2016 Market Outlook - Managed Money Reporter

Portfolio Advisory Group

February 2016

1

2016 Market Outlook: • Global growth projections declining

• Pace of Fed rate hikes and geopolitics are creating risks

• Bank of Canada could cut interest rates again in 2016

• USD approaching a peak

• Most commodities oversupplied; recovery to be painfully slow

• Overall return expectations remain modest

2

2015 Performance

Source: Bloomberg

-50%

-40%

-30%

-20%

-10%

0%

10%

DA

X

Shan

gha

i C

om

posite

Nik

kei

Na

sd

aq

Euro

Sto

xx 5

0

Me

xic

o IP

C

S&

P500

MS

CI

world

FT

SE

10

0

Sensex (

Ind

ia)

Ha

ng S

en

g

S&

P/T

SX

Co

mpo

site

Ibovespa (

Bra

zil)

Co

rn

Gold

Silv

er

Whea

t

CR

B In

dex

Co

ppe

r

WT

I

Na

tura

l G

as

Bre

nt

Weste

rn C

da S

ele

ct

JP

Y/U

SD

GB

P/U

SD

EU

R/U

SD

CA

D/U

SD

GoC

Ca

n IG

Co

rp

US

Tre

asury

EM

Sovere

ign (

US

D)

US

IG

Co

rp

US

HY

Corp

Ca

n H

Y C

orp

S&

P/T

SX

Pre

f S

hare

s

S&

P/T

SX

Pre

f R

ate

Reset

2015 Full Year Performance

Equities Commodities Fixed IncomeCurrencies

Pref

A recap of PAG’s 2015 themes and strategy appears at the end of this report

3

2015 Performance

Source: Bloomberg

14.8%

11.0%

-1.0%-3.5%

-5.5%-7.8%

-11.1%-12.5%

-15.8%

-22.8%-25.7%

-35%

-25%

-15%

-5%

5%

15%

Info

Tech

Cons. S

taple

s

Tele

com

Co

ns. D

iscre

tion

ary

Fin

ancia

l

Utilit

ies

S&

P/T

SX

Com

posite

Industr

ials

He

alth

care

Mate

rials

Energ

y

S&P/TSX Composite Index

2015 Performance

4

2015 Performance

Source: Bloomberg

8.4%

5.2% 4.3% 3.8%

-0.7% -1.7%-3.5%

-4.7%

-8.4%-10.4%

-23.6%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Co

ns.

Dis

cre

tion

ary

He

alth

care

Info

Tech

Co

ns.

Sta

ple

s

S&

P5

00

Te

leco

m

Fin

an

cia

l

Ind

ustr

ials

Utilit

ies

Ma

teria

ls

Energ

y

S&P500 Index

2015 Performance

5

2016 Investment Themes

• Economic growth: Disappointing pace • U.S. in advanced stages of economic cycle; growth unlikely to exceed 2.5%

• Europe: leveling off in the sub-2% range

• China: growth decelerating into mid-6% range; hard or soft landing?

• Canada: downside risks could keep growth below 1.5%

• Monetary policy: The Fed hikes while everyone else cuts • After liftoff, focus now on pace of future hikes; risk if speed is too fast/slow

• Europe: could add more stimulus but is reluctant to

• China: lots of room for rates to decline further

• Canada: Another rate cut likely… maybe by mid-year

• Commodities: Oversupply conditions persist • Oil: Lengthy wait for supply/demand equilibrium; OPEC capitulation needed

• Base metals: Decelerating China means recovery is still way off

• Gold: After prolonged drop, gold looking more interesting

• Geopolitical: Lots to disrupt investor sentiment • Middle East: Syria/ISIS, Sunni vs. Shia, financial strain of low oil prices

• U.S. election, U.K. referendum, N. Korea, Russia, environmental policy

6

2016 Investment Strategy

• Equity: Flat is the new up; volatility here to stay • U.S.: strong USD + declining global growth = modest profit growth (h 5% to 7%)

• Canada: 2015 challenges to persist; flat is the new up (h 3% to 5%)

• Defensive strategy: higher cash, focus on dividends, high-grade toward quality

• Fixed Income: Era of low rates to continue; risks for credit/high yield • Favour GICs (1-5 year), provincials, infrastructure, deposit notes

• Later stages of credit cycle could see further pressure for HY and IG credit

• Preferreds: The rollercoaster ride isn’t over yet • Remain out of favour; new issuance + rate cut to pressure existing rate resets

• Prefer: IG over non-IG, minimum dividend, wide spread, 2019-2020 reset dates

• Currency: USD crescendo approaching

• CAD nearing support; consider trimming USD exposure

• Commodities: Risk still outweighs return • Oil: more short-term pain ahead, recovery in 2H2016 or 2017?

• Materials: avoid most China-centric names; warming up to gold

Risks To Our Outlook

7

Equity Fixed

Income

Fed rate policy: pace of future hikes

Fed hikes faster than expected

Increased market volatility surrounding key data dates

-

-

Commodity price volatility – financial/political instability - +

Geopolitical Issues - / + +

Hard landing for China’s economy - +

European economic recovery stalls - +

Hard landing for Canada’s housing market - +

Elections in U.S., Portugal, Iran, Russia, UK referendum (‘17) - / + - / +

8

What’s going on?

Growth m

+

Valuation h

+

Uncertainty h

=

Market angst

• Economic rebound painfully slow

• Growth decelerating in most BRIC nations

• Oversupply of many commodities

• After years of low rates, many asset classes

are expensive from a historical perspective

• Increased geopolitical risks

• Destabilizing effects of low commodity prices

• Global monetary policy increasingly opaque

• Volatility has increased

• More cash parked on the sidelines

• Few incentives to take on additional risk

9

Growth: Painfully Slow Everywhere

• U.S. and Europe steady, China decelerating GDP Growth (YoY%)

Source: Bloomberg, Scotia Wealth Management

-7

-5

-3

-1

1

3

5

7

9

11

13

Jun

-02

Mar

-03

Dec

-03

Sep

-04

Jun

-05

Mar

-06

Dec

-06

Sep

-07

Jun

-08

Mar

-09

Dec

-09

Sep

-10

Jun

-11

Mar

-12

Dec

-12

Sep

-13

Jun

-14

Mar

-15

Dec

-15

Europe

U.S.

6.5

China

2.4

1.7

20

16

E

20

17

E

6.3

2.3

1.7

10

Global Growth: Downward Revisions

Source: Bloomberg

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

Global GDP Growth Forecast (%)

2016E

2015E

11

When Will Canada Recover?

Source: Bloomberg

0.5

1.0

1.5

2.0

2.5

3.0

Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

Canada GDP Growth Forecast (%)

2016E

2015E

2016 still too optimistic?

Oil: Where to From Here?

12

Wide Ranging Impact of Low Oil Prices

13

Low Oil

Prices

Oil exporting nations

impacted Sovereign

wealth funds

liquidate

Increased risk in high

yield market

Wealth transfer to net

importers

Regional disputes worsen

Currency market volatility

Political instability

grows

Monetary & fiscal policy

upended

Conflicts with environmental

policy

Alternative energy delayed

Equity markets decline

OIL

Global Oil Glut

14 Source: U.S. Department of Energy, EIG, Bloomberg

-2

0

2

4

6

8

10

70

75

80

85

90

95

100A

ug-

05

Dec

-05

Ap

r-0

6

Au

g-0

6

Dec

-06

Ap

r-0

7

Au

g-0

7

Dec

-07

Ap

r-0

8

Au

g-0

8

Dec

-08

Ap

r-0

9

Au

g-0

9

Dec

-09

Ap

r-1

0

Au

g-1

0

Dec

-10

Ap

r-1

1

Au

g-1

1

Dec

-11

Ap

r-1

2

Au

g-1

2

Dec

-12

Ap

r-1

3

Au

g-1

3

Dec

-13

Ap

r-1

4

Au

g-1

4

Dec

-14

Ap

r-1

5

Au

g-1

5

Dec

-15

Global Oil Supply/Demand (mln b/d)

Supply (lhs)

Demand (lhs)

Excess supply/demand (mln b/d)

Excess supply (rhs)

Excess demand (rhs)

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

0

20

40

60

80

100

120

140

160

Au

g-0

5

Dec

-05

Ap

r-0

6

Au

g-0

6

Dec

-06

Ap

r-0

7

Au

g-0

7

Dec

-07

Ap

r-0

8

Au

g-0

8

Dec

-08

Ap

r-0

9

Au

g-0

9

Dec

-09

Ap

r-1

0

Au

g-1

0

Dec

-10

Ap

r-1

1

Au

g-1

1

Dec

-11

Ap

r-1

2

Au

g-1

2

Dec

-12

Ap

r-1

3

Au

g-1

3

Dec

-13

Ap

r-1

4

Au

g-1

4

Dec

-14

Ap

r-1

5

Au

g-1

5

Dec

-15

Global Oil Inventory (billions of barrels)

Global oil inventory (rhs)

WTI Oil Price (USD/barrel)

Oil price (lhs)

OPEC Has Changed Its Strategy

15 Source: Bloomberg

0

20

40

60

80

100

120

140

160

27

28

29

30

31

32

33

Oct

-05

Oct

-06

Oct

-07

Oct

-08

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

OPEC Production (million barrels/day)

OPEC Production (left scale)

OPEC Quota (left scale)

Brent Oil Price(right scale)

Brent Oil Price (USD/barrel)

… Because OPEC Has Lost Market Share

16

Source: Bloomberg, ScotiaMcLeod

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

30%

31%

32%

33%

34%

35%

36%

37%

38%

39%

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Market Share (OPEC) Market Share (U.S., Canada, Russia)

Russia (right scale)

U.S. (right scale)

Canada(right scale)

OPEC(left scale)

Technology + High Price = US Supply Growth

17

Source: Bloomberg, ScotiaMcLeod

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1983

1983

198

4

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

199

4

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

200

5

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

U.S. Oil Production (000s barrels/day)

Conventional Oil

Shale Oil

High Cost of Incremental Production

18

Source: IEA, Forbes

U.S. Rig Count Down 70%

19

Source: Baker Hughes, Bloomberg

0

20

40

60

80

100

120

140

160

0

500

1000

1500

2000

2500

1/31

/200

0

8/31

/20

00

3/31

/200

1

10/3

1/20

01

5/31

/200

2

12/3

1/20

02

7/31

/200

3

2/29

/200

4

9/30

/200

4

4/30

/200

5

11/3

0/20

05

6/30

/200

6

1/31

/200

7

8/31

/200

7

3/31

/200

8

10/3

1/20

08

5/31

/200

9

12/3

1/20

09

7/31

/201

0

2/28

/201

1

9/30

/201

1

4/30

/201

2

11/3

0/20

12

6/30

/201

3

1/31

/20

14

8/31

/201

4

3/31

/201

5

10/3

1/20

15

Total Active Rig Count (U.S.) WTI Crude Oil (US$/bbl)

WTI Crude Oil (rhs)

Total Rig Count (lhs)

70% decline in rig count

20

Source: U.S. Department of Energy

3

4

5

6

7

8

9

10

111/

31/2

006

6/30

/200

6

11/3

0/20

06

4/30

/200

7

9/30

/20

07

2/29

/200

8

7/31

/200

8

12/3

1/20

08

5/31

/200

9

10/3

1/20

09

3/31

/201

0

8/31

/201

0

1/31

/201

1

6/30

/201

1

11/3

0/20

11

4/30

/201

2

9/30

/201

2

2/28

/201

3

7/31

/201

3

12/3

1/20

13

5/31

/201

4

10/3

1/20

14

3/31

/201

5

8/31

/201

5

1/31

/201

6

6/30

/20

16

Total U.S. Crude Oil Production (million bbl/day)

Forecast

Actual

U.S. Oil Production Moderating… But Slowly

Cdn Drilling Activity at Depressed Levels

21 Source: Canadian Association of Oilwell Drilling Contractors, Bloomberg

0

50

100

150

200

250

300

350

400

450

500

31-Dec 31-Jan 28-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul 31-Aug 30-Sep 31-Oct 30-Nov 31-Dec

Active Rig Count

5-year range

Alberta

0

20

40

60

80

100

120


Active Rig Count

5-year range

Saskatchewan

0

20

40

60

80

100

120


Active Rig Count

B.C.

Even OPEC Needs Higher Prices

22

Current

price

Source: APICORP Research

Demand Lagging Due To Technology

23 23

Source: U.S. Department of Energy

29.5

36.0

24

26

28

30

32

34

36

38

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

U.S. New Vehicle Fuel Efficiency By Model Year (miles per gallon)

22% improvement

in 10 years

Source: Bloomberg

Global Oil Demand (Millions barrels/day)

Base case

scenario

(International

Energy

Agency –

2015 World

Energy

Outlook)

Oil Scenarios: Where To From Here?

24


0

20

40

60

80

100

120

140

160

Au

g-0

7

Feb

-08

Au

g-0

8

Feb

-09

Au

g-0

9

Feb

-10

Au

g-1

0

Feb

-11

Au

g-1

1

Feb

-12

Au

g-1

2

Feb

-13

Au

g-1

3

Feb

-14

Au

g-1

4

Feb

-15

Au

g-1

5

Oil Price (USD/barrel)

WTI

Brent

Bear case:Global recession

Bull case:OPEC cuts production;Geopolitical conflict worsens

Non-OPEC productionremains high as costs decline

Base case:Non-OPEC production declines; OPEC slowly regains market share

Saudi Arabia in the Driver’s Seat

25

• October 2014 strategy: Short-term pain for long-term gain

• Financial: Regain market share by targeting high cost producers

• Existential: Prolong oil cycle by discouraging alternative energy

• Geopolitical: Financial warfare against Iran

• Domestic : Start long process of weaning economy off oil

• Timing of oil recovery dependent on Saudi Arabia’s next move

• So far, objectives have not been fulfilled

Modest market share gains… but taking too long

Global production still high / Demand proving to be relatively inelastic

Iran sanctions lifted

Weaning Saudi public off “welfare state” is lengthy and could prove dangerous

Strategy proving to be very expensive (>US$250B per year @ $30/bbl)

• Bottom line: Saudi Arabia can’t pursue this strategy indefinitely

Saudi Reserve Assets Being Depleted

26

Source: Bloomberg, Scotia Wealth Management PAG

0

100

200

300

400

500

600

700

800

0

20

40

60

80

100

120

140

160

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

Oil Price (Brent USD$/bbl) Saudi Arabia Total Reserve Assets (USD Billion)

Oil Price(left scale)

Saudi Reserve Assets(right scale)

@ $30/bbl

@ $50/bbl

@ $40/bbl

27

Canadian Challenges to Persist in 2016

• Downside risks to economy remain

• A recovery is contingent on commodity price recovery, particularly oil/nat gas

• High consumer debt and home prices create additional risks

• Canadian interest rates to follow oil’s lead

• The Bank of Canada likely to cut interest rates again

• Still waiting for full benefit of lower CAD; import inflation impacting consumers

• Monetary policy has limitations; fiscal stimulus needed

• Canadian equities still trading at above-average valuation

• Canada remains out of favour in the eyes of foreign capital

• Current equity valuations already reflecting somber outlook

• Recommend defensive strategy focused on dividends and valuation

• Overweight Financials (banks, lifecos, select REITs)

• Underweight Energy (prefer energy infrastructure), Materials (prefer ferts)

• Select Consumer, Utilities, Telcos names that are reasonably valued

Canada Dragged Lower by Commodities

28

Source: Bloomberg

0

50

100

150

200

250

300

350

400

450

500

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Sep-14

Canada GDP(left scale)

Thomson Reuters Commodity Index(right scale)

Thomson Reuters Commodity IndexCanada GDP Growth YoY%

Cdn Consumer Debt at Record Levels

29

Source: Bloomberg

167%

130%

104%

40

60

80

100

120

140

160

180

Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14

Household debt to disposable income (%)

U.S.

Canada

Residential Real Estate is Different Story

30

Source: Scotiabank GBM

Waiting for Manufacturing Jobs in Canada

31

Source: Statistics Canada, Bloomberg

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

500

600

700

800

900

1000

1100

1200

1300

Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14

Total Cdn Manufacturing Jobs (000s) CAD/USD Fx Rate

Manufacturing jobs

CAD /USD

18-24 month lag

Canada Has Lots of Fiscal Firepower

32

Source: Bloomberg

0

10

20

30

40

50

60

70

80

90

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

Total Government Debt to GDP Ratio

U.S.

Canada

36%

80%

33

What’s Happening in China?

• China’s economy is maturing

• China is now 2nd largest economy; 1st on a purchasing power parity basis

• Era of rapid growth coming to an end

• Already the “factory” of the world; mass migration into cities

• What happens in China matters!

• Transition to slower growth is bumpy

• Government experimenting with policy tools

• Intervening in equity, currency, rate markets

• Deregulating financial system; liberalizing trade

• Crack down on corruption

• Social reforms (i.e. Hukou system, one-child policy)

• Outlook

• Global growth to decelerate… until the next cycle starts (India?)

• Global supply chain needs to adjust

34

China Overtaking U.S. and E.U

Source: Bloomberg, IMF

0

5

10

15

20

25

30

35

1980 1985 1990 1995 2000 2005 2010 2015E 2020E

Share of Global GDP on Purchasing Power Parity Basis (%)

European Union

India

China

United States

35

As Goes China… So Do Commodities

Source: Bloomberg

4

5

6

7

8

9

10

11

12

13

50

100

150

200

250

300

350

400

450

500M

ar-0

0

Dec

-01

Sep

-03

Jun

-05

Mar

-07

Dec

-08

Sep

-10

Jun

-12

Mar

-14

Dec

-15

Thomson Reuters Commodity Index

China GDP Growth

Thomson Reuters Commodity Index

China GDP Growth (YOY)

36

Chinese Manufacturing i, Services h

Source: Bloomberg

35

40

45

50

55

60

65

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Expansion

Contraction

Manufacturing

Services

China Purchasing Managers Index (PMI)

37

China’s Working Age Population Shrinking

Source: United Nations

0%

10%

20%

30%

40%

50%

60%

70%

19

50

19

55

19

60

19

65

19

70

19

75

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

20

35

20

40

20

45

20

50

Working-age

(20-59)

Children

(0-19)

Elderly

(60+)

Current

% of total population

One-child policy

38

Massive Migration Into Cities Nearing An End

Source: National Bureau of Statistics of China, IMF, Bloomberg

54%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Urban population as a % of total population

Canada / US = 82%

Europe = 74%

Japan = 67%

India = 31%China

415 million more people in Chinese cities over last 20 years!

China’s goal is

60% by 2020

39

Volatile Chinese Equity Market

+


0

5

10

15

20

25

30

35

Ja

n-0

6

Ju

n-0

6

No

v-0

6

Apr-

07

Sep

-07

Feb-0

8

Ju

l-0

8

De

c-0

8

Ma

y-0

9

Oct-

09

Ma

r-10

Aug

-10

Ja

n-1

1

Ju

n-1

1

No

v-1

1

Apr-

12

Sep

-12

Feb-1

3

Ju

l-1

3

De

c-1

3

Ma

y-1

4

Oct-

14

Ma

r-15

Aug

-15

Ja

n-1

6

Average = 14.2x

Shanghai Composite 12-Month Forward P/E Multiple

Current = 12.4x

Period of low global growth

June 2015 = 18.5x

2015 rally fueled by margin debt and expectations of financial deregulation

40

Robust U.S. Economy… Maturing Fast

• U.S. economy in advanced stages of economic cycle

• Large improvement in employment

• Corporate profit margins have peaked; PMI data starting to wane

• Strong USD and slower economic growth abroad restraining U.S. growth

• Interest rate path is a risk for 2016

• Is the Fed already late in hiking rates?

• Equity and bond markets pricing-in only a gradual pace of rate hikes

• Inflation is now the primary data point to watch

• Equities still trading at above-average valuation

• U.S. equity market is a crowded trade

• Profit growth has been disappointing… 2016/2017 expectations optimistic

• Weakness in energy a net negative… consumers banking gasoline savings

• Prefer Technology, Healthcare, Financials

41

Steady Progress in U.S. Employment

Source: Bloomberg

0

1

2

3

4

5

6

7

8

9

100

1

2

3

4

5

6

7

8

9

10

Jun

-85

Jun

-87

Jun

-89

Jun

-91

Jun

-93

Jun

-95

Jun

-97

Jun

-99

Jun

-01

Jun

-03

Jun

-05

Jun

-07

Jun

-09

Jun

-11

Jun

-13

Jun

-15

Jun

-17

U.S. Unemployment Rate (%)U.S. Fed Funds Rate (%)

Fed Funds Rate(left scale)

Unemployment(right scale,

inverted)

42

U.S. Inflation Starting to Trend Higher

Source: Bloomberg

0

1

2

3

4

5

6

0

1

2

3

4

5

6

7

8

9

10

Jun

-85

Jun

-87

Jun

-89

Jun

-91

Jun

-93

Jun

-95

Jun

-97

Jun

-99

Jun

-01

Jun

-03

Jun

-05

Jun

-07

Jun

-09

Jun

-11

Jun

-13

Jun

-15

Jun

-17

U.S. Core CPI (%)U.S. Fed Funds Rate (%)

Fed Funds Rate(left scale)

Core CPI(right scale)

Long-term inflation target (right scale)

43

U.S. Manufacturing i, Services fg


-200

300

800

1300

1800

2300

30

35

40

45

50

55

60

65

Jul-97 Jul-00 Jul-03 Jul-06 Jul-09 Jul-12 Jul-15

Exp

an

sio

nC

on

tra

ctio

n

Manufacturing

Services

S&P500

S&P500 IndexManufacturing and Services Purchasing Managers Index

44

S&P500 Not Cheap; Earnings Forecast i

+


8

9

10

11

12

13

14

15

16

17

18

No

v-0

3

Ju

n-0

4

Ja

n-0

5

Aug

-05

Ma

r-06

Oct-

06

Ma

y-0

7

De

c-0

7

Ju

l-0

8

Feb-0

9

Sep

-09

Apr-

10

No

v-1

0

Ju

n-1

1

Ja

n-1

2

Aug

-12

Ma

r-13

Oct-

13

Ma

y-1

4

De

c-1

4

Ju

l-1

5

Feb-1

6

Average = 14.1x

S&P500 12-Month Forward P/E Multiple

EPS Growth rates:2002-2007 = 12.9% avg2007-2012 = 3.2% avg2013 = 6.6%2014 = 6.4%2015E = -0.7%2016E = 8.3%2017E = 13.0%

- 1 Std Dev

+ 1 Std Dev

Current = 15.5x

In Jan/15, forecast for 2015E was +7.5%

2016E and 2017E may be too high

45

Bond Yields Likely to Remain Low in 2016


0

2

4

6

8

10

12

Jun-89 Jun-02 Jun-15

10 Year Government Bond Yields (%)

Canada

U.S.

Given current macro environment, 10-year yields unlikely to rise much in 2016

Fixed Income Market Outlook

46

• Quality Continues to Matter

• Focus on better quality, liquid spread product and governments

• Event risk will likely plague BBB corporates/HY energy in 2016 as

defaults are expected to rise

• (1) Investors better paid to assume risk now; (2) liquidity will continue to

be a concern (3) H2 could offer better value

• 2016 Positioning:

• Eastern/central provinces (Quebec and Ontario) still favoured

• GICs will remain a staple at the short end of the yield curve (1-5-years)

• Consistently low oil could impact credit and investment portfolios of

financials but should be manageable

• Transportation infrastructure should continue to benefit (e.g. 407)

• HY will likely remain vulnerable

Preferred Share Market Outlook

47

• Supply/Demand factors affect preferred share prices

• Rate reset issuance with minimum dividends or wider reset spreads will

put pressure on existing rate resets

• All 2016 rate resets expected to extend with lower dividends

• Floating rate sector expand (7% 10%) underperform

• Not all preferred shares created equal

• Preferred shares remain out of favour as near term outlook bleak

• Important to choose securities carefully and have a longer term view

• Recommend investment grade prefs, with focus on dividend income

• Non-NVCC Bank securities attractive (expected call prior to 2022)

• Underweight Floating Sector

• Minimum dividend and wide spread rate resets offer an attractive

yield

Conclusion

48

• This is not 2008… so stay invested

• Expect volatility to continue… treat this as an opportunity

• Risks elevated… maintain defensive positioning

• Focus on quality/valuation/dividends… a proven strategy

• Maintain realistic expectations… mid-single digits

• Review asset allocation… make adjustments if necessary

2015 Recap: Investment Themes

49

Last year’s PAG Themes What actually happened Observation

Economic growth:

• U.S.: Picking up steam

• Europe: Stuck in sub-2% era

• China: Growth decelerating

• Canada: Little momentum

U.S. economy gained momentum

• GDP: Q1: 0.6%, Q2: 3.9%. Q3: 2.0%

• Unemployment rate: -60bps to 5.0%

Europe improving but growth <2%

China growth <7% for 1st time since ’09

Canada had recession in H1 2015

Global growth in 2015 was

generally weaker than

expected.

Commodity price weakness

having a net negative impact

so far.

Monetary policy:

• U.S.: Rate hike in 2015?

• Liftoff likely delayed

• Eventual pace slower

• Europe: ECB to add more stimulus

• Canada: No rate hike justified;

maybe a cut?

U.S. finally raised rates in Dec/15

• Fed emphasized gradual pace

depending on data

ECB failed to accelerate QE program

China cut rates 5 times (total of 1.25%)

BOC cut twice (total of 0.5%)

Fed had to hike because

credibility was at stake

ECB could’ve been more

aggressive

China rate cuts + devaluation

are signs of desperation

BoC surprised the market

Strong geopolitical undercurrents 2 Greek elections

Iran nuclear agreement reached

Middle East tensions escalate

Investors have generally

reacted by remaining on

sidelines

2015 Recap: Investment Strategy

50

Last year’s PAG strategy What actually happened Observation

Equities: Prefer U.S. over Canada

• U.S. not cheap; better earnings growth

• Canada to struggle, anemic growth from

banks, energy, materials

• Mid-single digit returns expected

Total returns in local currency (and CAD)

• S&P500 +1.4% (20.7%)

• TSX -8.3% (big-3 sectors all negative)

• Euro Stoxx 50 +7.35% (14.8%)

Strong USD hurt S&P500

earnings

Prolonged slump in

commodity prices hurt TSX

Europe starting to benefit

from weaker EUR

Bonds:

• Stagnant Europe to continue “exporting”

low yields

• Potential flattening of yield curve

• Maintain short duration; HY risky

GoC Index: +3.8%

U.S. Treasury Index: +0.9%

U.S. curve flattened / Canada steepened

High yield bonds underperformed

Relatively flat long-term U.S.

bond yields indicating Fed

won’t be raising too much

Preferreds:

• Resets: All 2015s to be extended

• 2018-2020 IG looking friendlier

Only 1 bank rate reset redeemed

IG outperformed non-IG

‘18-’20 outperformed, ’15-’16 (still

negative)

Low bond yields and new

minimum dividend products

put further price pressure on

rate resets

Currencies: USD to remain strong USD rallied against most currencies Becoming a crowded trade

Commodities:

• Oil: supply response could take 6-12 mths

• Other: few positive catalysts

U.S. supply has started to decline, but

global supply is unrelenting

Non-energy commodities drifted lower on

decelerating Chinese growth.

Lower for longer

Bio

51

Himalaya Jain, CFA, MBA

Director, Portfolio Manager, Canadian Equities

Portfolio Advisory Group, ScotiaMcLeod

Himalaya joined ScotiaMcLeod’s Portfolio Advisory Group in March 2011. He is responsible

for providing advice on investment strategy and Canadian equities to ScotiaMcLeod

investment advisors across Canada. Himalaya is also a member of the Investment

Committee of ScotiaMcLeod’s Portfolio Advisory Group. Himalaya appears regularly on BNN

to provide market commentary.

Prior to joining the Portfolio Advisory Group, Himalaya was a top ranked Equity Research

Analyst at Scotia Capital covering the real estate, REIT, and hospitality sectors. Himalaya

has also held equity research positions at other Canadian investment firms since 1997. Prior

to the investment industry, Himalaya held corporate finance positions at TD Canada Trust,

and was an auditor at Deloitte.

Himalaya earned an MBA degree from the University of Western Ontario and holds a BA

degree (Chartered Accounting) from the University of Waterloo. Himalaya is a Chartered

Financial Analyst.

Himalaya is a civilian volunteer with 1188 Lorne Scots Royal Canadian Army Cadets and

served as Chair of the Cadet Support Committee (2011-2014).

Disclaimers

52

Important Disclosures

This report has been prepared by members of the ScotiaMcLeod Portfolio Advisory Group. ScotiaMcLeod is the full service retai l division of Scotia Capital Inc.

Scotia Capital Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.

General Disclosures

The ScotiaMcLeod Portfolio Advisory Group prepares this report by aggregating information obtained from various sources as a resource for ScotiaMcLeod and

HollisWealth Advisors and their clients. Information may be obtained from the Equity Research and Fixed Income Research departments of the Global Banking

and Markets division of Scotiabank. Information may be also obtained from the Foreign Exchange Research and Scotia Economics departments within

Scotiabank. In addition to information obtained from members of the Scotiabank group, information may be obtained from the following third party sources:

Standard & Poor’s, Valueline, Morningstar CPMS, Bank Credit Analyst and Bloomberg. The information and opinions contained in this report have been

compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness.

While the information provided is believed to be accurate and reliable, neither Scotia Capital Inc., which includes the ScotiaMcLeod Portfolio Advisory Group,

nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of such information. Neither Scotia

Capital Inc. nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.

This report is provided to you for informational purposes only. This report is not intended to provide personal investment advice and it does not take into account

the specific investment objectives, financial situation or particular needs of any specific person. Investors should seek advice regarding the appropriateness of

investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements

regarding future prospects may not be realized.

Nothing contained in this report is or should be relied upon as a promise or representation as to the future. The pro forma and estimated financial information

contained in this report, if any, is based on certain assumptions and management’s analysis of information available at the t ime that this information was

prepared, which assumptions and analysis may or may not be correct. There is no representation, warranty or other assurance that any projections contained in

this report will be realized

Opinions, estimates and projections contained in this report are our own as of the date hereof and are subject to change without notice.

Copyright 2012 Scotia GBM Inc. All rights reserved

® Registered trademark of The Bank of Nova Scotia, used by ScotiaMcLeod under license. ScotiaMcLeod is a division of Scotia Capital Inc. Scotia Capital Inc.

is a member of Canadian Investor Protection Fund.

.

Documents

2016 Market Outlook - Managed Money Reporter