NA Equity Strategy Q1 14

Report prepared by:

Ryan Lewenza, CFA, CMT

North American Equity Strategist

2014 Year-End Forecast

Index EPS P/E Price

S&P 500 Index $115.50 17.0 1,960

S&P/TSX

Composite Index $875 16.7 14,650 ↑

Sector Recommendations

Sector U.S. Canada Preference

Financials Over Over U.S.

Consumer

Discretionary Under Market Canada

Industrials Over Over U.S.

Information

Technology Over Over U.S.

Energy Market Over ↑ Canada

Materials Under Under Canada

Health Care Over Under ↓ U.S.

Consumer

Staples Market Market Canada

Utilities Under Under Canada

Telecom

Services Under Under Canada

Source: Portfolio Advice & Investment Research

Over=Overweight

Under=Underweight

Market=Marketweight

↑ = Upgrade

↓ = Downgrade

This Document is for distribution to Canadian

clients only.

Please refer to Appendix A of this report for important

disclosure information.

Q2/14 Equity Market Update

Highlights

North American equities were up in Q1/14, led by the Canadian

market. The S&P/TSX Composite Index (S&P/TSX) posted a gain

of 5.2%, while the S&P 500 Index (S&P 500) advanced a more

modest 1.3%. From a style perspective, small caps

underperformed in the U.S. (outperformed in Canada), while

value trumped growth.

We are upgrading the Canadian energy sector to overweight. Our

constructive outlook for the energy sector has led to an increase

in our year-end price target for the S&P/TSX to 14,650, from

14,250. Our S&P 500 price target remains unchanged at 1,960.

Most leading economic indicators we track are pointing to a

recovery in economic momentum and growth in the coming

quarters. Key areas of the U.S. economy continue to improve,

supporting TD Economics’ forecast for GDP growth of 2.7% in

2014, up from 1.9% in 2013. Canada’s economy should benefit

from the improving U.S. economy, but the slowdown in China is

likely to weigh on our heavy resource-based economy.

Valuations for the North American equity markets have expanded

markedly since the 2009 market lows, and are now at premiums

to their long-term averages. Despite this, we continue to forecast

additional gains for 2014, driven by improving corporate earnings.

The technical outlook for the North American equity markets

remains positive. The S&P 500 is in a long-term uptrend and

above its rising 50-week moving average (MA). The S&P/TSX

broke above an importance resistance level of 12,900 in Q4/13,

and is above key MAs. However, it is now trading at stiff

resistance at 14,300, and we believe commodity prices will need

to trend higher for the S&P/TSX to break above this level.

We maintain a cyclical bias, preferring the industrials, financials

and information technology sectors. These sectors stand to

benefit from an improving global economy, rising interest rates,

and our expectations for a ramp up in corporate spending in the

coming quarters. We are increasing our cyclical stance in Canada

by upgrading the energy sector to overweight, and downgrading

the health care sector to underweight.

April 14, 2014

North American Equity Strategy April 14 , 2014

Page 2

Indices Q1 Return 2013 Return

S&P 500 1.3% 29.6%

Dow Jones Industrials -0.7% 26.5%

Small Cap (Russell 2000) 0.8% 37.0%

Growth (Russell 1000) 0.7% 31.2%

Value (Russell 1000) 2.4% 29.4%

S&P/TSX Composite 5.2% 9.6%

S&P/TSX Small Cap 7.1% 4.4%

Q1 Sector Performance U.S. (S&P 500) Canada (S&P/TSX)

Financials 2.2% 1.9%

Consumer Discretionary -3.2% 3.7%

Industrials -0.4% 1.8%

Information Technology 1.9% 5.6%

Energy 0.2% 8.7%

Materials 2.3% 9.2%

Health Care 5.4% 12.6%

Consumer Staples -0.2% 6.9%

Utilities 9.0% 7.5%

Telecom Services -0.7% 3.0%

Q2/14 Equity Market Update

North American equities were up in the first quarter, led by the

Canadian market. The S&P/TSX posted an impressive gain of

5.2%, while the S&P 500 advanced a more modest 1.3% (Exhibit

1). From a style perspective, small caps underperformed in the

U.S. (outperformed in Canada), while value trumped growth in

the quarter. In recent weeks, there has been a notable rotation

from high growth momentum stocks into value stocks such as

U.S. large-cap technology and Canadian energy shares. Given

our expectations for improving economic growth, and interest

rates to slowly move higher in the coming months, we believe

value could continue to outperform growth. This is one factor in

our decision to upgrade the Canadian energy sector to

overweight. Our more constructive outlook for the energy sector

(26% weight in the S&PT/TSX) has led to an increase in our year-

end price target for the S&P/TSX to 14,650, from 14,250. Our

S&P 500 price target remains unchanged at 1,960.

On a sector basis, defensive sectors generally outperformed the cyclical sectors in Q1/14, with utilities, up 9% in the U.S.

and 7.5% in Canada, followed by strong performance in the health care sector, up 5.4% in the U.S. and 12.6% in Canada.

The U.S. consumer discretionary sector underperformed the most this past quarter, down 3.2%, while the industrials were

the weakest in Canada advancing 1.8%. The telecommunications services and financials sectors also underperformed in

the quarter.

Remaining bullish but see potential weakness in the summer/fall period

We believe the North American equity markets will be higher by year-end, and continue to forecast high single-digit total

returns for 2014. This view is predicated on our expectations for: 1) economic growth to improve following a weather-

induced slowdown; 2) improved corporate earnings growth, following an anticipated challenging Q1/14 earnings season;

3) the Federal Reserve (Fed) to leave the federal funds rate unchanged until the spring/summer of 2015. Additionally,

equity valuations, while above their long-term averages, are not at levels typically associated with major market tops. That

said, the North American equity markets could encounter some headwinds in the second or third quarter of 2014, which

we would view as a buying opportunity. First, the weak seasonal period of May to September is quickly approaching

(Exhibit 2). Since 1990, the May through September period has returned on average -0.17%, versus 8.20% for the

October to April period. Moreover, in years with a U.S. mid-term election, the summer has historically been even weaker,

declining 2.5% on average in Q2, mainly driven by poor performance in June. Finally, while we expect the Fed to keep

interest rates unchanged until next year, equity markets will likely begin to price in a 2015 rate increase sometime in

H2/14. Historically, the S&P 500 has typically pulled back an average of 6.5% in the six-months preceding the first federal

funds rate hike. Therefore, with weak seasonality approaching, and the equity markets likely to price in a federal funds

rate hike in H2/14, we expect increased volatility over the next quarter or two. However, this is likely to provide another

buying opportunity, within the context of the cyclical bull market.

Exhibit 2: S&P 500 is approaching weak seasonal period; S&P 500 typically declines 6.5% before first Fed hike

0.28%

-0.08%

1.44%

1.72%

0.98%

-0.56%

0.77%

-1.01%

-0.34%

1.48% 1.43%

1.93%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

S&P 500 Monthly Price Return

Exhibit 1: Q1/14 Price Returns

Source: Bloomberg Finance L.P. As of April 1, 2014 Source: Bloomberg Finance L.P. As of April 1, 2014

Period is 1990 to current based on monthly return data

Source: Bloomberg Finance L.P. As of April 1, 2014

Date of First

Fed Hike 6 Months Before 6 Months After

2-May-83 -7.5% -6.9%

16-Dec-86 -9.5% -9.3%

4-Feb-94 -2.7% -6.8%

30-Jun-99 -7.1% -9.9%

30-Jun-04 -5.6% -6.5%

Average -6.5% -7.9%

Max correction


Page 3

Economic Update

As North America emerges from the deep freeze experienced over the winter, we expect economic momentum to improve

following the weather-induced Q1/14 slowdown. According to the U.S. National Weather Service, the December to

February period was the coldest in 20 years. From record high flight cancelations to the Fed’s Beige Book update, which

mentioned weather 119 times, the severe winter weather impacted consumer spending and economic activity in recent

months. Coincident with rising temperatures, we believe more recent economic releases are beginning to capture the

improving economic momentum. U.S. light vehicle sales rebounded sharply in March, following a marked slowdown in the

December to February period. In March, vehicle sales rose to 16.3 million units annualized, up from February’s

disappointing 15.3 million units, and the highest level since February 2007 (Exhibit 3). Recent manufacturing data has

also shown improved strength, with the Philadelphia Federal Manufacturing Index (Philly Fed) bouncing back to 9 in

March, from -6.3 in February and the national ISM Manufacturing Index (ISM) rising 0.5 to 53.7 in March. Given the Philly

Fed Index typically troughs before other regional manufacturing indices, and the ISM manufacturing new orders sub-index

remains strong, we believe the U.S. manufacturing sector is approaching an inflection point, and should improve in the

coming months. Finally, on the employment front, initial jobless claims recently declined to new cycle lows of 317,000 (4-

week MA), while nonfarm payrolls rebounded to 192,000 in March, nudging the 12-month average up to a respectable

187,000.

Exhibit 3: U.S. vehicle sales rebound in March; U.S. jobless claims decline to lowest level in years

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

Feb-12 Aug-12 Feb-13 Aug-13 Feb-14

U.S. Total Light Vehicle Sales (SAAR) (in millions)

Other economic indicators we track are pointing to a potential improvement in economic data in the coming months. The

U.S. Citigroup Surprise Index, which tracks economic releases relative to expectations, has bottomed in the

spring/summer in each of the last four years (Exhibit 4). We believe this could play out again this year. Many of the major

economies we track are accelerating, with Purchasing Managers Index (PMI) readings well above the 50 boom/bust level,

and up from weaker readings six months ago. China is the exception, with the region clearly decelerating. From our

perspective, both U.S. and global economic data are pointing to an improvement in the coming months.

Exhibit 4: U.S. economic momentum set to improve; Global PMI heat map points to economic acceleration

-150

-100

-50

0

50

100

150

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Citigroup U.S. Economic Surprise Index



Global PMIs 1 Month 3 Months 6 Months

Current Ago Ago Ago

Global 53.3 53.0 53.1 51.6

U.S. 53.7 53.2 56.5 56

Canada 57.2 56.8 53.7 51

Japan 53.9 55.5 55.2 52.5

U.K. 55.3 56.2 56.9 56.4

Euro zone 53.0 53.2 52.7 51.1

Germany 53.7 54.8 54.3 51.1

France 52.1 49.7 47.0 49.8

Italy 52.4 52.3 53.3 50.8

China 50.3 50.2 51.0 51.1

>= 52 52 to 50 <= 50


200

300

400

500

600

700600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

S&P 500 & U.S. Initial Jobless Claims

S&P 500 (LHS)

U.S. Initial Jobless Claims 4-Week MA (RHS)

(inverted)


Page 4

We expect Canadian economic activity to pick up in the coming quarters. The weak Canadian dollar and expected

improvements in the U.S. economy could bode well for the Canadian manufacturing sector and exports. However, this

could be tempered by a continued slowdown in China, which would lessen incremental demand for commodities — a

headwind for a resource-based economy. Looking at recent economic releases, the Canadian economy added a robust

43,000 jobs in March, following a recent string of poor reports. The 3-month MA (used to smooth the volatile monthly

results) has turned up and could be signaling more robust employment gains in the coming months. Recent

manufacturing data (Ivey and RBC/Markit) have also improved, with both indicators comfortably above the 50 boom/bust

level. Finally, the OECD Leading Indicator Y/Y continues to trend higher, pointing to Canadian GDP growth of 2% or

higher.

Exhibit 5: Canadian economy created 43,000 jobs in March; OECD Canada CLI index is improving

-40

-30

-20

-10

0

10

20

30

40

50

60

-60

-40

-20

0

20

40

60

80

100

120

Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13

Canadian Labour Force Net Change

Monthly Change

3-Month MA

(in thousands)

Key Point: Most leading economic indicators we track are pointing to a recovery in economic momentum and growth in

the coming quarters. Key areas of the U.S. economy continue to improve, supporting TD Economics’ forecast for GDP

growth of 2.7% in 2014, up from 1.9% in 2013. Canada’s economy should benefit from a strengthening U.S. economy, but

the slowdown in China is likely to continue to weigh on Canada’s heavy resource-based economy.


Trend Restored

-4

-2

0

2

4

6

8

10

12

'80 '84 '88 '92 '96 '00 '04 '08 '12

OECD Canada Leading Indicator Y/Y



Page 5

Fundamental Update

With the S&P 500 up 170% since the March 2009 lows and 30% in 2013, equity valuations have expanded markedly, with

some analysts pointing to limited upside in equities as a result. While we believe equity returns are likely to be more

modest, we do not believe the elevated valuations are pointing to an imminent market top. We continue to forecast high

single-digit total returns for the North American equity markets in 2014, driven by earnings growth rather than an

expansion in valuations. Given the growing discussion about valuations becoming stretched we examined their current

state and conclude that the U.S. stock market is moderately overvalued.

The most common and traditional valuation metric is the trailing or forward price-to-earnings (P/E) ratio. Currently, the

S&P 500 is trading at 17.3x trailing earnings, which is 5.4% above its long-term average (Exhibit 6). On a forward basis,

the S&P 500 is trading at 16.0x, which is a 3.5% discount to its average. The S&P 500 is trading at 2.6x price-to-book

(P/B), which is an 8.6% discount to its long-term average. Two long-term valuation metrics that are particularly extended

include the Cyclically Adjusted P/E ratio (CAPE) and the total U.S. equity market capitalization to U.S. GDP ratio. The

CAPE compares stock prices to their 10-year average earnings, and is indicating the stock market is expensive at 25.4x,

a 54% premium to its long-term average. This metric is often cited by the equity bears as a sign of a frothy market that is

destined for a steep decline. We ascribe less weight to this measure because it has proven to be a poor timing model and

its reliability is questionable. Since 1990 the CAPE has been below the long-term average just 5% of the time (i.e.

“overvalued” 95% of the time), while the S&P 500 has delivered a total return of 785% (9.4% annually). Finally, the total

U.S. market capitalization to U.S. GDP ratio is also elevated at 1.15x, which is 62% above its long-term average.

However, similar to the CAPE, this metric has generally been above its long-term average since the 1990s. Although

valuations have expanded, with most measures now above their long-term averages, it does not necessarily imply an

imminent top or a looming material market decline, in our view.

Exhibit 6: S&P 500 valuations are moderately overvalued and the total U.S. market cap to GDP ratio is elevated

S&P 500 Index Long-term % Above

Valuation Metric Current Average /Below Average

Trailing P/E 17.3 16.4 5.4%

Forward P/E 16.0 16.5 -3.5%

EV/EBITDA 10.6 10.3 3.1%

P/Sales 1.7 0.9 86.4%

P/Cash Flow 9.2 7.1 29.7%

P/Book Value 2.6 2.9 -8.6%

U.S. Market Cap to GDP 1.2 0.7 61.8%

CAPE 10-Year P/E 25.4 16.5 54.2%

Corporate profits, which are also a key driver of equity returns, have been overshadowed by the expansion in valuations.

Total U.S. corporate profits increased 8% Y/Y in Q4/13 to a new record high US$1.74 trillion (Exhibit 7). This broad

measure of U.S. corporate profits includes all U.S. companies, capturing the undeniable strength of Corporate America.

Alternatively, looking at a more narrow measure, S&P 500 earnings are up 86% since the 2008 low, and are projected to

rise 8% Y/Y to US$117.50 in 2014. Although our forecast for S&P 500 2014 earnings is slightly lower at US$115.50 (7%

Y/Y), we believe corporate profits will remain robust and support equities going forward. Crucially, the rally in the S&P 500

has largely kept pace with growth in corporate profits, as seen by the tight fit between the S&P 500 and its earnings

stream (Exhibit 7). This is an important piece of the puzzle that is often overshadowed by concerns about valuations.

Exhibit 7: U.S. corporate profits are hitting new highs; S&P 500 rally has tracked the rise in earnings

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

'71 '76 '81 '86 '91 '96 '01 '06 '11

U.S. Total Market Cap Relative to U.S. GDP

Jun 07 1.05x

Mar 001.42x

Current 1.15x

(in billions)


Source: Datastream. As of April 1, 2014

Includes IVA and CCA adjustment Source: Bloomberg Finance L.P. As of April 1, 2014

Long-term Average

$0

$20

$40

$60

$80

$100

$120

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

'00 '02 '04 '06 '08 '10 '12 '14

S&P 500 Index and Earnings

S&P 500

S&P 500 Trailing 12-Month Earnings


Page 6

Similar to the U.S., Canadian equity valuations are moderately overvalued relative to historic levels. However, the outlook

for S&P/TSX earnings appears challenged, driven in part by negative earnings revisions in the volatile materials sector.

Currently, the S&P/TSX is trading at 19.4x trailing earnings, which is 2.5% above its long-term average of 18.9x (Exhibit

8). On a forward basis, the S&P/TSX appears more attractive trading at 15.8x, a modest premium to its average of 15.5x.

However, this is based on the consensus estimate of roughly $900, which we believe is too high. On our 2014 earnings

forecast of $875, the S&P/TSX trades at 16.3x. On a price to cash flow basis, the S&P/TSX trades at 8.2x, a 19%

discount to its long-term average. This is arguably a better metric for the S&P/TSX, given its volatile earnings stream. On

a P/B basis, the S&P/TSX trades at 2x, which is in-line with its long-term average. Overall, we believe the S&P/TSX is

overvalued, but less so when compared to the S&P 500. For the S&P/TSX to maintain its strong price trajectory, we

believe earnings will need to improve and with forward earnings estimates continuing to decline this may prove to be a

challenge.

Exhibit 8: S&P/TSX is moderately overvalued; S&P/TSX earnings estimates continue to trend lower

S&P/TSX Index Long-term % Above

Valuation Metric Current Average /Below Average

Trailing P/E 19.4 18.9 2.5%

Forward P/E 15.8 15.5 1.8%

EV/EBITDA 11.3 8.5 33.5%

P/Sales 1.8 1.3 35.8%

P/Cash Flow 8.2 10.2 -19.1%

P/Book Value 2.0 2.0 0.6%

Key Point: Valuations for the North American equity markets have expanded markedly since the 2009 market lows, and

are now at premiums to their long-term averages. Despite this, we continue to forecast additional gains for 2014, driven by

improving corporate earnings.


$800

$850

$900

$950

$1,000

$1,050

$1,100

$1,150

$1,200

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

S&P/TSX Composite Annual EPS Estimates

2014E = $901.26

2013 = $842.50

2015E = $1,015.96


Page 7

Technical Considerations

The U.S. equity markets have pulled back from their recent highs, with the Nasdaq Composite (Nasdaq) bearing the brunt

of the weakness. The Nasdaq is off 6% from its highs, and more importantly, has broken below its year-and-a-half uptrend

(Exhibit 9). Currently trading around the 4,100 level, the Nasdaq needs to hold its 200-day moving average (MA) at 3,925,

otherwise, a break below its MA could be a warning sign of a potentially larger correction. The S&P 500 remains in a very

bullish uptrend, and above key MAs. We believe there is an ongoing rotation within the stock market from high growth

momentum stocks to more defensive laggards. This could explain why the S&P 500 has held up much better than the

Nasdaq or the small-cap Russell 2000 Index. While we see the potential for some weakness in the summer months, we

maintain our bullish stance on U.S. equities, with the S&P 500 in a long-term uptrend, and above its rising 50-week MA,

currently at 1,742. To become more cautious on the U.S. equity markets, we need to see the S&P 500 break below its 50-

week MA, the cyclical sectors, notably financials break down, and the NYSE Advance/Decline line head lower. Until these

conditions are met, we will maintain our bullish long-term technical outlook for the U.S. equity market.

Exhibit 9: Nasdaq composite broke below its uptrend; S&P 500 remains in an uptrend and above its 50-week MA

2,700

2,900

3,100

3,300

3,500

3,700

3,900

4,100

4,300

4,500

Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14

Nasdaq Composite

Nasdaq Comp

50-day MA

200-day MA

The technical profile for the S&P/TSX has improved since it broke above key technical resistance of 12,900 in Q4/13. The

S&P/TSX is trading above its rising 200-day MA, with key sectors, such as financials and energy leading the Canadian

market. However, the S&P/TSX is now trading at an important resistance level of roughly 14,300, which dates back to the

2011 and 2007 highs. Given its technical importance, the S&P/TSX could oscillate around this level for some time.

The CRB Commodity Index recently broke above its three-year downtrend, which is bullish; however, the industrial

commodities, such as copper and steel remain weak. For the S&P/TSX to break decisively above 14,300, we believe

commodity prices, particularly the industrial commodities, will have to move higher. Should this occur, we would likely

revisit our forecast for the S&P 500 to outperform the S&P/TSX this year.

Exhibit 10: S&P/TSX is trading at stiff resistance; Commodities breakout, but industrial commodities remain weak

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

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

S&P/TSX Composite Index

S&P/TSX

200-day MA

Resistance

Key Point: The technical outlook for North American equity markets remains positive. The S&P 500 is in a long-term

uptrend and above its rising 50-week MA. The S&P/TSX is trading at resistance and we believe commodity prices will

need to trend higher for the S&P/TSX to break above this important 14,300 level.



250

270

290

310

330

350

370

390

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

CRB Commodity Index

CRB Index

200-day MA

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13

S&P 500 Index

S&P 500

50-week MA


Page 8

Sector Positioning

We are making two changes to our Canadian sector recommendations: upgrading the energy sector to overweight and

downgrading health care to underweight. The upgrade in the energy sector to overweight is based on: 1) narrowing crude

differentials between the Western Canadian Select benchmark and the West Texas Intermediate (WTI) oil benchmark; 2)

an improving earnings outlook; and 3) the sector’s improving technical profile following a break above its long-term

relative downtrend. The downgrade of the heath care sector to underweight is due to: 1) lofty 2014 earnings expectations;

2) valuation concerns with the sector trading at a 21.4x trailing earnings multiple and 5.1x P/B ratio (180% to five-year

average); and 3) the sector’s weakening technical profile.

We are not any making changes to our U.S. sector recommendations. Exhibit 11 outlines our specific sector

recommendations for the Canadian and U.S. equity markets.

Exhibit 11: U.S. and Canadian sector recommendations

Stance Rationale Stance Rationale

Financials Overweight

• Stronger labour and housing markets should support loan

growth

• Preference is for U.S. financials given more attractive

valuations and frothy Canadian housing market

Overweight

• Economic conditions should support steady EPS and

dividend growth

• Attractively valued on P/E basis (12.7x FP/E) but fairly

valued on P/B (1.8x)

Consumer

Discretionary Underweight

• High earnings expectations for 2014

• Sector is expensive at 18.3x FP/E

• Technical profile is weakening

Marketweight

• Attractively valued at 15.3x FP/E and strong technical

trends

• Our preference is for Canadian discretionary given more

attractive valuations

Industrials Overweight

• Play on improving global growth and Capex spending

• Strong technical trends

• Preference is for U.S. industrials given higher U.S. GDP

growth expectations and cheaper valuations

Overweight• Play on improving global growth

• Strong technical trends

Information

TechnologyOverweight

• Attractive valuations at 14.5x FP/E

• Strong balance sheets and cash flow

• Preference is for U.S. technology given greater breadth

Overweight• Sector could benefit from companies putting their cash

hoard to work

• Improving technical trends

Energy Marketweight

• Earnings are under pressure and sector is facing negative

revision trends

• This is offset by reasonable valuations (13.7x FP/E) and

strong cash flows

Overweight

(↑ from

marketweight)

• Strong earnings outlook and positive earnings revisions

• Improving technical profile with the sector breaking above

its long-term relative downtrend

Materials Underweight• Weak earnings and lofty 2014 earnings estimates

• Weak relative technical trendsUnderweight

• Weak commodity prices to provide headwinds to earnings

outlook

• Weak relative technical trends

• Preference is for Canadian materials

Health Care Overweight

• Positive long-term trends with aging population

• Preference is for U.S. health care given greater breadth

and higher percentage spent on health care costs as

percentage of GDP

Underweight

(↓ from

marketweight)

• Deteriorating technical profile

• High earnings expectations for 2014

• Valuations are at high-end on P/E and P/B basis

Consumer Staples Marketweight• Sector is fairly valued at 18x FP/E

• Weak technical trends on the back of slowly rising interest

rates

Marketweight

• Solid technicals for the sector given new price highs and

strong relative strength

• We prefer Canadian staples sector to U.S. given better

technicals and more attractive valuations

Utilities Underweight• Premium valuation with low earnings growth

• Negatively correlated with interest rates. Should

underperform if rates move higher

Underweight

• Premium valuation with low earnings growth

• Negatively correlated with interest rates. Should

underperform if rates move higher

• Prefer Canadian utilities

Telecom Services Underweight

• The sector trades at a high 2.5x P/B and unjustified P/E

premium to the market

• Weak technical trends on the back of slowly rising interest

rates

Underweight• Weak relative technical trends

• Trading at a P/E and P/B premium to long-term averages

SectorU.S. (S&P 500) Canada (S&P/TSX Composite)

Key Point: We maintain a cyclical bias, preferring the industrials, financials and information technology sectors. These

sectors stand to benefit from an improving global economy, rising interest rates, and our expectations for ramp up in

corporate spending in the coming quarters. We are increasing our cyclical stance in Canada by upgrading the energy

sector to overweight, and downgrading the health care sector to underweight.

Source: Portfolio Advice & Investment Research. As of April 1, 2014


Page 9

Conclusion

Overall, we see the North American economy improving in the coming quarters, which should support stronger earnings

growth and further equity gains by year-end. The technical outlook remains constructive and supports our fundamental

conclusions. We are approaching the weak seasonal summer period, which could lead to higher volatility, and some

short-term market weakness. However, we would look at weakness over the spring/summer months as an opportunity to

increase equity exposure, as we believe equities can continue to grind higher on stronger earnings growth.


Page 10

Appendix A – Important Disclosures

General Research Disclosure

The statements and statistics contained herein are based on material believed to be reliable, but are not guaranteed to be accurate or

complete. This report is for informational purposes only and is not an offer or solicitation with respect to the purchase or sale of any

investment fund, security or other product. Particular investment, trading, or tax strategies should be evaluated relative to each

individual’s objectives. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance.

This document does not provide individual financial, legal, investment or tax advice. Please consult your own legal, investment and tax

advisor. All opinions and other information in this document are subject to change without notice. The Toronto-Dominion Bank and its

affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.

TD Waterhouse Canada Inc. and/or its affiliated persons or companies may hold a position in the securities mentioned, including

options, futures and other derivative instruments thereon, and may, as principal or agent, buy or sell such securities. Affiliated persons

or companies may also make a market in and participate in an underwriting of such securities.

Technical Research Disclosure

The opinions expressed herein reflect a technical perspective and may differ from fundamental research on these issuers. Fundamental

research can be obtained through your TD Wealth advisor or on the Markets and Research site within WebBroker.

The technical research opinions contained in this report are based on historical technical data and expectations of the most likely

direction of a market or security. No guarantee of that outcome is ever implied.

Research Report Dissemination Policy

TD Waterhouse Canada Inc. makes its research products available in electronic format. These research products are posted to our

proprietary websites for all eligible clients to access by password and we distribute the information to our sales personnel who then may

distribute it to their retail clients under the appropriate circumstances either by email, fax or regular mail. No recipient may pass on to

any other person, or reproduce by any means, the information contained in this report without our prior written consent.

Analyst Certification

The Portfolio Advice and Investment Research analyst(s) responsible for this report hereby certify that (i) the recommendations and

technical opinions expressed in the research report accurately reflect the personal views of the analyst(s) about any and all of the

securities or issuers discussed herein, and (ii) no part of the research analyst’s compensation was, is, or will be, directly or indirectly,

related to the provision of specific recommendations or views expressed by the research analyst in the research report.

Conflicts of Interest

The Portfolio Advice & Investment Research analyst(s) responsible for this report may own securities of the issuer(s) discussed in this

report. As with most other employees, the analyst(s) who prepared this report are compensated based upon (among other factors) the

overall profitability of TD Waterhouse Canada Inc. and its affiliates, which includes the overall profitability of investment banking

services, however TD Waterhouse Canada Inc. does not compensate its analysts based on specific investment banking transactions.

Corporate Disclosure

TD Wealth represents the products and services offered by TD Waterhouse Canada Inc. (Member – Canadian Investor Protection

Fund), TD Waterhouse Private Investment Counsel Inc., TD Wealth Private Banking (offered by The Toronto-Dominion Bank) and

TD Wealth Private Trust (offered by The Canada Trust Company).

The Portfolio Advice and Investment Research team is part of TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion

Bank.

Trade-mark Disclosures

Bloomberg and Bloomberg.com are trademarks and service marks of Bloomberg Finance L.P., a Delaware limited partnership, or its

subsidiaries. All rights reserved.

“TD Securities” is the trade name which TD Securities Inc. and TD Securities (USA) LLC. jointly use to market their institutional equity

services.

TD Securities is a trade-mark of The Toronto-Dominion Bank representing TD Securities Inc., TD Securities (USA) LLC, TD Securities

Limited and certain corporate and investment banking activities of The Toronto-Dominion Bank.

All trademarks are the property of their respective owners.

® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank.

Documents

NA Equity Strategy Q1 14