U.S. Equities Outlook Will the Secular Bull Run Continue?

Transcription

1 December 14, 217 U.S. Equities Outlook Will the Secular Bull Run Continue? Moderated by: Chuck Alberton, CFA, CAIA Managing Director, Senior Portfolio Manager Presented by: Tom Galvin Managing Director, Senior Portfolio Manager Investment management services provided by City National Bank through its wholly-owned subsidiary City National Rochdale, LLC, a registered investment advisor.

2 TABLE OF CONTENTS 217 Equity Review and Outlook Summary Perspectives on Tax Cuts and Implications for Stocks City National Rochdale Equity Allocation and LC Core Positioning

3 217 EQUITY REVIEW AND OUTLOOK SUMMARY 217 U.S. Equities Recap What we got right > A year of positive equity returns > A year of solid EPS growth 1% > Large cap stocks would outperform Mid and Small Cap indices > Rebound in quality stocks with visible earnings growth > Secular bull market in stocks likely to continue What we missed. > S&P 5 total return of 19% was higher than we anticipated > Expansion in PE helped by lower inflation and interest rates > Record low volatility > Weaker dollar boosting returns from international markets 3

4 217 EQUITY REVIEW AND OUTLOOK SUMMARY Top Keys to Success for U.S. Equities in 218 We believe the pace and direction for U.S. Equities will be influenced by three key factors: Continued strength in the U.S. and global economy Tax cuts impact on corporations profits and consumer spending Continued low inflation and interest rates Positive outlook for EPS growth, PE ratios likely to remain elevated Volatility will be higher, creating buying opportunities Bottom line we believe secular bull market likely continues, positive returns likely, volatility should increase 4

5 217 EQUITY REVIEW AND OUTLOOK SUMMARY Economic and Financial Indicators Indicators Are Forward-Looking Three to Six Months Monetary Policy U.S. Economic Outlook Yield Curve Consumer Sentiment Disposable Personal Income/Wages Housing/Mortgages Labor Market Consumer Spending Interest Rates Fiscal Policy Business Outlook Spending/Surveys Leading Indexes Corporate Profit Growth Global Economic Outlook Political Environment Inflation Credit Demand/Availability Energy Cost Impact Equity Market Valuation Geopolitical Risk Positive/Strengthening Financial Market Impact Negative/Weakening Speedometer color indicates the magnitude of the impact on economic financial markets. The arrow signifies the directional change in the indicator. Two arrows indicate a change from the previous month. One arrow indicates that no change occurred. Source: City National Rochdale. As of December

6 217 EQUITY REVIEW AND OUTLOOK SUMMARY Healthy Consumer Fundamentals 2, 18, 16, 14, 12, 1, 8, 6, 4, 2, Nonfarm Payrolls Change from Cycle Low of February 21 ( ) 17, Source: Bureau of Labor Statistics. As of October Household Net Worth 42% larger Recession 96.2 Current High Previous High Source: Federal Reserve Bank. As of June Household Debt Service Ratio (% of Disposable Personal Income) Recession 9.8 Period Average: Real Median Household Income People per household (LS) Real Median Household Income (RS) $59,39 $59, $54, $49, Source: Federal Reserve Bank, Bureau of Economic Analysis. As of June $44, Source: Census Bureau. As of December

7 217 EQUITY REVIEW AND OUTLOOK SUMMARY Long, Extended Business Cycle But Getting Late 6 U.S. Postwar Expansions (Cumulative Real GDP Growth from Prior Peak, %) Present Present Quarters Source: Bureau of Economic Analysis. As of September 3,

8 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Perspectives on Tax Cuts and Implications for Stocks 8

9 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS What Does a Trump Presidency Mean For Equities? POSITIVES Tax reduction likely for individuals and corporations, especially domestically-oriented companies Proposed U.S. tax rate would make companies more competitive on a global basis Fiscal stimulus > Infrastructure spending? > Defense spending Expected regulatory relief for Financial, and Energy Reduces business uncertainty NEGATIVES Magnitude and timing of proposed tax cuts Negative implications for states with high state, local, and property taxes Higher potential deficits impact bond market and the economy Little governing experience/leadership style Potential impacts from special counsel investigations Trade protectionism Overall approach to geopolitics Good for EPS and Demand for Stocks Uncertainty creates volatility 9

10 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Tax Cuts and Jobs Act of 217 How the House and Senate Versions of the Bill Compare Provision Current House Bill Senate Bill Top individual rate 1% > $ 15% > $9,325 25% > $37,95 28% > $ % > $191,65 35% > $416,7 39.6% > $418,4 12% > $ 25% > $45, 35% > $2, 39.6% > $5, 1% > $ 12% > $9,525 22% > $38,7 24% > $7, 32% > $16, 35% > $2, 38.5% > $5, Personal exemption $4,5 Eliminates. Eliminates. Standard deduction Single: $6,35 Single: $12, Single: $12, Married: $12,7 Married: $24,5 Married: $24,5 Child tax credit $1, $1,6 $2, State/local tax (SALT) deduction Mortgage interest Fully deductible. Allows deduction of interest on first $1 million of a mortgage. Repeals for income and sales tax. Caps property tax deduction at $1,. Limits the deduction for new mortgages to the first $5, of a loan. No change for existing loans. Repeals for income and sales tax. Caps property tax deduction at $1,. Keeps $1 million loan limit. Corporate tax rate 35% 2% starting in 218 2% starting in 219 Top pass-through rate Taxed at personal income rates. 25% tax rate, excluding all professional service providers. Phases in 9% rate for businesses earning less than $75,. Filers deduct 23% of pass-through income. Excludes service providers with taxable income over $25, ($5, filing jointly). Business investments Complicated rules for deducting business expenses over many years. Full same-year expensing. Expires after 222. Full same-year expensing. Phases out starting in 222. Source: : Wall Street Journal, CNN, Washington Post, New York Times, PBS Newshour. 1

11 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Tax Cuts May Provide a Modest Boost to Growth in Personal Tax Cuts Impact Over Two Years; Percentage Points Corporate Tax Cuts Equals about a.4% boost to overall GDP growth. Real GDP Growth (Mid-Range Estimate) Source: 217 Tax Cuts and Jobs Act, Congressional Budget Office Fiscal Multipliers,

12 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS U.S. Recession Risk Low City National Rochdale Recession Probability Monitor Probability of Recession in the Next 12 Months 5% or more 3% to 5% 3% or less Gray column represents recessionary period Source: City National Rochdale. As of November

13 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Global Outlook: Modest Growth Ahead E 218E Global Growth Forecasts 5 Real GDP Growth (Percentage) Global Economy Advanced Economies U.S. Euro Area Developing Economies China Source: The International Monetary Fund (IMF). As of July

14 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Most Corporate Sectors Would See a Substantial Benefit 5% Effective Rate by Sector Statutory Rate Effective Rate Potential New Statutory Rate 4% Effective Tax Rate (%) 3% 2% 1% % Sectors Source: Congressional Budget Office, Evercore ISI. As of December

15 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Tax Cuts Could Affect Our EPS Outlook 12.% = 1% EPS Growth 1.% 4% Corporate Tax Cuts 8.% = 6% EPS Growth Real U.S. GDP 6.% 2.5% 2.3% +12.% Inflation Stock Buybacks 4.% +8.% 2.% 2.% Oil 2.% 2.% 2.% International GDP.% -2.% -2.% 1.% 1.%.4% -.5%.4% -.5% -2.% -1.5% -1.5% Margin Change Dollar Impact -4.% Without expected tax cuts With expected tax cuts Source: City National Rochdale, as of December 1,

16 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS 218 Corporate Tax Cut Scenario Analysis Given political realities, we believe a reduction in the corporate statutory rate to the 2%-22% range is the most likely probability to occur sometime in 218 However, given fragmented efforts by the GOP so far, the probability in our opinion of a bill passing is 7% Uncertainty exists as to the date of implementation, we are assuming mid-218 Assuming Half Year Benefit from New Tax Rate CNR Estimate 218 S&P 5 EPS Potential New Tax Rate 2.% 22.5% 25.% 27.5% Base Case $138 $138 $138 $138 Benefit from Lower Tax Rate $8 $7 $5 $4 Total $146 $145 $143 $142 Source: City National Rochdale. As of December

17 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Economic Outlook: Global Synchronized Growth Positive U.S. economic fundamentals include jobs, housing, confidence, corporate profits, and stable inflation. Consumers, businesses, and the government all contribute to driving domestic growth. Fiscal policy is likely to modestly boost GDP in 218. Expecting one more Fed rate hike this year, and another two to three in 218. Global economies experiencing a synchronized upturn in growth. 216 City National Rochdale Forecasts 217e 218e* GDP Growth 1.6% 2.%-2.5% 2.25%-2.75% Corporate Profit Growth 1.3% 1%-11% 6%-1% Interest Rates Fed Funds Rate.5%-.75% 1.25%-1.5% 1.75%-2.5% Treasury Note, 1-Yr. 2.45% 2.25%-2.75% 2.5%-3.% Sources: BEA, Standard & Poor s, Bloomberg. As of December 217. *Upper end of range assumes potential increase of.5% to GDP and $7 boost to corporate profits from fiscal policy and tax cuts in second half of 218. Fed Funds Rate estimate represents top end of range. 17

18 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Equity Investors Should Not Fear Initial Fed Rate Hikes Correlations Between Weekly Stock Returns and Interest Rate Movements Higher Stock Prices Historically, when yields are below 5.%, rising rates are generally associated with rising stock prices Positive relationship between yield movements and stock returns Lower Stock Prices We are here Negative relationship between yield movements and stock returns Year Treasury Yield (%) Sources: S&P, U.S. Treasury, FactSet, JP Morgan Asset Management. As of January 6, 216. Returns are based on price index only and do not include dividends. Correlation coefficient: The correlation coefficient will vary from -1 to +1. A -1 indicates perfect negative correlation, and +1 indicates perfect positive correlation. 18

19 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Tax Cuts Could Provide Fuel for Higher Equity Prices Year-End 218 Estimate: No Tax Cut (3% Probability) S&P 5 EPS Fwd. P/E CNR Estimate Y/Y Change Expected Total Return* $ % -7% -5% -2% % 3% 6% 2,415 2,484 2,553 2,622 2,691 2,76 Year-End 218 Estimate: Assuming Half-Year Tax Benefit (7% Probability) S&P 5 EPS Fwd. P/E CNR Estimate Y/Y Change Expected Total Return* $ % -3% % 3% 5% 8% 11% 2,538 2,61 2,683 2,755 2,828 2,9 25% Downside Risk 5% Base Case 25% Upside Potential *Assumes reduction in corporate tax rate to 22.5%. Based on S&P 5 Index value. As of December 12,

20 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Powerful Forces that can Influence S&P 5 EPS and PE Impact S&P 5 EPS PE Multiples Positive GDP growth Tax cuts Deregulation Stronger economy Increased confidence Inflows into equities Negative No tax bill Stronger dollar Wages increasing Potential delays in spending No tax bill Policy and leadership uncertainty Deficit spending impact on interest rates Geopolitical exogenous shocks Based on S&P 5 value. As of November 3,

21 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Improving Earnings, but Full Valuations S&P 5 12-Month Forward P/E Overvalued Fairly Valued Attractive Very Attractive $14 $12 $1 $8 $6 $4 $2 Earnings S&P 5 Earnings Per Share ($) Y/Y (%) $138 $132 5% 4% 3% 2% 1% % -1% $ -2% e Sources (both charts): Thomson Financial Baseline, S&P 5, FactSet. As of November 3, 217. S&P 5 Valuation Measures Valuation 2-Year 2-Year Standard Deviation Description Latest Measure Maximum Average* Over-/Undervalued P/E Forward P/E 18.9x 27.x 15.8x.2 CAPE Shiller s P/E Div. Yield Dividend Yield 1.81% 3.3% 2.% -.5 P/B Price to Book P/CF Price to Cash Flow EY Spread EY Minus Baa Yield Sources (bottom chart): FactSet, S&P 5, Robert Shiller. As of November 3, 217. Price to earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. Shiller s P/E (CAPE) uses trailing 1 years of inflation-adjusted earnings as reported by companies. Dividend yield is calculated as the next 12-month consensus dividend divided by most recent price. Price to book ratio is the price divided by book value per share. Price to cash flow is price divided by NTM cash flow. EY minus Baa yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) minus the Moody s Baa seasoned corporate bond yield. Standard deviation: over-/undervalued is calculated using the average and standard deviation over 25 years for each measure. *Price to cash flow is a 2-year average due to cash flow data availability. 21

22 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Valuation Measures Limited Predictive Value for Short-Term Returns 15 Annualized Real Total Returns 1 Current Shiller P/E: yr Holding Period 5-yr Holding Period 2-yr Holding Period 1-yr Holding Period -15 Less than 1 1 to 2 2 to 3 3 to 4 More than 4 Initial Shiller P/E Ratio Source: BCA Research. As of December 216. Based on S&P 5 data since

23 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Short-Term Volatility Is Normal S&P 5 Return (%) S&P 5 Return (%) Calendar Year Returns Intra-Year Declines* Downside Intra-Year Declines % Occurrence (37 Years) Average Downside Average Calendar Year Return to to to % 24.3% 1.8% -4.9% -14.% -29.7% 19.6% 7.6% -16.4% Source: FactSet. As of November 217. *Intra-year declines are the largest declines within the calendar year. 23

24 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS S&P 5 Volatility Zones Market Volatility Returns to More Moderate Levels for Now Recurring bouts of excessive volatility over the past 15 years requires investors to rethink their approach to equity investing. An adjustment to the portfolio s equity allocation may be necessary to meet risk tolerance Market Capitalization Weighted Percent in Category (Excludes Utilities) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 12/31/ /31/ /31/ /31/ /31/ /31/2 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25 12/31/26 12/31/27 1/5/28 3/31/29 2/28/21 12/31/211 12/31/212 12/31/213 12/31/214 1/3/215 2/27/215 3/31/215 4/3/215 5/31/215 6/3/215 7/31/215 8/31/215 9/3/215 1/3/215 11/3/215 12/31/215 1/3/216 2/29/216 3/31/216 4/29/216 5/31/216 6/3/216 7/31/216 8/31/216 9/3/216 1/31/216 11/3/216 12/31/216 1/31/217 2/28/217 3/31/217 4/3/217 5/31/217 6/3/217 7/31/217 8/31/217 9/3/217 Over 36% 3/29/2, S&P 153 1/4/22, S&P 83 46% decline Excessive 29% 36% High 24% 29% Elevated 1/29/27, S&P 162 3/4/29, S&P % decline % 23% Moderate For Illustrative Purposes Only. As of September 3, 217. City National Rochdale uses Barra Inc.'s Aegis System 'Total Risk' data as a measure of volatility. Barra Inc.'s Aegis System is a third party equity risk management software package used to help assess risk/return trade offs. 24

25 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Secular Bull Market Appears to Still Have Room to Run 4 Secular Bull Starting in 1921 Dow Jones Industrial Average % -18.6% 344.5% Secular Bull Ended in Secular Bull Starting in % -23.2% 18.4% -16.3% Secular Bull Ended in ,1 Secular Bull Starting in ,1 1, % -15.6% 15.6% -36.1% 72.5% -21.2% Secular Bull Ended in ,4 19,4 December 12, ,4 95.7% -16.8% 71.9% -14.5% 9, Source: Ned Davis Research, with permission; S&P Dow Jones Indices 25

26 PERSPECTIVES ON TAX CUTS AND IMPLICATIONS FOR STOCKS Liquidity is Still Supportive M2 Money Supply / NDR Total Market Value Linear Regression Trendline (Long Dashed Line) High Liquidity Low Liquidity Based on S&P 5 value. As of November 3,

27 EQUITY ALLOCATION AND LC CORE POSITIONING Equity Allocation and LC Core: City National Rochdale Approach and Positioning 27

28 EQUITY ALLOCATION AND LC CORE POSITIONING Our Asset Allocation Positioning EQUITIES Prefer U.S. to international markets Europe/Japan have significant structural issues Neutral on EM; favor Asia CORE FIXED INCOME Low return potential Prefer corporate credit over government bonds Municipals attractive for highbracket investors OPPORTUNISTIC INCOME Opportunities in structured/distressed credit, emerging market high yield REAL ASSETS Modest exposure for diversification benefits Underweight due to lowinflation environment U.S. Equities Large Cap Core Mid/Small Cap Dividend Income International Equities Developed Markets Emerging Markets Core Fixed Income Government/Agency Corporate Municipal Cash and Equivalents Opportunistic Income Taxable Tax Exempt Real Assets Real Estate Diversified Commodities TIPS Min Neutral Max Source: City National Rochdale. As of December

29 EQUITY ALLOCATION AND LC CORE POSITIONING Regional Exposures Can Add Alpha to Equity Allocation 18% 5 Year returns period ending December 7, % 15.6% 14% 12% 11.5% 1% 8% 7.4% 6% 4% 4.8% 3.9% 2% % S&P 5 Stoxx Europe 6 Japan Nikkei 225 MSCI EM Asia MSCI EM Sources: MSCI, Factset. As of September 3, 217. Indexed returns for S&P are greater than other regions. Returns include dividends reinvested. 29

30 EQUITY ALLOCATION AND LC CORE POSITIONING Comparing Net Margins for S&P 5 vs. Mid/Small Cap S&P 5 margins have been consistently higher than S&P Mid/Small Cap this cycle S&P 5 margins have been stable, while the S&P Mid/Small Cap margins had been trending down 12 1 Net Profit Margin (LTM) - S&P Net Profit Margin (LTM) - S&P Mid / Small Cap Net Profit Margin +2 Stdev + 1 Stdev Average -1 Stdev -2 Stdev Net Profit Margin +2 Stdev + 1 Stdev Average -1 Stdev -2 Stdev 2 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 * Dotted lines are where net profit margins will be if tax rate goes to 22% Source: Factset, November 3, 217 3

31 EQUITY ALLOCATION AND LC CORE POSITIONING Comparing S&P 5 to Mid-Small Cap Stocks S&P 5 S&P % 11% 18x 14% 27% % 14.5% 17.74x 1% 29% S&P 5 S&P Sales Growth 218 EPS Growth 218 PE ROE Tax Rate 218 Sales Growth 218 EPS Growth 218 PE ROE Tax Rate S&P % % 16% 19x 8% S&P Sales Growth 218 EPS Growth 218 PE ROE Tax Rate Source: Factset, November 3,

32 EQUITY ALLOCATION AND LC CORE POSITIONING Comparing GAAP vs. Non-GAAP EPS $15. S&P 5 EPS Rolling 4 Qs $1. $5. $ Q4 199 Q Q Q Q Q Q Q Q4 2 Q1 21 Q2 22 Q3 23 Q4 25 Q1 26 Q2 27 Q3 28 Q4 21 Q1 211 Q2 212 Q3 213 Q4 215 Q1 216 Q2 217 Q3 S&P 5 (non-gaap, S&P) S&P 5 (GAAP, S&P) S&P 5 (non-gaap, Factset) $1. S&P 4 EPS Rolling 4 Qs $5. $- $(5.) $ Q Q Q Q Q Q Q Q3 2 Q1 2 Q3 21 Q1 21 Q3 22 Q1 22 Q3 23 Q1 23 Q3 24 Q1 24 Q3 25 Q1 25 Q3 26 Q1 26 Q3 27 Q1 27 Q3 28 Q1 28 Q3 29 Q1 29 Q3 21 Q1 21 Q3 211 Q1 211 Q3 212 Q1 212 Q3 213 Q1 213 Q3 214 Q1 214 Q3 215 Q1 215 Q3 216 Q1 216 Q3 217 Q1 217 Q3 S&P 4 (non-gaap, S&P) S&P 4 (GAAP, S&P) S&P 4 (non-gaap, Factset) S&P 6 EPS Rolling 4 Qs $- $(5.) 1996 Q Q Q Q Q Q Q Q3 2 Q1 2 Q3 21 Q1 21 Q3 22 Q1 22 Q3 23 Q1 23 Q3 24 Q1 24 Q3 25 Q1 25 Q3 26 Q1 26 Q3 27 Q1 27 Q3 28 Q1 28 Q3 29 Q1 29 Q3 21 Q1 21 Q3 211 Q1 211 Q3 212 Q1 212 Q3 213 Q1 213 Q3 214 Q1 214 Q3 215 Q1 215 Q3 216 Q1 216 Q3 217 Q1 217 Q3 S&P 6 (non-gaap, S&P) S&P 6 (GAAP, S&P) S&P 6 (non-gaap, Factset) Source: Factset, S&P 5, November 3, 217 *Ratios presented use S&P data and methodology 32

33 EQUITY ALLOCATION AND LC CORE POSITIONING Comparing Net Margins for S&P 5 vs. MSCI Europe S&P 5 margins have been consistently higher than MSCI Europe this cycle S&P 5 margins have been stable, while the MSCI Europe margins had been trending upward Net Profit Margin (LTM) - S&P 5 Net Profit Margin (LTM) MSCI Europe Net Profit Margin +2 Stdev + 1 Stdev Average -1 Stdev -2 Stdev Net Profit Margin +2 Stdev + 1 Stdev Average -1 Stdev -2 Stdev 2 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Source: Factset, November 3,

34 EQUITY ALLOCATION AND LC CORE POSITIONING Comparing Net Margins for S&P 5 vs. MSCI Japan S&P 5 margins have been consistently higher than MSCI Japan this cycle S&P 5 margins have been stable, while the MSCI Japan margins had been trending upward Net Profit Margin (LTM) - S&P 5 Net Profit Margin (LTM) - MSCI Japan Net Profit Margin +2 Stdev + 1 Stdev Average -1 Stdev -2 Stdev Net Profit Margin +2 Stdev + 1 Stdev Average -1 Stdev -2 Stdev 2 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Source: Factset, November 3,

35 EQUITY ALLOCATION AND LC CORE POSITIONING Comparing S&P 5 to Europe and Japan S&P 5 MSCI Europe % 11% 18x 14% 27% % 9% 15x 11% 2% S&P 5 MSCI Europe 218 Sales Growth 218 EPS Growth 218 PE ROE Tax Rate 218 Sales Growth 218 EPS Growth 218 PE ROE Tax Rate 3 25 MSCI Japan 24% x 1 8% 9% 5 3% MSCI Japan 218 Sales Growth 218 EPS Growth 218 PE ROE Tax Rate Sources: Factset, Citicorp, November 3,

36 EQUITY ALLOCATION AND LC CORE POSITIONING Investment Philosophy The Three Pillars Large Cap Core Equity Macro & Industry Research Fundamental Research Risk Management Objective: Outperform S&P 5 over full market cycle Macro Research Profit Cycle Analysis Recession Monitor Equity Scorecard & Returns Industry & Themes Industry Research Proprietary Quantitative Research Attractive Themes Style Tilts Overweight Favored Fundamental Research Proprietary CAF* Scorecard Proprietary Quality Rank Franchise Value Market Share Revenue & EPS Growth Cash Flow Balance Sheet Return on Equity P/BV* & Forward P/E* Versus Peers & S&P 5 Research Analytic Prism Projected Fair Value Risk Management Target Tracking Error Target Factor Exposures Sector Size Limits Security Size Limits Sell Discipline Change in Industry Outlook Change in Thesis Target Price Realized Stop Loss Review Tax Aware *CAF = Company Analytical Framework, P/BV = Price/Book Value, P/E = Price/Earnings Source: City National Rochdale 36

37 EQUITY ALLOCATION AND LC CORE POSITIONING Core Equity Positioning Identify secular themes from macro and fundamental research, as well as demographic viewpoints, that have potential for above average long-term growth and long-term capital appreciation potential Themes can span various industry groups and sectors Identify industries and companies that are positively and negatively impacted by these trends Examples of secular themes include Stronger Consumer, Health Care Innovators, Digital Revolution, and Visible EPS Growth Recent changes include adding to quality companies with a domestic cyclical orientation. Stronger Consumer 3% 31% Digital Revolution* Health Care Innovators 21% 19% 22% Industrial Leaders Visible Growth* *Some stocks are included in more than one theme 37

38 EQUITY ALLOCATION AND LC CORE POSITIONING U.S. Large Cap Core Equity Emphasis on Quality Since 1994 high earnings and investment quality companies generally provide most stable returns There are periods when quality can lag such as the speculative market of the late 199s and during 216 and 217 Historically, quality stocks strongly outperform during market downturns Barra comparison of quality factor vs. other Barra factors.35 Quality Factor Performance & S&P 5 Performance Cumulative GEMLT Earnings Quality (LS) Cumulative GEMLT Investment Quality (LS) Cumulative S&P 5 (RS) Value of $1 compounded over time GEMLT Global Equity Model Long Term. GEMLT Earnings Quality describes the quality of company operating fundamentals. GEMLT Investment Quality measures management s ability to manage its assets efficiently. Cumulative Return: Growth of $1 Source: MSCI. As of November 3,

39 EQUITY ALLOCATION AND LC CORE POSITIONING U.S. Core Equity Emphasis on Quality 7% 6% 5% 4% 3% 2% 1% % CNR Proprietary Quality Ranking DuPont Quality Earnings Stability Revenue Stability Cash Earnings Quality Balance Sheet Quality City National Rochdale Core S&P 5 CNR Proprietary Quality Ranking weighted: 4% Dupont Quality (return on equity), 15% Earnings Stability (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company), 15% Balance Sheet Quality (fundamental strength of balance sheet). DuPont Quality = Return on equity adjusted for debt levels. Source: MSCI, FactSet, City National Rochdale. As of November 3,

40 EQUITY ALLOCATION AND LC CORE POSITIONING U.S. Core Equity Emphasis on Quality 1.15 Core - Beta Relative to S&P Core Active Exposure - Earnings Variation Lower than S&P Higher than S&P Source: MSCI Barra, City National Rochdale. As of November 3, 217. Beta: Captures the systematic risk of a portfolio in comparison to the S&P 5 Earnings Variation: Measures a portfolios historical earnings variability and cash flow fluctuations in comparison to the S&P 5 Growth: Measures a portfolios growth prospects using historical sales growth and historical and predicted earnings growth in comparison to the S&P 5 Size: Measures a portfolios market capitalization compared to the S&P 5 4

41 EQUITY ALLOCATION AND LC CORE POSITIONING Thomas Galvin Managing Director, Senior Portfolio Manager Mr. Galvin joined the former Rochdale Investment Management (predecessor to City National Rochdale) in 212. He works directly with the CIO to guide the firm s overall equity strategy and is a member of the Asset Allocation Committee. He is the Portfolio Manager for the City National Rochdale U.S. Core Equity Fund and leads the research and management of this strategy for client accounts. Mr. Galvin has over 3 years of equity investment experience from financial services organizations such as Lehman Brothers, Smith Barney, Forstmann-Leff and UBS. Most recently, he was Managing Partner at Galvin Asset Management, where he managed accounts for high-net-worth individuals. At UBS, he was a Senior Portfolio Manager and Director of Research where he co-managed $8 billion in large-cap growth, core institutional, and mutual fund portfolios. Prior to UBS, he was a Senior Managing Director with Forstmann-Leff Associates where he was responsible for $3.8 billion in large-cap, mid-cap, asset allocation, and long/short equity hedge fund products as well as held numerous positions including Chief Investment Officer and Director of Research. Mr. Galvin earned his BA in Economics from Queens College and his MBA in Finance and Investments from Fordham University. Mr. Galvin is the Founder of the Fordham Wall Street Council and a former board member of the McCaddin-Quirk Foundation, The Lavelle Fund for the Blind and The Maryknoll Society. He is also a member of the New York Society of Security Analysts. 41

42 Index Definitions The Standard and Poor s 5 Index (S&P 5) is a market capitalization-weighted index of 5 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. The Standard and Poor s MidCap 4 Index (S&P 4) provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 5, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The Standard & Poor s Small Cap 6 Index (S&P 6) measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable. MSCI All World Equity Index represents the performance of small- to large-cap stocks from 23 developed and 24 emerging markets. The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 321 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. Indices are unmanaged and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.

43 Important Disclosures The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party source and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change. There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative. There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets. Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high. Investments in below-investment-grade debt securities which are usually called high-yield or junk bonds, are typically in weaker financial health and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors' incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases, and changes in the credit ratings. Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets. Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors. Returns include the reinvestment of interest and dividends. Diversification may not protect against market risk or loss. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future performance.

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