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May 2 0 , 2 0 1 6 R B C W E A LT H M A N A G E M E N T Global Insight Weekly A closer look Do as I say, not as I say Tom Garretson – Minneapolis ...
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May 2 0 , 2 0 1 6

R B C W E A LT H M A N A G E M E N T

Global Insight Weekly

A closer look

Do as I say, not as I say Tom Garretson – Minneapolis

After telling investors to expect a more cautious approach to raising rates amid global concerns, Fed officials appear surprised to find investors have done just that. And now the Fed is back on the verbal offensive—and underscoring the sorry state of Fed communications. Fed-induced volatility Global markets endured another bout of volatility during the week following the release of the minutes from the Fed’s April 26–27 meeting, which painted Fed officials as being perhaps much closer to the next rate hike than markets were previously led to believe. It all began back in March, when “global concerns” were thrust to the top of the Fed’s risk factors, amplified later that month by Chair Janet Yellen’s dovish speech that highlighted growing downside risks to the U.S. economic outlook. From there markets began to price in a much-lower trajectory for rate increases. And when the Fed did little at the April meeting to prepare markets for a rate hike this summer, market-based probabilities for June declined effectively to zero. That all changed following the release of the minutes, which surprisingly showed that “most” officials thought a June rate hike could be appropriate as long as the data holds steady, which sparked a quick repricing of the Fed’s intentions.

The battle against complacency So should we take the Fed at its word now, and does this mean that a rate hike is imminent? In short, no. In our view, all of this backtracking is more about the Fed wanting to regain the option to raise rates at any particular meeting, rather than an attempt to signal to markets that one might be around the corner. As the minutes stated, “Some participants were concerned that market participants may

Click here for authors’ contact information. Priced (in USD) as of 5/20/16 market close, EST (unless otherwise stated). For important and required non-U.S. analyst disclosures, see Page 6.

Repricing the Fed: Rate hike probabilities for each meeting March-to-April Fed meetings

June

September

December

100% 80%

74% 62%

60% 40%

32%

20% 0% Mar 2016

Apr 2016

May 2016

Source - RBC Wealth Management, Bloomberg; data through 5/18/16; July and November meetings not shown.

Market pulse 3

Why U.S. banks’ rock-bottom valuations are too low

3

Canada’s inflation rate warms up

3

Another megamerger to shake up agribusiness?

4

Jury’s still out on Japan’s subzero interest rates

2 | Global Insight Weekly

not have properly assessed the likelihood of an increase in the target range at the June meeting.” Fed officials were clearly concerned that markets had become far too complacent about the rate hike outlook. In an ideal, “data dependent” world for the Fed, markets would perhaps price a 50/50 chance of a rate hike at any meeting, giving it optionality. If the data comes in as expected, the Fed can raise rates. If it disappoints, it can pause and assess the situation. That’s the beauty of data dependency. The downside, of course, is that it can leave market participants scratching their heads.

Revamped rate hike rhetoric Ultimately, our view for the Fed remains mostly unchanged. A rate hike in September or December still seems more likely at this point as we think the Fed will see too much downside risk in June. We wouldn’t necessarily rule out July, but for that to happen, we would expect the Fed to specifically state its intentions at the June meeting. Finally, we are keeping an eye on the steepness of the yield curve. Typically a sign of markets’ expectations for growth and inflation, it remains historically flat. The last time the spread from two to 10 years was this low, the Fed was already

on the cycle’s fifth rate hike, and we think the Fed will have to take that into consideration as it looks to move forward in the normalization process.

Flattening yield curve: Fed was on its fifth rate hike the last time the curve was this flat

5.5%

Fed Funds Rate (upper bound) Treasury yield curve: Spread from 2Y to 10Y

4.5% 3.5% 2.5% 1.5% 0.5% -0.5% 2003

2005

2007

2009

2011

2013

2015

Source - RBC Wealth Management, Bloomberg; data through 5/19/16

WWhHaAT t ’ s’ S mMoOvVi InNgG mMaArRkKeET t sS That was then, this is now

Bond fund flows have been strong, equities weak

As the MSCI World Index has pulled back about 4% in the past month, consolidating its post-correction gains, there is evidence institutional investors have become more cautious or are outright bearish about the global equity market’s prospects. Fund flow trends support that notion with money moving out of stocks and into bonds (see chart).

Cumulative net change in global fund flows (%)

While we believe the equity market could retreat in coming weeks or months during the seasonally slow summer period, we doubt a sharp correction will occur like earlier this year. Conditions have changed since then. In January and February, markets were grappling with the crude oil rout. WTI and Brent had plunged to $26/bbl and $28/bbl, respectively. But the oil market has begun to heal recently. WTI has rallied to $48/bbl and Brent has climbed to $49/bbl. Excess oil supply has diminished as U.S. shale producers have cut production, and global supply and demand are closer to being balanced. Just as important, U.S. recession risks and China’s regulatory, currency, and economic risks have declined. We recommend equity investors sit tight with portfolio allocations and look for buying opportunities in high-quality stocks should a deeper pullback materialize.

May 20, 2016 | RBC Wealth Management

2.5

Emerging markets bonds

2.0

Developed markets bonds

1.5

Emerging markets equities

1.0

Developed markets equities

0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 Jan

Feb

Mar

Apr

May

Source - RBC Wealth Management, EPFR Data; weekly data through 5/18/16

3 | Global Insight Weekly

United States Kelly Bogdanov – San Francisco • The equity market performed well in light of the Fed’s hawkish tone and amid mixed earnings reports. The S&P 500 rose 0.3%, snapping a three week losing streak. The U.S. Dollar Index rose 0.8%. • Financials stood out to the upside. The S&P 500 Banks Index climbed 3.4% on the hawkish Fed minutes. While it’s unlikely the Fed will raise interest rates in June, two or three rate hikes could occur in the next year and would boost banks’ net interest margins. We continue to view bank stocks as attractive for patient investors. The group’s price-to-book ratio of 0.9 is cheap versus the 1.7 longterm average (see chart). A near- or moderately belowaverage valuation is warranted as banks’ business models, especially large banks, have changed meaningfully due to stringent regulations that require higher capital levels and less risk taking. However, even factoring in the sweeping industry changes since the financial crisis, the nearly rockbottom valuation seems lower than is justified. Capital positions of the 20 largest U.S. banks are robust. Improved loan growth in coming quarters, combined with better net interest margins as the Fed slowly normalizes rates, should result in stronger revenue growth. • Following the previous week’s ugly department store earnings reports, a second round of retail results proved there are pockets of outperformance in the industry. Lowe’s reported a particularly strong quarter that included a 7.3% y/y jump in same-store sales, while Home Depot registered solid results with a 6.5% y/y gain and lifted full-year guidance. Wal-Mart exceeded expectations. But Target stumbled badly, similar to the department stores.

Canada Patrick McAllister & Alana Awad – Toronto • The S&P/TSX Composite advanced 1.2% on broad-based gains offset partially by a decline in the Materials sector. • Strong year-to-date performance has compressed the discount to net asset value of real estate investment trusts. While valuations on an absolute basis are roughly in line with long-term averages, yields in the industry remain attractive in the context of the low interest rate environment. • The mandatory evacuation zone around Fort McMurray was extended in response to the wildfires’ move north. Oil sands mining operations for both Suncor and Syncrude were forced to shut down as a result. A resumption of

May 20, 2016 | RBC Wealth Management

U.S. bank stocks are inexpensive S&P 500 Banks Index price-to-book ratio 3.6 3.0 2.4 Average

1.8

1.7

1.2 0.9 0.6 0.0 1990

1995

2000

2005

2010

2015

Source - RBC Wealth Management, Bloomberg; weekly data through 5/13/16

operations will require provincial approval once the imminent threat of the fires has passed and air quality has improved. • The Canadian CPI released on Friday showed that inflation rose 1.7% y/y in April, stronger than the 1.3% increase recorded in March and in line with economists’ expectations. Gas prices were the main drag on inflation, dropping 5.8% y/y, while food prices climbed 3.2%. The core inflation rate strengthened to 2.2% from 2.1%, beating economists’ expectations of 2.0%. • Interest rates moved 5–8 basis points higher across the Government of Canada yield curve during the week. Heightened expectations of a Fed rate hike and strong inflation numbers were supportive of higher rates. • Despite higher rates and broadly tighter credit spreads, the preferred share market has remained within a 1% range over the past month—the longest period of price stability in over 12 months.

Europe Frédérique Carrier – London • The STOXX Europe 600 rose 1.0% for the week despite volatility caused by the Fed’s hawkish meeting minutes and the following repricing of U.S. interest rate risk. One sector which benefitted was Financials, as those companies exposed to the U.S. could see margins benefit from a higher rate environment. • In Germany, Bayer announced it had made an unsolicited offer to buy Monsanto. With a likely price tag in the neighbourhood of €50B, this would be the largest acquisition in Bayer’s 150-year history, and the largest ever in corporate Germany. The strategic rationale makes

4 | Global Insight Weekly

sense, in our view, as both companies’ portfolios are complementary in agribusiness, but the financing would be challenging. An equity issue and credit downgrade cannot be ruled out. In addition, the deal—if it goes ahead—would transform Bayer, which generates half of its revenue from health care, into a business with half of sales from agribusiness. Execution risk appears to be high for the new CEO, who has held the post only for the past two months. Bayer shares retreated more than 10% after the news emerged. • In the U.K., the Q1 labour report confirmed the rate of hiring had slowed, though given the “Brexit” uncertainty the data was better than expected. Employment grew in Q1 2016 by 44,000, much less than the Q4 increase of 195,000, and the participation rate reached a new high of 74.2%. Unemployment held firm at 5.1%, while average earnings growth eased to 2.1% in Q1. • With employment growth and various indicators slowing, and inflation not expected to exceed 1% by the end of 2016, we would expect the Bank of England to hold off on rate increases for some time if the U.K. votes to remain in the EU in the June referendum. Should it vote for Brexit, further rate cuts and an increase in the asset purchase programme are likely, in our view.

Asia Pacific Jay Roberts – Hong Kong • Asian markets took the increased likelihood of interest rate hikes by the Fed in stride. Part of this somewhat uneventful response may be due to the fact that a number of Asian markets continue to trade at unusually depressed valuations. The U.S. dollar moved higher against a number of Asian currencies. • Japan will host the G7 meeting on May 26–27. Prime Minister Shinzo Abe said that he had earlier discussed with European leaders that there is a need “to create demand and to remove supply-side constraints.” In our view, Abe will again raise the topic of the need for a coordinated fiscal response to relatively weak global demand. This ties in to a debate that is currently underway with respect to whether Japan will introduce further fiscal stimulus via an expanded budget. Japanese equities and the yen have been relatively steady for the past three months. • Abe also announced a plan to increase the Japanese workforce by over 1 million people by 2020, an increase of approximately 1.8%. Methods include a steady increase in the minimum wage and further expansion of childcare facilities. In a win for Abenomics, which has come under

May 20, 2016 | RBC Wealth Management

Decreasing rates a positive, but only to a point Japan’s equity market has struggled since the BoJ implemented negative rates in 2016 1800

1.8

1600

1.6

1400

1.4

1200

1.2

1000

1.0

TOPIX (left axis)

800

Japan 10-year yield (right axis, %)

0.8

600

0.6

400

0.4

200

0.2

0

0.0

-200 Jan-2014

-0.2 Jul-2014

Jan-2015

Jul-2015

Jan-2016

Source - RBC Wealth Management, Bloomberg; data through 5/20/16

criticism from certain corners, the number of women in the workforce has risen by 1.5 million, over 5%, since he took power. This growth far exceeds the growth in the male workforce. • The Bank of Japan’s negative interest rate policy (NIRP) has impacted the bottom line for the country’s banks. Mitsubishi UFJ Financial Group (8306 JP), the largest bank, forecasts an 11% decline in earnings for this fiscal year (ending March 2017). This is partly due to NIRP’s impact on lending margins. Mizuho Financial Group (8411 JP), the second-largest bank, issued a similar outlook. • However, NIRP has brought benefits outside the banking sector. The mortgage rate has declined causing a surge in mortgage refinancing, which effectively puts more money into the pockets of consumers. It remains to be seen if NIRP will be able to convince individuals to switch out of cash investments and into other securities en masse. Over half of Japanese household financial assets are still held in cash and deposits. This equates to over $8T and is well over three times more than households hold in equities. • Chinese internet giant Tencent (0700 HK), which runs China’s dominant social network and operates the largest online gaming business, posted a Q1 earnings beat. Earnings rose by 33% y/y to RMB 9.18B ($1.4B). Revenue rose by 43%. However, management noted that deceleration in the Chinese economy may impact the growth in advertising revenue and that investors’ expectations may be too high. Tencent is currently monetizing its vast user base. Online advertising revenue rose by 73% y/y and is now 15% of total revenue.

5 | Global Insight Weekly

M A R K ET S C O R E C A R D Data as of May 20, 2016 Equities (local currency) S&P 500 Dow Industrials (DJIA) NASDAQ Russell 2000

Level

1 week

MTD

YTD

12 mos

Govt bonds (bps chg)

Yield

1 week

MTD

YTD

12 mos

9.9

-16.7

29.5

2,052.32

0.3%

-0.6%

0.4%

-3.5%

U.S. 2-Yr Tsy

0.880%

13.5

17,500.94

-0.2%

-1.5%

0.4%

-4.3%

U.S. 10-Yr Tsy

1.844%

14.4

1.0

-42.6

-40.4

4,769.56

1.1%

-0.1%

-4.8%

-6.0%

Canada 2-Yr

0.625%

7.5

-6.7

14.4

-5.5

1,112.28

0.9%

-1.6%

-2.1%

-11.6%

Canada 10-Yr

1.347%

7.5

-16.6

-4.7

-44.8

S&P/TSX Comp

13,919.58

1.2%

-0.2%

7.0%

-7.7%

U.K. 2-Yr

0.441%

6.8

-8.7

-21.0

-9.3

FTSE All-Share

3,387.22

0.5%

-1.0%

-1.7%

-11.0%

U.K. 10-Yr

1.452%

7.6

-14.4

-50.8

-52.6

338.01

1.0%

-1.0%

-7.6%

-16.8%

Germany 2-Yr

-0.506%

0.7

-2.2

-16.1

-29.4

Germany 10-Yr

0.165%

4.1

-10.6

-46.4

-46.7

Rate

1 week

MTD

YTD

12 mos

95.32

0.8%

2.4%

-3.4%

-0.1%

-1.4%

-4.3%

5.5%

-7.0%

STOXX Europe 600 German DAX Hang Seng Shanghai Comp

9,916.02

-0.4%

-1.2%

-7.7%

-16.3%

19,852.20

0.7%

-5.8%

-9.4%

-28.0%

2,825.48

-0.1%

-3.8%

-20.2%

-36.5%

Currencies U.S. Dollar Index

Nikkei 225

16,736.35

2.0%

0.4%

-12.1%

-16.6%

India Sensex

25,301.90

-0.7%

-1.2%

-3.1%

-9.1%

CAD/USD

0.76

2,763.82

1.1%

-2.6%

-4.1%

-19.6%

USD/CAD

1.31

1.4%

4.5%

-5.2%

7.5%

Brazil Ibovespa

49,722.75

-4.0%

-7.8%

14.7%

-9.4%

EUR/USD

1.12

-0.8%

-2.0%

3.3%

1.1%

Mexican Bolsa IPC

45,155.91

-0.5%

-1.4%

5.1%

-0.3%

GBP/USD

1.45

0.9%

-0.8%

-1.6%

-6.7%

AUD/USD

0.72

-0.6%

-5.0%

-0.9%

-8.3%

Singapore Straits Times

Commodities (USD) Gold (spot $/oz)

Price

1 week

MTD

YTD

12 mos

USD/CHF

0.99

1.6%

3.2%

-1.1%

5.7%

1,252.69

-1.6%

-3.1%

18.0%

3.5%

USD/JPY

110.13

1.4%

3.4%

-8.4%

-9.2%

123.55

0.6%

1.3%

-5.4%

-8.2%

Silver (spot $/oz)

16.53

-3.4%

-7.3%

19.3%

-3.4%

EUR/JPY

4,593.75

-0.9%

-9.3%

-2.4%

-26.1%

EUR/GBP

0.77

-1.7%

-1.3%

5.0%

8.4%

Oil (WTI spot/bbl)

47.75

3.3%

4.0%

28.9%

-18.3%

EUR/CHF

1.11

0.8%

1.2%

2.2%

6.9%

Oil (Brent spot/bbl)

48.84

2.1%

1.5%

31.0%

-24.9%

USD/SGD

1.38

0.7%

2.8%

-2.6%

3.3%

2.05

-2.0%

-5.7%

-12.1%

-29.5%

USD/CNY

6.55

0.3%

1.1%

0.9%

5.6%

302.75

-0.6%

-0.7%

6.8%

3.9%

USD/BRL

3.52

-0.3%

2.5%

-11.1%

17.3%

Copper ($/metric ton)

Natural Gas ($/mmBtu) Agriculture Index

Source - Bloomberg. Note: Equity returns do not include dividends, except for the German DAX. Bond yields in local currencies. Copper and Agriculture Index data as of Thursday’s close. Dollar Index measures USD vs. six major currencies. Currency rates reflect market convention (CAD/USD is the exception). Currency returns quoted in terms of the first currency in each pairing. Data as of 8:36 pm GMT 5/20/16. Examples of how to interpret currency data: CAD/USD 0.76 means 1 Canadian dollar will buy 0.76 U.S. dollar. CAD/USD 5.5% return means the Canadian dollar rose 5.5% vs. the U.S. dollar year to date. USD/JPY 110.13 means 1 U.S. dollar will buy 110.13 yen. USD/JPY -8.4% return means the U.S. dollar fell 8.4% vs the yen year to date.

U P CO M I N G EV E N TS Sun, May 22

Tue, May 24

Wed, May 25 (cont.)

Thu, May 26 (cont.)

Japan Exports (-10.1% y/y)

Eurozone ZEW Surveys

BoC meeting

U.S. Pending Home Sales (0.6% m/m)

Japan Imports (-19.3% y/y)

Germany Exports (0.8% q/q)

Thu, May 26

Fri, May 27

Mon, May 23

Germany Q1 GDP revision (0.7% q/q)

China Industrial Profits

U.S. Q1 GDP revision (0.8% q/q)

Japan Nikkei Manuf. PMI

U.S. New-Home Sales (1.8% m/m)

Japan CPI (-0.3% y/y, Core 0.6%)

U.S. Core PCE

Eurozone Markit Comp. PMI (53.2)

Wed, May 25

U.K. Q1 GDP revision

U.S. Univ. of Mich. Confidence (95.8)

Eurozone Markit Manuf. PMI (51.9)

Germany IFO Expectations (100.6)

U.K. Exports

U.S. Fed Chair Yellen speaks

Eurozone Markit Services PMI (53.2)

U.S. Markit Services PMI (53.2)

U.K. Imports

Thu, Jun 2

U.S. Markit Manuf. PMI (51.0)

U.S. Markit Composite PMI

U.S. Durable Goods (0.3% m/m)

ECB meeting

All data reflect Bloomberg consensus forecasts where available

May 20, 2016 | RBC Wealth Management

6 | Global Insight Weekly

Authors Tom Garretson – Minneapolis, United States [email protected]; RBC Capital Markets, LLC.

Kelly Bogdanov – San Francisco, United States

regardless of a firm’s own rating categories. Although RBC Capital Markets, LLC ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP) and Underperform (U) 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 below).

[email protected]; RBC Capital Markets, LLC.

Patrick McAllister – Toronto, Canada

[email protected]; RBC Dominion Securities Inc.

Alana Awad – Toronto, Canada [email protected]; RBC Dominion Securities Inc.

Frédérique Carrier – London, United Kingdom [email protected]; Royal Bank of Canada Investment Management (UK) Ltd.

Jay Roberts – Hong Kong, China [email protected]; RBC Dominion Securities Inc.

Disclosures and Disclaimer Analyst Certification

All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

Important Disclosures

In the U.S., RBC Wealth Management operates as a division of RBC Capital Markets, LLC. In Canada, RBC Wealth Management includes, without limitation, RBC Dominion Securities Inc., which is a foreign affiliate of RBC Capital Markets, LLC. This report has been prepared by RBC Capital Markets, LLC. which is an indirect wholly-owned subsidiary of the Royal Bank of Canada and, as such, is a related issuer of Royal Bank of Canada. Non-U.S. Analyst Disclosure: Patrick McAllister, Alana Awad, and Jay Roberts, employees of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc.; and Frédérique Carrier, an employee of RBC Wealth Management USA’s foreign affiliate Royal Bank of Canada Investment Management (UK) Limited; contributed to the preparation of this publication. These individuals are not registered with or qualified as research analysts with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since they are not associated persons of RBC Wealth Management, they may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts. In the event that this is a compendium report (covers six or more companies), RBC Wealth Management may choose to provide important disclosure information by reference. To access current disclosures, clients should refer to http://www. rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?EntityID=2 to view disclosures regarding RBC Wealth Management and its affiliated firms. Such information is also available upon request to RBC Wealth Management Publishing, 60 South Sixth St, Minneapolis, MN 55402. References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Dividend Growth (RL 8), and the Guided Portfolio: ADR (RL 10), and former lists called the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Midcap 111 (RL 9), and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios. The abbreviation ‘RL On’ means the date a security was placed on a Recommended List. The abbreviation ‘RL Off’ means the date a security was removed from a Recommended List.

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 May 20, 2016 | RBC Wealth Management

Rating

Distribution of Ratings - RBC Capital Markets, LLC Equity Research As of March 31, 2016 Investment Banking Services Provided During Past 12 Months Count Percent Count Percent

Buy [Top Pick & Outperform] Hold [Sector Perform] Sell [Underperform]

887 722 104

51.78 42.15 6.07

258 115 8

29.09 15.93 7.69

Explanation of RBC Capital Markets, LLC Equity Rating System

An analyst’s “sector” is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst’s view of how that stock will perform over the next 12 months relative to the analyst’s sector average. Although RBC Capital Markets, LLC ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), and Underperform (U) 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 below).

Ratings:

Top Pick (TP): Represents analyst’s best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months.

Risk Rating:

As of March 31, 2013, RBC Capital Markets, LLC suspends its Average and Above Average risk ratings. The Speculative risk rating reflects a security’s lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility.

Valuation and Price Target Impediments

When RBC Wealth Management assigns a value to a company in a research report, FINRA Rules and NYSE Rules (as incorporated into the FINRA Rulebook) require that the basis for the valuation and the impediments to obtaining that valuation be described. Where applicable, this information is included in the text of our research in the sections entitled “Valuation” and “Price Target Impediment”, respectively. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of RBC Capital Markets, LLC, and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets, LLC and its affiliates.

Other Disclosures

Prepared with the assistance of our national research sources. RBC Wealth Management prepared this report and takes sole responsibility for its content and distribution. The content may have been based, at least in part, on material provided by our third-party correspondent research services. Our third-party correspondent has given RBC Wealth Management general permission to use its research reports as source materials, but has not reviewed or approved this report, nor has it been informed of its publication. Our third-party correspondent may from time to time have long or short positions in, effect transactions in, and make markets in securities referred to herein. Our third-party correspondent may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any company mentioned in this report. RBC Wealth Management endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. In certain investment advisory accounts, RBC Wealth Management will act as overlay manager for our clients and will initiate transactions

7 | Global Insight Weekly

in the securities referenced herein for those accounts upon receipt of this report. These transactions may occur before or after your receipt of this report and may have a short-term impact on the market price of the securities in which transactions occur. RBC Wealth Management research is posted to our proprietary Web sites to ensure eligible clients receive coverage initiations and changes in rating, targets, and opinions in a timely manner. Additional distribution may be done by sales personnel via e-mail, fax, or regular mail. Clients may also receive our research via third-party vendors. Please contact your RBC Wealth Management Financial Advisor for more information regarding RBC Wealth Management research. Conflicts Disclosure: RBC Wealth Management is registered with the Securities and Exchange Commission as a broker/dealer and an investment adviser, offering both brokerage and investment advisory services. RBC Wealth Management’s Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on our Web site at http://www.rbccm.com/GLDisclosure/PublicWeb/ DisclosureLookup.aspx?EntityID=2. Conflicts of interests related to our investment advisory business can be found in Part II of the Firm’s Form ADV or the Investment Advisor Group Disclosure Document. Copies of any of these documents are available upon request through your Financial Advisor. We reserve the right to amend or supplement this policy, Part II of the ADV, or Disclosure Document at any time. The authors are employed by one of the following entities: RBC Wealth Management USA, a division of RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in Minnesota and New York, USA; by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada; by RBC Investment Services (Asia) Limited, a subsidiary of RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Hong Kong, China; and by Royal Bank of Canada Investment Management (U.K.) Limited, an investment management company with principal offices located in London, United Kingdom.

Research Resources

This document is produced by the Global Portfolio Advisory Committee within RBC Wealth Management’s Portfolio Advisory Group. The RBC WM Portfolio Advisory Group provides support related to asset allocation and portfolio construction for the firm’s Investment Advisors / Financial Advisors who are engaged in assembling portfolios incorporating individual marketable securities. The Committee leverages the broad market outlook as developed by the RBC Investment Strategy Committee, providing additional tactical and thematic support utilizing research from the RBC Investment Strategy Committee, RBC Capital Markets, and third-party resources. 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.

Disclaimer

The information contained in this report has been compiled by RBC Wealth Management, a division of RBC Capital Markets, LLC, from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Wealth Management, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Wealth Management’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. 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,

May 20, 2016 | RBC Wealth Management

the securities discussed in this report may not be eligible for sale in some jurisdictions. 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. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read 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. To the full extent permitted by law neither Royal Bank of Canada 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 Royal Bank of Canada. Additional information is available upon request. To U.S. Residents: This publication has been approved by RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC, which is a U.S. registered broker-dealer and which accepts responsibility for this report and its dissemination in the United States. RBC Capital Markets, LLC, is an indirect wholly-owned subsidiary of the Royal Bank of Canada and, as such, is a related issuer of Royal Bank of Canada. 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. International investing involves risks not typically associated with U.S. investing, including currency fluctuation, foreign taxation, political instability and different accounting standards. To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. ®Registered trademark of Royal Bank of Canada. Used under license. RBC Wealth Management is a registered trademark of Royal Bank of Canada. Used under license. To European Residents: Clients of United Kingdom subsidiaries may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £50,000. The Channel Islands subsidiaries are not covered by the UK Financial Services Compensation Scheme; the offices of Royal Bank of Canada (Channel Islands) Limited in Guernsey and Jersey are covered by the respective compensation schemes in these jurisdictions for deposit taking business only. To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited and RBC Investment Management (Asia) Limited, licensed corporations under the Securities and Futures Ordinance or, by Royal Bank of Canada, Hong Kong Branch, a registered institution under the Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited or Royal Bank of Canada, Hong Kong Branch at 17/Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong (telephone number is 28481388). To Singapore Residents: This publication is distributed in Singapore by RBC (Singapore Branch) and RBC (Asia) Limited, registered entities granted offshore bank status 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. © RBC Capital Markets, LLC 2016 - Member NYSE/FINRA/SIPC © RBC Dominion Securities Inc. 2016 - Member CIPF © RBC Europe Limited 2016 © Royal Bank of Canada 2016 All rights reserved

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