. 51-52).

Spring 2015 41


Exhibit 1: S&P 500 / S&P 500 QUADRANT BALANCE DATA (WEEKLY)

Source: RBC Capital Markets Trend & Cycle

• Intermediate-term quadrant balance data for the S&P 500 is trading just above the oversold zone (see blue shaded box, bottom panel) that is historically consistent with intermediate-term lows.

• The intermediate-term uptrend on the S&P 500 (top panel) remains intact and our proprietary intermediate-term quadrant balance data forged a low in October, coincident with the developing price low (see blue circle, bottom panel).

• A close below the December lows at 1972 would constitute a lower low, and confirm an intermediate-term correction is developing. Next important intermediate-term support is near the April 2014 lows at 1814.

Spring 2015 42


Exhibit 2: TSX COMPOSITE / TSX COMPOSITE QUADRANT BALANCE DATA (WEEKLY)


• The TSX Composite (top panel) remains in an intermediate-term uptrend that began with the lows on December 15th, and has since forged a series of higher lows and higher highs. Our proprietary intermediate-term quadrant balance data (bottom panel) forged a low in October (see blue circle, bottom panel).

• Both intermediate-term price and quadrant balance data have corrected for the TSX Composite over the last two weeks, however, this is within the context of an intermediate-term uptrend.

• First support is near the January 29th at 14,393, followed by the December lows at 13,635. • A close below the December lows at 13,635 would constitute a lower low, and confirm an intermediate-term correction is

developing. Next important intermediate-term support is near the February 2014 lows at 13,450, followed by the March 2013 highs at 12,905.

Spring 2015 43


Exhibit 3: TSX COMPOSITE / TSX COMPOSITE QUADRANT BALANCE DATA (DAILY)


• Short-term quadrant balance data for the TSX Composite (bottom panel) is bouncing from oversold levels that are typically consistent with short-term (2-4 week) trading lows (see blue circles, bottom panel).

• A close by the TSX Composite (top panel) below the January 29th low at 14,393, would be a technical negative, and suggest that a retest of the intermediate-term price low set in December at 13,635 was underway.

• First resistance is near the confluence zone of the 50 and 200-day moving averages, currently at 14,818, and 14,902, respectively. A close above these averages would be a strong technical positive, and would likely signal a resumption of the intermediate-term uptrend.

Spring 2015 44


Exhibit 4: DOW JONES INDUSTRIALS / DOW JONES TRANSPORTS (WEEKLY)


• The Dow Jones Industrials (top panel) and the Dow Jones Transports (bottom panel) both remain in intermediate-term uptrends (see blue uptrend lines below), a technical positive.

• However, the Dow Jones Transports failed to confirm the recent highs by the Dow Jones Industrials, a technical negative. Dow Theory points to divergences between the Dow Jones Industrials and Dow Jones Transports as early indications of greater underlying economic issues/uncertainty.

• A close below the December lows at 8,580 on the Dow Jones Transports would confirm a new intermediate-term downtrend, and confirm a major divergence between the Dow Jones Transports and the Dow Jones Industrials, which would be a strong technical negative.

Spring 2015 45


Exhibit 5: TRANSFORCE / WESTJET (DAILY)


• Transforce (TFI, top panel) remains in an intermediate-term uptrend. • For those looking to add new positions on TFI, we would use the recent lows at 29.42 as our risk control level. • For those who already own TFI, we would use intermediate-term support near 28.11 as our risk control level. • West Jet (WJA, bottom panel) has been in a downtrend since December, however, the price and volume action over the

last two weeks suggest that WJA is attempting to form an intermediate-term low. • For those looking to add new positions on WJA, we would use the recent lows at 28.42 as our risk control level. • For those who already own WJA, we would use intermediate-term support near 25.93 as our risk control level.

Spring 2015 46


Exhibit 6: COPPER / COPPER – COMMERCIAL HEDGERS (WEEKLY)


Commercial Hedgers on Copper (bottom panel) are at extreme long positions, consistent with previous intermediate-term lows in Copper (please see our February 13th report, The Case for Copper and Copper Stocks).

• Neutral positioning close to zero has historically been coincident with intermediate-term peaks in Copper (see red circles, bottom panel). The current Commercial Hedger data suggests that the intermediate-term upleg developing on Copper still has some room to run,

• First support on Copper (top panel) is near the February lows at 2.53, followed by important support near the January lows at 2.42.

• First resistance on Copper is near the December lows at 2.77, followed by the March 2014 lows at 2.87. Major resistance is near the October 2011 low at 2.99.

Spring 2015 47

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Exhibit 7: FIRST QUANTUM / LUNDIN (DAILY)


• First Quantum (FM, top panel) continues to make higher highs and higher lows, a technical positive, since forging an intermediate-term low in January.

• For those looking to add new positions on FM, we would use the recent lows at 13.46 as our risk control level. • For those who already own FM, we would use intermediate-term support near 12.22 as our risk control level. • Lundin (LUN, bottom panel) continues to make higher highs and higher lows, a technical positive, since forging an

intermediate-term low in January. • For those looking to add new positions on LUN, we would use the recent lows at 4.76 as our risk control level. • For those who already own LUN, we would use intermediate-term support near 4.27 as our risk control level.

Spring 2015 48


Exhibit 8: GOLD / GOLD – COMMERCIAL HEDGERS (WEEKLY)


• Gold (top panel) has resumed its intermediate-term downtrend, with next important support near 1138 - 1132, followed by major support near 1060.

• Commercial Hedgers on Gold (bottom panel) have begun to increase their long positions. While not currently at levels consistent with intermediate-term lows on Gold (see blue circles), this increase in long positions suggests that the case for an intermediate-term low for Gold could develop towards the latter stage of the ongoing intermediate-term rally in equities. This timing would coincide with the positive seasonality in Gold equities beginning in June/July.

Spring 2015 49


Exhibit 9: GOLDCORP / AGNICO-EAGLE (DAILY)


• Goldcorp (G, top panel) continues to make lower highs and lower lows, a technical negative, since forging an intermediate-term top in late January/early February.

• While the current trend is down, G appears to be carving out a short-term low. For those who currently own G or are looking to add new positions, we would use the recent lows at 22.78 as our risk control level.

• Next important support is near the October lows at 19.18. If Commercial Hedger long positions in Gold continue to build positively from current levels (see page 49), then we believe these lows would likely offer an attractive reward to risk ratio for new positions.

• Agnico-Eagle (AEM, bottom panel) continues to make lower highs and lower lows, a technical negative, since forging an

intermediate-term top in late January/early February. • While the current trend is down, AEM appears to be carving out a short-term low. For those who currently own AEM or are

looking to add new positions, we would use the recent lows at 34.30 as our risk control level. • Next important support is near the October lows at 25.05. If Commercial Hedger long positions in Gold continue to build

positively from current levels (see page 49), then we believe these lows would likely offer an attractive reward to risk ratio for new positions.

Spring 2015 50


Exhibit 10: BRENT OIL / WTI CRUDE / NATURAL GAS / TSX ENERGY VERSUS TSX COMPOSITE (MONTHLY)


• Both the Energy commodities and equities have pulled back since early February, after rallies in January/February. • A close below the lows established in January in Brent and WTI Crude, and in February in Natural Gas, would confirm a

resumption of the intermediate-term downtrend in Energy commodities. • Brent remains the strongest and Natural Gas remains the weakest of Brent, WTI Crude, and Natural Gas. • A close below the recent lows at 45.19 on Brent (top panel) sees next long-term support near the October 2001 highs at

35.30. • A close below the recent lows at 43.58 on WTI Crude (second panel from top), sees next long-term support near the

December 2008 lows at 32.40. • A close below the recent lows at 2.56 on Natural Gas (third panel from top), sees next long-term support near the April

2012 lows at 1.90. • The long-term downtrend of the TSX Energy Index relative to the TSX Composite since 2006 remains intact (see red circle,

bottom panel).

Spring 2015 51


Exhibit 11: SUNCOR / PEYTO (DAILY)


• Suncor (SU, top panel) has pulled back sharply since peaking in mid-February. • The current short-term trend is down. A close below the January lows at 33.85 would confirm a lower low and signal the

resumption of the intermediate-term downtrend. Next important support is near the December lows at 30.89. • For those looking to add new positions on SU, we would use the January lows at 33.85 as our risk control level. • For those who already own SU, we would use intermediate-term support near 30.89 as our risk control level. • Since October Peyto (PEY, bottom panel) has oscillated in a trading range between 36 and 30. • A close above the February highs at 36.53 would be a technical positive, and suggest that an upside breakout of the multi-

month trading range was underway, with next important resistance near the September highs at 38.70. • Conversely, a close below the recent lows at 32.97 would be a technical negative, and would suggest risk towards

important support near the January lows at 29.67. • For those looking to add new positions on PEY, we would use the recent lows at 32.97 as our risk control level. • For those who already own PEY, we would use intermediate-term support near 29.67 as our risk control level.

Spring 2015 52


Exhibit 12: S&P 500 / DAX / SENSEX / SHANGHAI “A”, ALL VERSUS TSX COMPOSITE, ALL IN CANADIAN DOLLARS (WEEKLY)


• Coincident with the sharp deterioration in the Canadian Dollar since the summer of 2014 (see blue dotted line), the S&P 500 (top panel), DAX (second panel from top), Sensex (third panel from top), and Shanghai “A” Index (bottom panel) have all outperformed the TSX Composite.

• We anticipate the underperformance of the resource-heavy TSX to continue, with the headwind of a strengthening DXY continuing to put pressure on commodity prices.

• Although we believe the next commodity cycle will occur sometime in mid-2020 (see 2015 Canadian Technical Outlook: The Trend is your friend, December 21st) , catching the ongoing rotation between Lumber, Base Metals, Precious Metals, and Energy will continue to be a source of alpha for active asset managers in the TSX.

Spring 2015 53

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Strategy: The Investment Outlook – Fundamental Equity Weightings

Fundamental Equity Weightings Spring 2015 Fundamental Equity Weighting Portfolio (FEW) We are pleased to present our Spring 2015 FEW portfolio and a review of the performance of the New Year 2015 FEW portfolio.

Changes to the Spring 2015 FEW:

• Stocks added to the Spring 2015 FEW: Gildan Activewear Inc., Lundin Mining Corp., Restaurant Brands Int’l Inc.

• Stocks deleted from the Spring 2015 FEW: Canadian Western Bank, Dorel Industries, New Gold Inc., Teck Resources Ltd., West Fraser Timber Co. Ltd.

The Spring 2015 FEW portfolio contains 62 stocks, with three additions and five deletions from the New Year 2015 portfolio. 1) We remain Overweight Energy, with our 23% sector allocation (the benchmark is

20.8%). Within Oil & Gas, we have reduced our weight in Canadian Natural Resources by 1% (to 2%) and increased our weight in Pembina Pipeline Corporation by 1% (to 2%). Mirroring the changes to the FEW, Pembina has been added to the Focus List, at a half (2.5%) weight while Canadian Natural Resources has been reduced by half, to 2.5%.

2) We have reduced our allocation in Materials by 2%, to 8%. Coupled with recent, albeit increases in the sector weight (to 11.7%), the shifts in our stock weights moves the FEW portfolio allocation to Underweight from Market Weight, formerly. Within Materials, we are Underweight Chemicals, Metals & Mining and Gold. Within Metals & Mining we have added Lundin Mining Corporation to the FEW and removed Teck Resources Limited. Within Gold we have removed Newgold Inc. from the FEW portfolio. Within the smaller Steel and Paper & Forest Products sectors we remain Overweight, although this quarter West Fraser Timber Co. Ltd. has been removed from the FEW.

3) Within remain Overweight Industrials. Our 11% sector allocation (up 1%, and relative to a benchmark weight of 8.5%) has been achieved through a 1% incremental stake in CN Rail.

4) Our weighting in Consumer Discretionary increases by 1%, to 9%, and remains Overweight versus the Index at 6.6%. We have added Restaurant Brands International Inc. to the FEW and in the Focus List, where the stock has been moved to a full weight (5%) from a half (2.5%) formerly. Other stock selection changes within the FEW this quarter include the addition of Gildan Activewear Inc. and the deletion of Dorel Industries Inc., each with 1% changes.

5) Our weighting in Consumer Staples remains at 3%, which is modestly Underweight versus the Index at 3.7%. There are no changes to our stock selections within the FEW.

6) We have increased our already Overweight Health Care sector allocation by 1%, to 6% (the benchmark weight is 4.7%) through an incremental 1% allocation to Valeant Pharmaceuticals International, Inc.

7) Our Financials allocation continues to be Market Weight, at 35%, down 1% from prior. The benchmark sector weight is 34.5%. Within the FEW and the Focus List, we have removed Canadian Western Bank. Reflecting our sub-sector preferences, we are Overweight Insurance and Diversified Financials, and Underweight Banks and Real Estate.

8) We remain Underweight in Information Technology. Our 1% sector exposure is below the Index weight of 2.5%, and our sole stock selection remains CGI Group Inc.

9) Telecommunications Services remains Underweight, with a 3% sector allocation (the benchmark is 4.8%). There are no changes within our FEW stock selections this quarter.

10) The 1% sector allocation recommendation for Utilities remains Underweight (Index weight is 2.2%). Brookfield Infrastructure Partners LP remains our sole selection in the FEW.

Introduction: Following the determination of a recommended asset mix, the strategy process at RBC Capital Markets addresses sector weightings within the equity component of the portfolio, followed by specific stock selections within each sector. Sector weightings reflect the combined views of our fundamental, technical, and quantitative analysts. The specific stocks comprising our Fundamental Equity Weightings (FEW) portfolio are selected solely by our fundamental analysts. These selections are detailed on the following pages. Our Strategy Focus List, described earlier, is drawn from the broader FEW portfolio and reflects the best aggregate rankings of our three investment disciplines: fundamental, technical, and quantitative.

Spring 2015 54


Exhibit 1: RBC Capital Markets Spring 2015 Fundamental Equity Weighting (FEW) Portfolio

Symbol

Weights (%) RBC CM S&P/TSX Closing Price

27-Feb-15 28-Nov-14 27-Feb-15 27-Feb-15 Energy ENC 23.0 23.0 20.8 2,661.43

Energy Equipment & Services ENEQP 2.0 2.0 0.8 1,146.94Calfrac Well Services Ltd. CFW 1.0 1.0 0.0 8.54Precision Drilling Corporation PD 1.0 1.0 0.1 7.61

Oil, Gas & Consumable Fuels OIL 21.0 21.0 20.1 2,804.58ARC Resources Ltd. ARX 1.0 1.0 0.4 24.15Cameco Corporation CCO 1.0 1.0 0.4 19.30Canadian Natural Resources Limited CNQ 2.0 3.0 2.1 36.36Cenovus Energy Inc. CVE 1.0 1.0 0.9 21.57Enbridge Inc. ENB 2.0 2.0 2.6 58.13Encana Corporation ECA 2.0 2.0 0.6 16.29Husky Energy Inc. HSE 2.0 2.0 0.4 28.09Inter Pipeline Ltd. IPL 1.0 1.0 0.6 33.20MEG Energy Corp. MEG 1.0 1.0 0.2 20.91Pembina Pipeline Corporation PPL 2.0 1.0 0.7 39.98Suncor Energy Inc. SU 3.0 3.0 2.9 37.53Tourmaline Oil Corp. TOU 1.0 1.0 0.3 38.86TransCanada Corporation TRP 2.0 2.0 2.0 54.79

Materials BMS 8.0 10.0 11.7 2,267.28Chemicals CHM 1.0 1.0 3.5 5,888.82

Agrium Inc. AGU 1.0 1.0 1.1 144.38Other* 0.0 0.0 0.2 6,082.64

(Const. Materials, Containers & Packaging)Metals & Mining

ex Gold and Steel* 2.0 2.0 2.5 4,992.97Lundin Mining Corporation LUN 1.0 0.0 0.2 5.45Silver Wheaton Corp. SLW 1.0 1.0 0.5 27.00

Gold GLD 3.0 4.0 4.8 1,466.97Agnico Eagle Mines Limited AEM 1.0 1.0 0.5 40.17Franco-Nevada Corporation FNV 1.0 1.0 0.5 65.96Goldcorp Inc. G 1.0 1.0 1.2 27.53

Steel STL 1.0 1.0 0.1 5,851.10Labrador Iron Ore Royalty Corporation LIF 1.0 1.0 0.1 18.16

Paper & Forest Products PPRFP 1.0 2.0 0.5 515.78Interfor Corporation IFP 1.0 1.0 0.1 20.98

Industrials CAP 11.0 10.0 8.5 2,470.15Capital Goods CG 2.0 2.0 1.6 538.76

CAE Inc. CAE 1.0 1.0 0.2 15.09MacDonald, Dettwiler and Associates Ltd. MDA 1.0 1.0 0.2 98.49

Commercial & Prof. Services DUR 2.0 2.0 0.7 882.24Progressive Waste Solutions Ltd. BIN 1.0 1.0 0.2 34.92Stantec Inc. STN 1.0 1.0 0.2 31.92

Transportation TRNS 7.0 6.0 6.2 8,935.93Air Canada AC 1.0 1.0 0.2 12.34Canadian National Railway Company CNR 4.0 3.0 3.7 86.35Cargojet Inc. CJT 1.0 1.0 n.m 26.85TransForce Inc. TFI 1.0 1.0 0.1 30.49

Consumer Discretionary CONC 9.0 8.0 6.6 2,008.74Automobiles & Components AUTO 2.0 2.0 1.7 3,772.20

Magna International Inc. MG 2.0 2.0 1.5 135.88Consumer Durables & Apparel DUR 2.0 2.0 0.6 4,493.27

BRP Inc. DOO 1.0 1.0 0.0 23.11Gildan Activewear Inc. GIL 1.0 0.0 0.5 76.03

Continued on next page.

Spring 2015 55


Exhibit 1: RBC Capital Markets Spring 2015 Fundamental Equity Weighting (FEW) Portfolio (continued)

Symbol

Weights (%) RBC CM S&P/TSX Closing Price

27-Feb-15 28-Nov-14 27-Feb-15 27-Feb-15 Consumer Services HOTEL 1.0 0.0 0.9 3,329.06

Hotels Restaurants & Leisure 1.0 0.0 0.9 3,492.47Restaurant Brands International Inc. QSR 1.0 0.0 0.6 55.26

Media MEDIA 2.0 2.0 2.1 997.36Broadcasting TV 0.0 0.0 0.1 1,859.76Other* (Advertising, Cable & Satellite,

Movies & Entertainment, Publishing) 2.0 2.0 2.1 8,577.88Cineplex Inc. CGX 1.0 1.0 0.2 49.88Sirius XM Canada Holdings Inc. XSR 1.0 1.0 n.m. 6.20

Retailing RETL 2.0 2.0 1.2 4,460.85Canadian Tire Corporation, Limited CTC.A 1.0 1.0 0.5 131.72Dollarama Inc. DOL 1.0 1.0 0.4 62.52

Consumer Staples CONS 3.0 3.0 3.7 3,905.86Loblaw Companies Limited L 2.0 2.0 0.8 63.79Saputo Inc. SAP 1.0 1.0 0.5 36.32

Health Care HC 6.0 5.0 4.7 2,819.24Catamaran Corp. CCT 1.0 1.0 0.7 62.41Concordia Healthcare Corp. CXR 1.0 1.0 n.m. 63.40Valeant Pharmaceuticals International, Inc. VRX 4.0 3.0 4.0 246.27

Financials TSF 35.0 36.0 34.5 2,302.60Banks BKS 20.0 21.0 21.4 2,689.00

Bank of Montreal BMO 2.0 2.0 2.6 77.46The Bank of Nova Scotia BNS 5.0 5.0 4.3 66.81National Bank of Canada NA 1.0 1.0 0.8 48.11

Toronto-Dominion Bank TD 6.0 6.0 5.3 54.80Diversified Financials DIVFIN 3.0 3.0 1.4 2,581.76

CI Financial Corp. CIX 1.0 1.0 0.4 35.12Gluskin Sheff + Associates Inc. GS 1.0 1.0 n.m. 28.62Tricon Capital Group Inc. TCN 1.0 1.0 n.m. 10.04

Insurance ISR 8.0 8.0 6.7 1,294.20Industrial Alliance Insurance IAG 2.0 2.0 0.2 42.45Manulife Financial Corporation MFC 4.0 4.0 2.3 21.77Power Corporation of Canada POW 2.0 2.0 0.6 33.72

Real Estate RES 4.0 4.0 5.0 3,153.81Brookfield Asset Management Inc. BAM.A 2.0 2.0 2.0 67.85Canadian Real Estate Investment Trust REF.UN 1.0 1.0 0.2 46.80Pure Industrial Real Estate Trust AAR.UN 1.0 1.0 n.m. 5.07

Information Technology HTC 1.0 1.0 2.5 216.86Software & Services SFTWR 1.0 1.0 1.9 3,656.64

CGI Group Inc. GIB.A 1.0 1.0 0.8 52.31Technology Hardware & Semi-conductors* 0.0 0.0 0.6 1,124.48

Telecommunication Services CS 3.0 3.0 4.8 1,307.75BCE Inc. BCE 1.0 1.0 2.4 54.71TELUS Corporation T 2.0 2.0 1.4 44.44

Utilities UTIL 1.0 1.0 2.2 2,043.82Brookfield Infrastructure Partners L.P. BIP.UN 1.0 1.0 n.m. 56.86

TOTAL PORTFOLIO TSX 100 100 100 15,234 New to the FEW portfolio this quarter.

* RBC Capital Markets estimates; n.m. = Not a member of TSX Composite. Source: RBC Capital Markets

At the time of this publication, one or more analysts that were responsible for the preparation of this report, or their household members, held a long position in the common shares of Canadian Pacific Railway and Teck Resources Limited.

Spring 2015 56


New Year 2015 FEW Performance Review As summarized in the table in Exhibit 2, the New Year 2015 FEW portfolio delivered a total return of 5.3% which was 120 basis points better than the 4.1% total return from the S&P/TSX Composite Index for the three-month period ending February 27, 2015.1

Exhibits 3 graphically depicts the total returns from the FEW relative to the TSX Index since inception.

A detailed re-cap of the stock selections and performance of the New Year 2015 FEW is included in Exhibit 4 on pages 59-60.

Exhibit 2: The FEW’s historical total return performance over the short- and long-term (all periods ended February 27, 2015)

RBC CM FEW S&P/TSX 3 months 5.3% 4.1% 6 months 0.6% -1.1% 1 Year 11.7% 10.3% 3 Years 12.8% 9.7% 5 Years 11.6% 8.6% 10 Years 9.8% 7.6% 15 Years 8.0% 5.9% 20 Years 11.9% 9.2% Since Inception (June 30, 1986) 11.3% 8.4% Note: 3-months, 6 months and 1 Year returns are all simple returns. All other time periods (3 Years to Since Inception) are compound returns. Source: RBC Capital Markets

Exhibit 3: RBC Capital Markets FEW Performance (Dividends plus Appreciation) vs. S&P/TSX Composite Index (June 1986 = 100)

100

400

700

1000

1300

1600

1900

2200

2500

Jun-86 Sep-89 Nov-92 Feb-96 May-99 Aug-02 Nov-05 Feb-09 May-12

RBC CM2,167

S&P/TSX1,019

Feb-15 Source: RBC Capital Markets

Market internals included outperformance by Materials, Consumer Discretionary, Consumer Staples, Healthcare, and Information Technology. The Energy, Industrials, Telecommunications and Utilities sectors underperformed the total return from the S&P/TSX Composite.

1 Note: Past performance is not necessarily indicative of future performance. Performance returns do not take into consideration management fees or other account expenses, which would lower actual returns.

Spring 2015 57


The New Year FEW portfolio’s performance comfortably exceeded the market. Five of ten sectors (Materials, Industrials, InfoTech, Telecom, and Utilities) outperformed the market, in some instances by a wide margin, thus allowing the overall FEW Portfolio stock selection to drive outperformance versus the broad market. Three of ten sectors (Consumer Discretionary, Staples, and Healthcare) lagged their respective industry groups, while two (Energy and Financials) posted generally “in-line” performance.

The best-performing stock selections within the FEW were: Agnico Eagle Mines Limited (50.9%), Valeant Pharmaceuticals International (48.8%) and Concordia Healthcare Corp. (35.1%). The weakest performers were Calfrac Well Services Ltd. (-29.0%), Canadian Western Bank (-18.9%), and BRP Inc. (-17.2%).

Spring 2015 58


Exhibit 4: RBC CM Fundamental Equity Weighting (FEW) New Year 2015 Portfolio Performance – Last Quarter

Symbol

Weights (%)

Closing Price

Performance (%) RBC CM

S&P/TSX RBC CM

S&P/TSX Price

Return Total

Return Price

Return Total

Return 28-Nov-14 28-Nov-14 27-Feb-15 28-Nov-14 27-Feb-15

Energy ENC 23.0 21.6 20.8 2,692.75 2,661.43 -0.4 0.3 -1.2 -0.3Energy Equipment & Services ENEQP 2.0 1.0 0.8 1,391.15 1,146.94 -13.7 -13.2 -17.6 -16.8

Calfrac Well Services Ltd. CFW 1.0 0.0 0.0 12.20 8.54 -30.0 -29.0Precision Drilling Corporation PD 1.0 0.1 0.1 7.42 7.61 2.6 2.6

Oil, Gas & Consumable Fuels OIL 21.0 20.6 20.1 2,815.19 2,804.58 0.9 1.6 -0.4 0.5ARC Resources Ltd. ARX 1.0 0.5 0.4 27.04 24.15 -10.7 -9.6Cameco Corporation CCO 1.0 0.5 0.4 21.26 19.30 -9.2 -8.7Canadian Natural Resources Limited CNQ 3.0 2.3 2.1 37.96 36.36 -4.2 -3.6Cenovus Energy Inc. CVE 1.0 1.1 0.9 25.67 21.57 -16.0 -14.9Enbridge Inc. ENB 2.0 2.4 2.6 52.50 58.13 10.7 11.4Encana Corporation ECA 2.0 0.7 0.6 18.02 16.29 -9.6 -9.1Husky Energy Inc. HSE 2.0 0.4 0.4 24.18 28.09 16.2 17.4Inter Pipeline Ltd. IPL 1.0 0.6 0.6 32.62 33.20 1.8 2.9MEG Energy Corp. MEG 1.0 0.2 0.2 18.57 20.91 12.6 12.6Pembina Pipeline Corporation PPL 1.0 0.7 0.7 38.96 39.98 2.6 3.7Suncor Energy Inc. SU 3.0 2.9 2.9 36.11 37.53 3.9 4.7Tourmaline Oil Corp. TOU 1.0 0.3 0.3 38.00 38.86 2.3 2.3TransCanada Corporation TRP 2.0 2.1 2.0 54.45 54.79 0.6 1.5

Materials BMS 10.0 10.4 11.7 1,964.36 2,267.28 20.0 20.8 15.4 16.1Chemicals CHM 1.0 3.0 3.5 4,972.84 5,888.82 30.8 31.7 18.4 19.5

Agrium Inc. AGU 1.0 0.9 1.1 110.38 144.38 30.8 31.7Other* 0.0 0.2 0.2 5,490.49 6,082.64 0.0 0.0 10.8 11.2

(Const. Materials, Containers & Packaging)Metals & Mining

ex Gold and Steel* 2.0 2.5 2.5 4,968.83 4,992.97 16.7 18.1 0.5 1.2Silver Wheaton Corp. SLW 1.0 0.4 0.5 22.58 27.00 19.6 19.9Teck Resources Limited TCK.B 1.0 0.4 0.5 17.64 20.08 13.8 16.4

Gold GLD 4.0 4.1 4.8 1,221.53 1,466.97 23.5 23.9 20.1 20.5Agnico Eagle Mines Limited AEM 1.0 0.3 0.5 26.68 40.17 50.6 50.9Franco-Nevada Corporation FNV 1.0 0.5 0.5 57.21 65.96 15.3 15.7Goldcorp Inc. G 1.0 1.0 1.2 22.40 27.53 22.9 23.7New Gold Inc. NGD 1.0 0.1 0.1 4.56 4.79 5.0 5.0

Steel STL 1.0 0.1 0.1 5,374.25 5,851.10 8.9 11.0 8.9 11.0Labrador Iron Ore Royalty Corporation LIF 1.0 0.1 0.1 16.68 18.16 8.9 11.0

Paper & Forest Products PPRFP 2.0 0.4 0.5 467.22 515.78 16.6 16.6 10.4 10.6Interfor Corporation IFP 1.0 0.1 0.1 17.70 20.98 18.5 18.5West Fraser Timber Co. Ltd. WFT 1.0 0.2 0.2 59.38 68.06 14.6 14.7

Industrials CAP 10.0 8.7 8.5 2,426.30 2,470.15 4.2 4.5 1.8 2.1Capital Goods CG 2.0 1.8 1.6 595.27 538.76 4.7 4.9 -9.5 -9.1

CAE Inc. CAE 1.0 0.2 0.2 15.14 15.09 -0.3 0.1MacDonald, Dettwiler and Assoc. Ltd. MDA 1.0 0.2 0.2 89.77 98.49 9.7 9.7

Commercial & Prof. Services DUR 2.0 0.7 0.7 893.26 882.24 -1.7 -1.4 -1.2 -0.7Progressive Waste Solutions Ltd. BIN 1.0 0.2 0.2 34.79 34.92 0.4 0.8Stantec Inc. STN 1.0 0.2 0.2 33.20 31.92 -3.9 -3.6

Transportation TRNS 6.0 6.2 6.2 8,463.58 8,935.93 6.0 6.3 5.6 5.9Air Canada AC 1.0 0.2 0.2 11.18 12.34 10.4 10.4Canadian National Railway Company CNR 3.0 3.6 3.7 81.23 86.35 6.3 6.6Cargojet Inc. CJT 1.0 n.m n.m 25.80 26.85 4.1 4.6TransForce Inc. TFI 1.0 0.1 0.1 29.79 30.49 2.3 2.9

Consumer Discretionary CONC 8.0 6.4 6.6 1,839.82 2,008.74 7.6 8.5 9.2 9.6Automobiles & Components AUTO 2.0 1.6 1.7 3,374.77 3,772.20 11.1 11.5 11.8 11.8

Magna International Inc. MG 2.0 1.4 1.5 122.30 135.88 11.1 11.5Consumer Durables & Apparel DUR 2.0 0.5 0.6 4,052.38 4,493.27 -4.9 -4.4 10.9 11.3

BRP Inc. DOO 1.0 0.1 0.0 27.90 23.11 -17.2 -17.2Dorel Industries Inc. DII.B 1.0 0.1 0.1 37.90 40.71 7.4 8.4

Consumer Services HOTEL 0.0 0.9 0.9 2,663.79 3,329.06 0.0 0.0 25.0 25.3Media MEDIA 2.0 2.1 2.1 976.81 997.36 14.6 17.0 2.1 3.0

Broadcasting TV 0.0 0.1 0.1 1,856.34 1,859.76 0.0 0.0 0.2 1.4Other* (Advertising, Cable & Satellite,

Movies & Entertainment, Publishing) 2.0 2.0 2.1 8,117.69 8,577.88 14.6 17.0 5.7 6.6Cineplex Inc. CGX 1.0 0.2 0.2 43.75 49.88 14.0 14.9Sirius XM Canada Holdings Inc. XSR 1.0 n.m. n.m. 5.38 6.20 15.2 19.1

Continued on next page.

Spring 2015 59


Exhibit 4: RBC CM Fundamental Equity Weighting (FEW) New Year 2015 Portfolio Performance – Last Quarter (continued)

Symbol

Weights (%)

Closing Price

Performance (%) RBC CM

S&P/TSX RBC CM

S&P/TSX Price

Return Total

Return Price

Return Total

Return 28-Nov-14 28-Nov-14 27-Feb-15 28-Nov-14 27-Feb-15

Retailing RETL 2.0 1.2 1.2 4,105.46 4,460.85 9.7 9.9 8.7 9.0Canadian Tire Corporation, Limited CTC.A 1.0 0.5 0.5 128.31 131.72 2.7 3.0Dollarama Inc. DOL 1.0 0.4 0.4 53.58 62.52 16.7 16.8

Consumer Staples CONS 3.0 3.4 3.7 3,489.42 3,905.86 5.7 6.1 11.9 12.3Loblaw Companies Limited L 2.0 0.8 0.8 61.51 63.79 3.7 4.1Saputo Inc. SAP 1.0 0.5 0.5 33.15 36.32 9.6 10.0

Health Care HC 5.0 3.5 4.7 2,012.65 2,819.24 37.4 37.9 40.1 40.1Catamaran Corp CCT 1.0 0.7 0.7 57.77 62.41 8.0 8.0Concordia Healthcare Corp. CXR 1.0 n.m. n.m. 47.00 63.40 34.9 35.1Valeant Pharmaceuticals Intl, Inc. VRX 3.0 2.8 4.0 166.40 246.27 48.0 48.8

Financials TSF 36.0 36.7 34.5 2,370.76 2,302.60 -2.7 -1.8 -2.9 -1.9Banks BKS 21.0 23.8 21.4 2,875.43 2,689.00 -6.4 -5.5 -6.5 -5.6

Bank of Montreal BMO 2.0 3.0 2.6 83.86 77.46 -7.6 -6.7The Bank of Nova Scotia BNS 5.0 4.7 4.3 70.50 66.81 -5.2 -4.3Canadian Western Bank CWB 1.0 0.2 0.1 36.10 29.06 -19.5 -18.9National Bank of Canada NA 1.0 1.0 0.8 53.13 48.11 -9.4 -8.5

Toronto-Dominion Bank TD 6.0 5.8 5.3 57.62 54.80 -4.9 -4.1

Diversified Financials DIVFIN 3.0 1.4 1.4 2,551.85 2,581.76 7.3 8.9 1.2 1.9CI Financial Corp. CIX 1.0 0.4 0.4 33.87 35.12 3.7 4.6Gluskin Sheff + Associates Inc. GS 1.0 n.m. n.m. 27.95 28.62 2.4 5.3Tricon Capital Group Inc. TCN 1.0 n.m. n.m. 8.66 10.04 15.9 16.6

Insurance ISR 8.0 6.9 6.7 1,300.20 1,294.20 -3.8 -3.1 -0.5 0.5Industrial Alliance Insurance IAG 2.0 0.3 0.2 47.41 42.45 -10.5 -9.9Manulife Financial Corporation MFC 4.0 2.3 2.3 22.77 21.77 -4.4 -3.7Power Corporation of Canada POW 2.0 0.6 0.6 32.43 33.72 4.0 4.9

Real Estate RES 4.0 4.7 5.0 2,850.89 3,153.81 11.4 12.2 10.6 11.7Brookfield Asset Management Inc. BAM.A 2.0 1.8 2.0 57.49 67.85 18.0 18.4Canadian Real Estate Investment Trust REF.UN 1.0 0.2 0.2 48.66 46.80 -3.8 -2.9Pure Industrial Real Estate Trust AAR.UN 1.0 n.m. n.m. 4.47 5.07 13.4 15.2

Information Technology HTC 1.0 2.1 2.5 184.02 216.86 25.5 25.5 17.8 18.0Software & Services SFTWR 1.0 1.6 1.9 3,076.88 3,656.64 25.5 25.5 18.8 19.0

CGI Group Inc. GIB.A 1.0 0.6 0.8 41.68 52.31 25.5 25.5Technology Hardware & Semi-conductors* 0.0 0.5 0.6 981.81 1,124.48 0.0 0.0 14.5 14.5

Telecommunication Services CS 3.0 4.9 4.8 1,293.68 1,307.75 2.6 3.6 1.1 2.2BCE Inc. BCE 1.0 2.4 2.4 53.34 54.71 2.6 3.7TELUS Corporation T 2.0 1.4 1.4 43.28 44.44 2.7 3.6

Utilities UTIL 1.0 2.2 2.2 2,005.11 2,043.82 19.1 20.1 1.9 3.0Brookfield Infrastructure Partners L.P. BIP.UN 1.0 n.m. n.m. 47.75 56.86 19.1 20.1

TOTAL PORTFOLIO TSX 100 100 100 14,745 15,234 4.5 5.3 3.3 4.1 * RBC Capital Markets estimates n.m. = Not a member of TSX Composite. All values in Canadian dollars, unless otherwise noted. Source: RBC Capital Markets

At the time of this publication, one or more analysts that were responsible for the preparation of this report, or their household members, held a long position in the common shares of Canadian Pacific Railway and Teck Resources Limited.

Spring 2015 60

Strategy: The Investment Outlook – Global Equity Coverage Universe

Global Equity Coverage Universe

Click here for Company Coverage and Rating Summary as of March 13, 2015.

Spring 2015 61

https://www.rbcinsight.com/CM/Share/ResearchViewer/?SSS_FEC57EA84F80E50006BBE7C56F9D5F89

Strategy: The Investment Outlook - Disclosures

Required Disclosures Non-U.S. analyst disclosure Steve Arthur, Neil Downey, Michael Harvey, Bish Koziol, Robert Kwan, Chad McAlpine, Drew McReynolds, Darko Mihelic, Javed Mirza, Irene Nattel, Sara O’Brien, Greg Pardy, Walter Spracklin, Andrew D. Wong (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Conflicts disclosures This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Distribution of ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above).

Distribution of ratings RBC Capital Markets, Equity Research

As of 31-Dec-2014 Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent BUY [Top Pick & Outperform] 897 52.92 290 32.33 HOLD [Sector Perform] 686 40.47 137 19.97 SELL [Underperform] 112 6.61 6 5.36

Conflicts policy RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

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Spring 2015 62

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The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial Services LLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Spring 2015 63


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Among other requirements, the publication must include a full and complete statement of the relationship between the investment dealer and the issuer, and must include information on a substantial number of others in the industry or business of the issuer comparable to that given for the issuer and must not give materially greater space or prominence to the information on the issuer than is given to the information on any of the others.

RBC Dominion Securities Inc. is a direct wholly owned subsidiary of Royal Bank of Canada and, as such, is a ‘related issuer’ of Royal Bank.

Disclaimer RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/ or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicable industry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets.

Additional information is available on request.

To U.S. Residents: This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which accepts responsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital Markets, LLC.

To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. (member IIROC). Any Canadian recipient of this report that is not a Designated Institution in Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.

Spring 2015 64


To U.K. Residents: This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ('FCA') and the Prudential Regulation Authority, in connection with its distribution in the United Kingdom. This material is not for general distribution in the United Kingdom to retail clients, as defined under the rules of the FCA. However, targeted distribution may be made to selected retail clients of RBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.

To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section 761G of the Corporations Act.

To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Capital Markets (Hong Kong) Limited and Royal Bank of Canada, Hong Kong Branch (both entities which are regulated by the Hong Kong Monetary Authority (‘HKMA’) and the Securities and Futures Commission ('SFC')). Financial Services provided to Australia: Financial services may be provided in Australia in accordance with applicable law. Financial services provided by the Royal Bank of Canada, Hong Kong Branch are provided pursuant to the Royal Bank of Canada's Australian Financial Services Licence ('AFSL') (No. 246521). RBC Capital Markets (Hong Kong) Limited is exempt from the requirement to hold an AFSL under the Corporations Act 2001 in respect of the provision of such financial services. RBC Capital Markets (Hong Kong) Limited is regulated by the HKMA and the SFC under the laws of Hong Kong, which differ from Australian laws.

To Singapore Residents: This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch, a registered entity granted offshore bank licence by the Monetary Authority of Singapore. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicative of future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch. Royal Bank of Canada, Singapore Branch accepts responsibility for this report and its dissemination in Singapore.

To Japanese Residents: Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financial instruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank.

® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright © RBC Capital Markets, LLC 2015 - Member SIPC

Copyright © RBC Dominion Securities Inc. 2015 - Member CIPF Copyright © RBC Europe Limited 2015

Copyright © Royal Bank of Canada 2015 All rights reserved

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Strategy: The Investment Outlook

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