Insights & Strategies Quarterly Edition

October 4, 2013

Inside this Issue Asset Allocation Update ......................3 Take It to the Limit…One More Time ..4 In US Funds We Trust .........................5 Any Interest in Compounding? ............7 Quarterly Chart Package .....................8 Charts of Interest...............................11 Asset Class Weightings ....................12

Taper Off, Risk On September was another good month for equities. Expectations for a ‘tapering’ in asset purchases failed to play out as expected, sending yields lower and equity markets higher. This surprise was due to the Fed deciding to leave its asset purchase program (otherwise known as QE3) intact. As justification, the Fed pointed to tightening financial conditions and fiscal retrenchment which, if sustained, could slow the pace of economic improvement. The Fed also cited concerns over the trend in inflation, which remains obstinately below 2% despite its best efforts to raise it to the 2.0-2.5% range. Also helping equities was a plethora of data, from Beijing to Frankfurt, showing a rebound in economic activity.

2013 Q3 Returns Ibex 35 Euro Stoxx 50 Nasdaq CAC 40 iBovespa Hang Seng CSI 300 S&P/ASX 200 DAX MSC World Nikkei 225 S&P/TSX Comp S&P 500 Swiss Market FTSE 100 Dow Jones Ind Avg 0%

5%

10%

15%

20%

Source: Bloomberg, Raymond James Ltd.

On the month, the MSCI World Index gained almost 5%. Among the major markets, none traded to the downside. The European (Euro Stoxx 50 up 6.3%) and Japanese (up 8%) markets were the standout performers, as investors responded positively to the improving economic data and evidence that recent policy initiatives were gaining traction. In Europe, a commitment by the European Central Bank to maintain its accommodative monetary policy, together with clear improvement in some of the peripheral economies (especially Spain) and few signals that the banking / debt crisis is about to flare up again, helped drive stocks higher. In Japan, the government’s commitment to lifting its economy out of more than two decades of deflation is showing clear signs of success. Closer to home, the US (in particular the NASDAQ) continued to rally on gathering economic momentum (both in the US and abroad). These positive factors led to a fairly broad-based rally on the month, with most sectors (Telecom was an exception) ending in positive territory, led by Industrials, Consumer Discretionary and Materials. Meanwhile, in Canada, returns were more muted but stocks still ended the month on a positive note, led by Industrials, Telecom, and Consumer Discretionary. The Materials sector (down over 5%) continued to act as a drag on overall performance as volatility in the gold sector, together with uncertainty over the global mining outlook, weighed on shares. Going into the fourth quarter, we remain positive on the outlook for what are deemed to be risky assets. From an asset allocation perspective, we continue to recommend an overweight in equities, corporate bonds, and alternative assets. At the same time, we recommend that investors maintain minimum exposure to government bonds and cash. Our positive view towards risk is supported by two key factors: ongoing favourable monetary conditions and a reacceleration in global economic growth.

Insights & Strategies: Quarterly Edition

October 4, 2013 | Page 2 of 12

Financial Conditions Improving 0 -5 -10

Financial Conditions 1996

1998

2000

2002

2004

60

Expansion 50

Contraction

40

JP Morgan Global PMI Index

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

30

Source: Bloomberg, Raymond James Ltd.

5

-15 1994

Global PMI is Positive

2001

Excess Liquidity: Excess liquidity which measures the excess in money supply growth (M2) over nominal GDP growth continues to expand on a global basis. When more money is generated than can be absorbed into the real economy, it tends to exert inflationary pressures either on the economy in general or on the asset markets. With headline inflation remaining less than 2% in most major economies and little in the way of inflationary forces developing, we expect the primary impact of the excess liquidity will continue to be felt in the asset markets. This should not only help equities and risky assets in general, but also other assets such as real estate.

2000



Reacceleration of Global Economic Growth The second factor supporting our positive view on the markets is that the global economic recovery appears to be gaining momentum. Our favourite measure of economic momentum is the JP Morgan Global PMI Index, which continues to hold above the 50 level—the cut-off for expansion / contraction in the global manufacturing economy. Although the global recession ended in 2009, we are only now beginning to see evidence that the recovery is synchronizing. Ongoing fiscal / budgetary issues in the US, together with a banking / debt crisis in Europe and fears of a hard-landing in China, have kept the global economy sputtering for the better part of the past four years. China seems to have averted the much-feared hard-landing scenario, as evidenced by exports and manufacturing growing once again. The core of Europe seems to be in recovery mode, while the deterioration in the periphery has stopped. Importantly, the banking / debt crisis seems to have been contained by the European Central Bank’s pledge to do everything required to stabilize the situation.

1999

The implications of this ongoing loose monetary policy, apart from interest rates staying lower for longer, is that excess liquidity will remain high, overall financial conditions will be favourable, and the yield curve will likely steepen.

steady inflation expectations. We expect that the yield curve will continue to steepen as global economic momentum picks up and the Fed eventually begins to back away from its asset purchase program.

1998

Favourable Monetary Conditions The Fed’s surprising decision to postpone tapering its asset purchase program has removed the only (minor) concern regarding global monetary policy. We say minor because the tapering did not constitute a tightening of policy, only a reduction in the pace of expansion. While we expect that the Fed will eventually taper, it’s likely to be much more cautious in the withdrawal of support than previously anticipated. Meanwhile, the other central banks (for instance, the Bank of England, the Bank of Japan, and the European Central Bank) have stressed that they will continue to be very accommodative. All in all, we don’t expect any tightening of monetary policy in any of the major economic regions (North America, Europe, and Asia) until 2015 at the earliest.

2006

2008

2010

2012

Source: Bloomberg, Raymond James Ltd.



Improving Financial Conditions: Financial conditions include corporate, mortgage, and municipal spreads. In general, declining spreads point to an improving economic backdrop and an increasing willingness to take on risk in the market. We anticipate that spreads, especially mortgage spreads, will continue to narrow now that the Fed has backed away from an immediate need to taper aggressively.



Yield Curve: An increasing slope to the yield curve is typically associated with economic expansion and

The two major risks that we see on the horizon are the situation in the Middle East (especially Syria) and the prospect for a major policy mistake. Tensions and the risk of the conflict spilling outside of Syria have moderated slightly with the US and Russia agreeing to pursue a diplomatic solution to the weapons of mass destruction problem. As for the risk of a major policy mistake, the US is in the midst of another battle over the budget with the government already in the process of shutting down. On top of this, we have another debt ceiling deadline coming up in a few weeks. Provided the budget and debt ceiling battles don’t grind on for too long, the impact on the economy should be relatively muted. And even if a resolution is not found relatively soon, we don’t expect as severe an impact as what occurred in August 2011. At that time, the US economy was in much shoddier shape, monetary policy was not as supportive, and the deficit situation was much worse.

Insights & Strategies: Quarterly Edition Against this backdrop of abundant liquidity and an improving global economy, we believe investors should overweight risky assets. Equities should benefit from continued multiple expansion (driven by accommodative monetary policy) and improving corporate profitability (from an improving global economy). Investors should remain focused on cyclical plays such as Industrials, Technology, and Consumer Discretionary. We are neutral on Financials, preferring insurance stocks to the banks. At the same time, Utilities, Telecom, and Consumer Staples should be avoided due to their defensive characteristics and interest rate sensitivity. As the cycle unfolds and gathers momentum, we will look to add exposure in the Materials and Energy sectors, and scale back on Consumer Discretionary, but we feel that it’s too early to get aggressive on the deep cyclicals. Andy MacLean, CFA Private Client Strategist

October 4, 2013 | Page 3 of 12

reflation policy and could become even more aggressive going forward.  Global macro risks (European debt/banking crisis, China hard landing, US budget) continue to be contained. Key risk indicators (credit spreads, credit default swap spreads, the VIX volatility measure), while not all down to pre-crisis levels, continue to move in the right direction. Our scenario is positive for risk appetite, but there are still potential risks: 



Asset Allocation Update Our asset allocation recommendation continues to reflect our overall positive outlook for both the global economy and markets in general. Specifically, we favour risky assets (equities, corporate bonds, and alternative assets) over defensive securities such as cash and government bonds. We continue to believe that we are at a point in the cycle that favours a heavy allocation towards equities. Consequently, we are making no changes to our asset allocation. Our asset allocation recommendations are based on the view that: 



Global growth will continue to accelerate over the next six to 12 months. Leading indicators are coming in stronger than expected, implying a better-thanexpected rebound in both the European and Asian economies. Meanwhile, US growth indicators suggest that the recovery is gaining momentum. Importantly, a pickup in global Industrial Production should translate into an overall acceleration of Global GDP through the next year. Inflation is expected to remain muted in the US, Europe and Japan. Monetary conditions will remain very easy (even as Fed tapering begins). The Fed recently pushed out its scaling back of asset purchases (quantitative easing), and we’re not likely to see any tightening in monetary policy in the US until 2015. In a similar vein, the Bank of England is expected to maintain its accommodative stance, and the European Central Bank is likely to remain dovish as the recovery there is still in the early stage. The Bank of Japan remains committed to its

Policy Mistake: this is potentially the biggest risk and could come in the form of premature monetary tightening or a withdrawal of support for the European banks by the ECB. Geopolitical Risks: the aftermath of the Arab spring continues to play out in the Middle East. The full-scale civil war in Syria could spread to other countries in the region.

Recommendations: 









Overweight Equities: valuations are not excessive, earnings could reaccelerate, P/E multiples have room to expand, switch from bonds into equities still in early stages. Underweight Government Bonds: the short-term outlook not as bearish, but longer term rates are likely to head much higher. Overweight Credit: what’s good for equities tends to be good for credit. Secular improvement in balance sheets and low rates benefit credit. Underweight Cash: real cash returns remain negative. In this environment, use cash for very short-term tactical defensive positioning. We don’t see a need for this strategy at this time. International and Emerging Markets: Europe benefiting from favourable global recovery trends and monetary policy. Favour manufacturing emerging markets (East Asia) over commodity emerging markets (Latin America).

The Raymond James Ltd. Investment Policy Committee was established to provide oversight and guidance for the firm’s Asset Allocation, Guided Portfolios, and Mutual Funds Focus List. The Committee is comprised of Andy MacLean, CFA (committee chair, strategy), Adrian Weiss (portfolio management), Harvey Libby (fixed income), Doug Rowat (equities), Jordan Benincasa (mutual funds/ETFs), and Joe Paladino (compliance). At our most recent Investment Policy Committee meeting, we made no changes to our asset allocation. Current asset allocation weightings are located on the back page of this report.

Insights & Strategies: Quarterly Edition

Historical data on the behaviour of asset classes during past shutdowns and debt ceiling threats is limited at best. While there have been more than 15 shutdowns in the last 37 years in the US, the majority have only lasted a few days. An analysis of equity markets in October 1990 and December 1995 (the two most recent shutdowns) shows flat to somewhat positive price action with the same type of moves taking place in the US Dollar Index. Data from the 2011 debt ceiling crisis is more concrete (although limited in sample size). Once again, equities and the US dollar traded sideways with a slight bias to the upside heading into and through the crisis. The notable difference between the debt ceiling and previous government shutdowns is the fact that the fiscal cliff was the direct cause of a credit rating downgrade of US sovereign issues on August 5th, 2011. Revived memories of the S&P rating board’s decision to remove the US’s AAA status two years ago has left markets very sensitive to Congress’ potential failure to make a decision on the debt ceiling versus any smaller fallout related to the government shutdown. US Remains Haven Even with Domestic Distress 76.5

3.3 Debt Ceiling Crisis

76.0

DXY (US Dollar Index)

US 10-Year Yield (rs)

75.5

3.1 2.9

2.3

73.5

2.1

73.0

1.9

26-Aug-2011

74.0

19-Aug-2011

2.5

12-Aug-2011

74.5

05-Aug-2011

2.7

29-Jul-2011

75.0

22-Jul-2011

While the verbiage used to describe an impending halt to non-essential government programs is daunting, the actual repercussions from a short-lived closing of shop are relatively muted. There is certainly risk of a drag on American GDP as workers are sent home, but a short-lived shutdown isn’t likely to cause widespread financial damage. A breach of the debt ceiling, on the other hand, has the potential to wreak havoc on the price action of major asset classes, as well as the borrowing capabilities of the US government. The existence and mechanics of the debt ceiling are somewhat redundant. The threshold marks the total amount of national debt that the US government is allowed to issue in order to meet the financial obligations agreed to in spending bills. Failure to raise the limit in mid-October will mean the US government will lack the legal authority to fund activities it is mandated to finance, pushing it into a possible “failure to pay” position. Programs that require funding by law will be at risk of being cut off, while the debt servicing schedule of US Treasury bills will be exposed to potential default. If the creditworthiness of the US government comes under attack, it would impose a virtual tax on the American consumer in the way of increased borrowing costs, and send ripples through the global financial landscape.

US 10-yr Yield 5.96% 5.68% -28 bps

Source: Bloomberg, Raymond James Ltd.

15-Jul-2011

At the heart of the debt ceiling and government shutdown issues is the inability of Congress to come to a consensus on how best to move forward. Both the Senate and House of Representatives must agree on the language of a bill before it can be sent to the executive to be signed into law. The tax and borrowing sensitive language involved in either increasing the debt ceiling or putting forward a clean funding bill to avoid a shutdown have put both Chambers at odds given the conflicting majorities (Democratic Senate, Republican House).

S&P 500 592 618 26 (+4.4%)

Nov. 13, 1995 (1 day prior) Jan. 8, 1996 (Govt. reopens) Change

08-Jul-2011

There is never a dull moment when it comes to US politics, particularly when political changes overlap the fiscal matters of the nation. With the 2011 Debt Crisis debacle still very fresh in investors’ minds, the US is hurtling towards another fiscal cliff, this time with the added twist of a government shutdown. If the looming threat of a mid-October debt ceiling wasn’t enough to spook markets, the added overhang of a halt in non-essential spending has added another layer of complexity to the US fiscal situation. Credit, rates and foreign exchange markets have all been showing signs of risk aversion as tensions in Washington over funding and borrowing issues have come to a head. While there are common legislative protocols underpinning both threats, the potential aftermath stemming from a failure to act is radically different in each case.

Market Reaction Throughout 1995 Shutdown

01-Jul-2011

Take It to the Limit…One More Time

October 4, 2013 | Page 4 of 12

Source: Bloomberg, Raymond James Ltd.

What can be inferred from past price action following the credit downgrade? Ironically, Treasuries as well as the US dollar were bid as investors continued to park funds in the relative safety of USD denominated debt. With this in mind, we expect general weakness for the greenback over the next few weeks, as the current government shutdown is expected to weigh on US output activity. However, as the mid-October

Insights & Strategies: Quarterly Edition

October 4, 2013 | Page 5 of 12

deadline approaches, any USD softness should be backstopped by safe-haven buying.

In US Funds We Trust While the US government is certainly not working at the moment, US equity markets are. From a technical perspective, the S&P 500 broke through significant resistance in March, hitting new all-time highs, and importantly, surpassing the pre–credit crisis highs of October 2007. The recent S&P 500 move also breaks it above the area of consolidation that’s been building since the late-1990s (see chart). Technicians view this as significant as there has been a regular pattern of consolidation (sometimes lasting 20 years or more) followed by significant multi-year rallies that have provided total returns of greater than 400%.

Markets do not like the unknown, and if anything has been proven in the last week, it is that it’s difficult to predict how far politicians will go in defense of what they believe their electoral base has mandated them to protect. Given Washington has chosen to push the envelope on the government shutdown front, the hope is that both political parties will be able to come to a solution on the higher profile debt ceiling issue in short order. There is plenty of scope for volatility to pick up in the first half of the month across all asset classes, and the USD is expected to appreciate on the back of any signs that the deliberation process will once again be brought to the brink.

What is also important from the perspective of Canadian investors is that the relative performance (i.e., market leadership) between the US and Canadian markets has completely reversed in recent years. One of the tenets of relative strength is that trends of out- and underperformance persist. This has certainly been the case with the US and Canada, as each market has tended to outperform or lag the other for extended periods (see chart). The US’s last period of outperformance lasted roughly 20 years.

Matt Stastny Foreign Exchange

Regardless of your outlook on the US market (or your outlook on the US relative to Canada), most well diversified portfolios should have some US equity exposure. Currently, our asset allocation models for Moderate, Growth and Global Equity investor profiles have US equity weightings (15%, 40% and 45%, respectively). In this article, we highlight a US mutual fund and ETF as recommended ways to gain US equity exposure.

S&P 500 Breaking Out of Significant Consolidation 5,000

500

50

5 1928

1933

1938

1943

Source: Bloomberg. Logarithmic scale

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

Insights & Strategies: Quarterly Edition

October 4, 2013 | Page 6 of 12

Dynamic Power American Growth For US bulls, Dynamic Power American Growth fits the bill nicely. Lead manager Noah Blackstein employs a growth strategy, maintaining a concentrated portfolio of US companies with superior growth prospects. In assessing individual securities, valuation considerations are secondary to a company’s ability to grow its top and bottom line. In addition, Blackstein trades aggressively, with portfolio turnover averaging 308% over the past three fiscal years.

S&P 500 Index lost 37.0% in 2008 while the S&P 500 Low Volatility Index was only down 23.1%. By providing better downside protection, the Low Volatility Index’s 10-year annualized return of 9.42% trumps the S&P 500 Index by 213 basis points per year. PowerShares S&P 500 Low Volatility ETF (SPLV-US) tracks the performance of the S&P 500 Low Volatility Index, which is comprised of 100 stocks within the S&P 500 Index that sport the lowest volatility over the past 252 trading days as measured by standard deviation. Constituents are weighted relative to the inverse of their corresponding volatility, with the least volatile stocks receiving the highest weights. The Index is rebalanced and reconstituted quarterly. Not surprisingly, SPLV’s portfolio construction methodology leans towards defensive sectors. In particular, utilities, consumer staples, and healthcare collectively total 53.9% of the portfolio. Income-oriented investors will be pleased that SPLV sports a yield of 2.83%, which is 74 basis points higher than the S&P 500.

Despite exhibiting higher volatility, this all-cap strategy has produced excellent long-term relative and absolute results. For example, a $10,000 investment at the fund’s July 23rd 1998 inception would be worth almost $27,550 as of September 30, 2013. In contrast, an investment in the S&P 500 Index over the same period would be worth only $13,640. It should be noted that the fund’s attractive longterm numbers come with periods of extended underperformance, particularly during down markets. Investors should ask themselves whether they can endure sharp declines in NAV before climbing aboard. Dynamic Power American Growth is also available in a currency neutral version which eliminates currency fluctuations.

In January 2012, PowerShares launched a Canadian-listed ETF (ULV-T) by the same name. With a 0.35% expense ratio, ULVT is 10 basis points more expensive than SPLV-US but ULV-T hedges its USD exposure, helping to reduce foreign currency risk.

PowerShares S&P 500 Low Volatility ETF Despite a handful of high volatility funds like Dynamic Power American Growth posting strong long-term returns, research has shown that low-volatility US stocks have a higher probability of outperforming on an absolute and risk-adjusted basis. Their ability to protect on the downside during bear markets is one of the reasons low-volatility strategies have produced strong performance over the long haul. To wit, the

Doug Rowat VP, Research & Strategy

Jordan Benincasa, LL.B, MBA Mutual Fund & ETF Research

S&P/TSX Composite vs S&P 500: Beginning of New Long-Term Underperformance? 20 Extended Periods of Canadian Underperformance

15

10

5 1950

1960

1970

1980

1990

Source: Bloomberg. Relative performance. Shaded areas equal extended periods of Canadian underperformance.

2000

2010

Insights & Strategies: Quarterly Edition

Any Interest in Compounding? Investors often purchase fixed income products for the steady income stream. However, individuals who do not need this cash flow may be missing out on the opportunity to compound. In this article, we explore some common questions about compounding interest. Specifically, we look at cash flow and liquidity needs, ideal placement of compounding rate instruments, and suggest products to take advantage of the power of compounding. 

Do I need cash flow and better-than-average liquidity? If you answered yes to either of these, a compounding rate instrument longer than 1 year may not be suitable. Bonds that pay semi-annually (or even monthly in some cases) will better serve clients looking for income. If you need instant liquidity, shorter termed investments may be ideal as most compound rate securities are more difficult to liquidate. These difficulties can translate into larger bid-ask spreads or, in the case of GICs, no liquidity at all. Most issuers prohibit early redemptions or charge expensive penalties to do this.



In what account should I purchase a compounding rate instrument? To answer this, consider the mechanics of a compound interest product—interest compounds internally and is paid out in full at maturity. If held in taxable accounts (such as margin or cash accounts), you would owe taxes on the interest each year, even though you would not receive it. Thus, compound rate instruments should ideally be purchased in tax-deferred or tax-free accounts, like RRSPs, TSFAs, and RESPs.

Compounding products are also helpful when the size of the investment is relatively small. For example, if you buy $25,000 of a 5-year corporate bond with a coupon of 2.75%, you would receive half the interest, or approximately $343.75, twice a year. Unfortunately, the minimum investment size for most fixed income products is $5,000, meaning you would have to sit on the money until you’ve received multiple coupon payments. Using a compounding instrument would allow you to essentially reinvest this money before even receiving it. There are two types of compounding rate investments which are easy to purchase. Compound GICs are issued by banks, trust and insurance companies. They are generally issued with maturities of 1 to 5 years, and allow the purchaser to receive both principal and compounded interest at maturity. A second type is stripped coupons or residuals. These are offered by a variety of different issuers (government and corporate), and in a variety of maturities, from 6 months to 40 years out. With both types, you do not have to worry about reinvesting small cash flow payments.

October 4, 2013 | Page 7 of 12

For example, if you took $5,300 and invested it four different ways, you would end up with very different amounts at maturity. If invested in a 5-year compound rate GIC at the 2.90% (offered yield as of print), your investment would be worth approximately $6,114.38 at maturity. The same amount in a 5-year Provincial strip coupon (maturity of October 15, 2018) would give you approximately $5,995.00 when it matures. This would be a yield of 2.46% semi/2.48% annual equiv. Though a lesser amount, strip coupons have the benefit of liquidity, which may be important if your financial situation changes. In both of these cases, there would not be a need to reinvest coupons since it’s done internally. On the other hand, investing in the same GIC but with annual pay reduces your total income by $45.88 to $6,068.50, assuming you do not reinvest the coupons. In the same manner, if you bought a corporate deposit note yielding 2.75% semi and did not reinvest the coupons due to the small size, you would end up with $5,987.50. Interestingly, this is less than the provincial strip coupon yielding 29 basis points less. A 5-Year Compounding Comparison $6,150

$6,114

Compounding

$6,100

No Compounding $6,069

$6,050 $5,995

$6,000

$5,988

$5,950 $5,900 Compound GIC at 2.90%

Provincial Strip at 2.46%

Annual Pay GIC 2.90%*

Corporate Deposite Note at 2.75%*

*assuming no reinvestment of cashflows Source: Bloomberg, Raymond James Ltd.

Investors should remember that focusing solely on yield may not lead you to the best investment for your unique situation. Specifically, factors like investment size and ability to reinvest coupon cash flow may reduce the total proceeds of an investment and should be considered. A compounding instrument may actually provide you with the most money at the end of the day, even at a lower purchase yield. This illustrates the power of internal compounding. There are many factors that should be considered to optimize your fixed income investment, including your personal investment needs / goals, cash flow requirements, liquidity needs, and tax situation. Therefore, make sure to consult your investment advisor and accountant for guidance in choosing the right investment. Harvey Libby Fixed Income

Insights & Strategies: Quarterly Edition

October 4, 2013 | Page 8 of 12

Quarterly Chart Package Long-Term Market Returns Currency Canada S&P/TSX Comp CAD S&P/TSX Comp TR CAD S&P/TSX 60 Comp CAD S&P/TSX Small Cap CAD United States S&P 500 Comp USD S&P 500 Comp TR USD Dow Jones Ind Avg USD NASDAQ Comp USD S&P 600 Small Cap USD International DJ Euro Stoxx 50 EUR FTSE 100 (UK) GBP CAC 40 (France) EUR DAX (Germany) EUR IBEX 35 (Spain) EUR CSI 300 (China) CNY HANG SENG (Hong Kong) HKD NIKKEI 225 (Japan) JPY TOPIX (Tokyo) JPY KOSPI (S. Korea) KRW S&P/ASX 200 (Australia) AUD BOVESPA (Brazil) BRL BOLSA (Mexico) MXN Other MSCI World USD MSCI EAFE USD MSCI Emerging Markets USD MSCI Far East USD MSCI Europe USD C$ Indices S&P 500 Comp CAD S&P 500 Comp TR CAD Dow Jones Ind Avg CAD MSCI World CAD MSCI EAFE CAD MSCI Emerging Markets CAD MSCI Far East CAD MSCI Europe CAD Canadian Dollar USD/CAD

Level

1 Mo

3 Mo

6 Mo

2 Yr

3 Yr

4 Yr

5 Yr

10 Yr

12,787 37,594 733 576

1.1% 1.4% 0.8% 1.3%

5.4% 6.2% 5.4% 7.1%

0.3% 3.8% 1.9% 7.1% 0.2% 4.3% -1.5% -4.2%

4.9% 8.1% 4.8% -0.8%

1.1% 4.1% 0.8% -3.5%

2.9% 5.9% 1.9% 3.0%

1.7% 4.8% 0.7% 2.5%

5.6% 8.4% 5.8% 1.1%

1,682 3,000 15,130 3,771 608

3.0% 3.1% 2.2% 5.1% 6.1%

4.7% 7.2% 16.7% 5.2% 8.3% 19.3% 1.5% 3.8% 12.6% 10.8% 15.4% 21.0% 10.4% 14.4% 29.9%

21.9% 24.7% 17.7% 25.0% 30.8%

13.8% 16.3% 11.9% 16.8% 19.2%

12.3% 7.6% 5.4% 14.7% 10.0% 7.6% 11.7% 6.9% 5.0% 15.5% 12.5% 7.8% 17.6% 11.0% 9.9%

2,893 6,462 4,143 8,594 9,186 2,409 22,860 14,456 1,194 1,997 5,219 52,338 40,185

6.3% 0.8% 5.3% 6.1% 10.8% 4.1% 5.2% 8.0% 8.0% 3.7% 1.6% 4.7% 1.8%

11.2% 4.0% 10.8% 8.0% 18.3% 9.5% 9.9% 5.7% 5.3% 7.2% 8.7% 10.3% -1.1%

15.2% 12.3% 17.9% 25.0% 3.7% -3.4% 14.0% 28.9% 25.3% 6.2% 14.1% 0.0% 9.5%

1.7% 5.2% 3.7% 11.3% -4.4% -6.4% 0.7% 15.6% 12.9% 2.2% 4.4% -9.0% 6.4%

0.2% -1.0% 1.9% 5.9% 5.7% 4.7% 2.2% 0.5% 2.8% 10.9% 8.1% 10.2% -6.0% -3.5% 3.2% -5.4% 1.4% 7.9% 2.2% 4.9% 7.4% 9.3% 5.1% 3.5% 7.0% 1.9% 1.6% 4.5% 6.6% 11.1% 2.4% 2.6% 5.1% -4.0% 1.1% 12.6% 8.3% 10.1% 17.8%

1,544 1,818 987 2,911 1,636

4.8% 7.1% 6.2% 7.4% 7.1%

$1.03

0.7% 2.6% 8.6% 22.3% 20.8% 0.9% 3.1% 9.7% 25.1% 23.5% -0.1% -0.5% 5.2% 18.0% 16.7% 2.5% 5.5% 9.0% 23.4% 17.1% 4.8% 8.7% 10.0% 26.1% 14.0% 3.9% 2.9% -3.3% 3.2% 4.9% 5.1% 3.9% 9.8% 30.7% 10.9% 4.8% 10.9% 12.4% 26.5% 15.8% -2.2% -2.0% 1.3% 4.8% -0.9%

10.3% 0.8% 11.0% 10.3% 16.0% -3.4% 2.5% 16.6% 15.4% -0.4% 5.1% -7.1% -8.8%

1 Yr

17.9% 12.5% 23.5% 19.1% 19.2% 5.1% 9.7% 63.0% 61.9% 0.0% 19.0% -11.6% -1.7%

7.7% 7.6% 17.7% 18.2% 9.4% 10.9% 8.6% 20.4% 15.1% 5.2% 5.0% -4.6% -1.5% 5.9% -2.8% 6.0% 8.4% 24.7% 11.9% 6.0% 13.2% 10.9% 20.7% 16.9% 5.4% 13.9% 16.3% 12.0% 9.5% 5.3% -2.8% 6.0% 5.4% 0.1%

8.2% 4.0% 2.0% 4.8% 3.9%

5.5% 5.4% 3.2% 5.1% 4.6% 10.1% 3.9% 3.8% 2.7% 5.3%

11.3% 6.9% 2.6% 13.7% 9.3% 4.7% 10.7% 6.2% 2.2% 7.2% 4.8% 2.6% 3.1% 2.5% 2.3% 1.0% 4.0% 7.1% 3.8% 3.2% 1.0% 3.0% 2.1% 2.5% -0.9% -0.6% -2.7%

Source: Bloomberg, Raymond James Ltd. All return numbers greater than one year are annualized. Performance as at September 30, 2013.

Insights & Strategies: Quarterly Edition

S&P/TSX GICS Sectors Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities S&P 500 GICS Sectors Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Utilities Commodities Energy Crude Oil - WTI (US$/bbl) Brent Crude (US$/bbl) Natural Gas (US$/MMBtu) Heating Oil (US$/gal) Gasoline (US$/gal) Coal (US$/ton) Metals Gold (US$/oz.) Silver (US$/oz.) Aluminum AA (US$/lb.) Copper (US$/lb.) Nickel (US$/lb.) Zinc (US$/lb.) Soft Wheat (US$/bushel) Corn (US$/bushel) Sugar (US$/lb.) Currencies Canadian Dollar (CAD/USD) Canadian Dollar (USD/CAD) Euro (EUR/USD) Yen (USD/YEN) Pound Sterling (GBP/USD) U.S. Dollar Index

Level

1 Mo

1,386 2,475 2,781 1,916 1,368 1,736 135 2,127 1,093 1,733

3.2% 7.7% 16.2% 36.3% 0.5% 2.8% 11.4% 27.4% 1.5% 5.7% 1.4% 3.2% 2.2% 6.4% 5.8% 14.8% -2.1% 10.9% 23.0% 56.1% 4.7% 2.9% 2.5% 24.1% -0.8% 6.0% 8.5% 36.5% -5.1% 4.0% -20.2% -33.7% 3.5% 4.8% -7.4% 5.4% 1.9% -4.3% -9.6% -10.2%

480 410 605 268 586 401 519 265 149 190

5.3% 1.0% 1.7% 2.6% 3.0% 5.5% 2.8% 4.2% -0.6% 0.7%

$102.33 $108.37 $3.56 $2.97 $2.63 $55.09

-4.9% -4.9% -0.6% -5.4% -12.7% 7.1%

$1,329 $21.70 $0.84 $3.26 $6.23 $0.86

3 Mo

October 4, 2013 | Page 9 of 12

6 Mo

1 Yr

2 Yr

3 Yr

4 Yr

5 Yr

10 Yr

24.0% 20.2% 5.7% 11.0% 46.7% 22.6% 2.0% -20.4% 8.7% -5.8%

10.4% 15.6% 0.0% 6.1% 45.0% 11.8% -12.9% -16.1% 8.7% -2.2%

12.8% 14.6% 0.5% 4.7% 42.2% 13.4% -15.1% -7.1% 12.4% 3.3%

8.3% 11.8% -1.1% 3.2% 36.4% 9.7% -11.5% -3.8% 5.5% 1.1%

4.6% 5.9% 8.0% 5.8% 5.7% 8.0% -4.7% 6.0% 6.2% 3.8%

7.4% 14.3% 29.7% 32.0% 22.2% 22.0% 16.8% 0.1% -0.1% 10.9% 15.7% 12.5% 11.7% 7.5% 4.5% 3.6% 9.7% 16.9% 13.0% 10.3% 4.3% 2.4% 9.4% 27.8% 29.9% 11.6% 7.5% -0.2% 6.3% 9.9% 25.9% 26.2% 18.3% 15.1% 10.6% 8.3% 10.7% 25.5% 25.9% 13.9% 14.6% 7.8% 6.1% 7.4% 5.0% 17.2% 12.2% 11.5% 10.6% 9.7% 7.1% 13.8% 19.8% 9.4% 9.1% 5.7% -5.4% -5.5% -5.0% 10.6% 7.1% 8.4% 5.4% -0.8% -4.5% 2.7% 5.4% 6.0% 6.3% 2.5%

8.2% 7.0% 11.9% -2.4% 6.1% 6.3% 6.1% 7.0% 4.2% 5.5%

6.0% 5.2% 11.0% 13.7% 6.1% -1.5% -3.6% 2.7% -0.1% -11.5% 7.2% -1.5% 3.2% 1.9% -6.3% 3.1% -4.3% -15.2% -21.2% 0.2% -0.1% -8.7% -7.6% -13.5%

8.6% 9.7% 0.3% 13.4% 9.6% 11.9% 2.0% 14.7% -2.8% -7.4% -13.7% -3.0% 9.8% 13.4% 0.7% 14.3% 8.8% 11.2% 1.2% NA -5.4% 1.1% -11.3% 4.3% 7.2% 8.8% 6.9% 12.5% -0.6% -5.3% 4.3% 2.8% -6.0% -2.5% -0.7% 2.7%

13.2% 15.5% 2.6% 15.0% 3.3% 8.6%

$678.50 5.5% 4.6% -1.3% -24.8% 5.5% 0.2% 10.4% 0.0% $441.50 -10.8% -35.0% -36.5% -41.6% -13.7% -3.8% 6.4% -2.0% $17.48 7.0% 6.7% -1.0% -10.7% -18.5% -11.6% -7.7% 7.2%

6.5% 7.2% 10.9%

$0.97 $1.03 $1.35 98.27 $1.62 80.22

-4.7% 7.6% -16.9% -25.0% -9.5% 0.5% -7.8% 10.3% -23.8% -37.2% -14.9% -0.1% 1.7% 4.1% -3.1% -12.6% -7.5% -7.8% 2.8% 8.2% -3.2% -11.0% 2.0% -3.1% 1.1% 1.8% -16.2% -24.5% -11.0% -15.8% 0.7% 3.5% 1.1% -8.5% 1.5% -4.4%

2.2% -2.2% 2.3% 0.1% 4.4% -2.3%

2.0% -2.0% 4.0% -0.9% 6.4% -3.5%

-1.3% -4.6% 0.9% -0.1% 1.3% 4.8% -0.9% 0.1% 5.5% 5.2% 0.5% -0.3% 4.3% 26.1% 12.9% 5.6% 6.5% 0.1% 1.9% 1.0% -3.3% 0.4% 1.1% 0.6%

0.9% -0.9% -2.0% 2.3% 0.3% 1.1%

0.6% -0.6% -0.8% -1.5% -1.9% 0.2%

2.7% -2.7% 1.5% -1.3% -0.3% -1.5%

Source: Bloomberg, Raymond James Ltd. All return numbers greater than one year are annualized. Performance as at September 30, 2013.

Insights & Strategies: Quarterly Edition

October 4, 2013 | Page 10 of 12

Yield Curve U.S.

Canada 3.5

Spread 10 Year - 2 Year 300

4.0

250

3.0

3.0

200

2.5

150

2.0

2.0

100

1.5

30-Sep-2013 28-Sep-2012 31-Dec-2012

1.0

5

10

15

20

25

0

30

5

10

15

20

25

Canada

50

US

0

0.0

0.5 0

30-Sep-2013 28-Sep-2012 31-Dec-2012

1.0

30

-50

2007

2008

2009

2010

2011

2012

2013

Source: Bloomberg, Raymond James Ltd. Performance as at September 30, 2013.

Economic Data GDP (y/y)

5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0

Consumer Confidence

120

Univ of Mich US Conference Board

100

Industrial Production (y/y)

15.0 10.0 5.0

80

0.0

60

-5.0 40

Canada US

-10.0

20 0

2006

2008

2010

CPI y/y

6

-20.0 2007 2008 2009 2010 2011 2012 2013

2012

CPI Core y/y

3.0

2007 2008 2009 2010 2011 2012 2013

Unemployment Rate

11.0

5

10.0

2.5

4

Canada US

-15.0

9.0

3

2 1 0

2.0

8.0

1.5

7.0 6.0

-1

1.0

Canada US

-2

-3

Canada US

0.5

2007

2008

2009

2010

2011

2012

2013

Retail Sales

3.0

4.0 2007

2008

2009

2010

2011

2012

2013

Retail Sales Less Autos

3.0

2007

2.0

2.0

1.0

1.0

1.0

0.0

0.0

0.0

-1.0

-1.0

-1.0

-3.0 -4.0

Canada US

-3.0

2008

2009

2010

2011

2012

2013

Leading Indicators

US

-3.0 -4.0

-4.0 2007

2011 2012 2013

-2.0

-2.0 Canada US

2008 2009 2010

3.0

2.0

-2.0

Canada US

5.0

2007

2008

2009

2010

Source: Bloomberg, Raymond James Ltd. Performance as at September 30, 2013.

2011

2012

2013

2007

2008

2009

2010

2011

2012

2013

Jan-2010 Canadian Dollar

Jul-2011 200-Day MA

Jan-2013

50-Day MA Euro 200-Day MA

Source: Bloomberg, Raymond James Ltd. Performance as at September 30, 2013. Jul-2012 Jan-2013

50-Day MA

$1.55

$1.50

$1.45

$1.40

$1.35

$1.30

$1.25

$1.20

$1.15

$1.10

Copper

Yen

200-Day MA

Euro

200-Day MA 50-Day MA

Jul-2013

50-Day MA

Jan-2013 Jul-2013

Apr-2013

$60

Jan-2013

$900

200-Day MA

Apr-2013

$70

Jul-2012

$1,100

Oct-2012

$80

Jul-2012

$1,300

Oct-2012

$90

Jan-2012

$1,500

Apr-2012

$4.50

$100

Jan-2012

$110

$1,700

Apr-2012

$1,900

Jul-2011

$5.00

Oil (WTI)

Oct-2011

$120

Jul-2011

Dow Jones Ind Avg

Oct-2011

$2,100

Jan-2011

50-Day MA

Apr-2011

Jan-2011

Jul-2013

Apr-2013

Jan-2013

Oct-2012

Jul-2012

Apr-2012

Jan-2012

Oct-2011

Jul-2011

Apr-2011

9,000

Jan-2011

S&P 500

Apr-2011

10,000

900

Jul-2010

11,000

1,000

Oct-2010

1,100

Jul-2010

1,200

Oct-2010

1,300

Jan-2010

15,000

Apr-2010

1,400

Apr-2010

Jul-2013

1,500

Jan-2010

Jul-2013

Jan-2013 Apr-2013

1,600

Jul-2010

Jan-2013 Apr-2013

Jul-2012 Oct-2012

16,000

Oct-2010

Jul-2012 Oct-2012

Jan-2012 Apr-2012

17,000

1,700

Apr-2010

Jan-2012

Apr-2012

Oct-2011

Jul-2011

Apr-2011

Jan-2011

Oct-2010

Jul-2010

Apr-2010

Jan-2010

Jul-2013

1,800

Jan-2010

Jul-2013

200-Day MA

Apr-2013

Canadian Dollar Jul-2011

200-Day MA

Oct-2012

Oil (WTI)

Oct-2011

Gold

Apr-2012

Jan-2011 Apr-2011

S&P 500

Jan-2012

Jul-2010 Oct-2010

50-Day MA

Jul-2011

50-Day MA

Apr-2010

Jan-2013 Apr-2013

S&P/TSX Composite

Oct-2011

$1.08 $1.06 $1.04 $1.02 $1.00 $0.98 $0.96 $0.94 $0.92 $0.90

Jan-2010

Jul-2013

Jul-2012 Oct-2012

10,000

Jan-2011

Jan-2013 Apr-2013

Jan-2012 Apr-2012

11,000

Apr-2011

Jul-2012

Oct-2012

Jul-2011 Oct-2011

12,000

Oct-2010

Jan-2012 Apr-2012

Jan-2011 Apr-2011

13,000

Jul-2010

Jul-2011 Oct-2011

Jul-2010 Oct-2010

14,000

Apr-2010

Jan-2011 Apr-2011

Jan-2010 Apr-2010

15,000

Jan-2010

Jul-2013

Jul-2010 Oct-2010

200-Day MA

Apr-2013

200-Day MA

Oct-2012

Jul-2012

Apr-2012

Jan-2012

Jan-2010 Apr-2010

S&P/TSX Composite

Oct-2011

Gold

Apr-2011

Jan-2011

Oct-2010

Jul-2010

Apr-2010

Insights & Strategies: Quarterly Edition October 4, 2013 | Page 11 of 12

Charts of Interest

Markets Dow Jones Ind Avg

14,000

13,000

12,000

50-Day MA

Commodities Copper

$4.00

$3.50

$3.00

$2.50

50-Day MA

Currencies

¥105.00

Yen

¥100.00

¥95.00

¥90.00

¥85.00

¥80.00

¥75.00

Insights & Strategies: Quarterly Edition

October 4, 2013 | Page 12 of 12

Asset Class Weightings Profile

Cash

Bond

Can. Equity

Intl. Equity

US Equity

Alternative

Income & Capital Preservation Conservative Moderate Growth Global Equity

40% 15% 5% 0% 0%

40% 65% 47% 20% 0%

20% 20% 15% 20% 20%

0% 0% 15% 10% 20%

0% 0% 15% 40% 45%

0% 0% 3% 10% 15%

General Asset Class Ranges Income & Capital Preservation Conservative Moderate Growth Global Equity

Cash

Bonds

Equities

Alternative

40 – 75 15 – 30 5 – 10 0–5 0

15 – 40 60 – 65 45 – 65 15 – 40 0

0 – 20 10 – 20 25 – 45 50 – 70 80 – 85

0 0 0–5 10 – 15 15 – 20

Profile Descriptions Description Income & Capital Preservation

Virtually any loss is unacceptable. Investors’ primary objective is to achieve a return that keeps pace with inflation. Fixed income and cash make up the largest portion of holdings.

Conservative

Losses can be tolerated, but erosion of regular income payments cannot. Stability of coupon or dividend is the primary concern as many investors will employ this income for cost-of-living expenses. Bonds tend to make up the largest proportion of holdings.

Moderate

Some higher risk positions tolerated but these are typically offset with blue-chip dividend paying equities or low-risk bonds.

Growth

Willingness to take speculative bond and equity positions though growth portfolios are typically biased towards equities. Strong earnings growth or high yields usually take preference over valuations. Some defensive constraints may be employed, but even these may be removed for highly risk-tolerant investors.

Global Equity Income & Capital Preservation

A willingness to ignore ‘home-country bias’ and allocate holdings internationally. International equities typically receive weightings equivalent to or greater than domestic securities. These investors recognize that Canada represents only ~3% of global equity markets and are willing to source investment opportunities outside our borders. Conservative Moderate Growth Global Equity

Cash 40%

US Equity 15%

Cash 15%

Can Equity 20%

Can Equity 20% Bonds 40%

Alt Cash 3% 5%

US Equity 40%

Alt 10%

Intl Equity 15% Bonds 65%

Can Equity 15%

US Equity 45%

Bonds 47%

Intl Equity 10%

Can Equity 20%

Bonds 20%

Intl Equity 20%

Alt 15%

Can Equity 20%

Important Investor Disclosures Complete disclosures for companies covered by Raymond James can be viewed at: www.raymondjames.ca/researchdisclosures Raymond James Ltd. (RJL) prepared this newsletter. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. This document is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The securities discussed in this document may not be eligible for sale in some jurisdictions. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. RJL, its officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.