JANUARY 11, 2013

All values in U.S. dollars unless otherwise noted.Priced as of January 11, 2013, market close

(unless otherwise stated).For Important Disclosures, see pages 5-6.

Equity Scorecard – January 11, 2013

» Japan’s Nikkei outperformed following Prime Minister Abe’s stimulus announcement. The easing of Basel III regulatory requirements prompted a surge in European bank stocks.

» RBC has modestly upgraded global and U.S. equities. Diminished policy risks and better global economic trends should provide worthwhile returns in 2013. (pages 2-3)

» We’d also add exposure to economically-sensitive cyclical sectors at the expense of defensive ones.

» Global Roundup: Analysis of the ECB meeting and updates from the U.S., Canada, and Asia Pacific. (pages 3-4)

Global Insight WeeklyRBC Wealth Management

Author Kelly Bogdanov – San Francisco, United States kelly.bogdanov@rbc.com; RBC Capital Markets, LLC

ContributorsAdrian Brown & Lucy So – Toronto, Canada adrian.brown@rbc.com, lucy.so@rbc.com; RBC Dominion Securities Inc.

Frédérique Carrier – London, United Kingdom frederique.carrier@rbc.com; Royal Bank of Canada Investment Management (UK) Ltd.

Jay Roberts – Hong Kong, China jay.roberts@rbc.com; RBC Dominion Securities Inc.

Note: Equity returns do not include dividends.

Global Insight Monthly Now AvailableMore Growth, Less Defense: Washington’s last-minute fiscal cliff compromise was far from ideal, but it substantially reduced U.S. recession risks. This development, combined with better global economic data and diminished European policy threats, have prompted us to modestly upgrade global and U.S. equities and to add cyclical exposure.

Index (local currency) Level 1 week MTD YTD

S&P 500 1,472.05 0.4% 3.2% 3.2%S&P/TSX Comp 12,602.18 0.5% 1.4% 1.4%FTSE All Share 3,209.56 0.6% 3.8% 3.8%Hang Seng 23,264.07 -0.3% 2.7% 2.7%

Dow (DJIA) 13,488.43 0.4% 2.9% 2.9%NASDAQ 3,125.64 0.8% 3.5% 3.5%Russell 2000 880.77 0.2% 3.7% 3.7%STOXX Europe 600 287.08 -0.3% 2.6% 2.6%German DAX 7,715.53 -0.8% 1.4% 1.4%Nikkei 225 10,801.57 1.1% 3.9% 3.9%Straits Times 3,216.50 -0.3% 1.6% 1.6%Shanghai Comp 2,243.00 -1.5% -1.2% -1.2%Brazil Bovespa 61,497.43 -1.6% 0.9% 0.9%

2 GLOBAL INSIGHT WEEKLY – JANUARY 11, 2013

Markets & the EconomyMarket Scorecard – January 11, 2013

Source: Bloomberg. Note: Bond yields in local currencies. Copper and Agricul-ture Index data as of Thursday’s close. Dollar Index measures USD vs. six major currencies. Currency rates reflect market convention (CAD/USD is the excep-tion). Currency returns quoted in terms of the first currency in each pairing. Data as of 9:30 pm GMT 1/11/13.

Examples of how to interpret currency data: CAD/USD 1.02 means 1 Canadian dollar will buy 1.02 U.S. dollars. CAD/USD 0.8% return means the Canadian dollar rose 0.8% vs. the U.S. dollar year to date. USD/JPY 89.16 means 1 U.S. dollar will buy 89.16 yen. USD/JPY 2.8% return means the U.S. dollar rose 2.8% vs. the yen year to date.

Most equity markets consolidated during the weak amid fairly quiet trading activity, although China and Germany underperformed.

The Shanghai Composite fell 1.8% on Friday following stronger-than-expected food inflation data, which pushed up consumer prices. We expect inflation to rise moderately in 2013.

More importantly, the country’s robust December export and import growth not only indicate China’s economy is gaining momentum, but are further evidence the global economy is on the mend.

Germany’s DAX, a big winner in 2012, stumbled as November factory orders, industrial production, exports, and imports fell short of expectations. The industrial engine of Europe suffered its steepest monthly decline in exports in more than a year.

Even though Germany’s economy seems to be slowing further and the European region remains in recession, sentiment has improved recently (see chart).

Across various regions, European bank stocks were among the best-performing groups. The STOXX 600 Banks Index rose 4.3% for the week, mostly due to the announcement banks will have four more years to meet the Basel III global regulations, and, importantly, the associated capital and liquidity requirements will be much-less stringent.

Spain’s strong bond auction also helped set a positive tone for European banks. Spain’s 10-year sovereign bond rallied forcefully, and the yield fell 17 basis points for the week to 4.89% by Friday, its lowest level since March 2012.

Corporate earnings will likely occupy investors’ attention during the next few weeks.

Source - RBC Wealth Management, Bloomberg, European Commission

60

70

80

90

100

110

120

2007 2008 2009 2010 2011 2012

Govt Bonds (bps chg) Yield 1 week MTD YTDUS 2-Yr Tsy 0.245% -1.9 -0.2 -0.2US 10-Yr Tsy 1.862% -3.7 10.5 10.5Canada 2-Yr 1.194% -1.3 5.3 5.3Canada 10-Yr 1.941% 0.3 14.3 14.3UK 2-Yr 0.396% -6.2 7.3 7.3UK 10-Yr 2.082% -3.7 25.4 25.4Germany 2-Yr 0.134% 5.9 14.9 14.9Germany 10-Yr 1.583% 4.7 26.7 26.7 Commodities (USD) Price 1 week MTD YTDGold (spot $/oz) 1,662.60 0.4% -0.8% -0.8%Silver (spot $/oz) 30.46 0.8% 0.4% 0.4%Copper ($/ton) 8,084.25 0.4% 2.2% 2.2%Oil (WTI spot/bbl) 93.56 0.5% 1.9% 1.9%Oil (Brent spot/bbl) 111.82 -0.8% -0.9% -0.9%Natural Gas ($/mlnBtu) 3.18 -0.2% -7.4% -7.4%Agriculture Index 443.83 1.1% -1.7% -1.7% Currencies Rate 1 week MTD YTD

US Dollar Index 79.56 -1.2% -0.3% -0.3%CAD/USD 1.02 0.3% 0.8% 0.8%USD/CAD 0.98 -0.3% -0.8% -0.8%EUR/USD 1.33 2.1% 1.1% 1.1%GBP/USD 1.61 0.4% -0.8% -0.8%AUD/USD 1.05 0.5% 1.4% 1.4%USD/CHF 0.91 -1.2% -0.2% -0.2%USD/JPY 89.16 1.1% 2.8% 2.8%EUR/JPY 118.94 3.2% 3.9% 3.9%EUR/GBP 0.83 1.7% 1.9% 1.9%EUR/CHF 1.22 0.8% 0.9% 0.9%USD/SGD 1.23 -0.2% 0.3% 0.3%USD/CNY 6.22 -0.2% -0.2% -0.2%USD/BRL 2.03 0.1% -0.9% -0.9%

The current S&P 500 consensus forecast, which incorporates those companies that have already reported, currently stands at 1.9% year-over-year growth, according to Thomson Reuters I/B/E/S. That’s down considerably from the roughly 9% consensus forecast of last October, so expectations are now much more reasonable.

Among the handful of companies that have reported fourth-quarter results, a slightly higher-than-usual proportion have exceeded earnings expectations (albeit, some were lowered expectations).

RBC Upgrades Global and U.S. EquitiesThe recent removal of many U.S. fiscal cliff risks, combined with modest improvement in Asian economic data and diminished European policy challenges, have prompted us to upgrade our overall global and specific U.S. equity recommendations to “neutral with a positive bias” from “neutral.” We maintained our weightings for other markets (see next page, top table).

Is Eurozone Economic Sentiment Turning the Corner?

Sentiment Has Risen Modestly for Two Straight Months

3 GLOBAL INSIGHT WEEKLY – JANUARY 11, 2013

Markets & the Economy

Global RoundupUnited States• Amid modest gains for the S&P 500 and

other major indices, sector activity was mixed. Health Care led for the week, and Telecommunications and Utilities lagged.

• The fourth-quarter earnings season officially began with aluminum-giant Alcoa. Earnings and revenue results came in close to expectations. Alcoa is not a bellwether company, per se, but its management team’s economic outlook carries weight with investors. Alcoa’s CEO said conditions in China are improving. Demand from other “BRIC” nations should also accelerate.

• Wells Fargo beat earnings expectations on a lower-than-expected tax rate. Earnings climbed 24% and revenue rose 7% year over year. However, the net interest margin dropped 10 basis points from last quarter to 3.56%. Wells Fargo’s profitability, like many banks, remains hampered by low interest rates.

• The U.S. trade deficit was wider than economists’ expected (-$48.7B vs. -$41.3B estimate). That means many economists are likely to reduce their GDP estimates. It could end up being a rather tepid fourth quarter.

• Coming up: Retail Sales (Jan 15); Earnings from JPMorgan Chase, Goldman Sachs (Jan 16), Bank of America, Citigroup, Intel (Jan 17), and General Electric (Jan 18).

Canada• Canadian equity markets were modestly higher

during the week, with little macro economic news. Healthcare and Industrial names outperformed, while the Telecommunications space sold off.

These upgrades translate into raising the equity weighting in portfolios to slightly above the long-term target allocation. For most portfolios, it means carrying an equity allocation that is roughly 2%-3% above the normal benchmark allocation.

We also recommend shifting the mix of equity holdings within portfolios. We would increase exposure to economically-sensitive cyclical sectors and decrease exposure to defensive ones. Even though our specific sector weightings are for the U.S. and Canadian markets (see bottom table), the pro-cyclical orientation applies broadly to portfolios across markets.

Washington’s last-minute tax compromise substantially reduced our greatest lingering policy concern—the risk of a U.S. recession. Even though the country’s fiscal drag could end up being between 1.5% and 2.0% of GDP growth in 2013, greater than the 1% drag in 2012, we believe the U.S. economy can avoid a recession.

Private sector activity should contribute at least 3% to overall growth with the help of stronger housing and labor markets, and could even push up toward a 4% contribution if capital spending rebounds.

Furthermore, global GDP growth should accelerate modestly in 2013 compared to 2012 with greater momentum coming from emerging economies.

Equity valuations are undemanding, with select Continental European and Asian markets still relatively inexpensive. Canadian and U.S. markets are reasonably valued.

Global equity indices should be able to deliver moderate earnings growth in 2013, mainly because U.S. earnings (the largest component in the total mix) should post mid single-digit gains, while emerging markets are capable of posting even stronger growth.

We acknowledge the upcoming U.S. debt ceiling and spending debates could disrupt global markets at times, possibly creating periods of

weakness in equities. At this juncture, we expect any related equity market corrections to represent buying opportunities. We believe the debt ceiling and other spending issues will ultimately be resolved—even if it’s a torturous process.

For additional information, please see the new January Global Insight report.

Regional Equity Weightings

Source - RBC Wealth Management

Source - RBC Capital Markets

Global Neutral with Positive Bias

United States Neutral with Positive Bias

Canada Neutral

Continental Europe Neutral

United Kingdom Neutral

Asia (excluding Japan) Overweight

Japan Neutral

Equity Sectors United Sates S&P 500

Canada S&P/TSX

Consumer Discretionary Market Weight Market Weight

Consumer Staples Underweight Underweight

Energy Market Weight Overweight

Financials Overweight Underweight

Health Care Underweight Market Weight

Industrials Overweight Overweight

Information Technology Overweight Market Weight

Materials Overweight Overweight

Telecom. Services Underweight Underweight

Utilities Underweight Underweight

Sector Recommendations

4 GLOBAL INSIGHT WEEKLY – JANUARY 11, 2013

Global Roundup

• There were a few events in the Industrials space that stood in the spotlight. First, Canadian Pacific Railway hit a new 52-week high after the company announced it had signed a five-year contract with global partners to deliver 50,000 barrels of Bakken crude to its refinery in New Jersey. Second, Finning International announced the departure of CEO Mike Waites. Finally, TransCanada ended the week strong after the company announced it had been selected by Progress Energy Canada to build, own, and operate a new pipe project worth C$5 billion.

• The Canada yield curve steepened during the week as federal bonds with maturities of 10 years or greater saw their yields increase, while short-term bonds with maturities less than five years saw their yields decline slightly.

• Building permits in November dropped by 17.9% month over month, well below consensus forecasts that called for a 5.0% decline. While permits were robust in October, rising by 15.9%, the November decline marked the lowest level of activity since January 2012. The decrease was primarily a result of diminished construction intentions in the non-residential and residential sectors in Ontario.

• Coming up: Bank of Canada Senior Loan Officer Survey (Jan. 14); Existing Home Sales (Jan.15), Manufacturing Sales (Jan. 18).

Europe• The European Central Bank’s (ECB) statement

and press conference are likely to have dampened market expectations of further rate cuts. Lower bond yields, higher stock prices, record-low volatility, strong capital inflows into the eurozone, a halt of deposit flight in peripheral countries, and a reduction of the ECB’s balance sheet were all cited as market improvements. The ECB’s economic assessment has shifted towards a slightly more optimistic view of the world.

Asia Pacific• After a 16.5% rally in December, Shanghai’s

A-share index was down 1.1% for the week, while Japan’s Nikkei continued to power on, up 1% for its ninth consecutive week of gains. The Nikkei hit a 2012 low of 8,295 on June 4. Friday’s close of 10,801 represents a 30.2% increase, despite the fact that the Japanese economy has been in recession over this period.

• The majority of the Nikkei’s rally has occurred since November, after the general election was called. On Friday, Prime Minister Shinzō Abe announced a US$116 billion stimulus package. Most of the package is targeted at disaster prevention and reconstruction as well as boosting private investment. The government forecasts this will add 2% to Japanese growth and create over 500,000 jobs. The yen has continued to weaken against the dollar and is down nearly 8% since the start of December.

• The Chinese economy continues to improve. Indeed, an RBC Capital Markets report asked the question, “Landing or take off?” concerning the world’s second-largest economy. This is a clear step away from the early 2012 debate on whether the Chinese economy would have a soft or hard landing. December exports rose 13% year over year, much higher than forecast, although the data series remains choppy. The Chinese renminbi rose to its highest level against the U.S. dollar in nearly 20 years.

• Chinese inflation rose 2.5% in December, slightly higher than forecast, but unlikely high enough to change monetary policy. Investors should expect inflation to moderately increase through the year as favourable base effects wear off and food prices rise.

• Indonesia kept its benchmark rate on hold at 5.75%. Inflation is unlikely to warrant a rate increase, given the relatively benign official inflation outlook.

• Yet, ECB President Mario Draghi made clear the Governing Council is not presently thinking about an exit from its non-standard measures. He conceded, however, there were no signs of an improvement of the real economy and that any recovery in the course of the year would be subdued.

• RBC economists remain comfortable with their ECB key policy rates forecast of unchanged rates throughout 2013, though further easing is possible if there is material downside news on the macro economic outlook over the next few months.

• Bank of England also opted to maintain its monetary policy stance, keeping interest rates on hold and bringing no change to the £375 billion asset purchase programme. Tentative evidence that the Bank’s Funding for Lending Scheme is beginning to bear fruit, spurring mortgage lending and lending to small companies, and sticky inflation outweighed concerns over recent disappointing data.

• Coming up: Euro area Industrial Production (Jan 14); German GDP, UK Consumer Price Index (Jan 15).

Source - RBC Wealth Management, Bloomberg; Eurozone data through November 2012, North American data through December 2012.

Eurozone Unemployment Has Reached Another New High and Continues to Diverge from its North American Peers

Unemployment Rates (%)

11.8 %

7.8 %7.1 %

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

EurozoneUnited StatesCanada

5 GLOBAL INSIGHT WEEKLY – JANUARY 11, 2013

Important DisclosuresAnalyst 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.

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Rating Count % Count %Buy (TP/O) 793 51.07 272 34.30Hold (SP) 688 44.30 177 25.73Sell (U) 72 4.64 8 11.11

Investment Banking Serv ices Prov ided During Past 12 Months

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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, approximately 10% of analyst’s recommendations. 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 Qualifiers:Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; no significant cash flow/financing concerns over coming 12-24 months; and/or fairly liquid.

Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; may not be suitable for a significant class of individual equity investors; may have negative cash flow; and/or low market cap or float.

6 GLOBAL INSIGHT WEEKLY – JANUARY 11, 2013

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