Insights Strategies

Insights & Strategies

April 8, 2014 Quarterly Edition

Inside this Issue

Asset Allocation Update ...................... 4

Biotech: Perspective Amidst the Sell-Off ....................................................... 5

Investing in Style ................................. 7

Paying Often, Pays Off ........................ 8

The Central Bank Show ...................... 9

Quarterly Chart Package ................... 10

Charts of Interest ............................... 13

Asset Class Weightings .................... 14

Major Risks Not Yet Present Global equity markets paused in March as investors digested several conflicting developments. Inconsistent economic data, the ongoing crisis in the Ukraine, fears of a more hawkish Fed, and an accelerating slowdown in China, together with rising risks in the banking sector, served to keep investors on the sidelines. Offsetting these fears somewhat was the lack of spillover from the Emerging Market currency volatility of the past couple of months and an overall favourable trend of growth, especially in the developed markets.

Weather appears to have played a large role in the spotty economic data through the first quarter. Unseasonably cold and severe weather in North America and Europe resulted in much of the data coming in below expectations. We expect that much of the shortfall will be made up in the second quarter—already the data is beginning to point in this direction. And while the crisis in the Ukraine is far from being resolved at this stage it does not look like it will spread beyond the Crimea.

On the month, the MSCI World Index contracted a modest 0.1% with most of the losses coming from the UK (down 3.1%), Hong Kong (down 3.0%), and China (down 1.5%). Offsetting these declines was a sharp rally in Brazil (up 7.1%) as investors realized that the currency and current account issues in the Emerging Markets were not as severe as previously feared. Spain also managed to continue to rally as economic conditions there pointed to stabilization. The Canadian market was one of the better performers on the month (up 0.9%) driven by a rebound in the Energy sector (up 4.8%), Utilities (up 3.9%) as well as strength in the consumer sectors.

For the first quarter as a whole, global equities managed to post a gain of 0.8%. Weakness in the select Asian and Emerging Markets were offset by ongoing strength in Europe driven by a continued economic rebound. After lagging (from a relative perspective) for most of the past two years, the Canadian market was the standout performer with a gain of 5.2%. While all sectors were up on the quarter, the majority of the gains came as the resource sectors bounced back from deeply oversold conditions.

2014 First Quarter Returns

Source: Bloomberg, Raymond James Ltd.

-10% -5% 0% 5% 10%

Nikkei 225CSI 300

Hang SengFTSE 100iBovespa

Dow Jones Ind AvgDAX

NasdaqMSCI World

S&P/ASX 200S&P 500

Euro Stoxx 50CAC 40

Swiss MarketIbex 35

S&P/TSX Comp

Insights & Strategies: Quarterly Edition April 8, 2014 | Page 2 of 14

Given the duration (five years) and magnitude (+175% on the S&P 500) of this bull market, we have begun to pay more attention of late to market risks and the potential end of the rally. By any historical measure, this bull market is getting long in the tooth. Last month, we examined deflationary forces in Europe, Emerging Market currency volatility, and finally possible risks to growth. We concluded that Europe did not yet have a serious deflation problem given that the European Central Bank has room to offset falling prices by introducing quantitative easing if necessary. Emerging Market currency volatility appears to have calmed (as expected) and remains contained to those countries with current account issues. As for the growth scare we experienced over the past few months, most of that looks to be attributable to weather related factors.

It’s Been Quite a Run


More recently two other issues have come to the fore: fears that the Fed may act to increase interest rates earlier than expected, and the ongoing weakness of both the Chinese economy and banking sector.

A move to a more restrictive monetary policy stance would represent a clear negative for global equity markets. The equity market rally of the past five years has to a large degree been driven by the move to record low interest rates. Historically, a move to a tighter monetary stance has represented a strong headwind for equities. The good news is that equities don’t usually begin to respond negatively to higher interest rates until the tightening phase is well underway.

The new Fed Chair, Janet Yellen, recently suggested that interest rates could be heading higher earlier than has been expected. The March 18

th FOMC meeting concluded as

expected with the Fed trimming its Quantitative Easing asset purchases by US$10 bln to US$55 bln per month, leaving

interest rates unchanged, and removing the 6.5% unemployment rate threshold before contemplating rate hikes. The trigger was replaced with a more broad-based set of conditions that are more qualitative in nature: labour market conditions, indicators of inflationary pressures and expectations, and readings on financial developments will be assessed in order to achieve full employment and 2% inflation target goals. From this perspective, the new Fed under Yellen seemed to be as dovish as it was under Bernanke.

Interest Rates Poised to Stay Low for Longer Still


That perception changed abruptly during the subsequent press conference. When questioned about the timeline for interest rate hikes following the end of quantitative easing, Yellen suggested that could occur in as little as six months. This would mean that the Fed could begin hiking rates as soon as the end of the first quarter of 2015. Prior expectations had been that rate hikes would most likely not occur until the end of 2015.

We believe that the market overreacted to Yellen’s comments, much like the market overreacted to Bernanke’s comments last May when he first raised the prospect of tapering asset purchases. Bottom line is that Yellen probably misspoke. If anything, her removal of a hard target for the unemployment rate, choosing instead to focus on forward guidance to reveal intentions, gives the Fed even more latitude than before. We believe that this Fed, much like the prior one, will continue an accommodative stance.

Over the past several months, investors have turned increasingly bearish on the outlook for Chinese growth. While the prospect of slowing growth has been a concern for the past two years, the recent combination of worse-than-expected economic reports and high levels of private debt

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have brought things to a head. At the same time, investors are concerned that the government will remain focused on reforms aimed at transforming its long-term growth model at the expense of current growth opportunities. If a slowdown takes hold, just how much pain the authorities are willing to take is an open question.

Chinese Growth Slowing – Not Collapsing


At the beginning of March we saw that China's manufacturing PMI fell to 48.5 in February from 49.5 in January, leaving manufacturing activity at the lowest level in seven months. Recall that levels below 50 indicate a contraction in manufacturing. More recently, reports on industrial production, retail sales, and fixed-asset investment have all surprised to the downside, suggesting that the slowdown in growth is gaining momentum. While these reports still point to an economy that is in overall expansion mode, the risk that the government’s 7.5% growth target will not be achieved is increasing.

While overall debt levels are not high in China, private debt levels are quite extended. The authorities have recognized this for some time and have been acting to tighten liquidity (through higher interest rates and closer regulation of shadow banking) in an effort to reduce debt levels. After a decade of expansion, it increasingly looks like the credit cycle has turned. But the problem here is that tightening liquidity in an environment of slowing economic growth (and presumably slowing profit growth) raises the prospect of wide-spread debt defaults. Earlier this month Shanghai Chaori Solar Energy defaulted on its obligations, spreading fear throughout the Chinese bond market.

Compounding these problems is that the default risks are only going to increase as the year unfolds. China has some RMB 5 tln in debt maturing this year with about 60% from local government and the remainder from private investors through trust funds. While not all of this debt could default (as some of the trust fund debt has equity like characteristics), it does raise the prospect that a policy error could trigger a chain reaction across the banking system.

Compared to prior periods of slowing growth, the expectation is that this government’s response may be slower and of more limited scope. The authorities this time around will likely want to give reforms more time to work and as such may not be as eager to add stimulus. As well efforts to artificially boost growth in the past have tended to exacerbate imbalances in the economy and add too much to the already extended debt pile.

We expect that the Chinese authorities will act should growth show signs of slowing significantly or if debt defaults heat up. The primary goal of the authorities is not just to manage short-term growth but perhaps more importantly it is to generate employment, especially for migrating workers. If employment growth looks to be slipping, we expect that the authorities would act just as they have done in the past (last summer being the most recent example). Already we are seeing indications that the Chinese are looking to add stimulus to the economy through a variety of infrastructure projects. We expect this trend to continue as the authorities have significant resources at their disposal to act if needed.

Major risks are not yet in place to mark an end to the bull market, but a correction could come at any time if for no other reason than the strong overbought conditions in the market after a five- year rally.

Andy MacLean, CFA Private Client Strategist

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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 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.

Overweight Equities

Valuations are not excessive, earnings could reaccelerate, P/E multiples have room to expand, and the switch from bonds into equities is still in the early stages.

Underweight Government Bonds

The short-term outlook is 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, we 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 is benefiting from favourable global recovery trends and monetary policy, and manufacturing emerging markets (East Asia) are favoured 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.

Our ongoing positive view of global equity markets is supported by three factors: global growth resynchronization, decent profit growth, and accommodative monetary policy.

The global economy for the first time since the onset of the Great Recession is showing signs of steady growth. North America is performing well with both housing and the consumer recovering, as the unemployment rate works lower. Europe is emerging from its recession and banking crisis on the back of strong support from the European Central Bank and steady performance from the core of Europe and early signals of stability from the periphery. China, meanwhile, should deliver steady growth as the government has ample resources to stimulate the economy if necessary.

Earnings are also recovering with growth set to accelerate. Looking at the S&P 500 (as a proxy for global profit growth), 2013 ended with year-over-year earnings growing upwards of 9%. This was driven by strong profit growth amongst the telecom, financials, basic materials, industrials, and consumer cyclical stocks. Only the oil and gas sector contracted on the quarter. Apart from a bit of a hiccup in the first quarter of 2014, due primarily to the unseasonably harsh winter, earnings growth should continue for the remainder of the year. Consensus expectations are for earnings growth to approach 14% by the end of the year.

The third factor supporting equities is monetary policy. Since the onset of the financial crisis (now over five years ago), the Fed and other central banks have been very accommodative, employing a number of innovative policies, including taking interest rates down to near zero and (depending on the country) using the balance sheet of the central bank to buy outstanding debt. For the remainder of 2014, we expect that global monetary conditions will remain very favourable. There is even a possibility, should the inflation outlook not improve, that the European Central Bank may engage in some sort of quantitative easing program. As well, monetary conditions have been tightening in China for much of the past year and should growth show signs of slipping, the authorities there would likely loosen policy. Even in England, where the recovery looks to be gaining momentum, the Bank of England committee members remain committed doves.

Given that we don’t expect any change in the direction of monetary policy (other than perhaps becoming even more accommodative) for the remainder of this year, and that the global growth and profit stories are still very much intact, we continue to recommend equities as our preferred asset class.

Andy MacLean, CFA Private Client Strategist


Biotech: Perspective Amidst the Sell-Off

Unlike pharmaceutical companies, which rely on chemical-based synthetic models to develop their drugs, biotechnology companies tend to focus on ‘living cells’ and biological processes to create their medications. The biotechnology industry is newer and smaller than the pharma industry with weaker balance sheets and drugs that tend to spend more time in the research and development stage. Accordingly, biotech companies are more volatile and sensitive to news flow, particularly if it relates to broader government policy.

In March, the market received a powerful lesson in this reality, as the biotechnology sector sold off sharply in reaction to US lawmakers questioning the price of Gilead Sciences’ (GILD-US) new hepatitis-C drug Sovaldi. By almost every account, Sovaldi is positioned to become a massive revenue generator, and fears of cutbacks in Medicaid reimbursements have negatively affected not just Gilead shares but the entire industry as well. The NASDAQ Biotechnology Index fell 13.3% in March after advancing 43.9% over the past year. While the drug is expensive (US$84,000 for a 12-week course), cure rates are high (near 90% in clinical trials). The eventual Sovaldi pricing outcome is, of course, uncertain, but there are indications that the market may be overreacting.

Fundamental Street View

Gilead Sciences, the world’s largest biotech, with a US$109 bln market cap and a key component of most biotech indices and ETFs, has been the main focus for the market. However, over the past few weeks

There have been 13 published analyst reports with zero rating downgrades (12 Buys, one Hold).

Overall consensus EPS estimates have actually increased.

The overall NASDAQ Biotechnology Index has experienced a similar increase in EPS estimates.

Gilead Sciences: An Overreaction?


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NASDAQ Biotechnology Index: Bent But Not Broken

Source: Bloomberg


Valuation

In a research note from March 25th, Credit Suisse highlights that there shouldn’t be valuation concerns for the biotech sector particularly in the large-cap space. When the last biotech bubble collapsed in 2000, valuations were staggering. Amgen Inc. (AMGN-US), for example, traded at 56x forward earnings vs only 14x now. Further, Credit Suisse notes that “if we see a further 10.5% decline in the stock across the large caps it would place the sector at 2015 PE parity to the S&P”. This despite having more than 4x the EPS growth potential. While the large-cap biotechs have not fallen another 10.5%, even reaching near parity with the broader market may be creating a valuation support level. For the past few weeks, the sector has been holding its ground.

Technicals

Near-term technical support levels for the NASDAQ Biotechnology Index have failed and failed miserably. However, the longer-term trendlines are still intact (see chart previous page). The Index also remains well above its 200-day moving average, which is frequently seen as a key support level. Further, there have been numerous double-digit percentage corrections for the sector over the past five years and each time they have marked attractive entry points (see chart). The relative strength trendline vs. the S&P 500 has certainly weakened, indicating some market leadership has been lost, but the overall uptrend is still intact.

Final Thoughts

We looked back at the news articles from the 2000 biotech crash when Wall Street pundits were encouraging investors to focus on fundamentals and the growth potential for the sector, but the sector just continued to drop. So investors are right to be sceptical this time; however, biotech companies

are more mature now (Gilead had barely graduated from penny-stock status when the last crash occurred), and this is reflected in the far more reasonable sector valuations, particularly relative to their growth potential. It’s also worth noting that after the sharp sell-off in early 2000, the sector roared back and gained more than 60% from the lows in only a few months.

Biotechnology Growth Profile Intact


Technicals may serve as your best guide right now, however. If support fails, it’s certainly worth re-evaluating the sector. Particularly if it’s coupled with unfavourable sabre-rattling from Congress. However, just because a support level is being tested doesn’t mean it has failed. New risks don’t necessarily blur the big picture.

Doug Rowat VP, Research & Strategy

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NASDAQ Biotechnology Index

S&P 500

Largest Biotech Stocks In NASDAQ Biotechnology Index

Company Ticker Mkt Cap (US$ bln)

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(x)

1 Month Rtn (%)

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(%)

Gilead Sciences Inc GILD 109.0 3.80 5.75 51.6 18.7 12.3 -14.4 26.1

Amgen Inc AMGN 93.1 8.15 8.73 7.1 15.1 14.1 -0.5 8.4

Biogen Idec Inc BIIB 72.3 11.36 14.18 24.8 26.9 21.6 -10.2 18.6

Celgene Corp CELG 56.7 7.28 9.57 31.4 19.2 14.6 -13.2 27.9

Alexion Pharmaceuticals Inc ALXN 30.1 4.52 5.41 19.9 33.7 28.1 -14.0 N/A

Regeneron Pharmaceuticals Inc REGN 29.9 9.73 11.91 22.3 30.8 25.2 -9.7 36.3

Shire PLC SHPG 29.1 9.43 10.45 10.9 15.8 14.2 -9.8 18.1

Illumina Inc ILMN 19.1 2.06 2.54 23.1 72.1 58.6 -13.3 44.4

Mylan Inc/PA MYL 18.2 3.45 3.89 12.5 14.1 12.6 -12.1 N/A

Gilead Sciences Inc GILD 109.0 3.80 5.75 51.6 18.7 12.3 -14.4 26.1

Grifols SA GRFS 17.1 1.84 2.02 10.0 16.3 14.8 -1.9 N/A

Average 21.3 26.3 21.6 -9.9 25.7 Source: Bloomberg, Raymond James Ltd. Priced April 1, 2014.


Investing in Style

There is no one way to pick stocks. Portfolio managers abide by a variety of different investment styles in an attempt to outperform their respective market. An investment style is a specific set of rules that, if followed closely, results in a portfolio of stocks that share similar characteristics. Notable styles include deep value, high quality, momentum, and growth-at-a-reasonable-price (GARP). Research has shown that funds that remain consistent to their investment style tend to produce higher total and relative long-term returns than less consistent funds.

While loyalty is a virtue, sticking to a single investment style can lead to increased risk of underperformance, regardless of the fund’s merits. That’s because, like in the fashion industry, investment styles can fall out of favour for periods of time, despite their long-term outperformance attributes. For example, value investors underperformed growth managers by a wide margin during the ‘go-go’ days of the late 1990s. In particular, US large-cap value funds produced a 19.3% average cumulative return while US large-cap growth funds returned 83.1% from the beginning of 1998 to the end of 1999. The opposite occurred from January 2003 to July 2007, when value funds outshone their growth counterparts by over 2000 basis points.

When gaining exposure to a particular market, pairing up funds with contrasting investment styles is an effective way to mitigate volatility and produce stronger risk-adjusted returns. As one fund “zigs”, the other “zags”, producing a consistent stream of alpha. A case-in-point is growth-oriented Dynamic Power Global Growth Class and high-quality value Mackenzie Ivy Foreign Equity (Mackenzie is a member of the

Raymond James Mutual Funds Focus List). Both of these global equity funds have delivered above-average results but at different periods of time. When combined together on an equally weighted basis and rebalanced annually, this pair has produced stronger risk-adjusted results when compared to their individual track records as measured by the 10-year Sharpe and Information ratios.

Whole Greater than Sum of its Parts

Name Std Dev

Sharpe Ratio

Info Ratio*

Ann Ret (%) Quart

Mackenzie Ivy Foreign Equity

8.73 0.45 0.01 5.60 1st

Dynamic Power Global Growth Class

19.73 0.45 0.25 9.19 1st

Combined Portfolio 12.34 0.49 0.34 8.19

Source: Morningstar Inc. As of March 31, 2014 using 10 years of history.

* Information Ratio measures an investment fund’s excess return over an appropriate benchmark relative to the standard deviation of those excess returns.

In order to identify funds that work well together, they should exhibit lower correlations to each other, show opposing upside and downside capture metrics, and display differing sector biases. In the table below, we highlight well-managed funds that pair well together due to their contrasting investment styles.

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

Name Style Comments

Canadian Equity

CI Synergy Canadian Corp Class*

Growth Subadvised by Toronto-based Picton Mahoney, this fund applies a quant-driven process, focusing on earnings momentum and other growth factors.

Mackenzie Cundill Cdn Security

Deep Value Flexible mandate that allows the fund to invest in a company of any size and elevate cash levels to manage volatility. Low valuation is a primary driver of security selection.

International Equity

Invesco International Growth Class*

Growth at a Reasonable Price

This fund differs from other growth mandates as it also focuses on quality and valuation.

Renaissance International Equity

Core This fund's conservative stock-picking approach has led to strong outperformance on the downside.

US Equity

Beutel Goodman American Equity

Value The fund abides by a classic value strategy, focusing on high quality companies trading at below average valuations.

Dynamic Power American Growth*

Growth and Momentum

Lead manager Noah Blackstein employs a high turnover growth strategy that comes with excellent long term returns but coupled with high volatility, as witnessed by its 12.6% drawdown in March.

Source: Raymond James Ltd. * Raymond James Focus List Fund

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=306999


Paying Often, Pays Off

It appears that, at least anecdotally, homeowners are beginning to worry about higher interest rates on the horizon and how that may affect their mortgage decisions when it comes time to renew.

Forecasted Bond Yields in Canada


While some debate whether a fixed rate or a floating rate mortgage is the best decision (a typical floating rate mortgage would have a rate that equates to the Prime rate minus a percentage), we would argue that homeowners with mortgages would be better off focusing on other factors. Based on the overall amortization schedule of a typical mortgage, it might be best, under some circumstances, to invest extra cash flow in non-taxable accounts. Further, waiting to the end of the year to contribute to your RRSP diminishes your returns. With absolute rates so low (economists are not expecting Canadian interest rates to start rising until the 3rd or 4th quarter of 2015), a more appropriate question for individuals with mortgages might be “Should I try to pay down my mortgage faster, lowering the amortization period (typically a 15–25 year initial term), or can I earn more money overall by leaving my mortgage alone and investing at a higher interest rate in the market today?” There are always multiple factors to consider that vary from person to person and may change over time. One factor would be how well you are keeping up with your RRSP and TFSA contributions. If you have contribution room and can invest in a security with suitable characteristics (maturity, credit rating, earnings growth, dividend growth, etc.) that has a higher potential return than what you are paying on your mortgage, investing may be a better option. Extending your term, if that makes financial sense in your case, would mean a smaller periodic mortgage payment, and extra funds to invest in a non-taxable account. For example, instead of paying off a 3% mortgage quickly, you might contribute money to your RRSP, earning a higher amount. If you assume a 4-6% return for a balanced portfolio, you would be able to make the difference between what you are paying and what

you are receiving (the difference between 4-6% and 3%, or 1-3%). We do caution that doing this in a taxable account is more complicated since gains would be taxed. To make the same percentage return, you would need to earn a lot more to make up for the extra tax payment, which is dependent on your individual tax rate and what type of security you invest in.

Whether you have extra contribution room or not, all users of registered products can benefit from improving the timing of their contributions. As the table here shows, just by making a contribution earlier in the year rather than last-minute can increase your retirement nest egg potential. A good start would be to take your tax refund, or payments saved from increasing the amortization period of your mortgage, and put these cash flows directly into your RRSP. A contribution of $5,000 once a year vs. $2,500 twice yearly adds up, especially over a 25-year period. For example, if you start with a $50,000 RRSP today and invest $5,000 a year on Feb 28th for 25 years vs. investing $2,500 in August and February, the end difference is over $7,000 extra (assuming a 5% rate of return). Contributing smaller amounts even more frequently (such as monthly) shows a more dramatic effect as per the table.

Investing More Often Pays Off

Initial Amount

Annual Contribution

Freq of Contribution

Rate of Return

Value After 25

yrs

$50,000 $5,000 end of yr 5.00% $407,953

$50,000 $5,000 semi-annual 5.00% $415,566

$50,000 $5,000 monthly 5.00% $422,194

$50,000 $5,000 end of yr 7.00% $587,617

$50,000 $5,000 semi-annual 7.00% $606,741

$50,000 $5,000 monthly 7.00% $623,800 Source: Raymond James Ltd.

To summarize, if you are thinking about extending the term of your amortization schedule on your mortgage because of current attractive rates, investing the extra money in a non-taxable account may provide benefits in the long run. Also, when planning your RRSP contributions during the year, don’t wait until the last minute—just by contributing money throughout the year, or even just increasing payments to twice a year can make a dramatic difference in the size of your nest egg many years from now. To start letting your money work for you sooner, talk with your financial advisor to set-up a customized pre-authorized contribution schedule which can go directly into your RRSP or TFSA and be invested at more frequent intervals.

Harvey Libby Fixed Income

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The Central Bank Show

The USDCAD pair experienced a 5% move higher in less than two months (December 15–February 15, High 1.1228) and has the market wondering how high it can go. The initial move appeared to have followed a dovish tone out of the Bank of Canada (December 4, 2013) as Governor Stephen Poloz’s pro export stance replaced Mark Carney’s pro rate-hike stance, and quickly convinced the market that a rate lift for Canada was off the table. Three-and-a-half months later, the pair has hit some resistance but still attracts volatility any time the BoC or Fed comments on policy.

The currency pair looks to rely on their respective central banks and how close a rate increase appears to be. The ‘taper talk’ has fizzled out from the mainstream media headlines, but will be a key factor in determining a timeline for when the US may look to start increasing rates. The Fed is actively participating in a quantitative easing program and the tapering aspect of the process is not fiscal tightening but rather a decrease in the amount of stimulus. It would be unlikely for the Fed to consider a rate hike if they still have to buy assets to keep rates low.

USDCAD: Taking Direction from Central Banks


The most recent BoC/Fed meetings (March 18th

and 19th

) kept the volatility seekers happy as BoC’s Poloz was consistent with his export interests, but spiced things up after indicating that a rate cut is not out of the question. Additionally, at the FOMC Q&A press conference following the rate decision, Fed Chair Janet Yellen made a potential slip by saying that rates could rise six months after the QE taper finishes. She has since said that rate hikes would be contingent on a number of qualitative measures looking at the overall health of the economy and the 6.5% unemployment threshold that was previously included in the Fed’s forward guidance was

dropped. USDCAD moved 1.5% higher during this 48 hour period and continued to reveal the market’s current infatuation with anything central bank.

CAD and NZD: Diverging Central Bank Policies


The New Zealand dollar is another example of how a rate increase can quickly grab attention in today’s markets. The CAD and NZD have moved in the same direction vs. the USD every year since 2007. Both currencies have traditionally been similar due to each nation’s reliance on commodity exports. This year, New Zealand leads the charge after lifting rates in March, putting the NZD in first place among its 16 major peers vs. the USD. The Canadian dollar slipped into last place as the ‘rate cut’ talk has clearly weighed on CAD.

At this point, the market is approximating when the Fed will look to increase rates (median forecast – Q3 2015) and possibly provide a more clear understanding of what we can expect from the BoC (median forecast – Q3 2015). Staying tuned to the current policy from the Federal Reserve and Bank of Canada seems more relevant than ever when looking for direction on USDCAD.

Jeff Fitzgerald Foreign Exchange

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03

-Mar

-20

14

10

-Mar

-20

14

17

-Mar

-20

14

24

-Mar

-20

14

31

-Mar

-20

14

FOMC Rate Decision

BoC Rate Decision

USDCAD

60

70

80

90

100

110

120

130

140

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

CADUSD

NZDUSD


Quarterly Chart Package

Long-Term Market Returns

Source: Bloomberg, Raymond James Ltd. All return numbers greater than one year are annualized. Performance as at March 31, 2014.

Currency Level 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 10 Yr

Canada

S&P/TSX Comp CAD 14,335 0.9% 5.2% 12.1% 12.4% 7.6% 0.5% 4.5% 10.5% 5.3%

S&P/TSX Comp TR CAD 42,779 1.2% 6.1% 13.8% 16.0% 10.9% 3.6% 7.5% 13.7% 8.1%

S&P/TSX 60 Comp CAD 821 0.9% 4.7% 12.0% 12.2% 7.7% 0.5% 3.8% 9.2% 5.6%

S&P/TSX Small Cap CAD 654 -0.1% 7.1% 13.6% 11.9% 0.5% -5.8% 2.3% 13.3% 0.6%

United States

S&P 500 Comp USD 1,872 0.7% 1.3% 11.3% 19.3% 15.3% 12.2% 12.5% 18.6% 5.2%

S&P 500 Comp TR USD 3,376 0.8% 1.8% 12.5% 21.9% 17.8% 14.7% 14.9% 21.2% 7.4%

Dow Jones Ind Avg USD 16,458 0.8% -0.7% 8.8% 12.9% 11.6% 10.1% 11.0% 16.7% 4.7%

NASDAQ Comp USD 4,199 -2.5% 0.5% 11.3% 28.5% 16.5% 14.7% 15.0% 22.4% 7.7%

S&P 600 Small Cap USD 671 0.6% 0.8% 10.4% 26.3% 20.3% 14.5% 16.8% 24.7% 8.9%

International

DJ Euro Stoxx 50 EUR 3,162 0.4% 1.7% 9.3% 20.5% 13.0% 2.8% 1.9% 8.8% 1.3%

FTSE 100 (UK) GBP 6,598 -3.1% -2.2% 2.1% 2.9% 7.0% 3.7% 3.8% 10.9% 4.2%

CAC 40 (France) EUR 4,392 -0.4% 2.2% 6.0% 17.7% 13.3% 3.3% 2.5% 9.4% 1.9%

DAX (Germany) EUR 9,556 -1.4% 0.0% 11.2% 22.6% 17.3% 10.7% 11.6% 18.5% 9.5%

IBEX 35 (Spain) EUR 10,341 2.2% 4.3% 12.6% 30.6% 13.6% -0.7% -1.2% 5.8% 2.6%

CSI 300 (China) CNY 2,146 -1.5% -7.9% -10.9% -14.0% -6.5% -12.7% -10.5% -3.1% 4.5%

HANG SENG (Hong Kong) HKD 22,151 -3.0% -5.0% -3.1% -0.7% 3.8% -2.0% 1.1% 10.3% 5.7%

NIKKEI 225 (Japan) JPY 14,828 -0.1% -9.0% 2.6% 19.6% 21.3% 15.0% 7.5% 12.8% 2.4%

TOPIX (Tokyo) JPY 1,203 -0.7% -7.6% 0.7% 16.3% 18.7% 11.4% 5.3% 9.2% 0.2%

KOSPI (S. Korea) KRW 1,986 0.3% -1.3% -0.6% -1.0% -0.7% -2.0% 4.1% 10.5% 8.5%

S&P/ASX 200 (Australia) AUD 5,395 -0.2% 0.8% 3.4% 8.6% 11.6% 3.7% 2.6% 8.5% 4.7%

BOVESPA (Brazil) BRL 50,415 7.1% -2.1% -3.7% -10.5% -11.6% -9.8% -8.0% 4.3% 8.6%

BOLSA (Mexico) MXN 40,462 4.3% -5.3% 0.7% -8.2% 1.2% 2.6% 5.0% 15.6% 14.4%

Other

MSCI World USD 1,674 -0.1% 0.8% 8.4% 16.7% 13.0% 7.8% 8.7% 15.8% 4.7%

MSCI EAFE USD 1,916 -1.0% 0.0% 5.4% 14.4% 11.0% 4.0% 4.9% 12.6% 3.7%

MSCI Emerging Markets USD 995 2.9% -0.8% 0.7% -3.9% -2.3% -5.3% -0.4% 11.8% 7.5%

MSCI Far East USD 2,802 -1.8% -5.8% -3.8% 4.3% 5.8% 2.9% 2.7% 9.2% 1.3%

MSCI Europe USD 1,786 -1.3% 1.5% 9.2% 21.0% 13.8% 5.0% 6.1% 13.9% 4.3%

C$ Indices

S&P 500 Comp CAD 0.6% 5.4% 19.3% 29.6% 21.3% 17.1% 14.9% 15.5% 3.4%

S&P 500 Comp TR CAD 0.7% 5.9% 20.6% 32.3% 24.0% 19.7% 17.4% 18.0% 5.6%

Dow Jones Ind Avg CAD 0.7% 3.3% 16.6% 22.6% 17.4% 15.0% 13.3% 13.7% 3.0%

MSCI World CAD -0.2% 4.8% 16.2% 26.7% 18.8% 12.6% 11.0% 12.8% 2.9%

MSCI EAFE CAD -1.2% 4.0% 12.9% 24.3% 16.8% 8.6% 7.1% 9.7% 1.9%

MSCI Emerging Markets CAD 2.8% 3.2% 8.0% 4.4% 2.8% -1.1% 1.7% 8.9% 5.7%

MSCI Far East CAD -1.9% -2.0% 3.2% 13.3% 11.3% 7.4% 4.9% 6.3% -0.4%

MSCI Europe CAD -1.5% 5.6% 17.0% 31.5% 19.7% 9.6% 8.4% 10.9% 2.5%

Canadian Dollar USD/CAD $1.11 -0.1% 4.0% 7.2% 8.6% 5.2% 4.4% 2.1% -2.6% -1.7%


Source: Bloomberg, Raymond James Ltd. All return numbers greater than one year are annualized. Performance as at March 31, 2014.

Level 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 10 Yr

S&P/TSX GICS Sectors

Consumer Discretionary 1,544 2.7% 3.7% 11.4% 29.4% 23.2% 13.1% 13.0% 15.8% 4.9%

Consumer Staples 2,741 1.9% 6.9% 10.7% 23.4% 20.9% 17.0% 15.5% 15.0% 6.1%

Energy 3,171 4.8% 8.7% 14.0% 15.5% 7.9% -2.2% 3.4% 8.7% 7.2%

Financials 2,129 1.5% 1.9% 11.2% 17.6% 11.6% 5.7% 6.1% 15.2% 5.2%

Health Care 1,752 -6.7% 12.6% 28.1% 57.6% 44.1% 33.5% 49.0% 46.7% 9.7%

Industrials 2,048 -0.6% 1.8% 17.9% 20.9% 22.7% 13.4% 14.3% 20.2% 9.2%

Information Technology 152 -4.4% 5.6% 13.0% 22.7% 13.7% -13.2% -13.9% -5.0% -6.2%

Materials 2,262 -5.9% 9.2% 6.4% -15.1% -16.0% -17.6% -7.0% -1.5% 4.7%

Telecom Services 1,189 1.0% 3.0% 8.8% 0.7% 9.9% 11.1% 11.9% 12.6% 7.1%

Utilities 1,897 3.9% 7.5% 9.5% -1.0% -1.2% -0.4% 2.3% 7.6% 3.7%

S&P 500 GICS Sectors

Consumer Discretionary 513 -2.9% -3.2% 6.9% 22.2% 20.0% 18.5% 18.7% 27.1% 7.4%

Consumer Staples 442 1.9% -0.2% 7.7% 7.7% 12.1% 12.7% 11.3% 15.1% 6.5%

Energy 653 2.3% 0.2% 7.9% 11.8% 10.1% 3.5% 11.0% 14.0% 10.8%

Financials 301 3.1% 2.2% 12.2% 22.7% 18.9% 10.9% 8.8% 20.4% -2.7%

Health Care 677 -1.4% 5.4% 15.5% 26.9% 24.6% 20.9% 16.1% 19.1% 6.9%

Industrials 451 0.8% -0.4% 12.5% 24.5% 18.0% 11.4% 13.3% 22.7% 6.2%

Information Technology 596 0.2% 1.9% 14.8% 23.4% 9.6% 12.6% 12.2% 19.9% 6.6%

Materials 298 0.6% 2.3% 12.6% 20.5% 12.9% 6.2% 9.9% 17.4% 6.3%

Telecom Services 154 4.7% -0.7% 3.4% -2.3% 8.7% 5.0% 9.3% 8.6% 2.9%

Utilities 211 3.1% 9.0% 11.0% 6.0% 8.8% 9.2% 8.7% 10.1% 5.5%

Commodities

Energy

Crude Oil - WTI (US$/bbl) $101.58 -1.0% 3.2% -0.7% 4.5% -0.7% -1.6% 4.9% 15.4% 11.0%

Brent Crude (US$/bbl) $107.76 -1.2% -2.7% -0.6% -2.1% -6.4% -2.8% 6.8% 17.0% 13.1%

Natural Gas (US$/MMBtu) $4.37 -5.2% 3.3% 22.8% 8.6% 43.4% -0.1% 3.1% 3.0% -3.0%

Heating Oil (US$/gal) $2.93 -5.1% -4.7% -1.3% 0.6% -3.8% -1.7% 7.9% 16.9% 12.7%

Gasoline (US$/gal) $2.91 4.3% 4.5% 10.5% -6.3% -7.3% -2.2% 6.0% 15.8% NA

Coal (US$/ton) $61.33 -1.4% 5.7% 11.3% 1.7% 1.4% -7.7% 2.5% 5.0% 1.3%

Metals

Gold (US$/oz.) $1,284 -3.2% 6.5% -3.4% -19.7% -12.3% -3.6% 3.6% 6.9% 11.7%

Silver (US$/oz.) $19.77 -6.8% 1.6% -8.9% -30.5% -21.7% -19.3% 3.1% 8.8% 9.6%

Aluminum AA (US$/lb.) $0.81 1.8% -0.8% -3.3% -6.3% -8.4% -12.3% -6.4% 5.1% 0.3%

Copper (US$/lb.) $2.97 -5.2% -9.7% -9.0% -11.9% -11.3% -11.0% -3.9% 10.5% 8.3%

Nickel (US$/lb.) $7.10 8.0% 14.4% 13.9% -4.6% -5.6% -15.2% -10.7% 10.1% 1.3%

Zinc (US$/lb.) $0.89 -4.3% -3.5% 3.4% 4.5% -0.4% -5.7% -4.4% 8.5% 6.0%

Soft

Wheat (US$/bushel) $697.25 16.4% 15.2% 2.8% 1.4% 2.7% -3.0% 11.5% 5.5% 5.5%

Corn (US$/bushel) $502.00 9.7% 19.0% 13.7% -27.8% -11.7% -10.2% 9.8% 4.4% 4.6%

Sugar (US$/lb.) $17.77 7.9% 8.3% 1.7% 0.6% -15.2% -13.1% 1.7% 7.0% 10.8%

Currencies

Canadian Dollar (CAD/USD) $0.91 0.1% -3.9% -6.7% -7.9% -4.9% -4.2% -2.1% 2.7% 1.7%

Canadian Dollar (USD/CAD) $1.11 -0.1% 4.0% 7.2% 8.6% 5.2% 4.4% 2.1% -2.6% -1.7%

Euro (EUR/USD) $1.38 -0.2% 0.2% 1.8% 7.4% 1.6% -0.9% 0.5% 0.8% 1.1%

Yen (USD/YEN) 103.23 1.4% -2.0% 5.0% 9.6% 11.6% 7.5% 2.5% 0.8% -0.1%

Pound Sterling (GBP/USD) $1.67 -0.5% 0.6% 2.9% 9.6% 2.0% 1.3% 2.3% 3.1% -1.0%

U.S. Dollar Index 80.10 0.5% 0.1% -0.2% -3.5% 0.7% 1.8% -0.3% -1.3% -0.9%


Yield Curve

Economic Data

Source: Bloomberg, Raymond James Ltd. Performance as at March 31, 2014.


0.5

1.0

1.5

2.0

2.5

3.0

3.5

0 5 10 15 20 25 30

Canada

31-Mar-2014

31-Dec-2013

28-Mar-20130.0

1.0

2.0

3.0

4.0

5.0

0 5 10 15 20 25 30

U.S.

31-Mar-2014

31-Dec-2013

28-Mar-2013

-50

0

50

100

150

200

250

300

2007 2008 2009 2010 2011 2012 2013

Spread 10 Year - 2 Year

Canada

US

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2006 2007 2008 2009 2010 2011 2012 2013

GDP (y/y)

Canada

US0

20

40

60

80

100

120

2007 2008 2009 2010 2011 2012 2013

Consumer Confidence

Univ of MichUS Conference Board

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2007 2008 2009 2010 2011 2012 2013 2014

Industrial Production (y/y)

Canada

US

-3

-2

-1

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012 2013 2014

CPI y/y

Canada

US

0.5

1.0

1.5

2.0

2.5

3.0

2007 2008 2009 2010 2011 2012 2013 2014

CPI Core y/y

Canada

US

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

2007 2008 2009 2010 2011 2012 2013 2014

Unemployment Rate

Canada

US

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2007 2008 2009 2010 2011 2012 2013 2014

Retail Sales

Canada

US

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2007 2008 2009 2010 2011 2012 2013 2014

Retail Sales Less Autos

Canada

US

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2007 2008 2009 2010 2011 2012 2013

Leading Indicators

US


Charts of Interest

Markets

Commodities

Currencies


11,000

12,000

13,000

14,000

15,000

Jan

-20

12

Mar

-20

12

May

-20

12

Jul-

20

12

Sep

-20

12

No

v-2

012

Jan

-20

13

Mar

-20

13

May

-20

13

Jul-

20

13

Sep

-20

13

No

v-2

013

Jan

-20

14

Mar

-20

14

S&P/TSX Composite

S&P/TSX Composite 200-Day MA 50-Day MA

1,000

1,200

1,400

1,600

1,800

2,000

Jan

-20

12

Mar

-20

12

May

-20

12

Jul-

201

2

Sep

-20

12

No

v-2

012

Jan

-20

13

Mar

-201

3

May

-20

13

Jul-

201

3

Sep

-20

13

No

v-2

013

Jan

-201

4

Mar

-201

4

S&P 500

S&P 500 200-Day MA 50-Day MA

11,000

12,000

13,000

14,000

15,000

16,000

17,000

Jan

-20

12

Mar

-201

2

May

-20

12

Jul-

20

12

Sep

-20

12

No

v-2

012

Jan

-20

13

Mar

-20

13

May

-20

13

Jul-

20

13

Sep

-20

13

No

v-2

013

Jan

-201

4

Mar

-20

14

Dow Jones Ind Avg

Dow Jones Ind Avg 200-Day MA 50-Day MA

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Jan

-20

12

Mar

-20

12

May

-20

12

Jul-

20

12

Sep

-20

12

No

v-2

012

Jan

-20

13

Mar

-201

3

May

-20

13

Jul-

201

3

Sep

-20

13

No

v-2

013

Jan

-20

14

Mar

-20

14

Gold

Gold 200-Day MA 50-Day MA

$70

$80

$90

$100

$110

$120

Jan

-201

2

Mar

-20

12

May

-20

12

Jul-

201

2

Sep

-20

12

No

v-2

012

Jan

-20

13

Mar

-20

13

May

-20

13

Jul-

201

3

Sep

-20

13

No

v-2

013

Jan

-20

14

Mar

-201

4

Oil (WTI)

Oil (WTI) 200-Day MA 50-Day MA

$2.50

$2.70

$2.90

$3.10

$3.30

$3.50

$3.70

$3.90

$4.10

Jan

-20

12

Mar

-20

12

May

-20

12

Jul-

20

12

Sep

-20

12

No

v-2

012

Jan

-20

13

Mar

-20

13

May

-20

13

Jul-

20

13

Sep

-20

13

No

v-2

013

Jan

-20

14

Mar

-20

14

Copper

Copper 200-Day MA 50-Day MA

$0.85

$0.90

$0.95

$1.00

$1.05

Jan

-20

12

Mar

-20

12

May

-20

12

Jul-

20

12

Sep

-20

12

No

v-2

01

2

Jan

-20

13

Mar

-20

13

May

-20

13

Jul-

20

13

Sep

-20

13

No

v-2

013

Jan

-20

14

Mar

-20

14

Canadian Dollar

Canadian Dollar 200-Day MA 50-Day MA

$1.15

$1.20

$1.25

$1.30

$1.35

$1.40

$1.45

Jan

-20

12

Mar

-20

12

May

-20

12

Jul-

20

12

Sep

-20

12

No

v-2

012

Jan

-20

13

Mar

-20

13

May

-20

13

Jul-

20

13

Sep

-20

13

No

v-2

013

Jan

-20

14

Mar

-20

14

Euro

Euro 200-Day MA 50-Day MA

¥75.00

¥80.00

¥85.00

¥90.00

¥95.00

¥100.00

¥105.00

¥110.00

Jan

-20

12

Mar

-20

12

May

-20

12

Jul-

20

12

Sep

-20

12

No

v-2

012

Jan

-20

13

Mar

-20

13

May

-20

13

Jul-

20

13

Sep

-20

13

No

v-2

013

Jan

-20

14

Mar

-20

14

Yen

Yen 200-Day MA 50-Day MA


Asset Class Weightings

Profile Cash Bond Can. Equity Intl. Equity US Equity Alternative Income & Capital Pres. 40% 40% 20% 0% 0% 0%

Conservative 15% 65% 20% 0% 0% 0%

Moderate 5% 47% 15% 15% 15% 3%

Growth 0% 20% 20% 10% 40% 10%

Global Equity 0% 0% 20% 20% 45% 15%

General Asset Class Ranges

Cash Bonds Equities Alternative Income & Capital Pres. 40 – 75 15 – 40 0 – 20 0

Conservative 15 – 30 60 – 65 10 – 20 0

Moderate 5 – 10 45 – 65 25 – 45 0 – 5

Growth 0 – 5 15 – 40 50 – 70 10 – 15

Global Equity 0 0 80 – 85 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

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.

Income & Capital Preservation

Conservative

Moderate

Growth

Global Equity

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.

Cash40%

Bonds40%

Can Equity20%

Cash15%

Bonds65%

Can Equity20%

Cash5%

Bonds47%

Can Equity15%

Intl Equity15%

US Equity15%

Alt3%

Bonds20%

Can Equity20%

Intl Equity10%

US Equity40%

Alt10%

Can Equity20%

Intl Equity20%

US Equity45% Alt

15%

http://www.raymondjames.ca/researchdisclosures

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