RBC WEALTH MANAGEMENT. Weekly

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1 RBC WEALTH MANAGEMENT June 1, 217 Global Weekly Insight A closer look Flow charting Kelly Bogdanov San Francisco Money has been coming back into European equities as investors are taking a shine to the region s prospects, while flows into the U.S. have been uneven. We look at what s behind the regional rotations and what this means for the global equity bull. Recently most major equity markets have quietly drifted higher or consolidated gains amid favorable global economic and corporate earnings growth prospects. As this has occurred, and even as equity markets rallied more forcefully late last year and early this year, money has not stood still. Money moving in and out of mutual funds and exchange-traded funds otherwise known as fund flows has impacted some equity markets more than others. Among the markets we monitor most closely, Japan and Europe ex-u.k. are leading in fund flows year to date. Both markets have seen funds rise roughly 6% in dollar terms, which are healthy increases, while other markets have lagged well behind including the U.S. and Canada. Funds have actually exited the U.K. and Asia ex-japan (see chart). To us, the shifting regional fund flow patterns are another indication that investors should take a closer look at the Continental European market. Course correction There s a perception that market performance tends to have a tight relationship with fund flows that they usually run in tandem or one leads the other within a short period of time. In reality, there is not a strong historical relationship between fund flows and market performance except during periods of extreme outflows or inflows. While none of the major markets are currently experiencing extreme flows, the data does provide a useful gauge of shifts in investor sentiment on a global basis. Japan and Europe outpacing others by a wide margin Year-to-date cumulative % change in equity fund flows (in USD) Jan 217 Feb 217 Mar 217 Apr 217 May 217 Source - RBC Wealth Management, EPFR Global; weekly data through 5/24/17 Market pulse 3 The Fed and puzzlingly low U.S. inflation 3 Canadian economy roars back to life 4 U.K. snap election gambit getting dicey? 4 Renminbi rally hints at show of strength from China Japan Europe ex-u.k. Canada U.S. U.K. Asia ex-japan The pattern for Europe is particularly notable. Click here for authors contact information. Priced in USD as of 6/1/17 market close, EST, unless otherwise stated. For important and required non-u.s. analyst disclosures, see Page 6.

2 2 Global Insight Weekly Soon after the Brexit vote in June 216, money flowed out of the Europe ex-u.k. equity market. Pessimism about a potential breakup of the EU was in the air when the U.K. decided to leave the union, populism was still gaining ground on the Continent, and the economy and earnings had not yet shown signs of vigor. Money moved out of Europe up until the end of 216. But all of that changed earlier this year. Investment funds started moving into Europe as the U.K. exit began to seem somewhat manageable, populism lost momentum, and, most importantly, economic and earnings trends improved meaningfully. Europe s fund flows completely shifted, as illustrated in the top two charts. On a cumulative basis (top chart), while Europe ex-u.k. flows are still negative since the Brexit vote, they made a massive reversal off the bottom. When flows are measured in weekly dollar terms (middle chart), Europe has experienced 17 straight weeks of inflows totaling $15.6B. We think Europe will continue to benefit from net inflows over the near and medium term. Its economy has turned the corner and earnings could rise by mid-double digits this year and grow again in 218. Europe s prospects look brighter to us than they have for quite some time, which is why we recently upgraded this market to Overweight. Flow fluctuation U.S. flows, on the other hand, have been inconsistent. They briefly surged after the presidential election and were positive earlier this year, but turned lower again starting in late March (see lower chart). This downturn may be the result of less confidence that the economy will break out of its subpar zone given that Treasury yields have shifted to a lower range and the yield curve has flattened. To a lesser degree, the difficulty of the administration s pro-growth legislative agenda to gain traction could also be contributing. We continue to believe the secular (long-term) bull market is intact for the U.S., but uneven and at times sluggish equity fund flows support our view that market performance could cool. We would Market Weight the U.S. in portfolios rather than Overweight it. Go with the flow Overall, the equity fund flow data support our view that the global rally still has further to go. Often when the equity market forms a major top, fund flows are surging they are a contrary indicator. That s not the case for any major market. On a regional basis, positive European fund flows are another reason for investors to weigh the attractive opportunities in this market. U.S. still in the lead but Europe has gained considerable ground Cumulative % change in equity fund flows since the Brexit vote (in USD) Jun 22-Aug 22-Oct 22-Dec 22-Feb 22-Apr Source - RBC Wealth Management, EPFR Global; weekly data through 5/24/17 Europe s trend has completely shifted Weekly change in Europe ex-u.k. equity fund flows since the Brexit vote (in USD millions) 3, 2, 1, -1, -2, -3, U.S. Europe ex-u.k. 22-Jun 13-Jul 3-Aug 24-Aug 14-Sep 5-Oct 26-Oct 16-Nov 7-Dec 28-Dec 18-Jan 8-Feb 1-Mar 22-Mar 12-Apr 3-May 24-May Source - RBC Wealth Management, EPFR Global; weekly data through 5/24/17 U.S. flows turned lower in late March Weekly change in U.S. equity fund flows since the Brexit vote (in USD millions) 35, 3, 25, 2, 15, 1, 5, -5, -1, -15, 22-Jun 13-Jul 3-Aug 24-Aug 14-Sep 5-Oct 26-Oct 16-Nov 7-Dec 28-Dec 18-Jan 8-Feb 1-Mar 22-Mar 12-Apr 3-May 24-May Source - RBC Wealth Management, EPFR Global; weekly data through 5/24/17 June 1, 217 RBC Wealth Management

3 3 Global Insight Weekly United States Bill Kuehn Minneapolis April s personal consumption expenditures (PCE) data released on May 3 showed inflationary pressures that retreated further away from the Federal Reserve s 2.% target, slowing to 1.5% y/y after having accelerated to 1.8% y/y as recently as February. Inflation continues to remain puzzlingly low despite a labor market that continues to tighten and consumer confidence that is at decade highs. Fed officials have taken notice during press conferences over the past week, with Fed Governor Lael Brainard saying that if the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy but continued that it likely will be appropriate soon to adjust the federal funds rate. Dallas Fed President Robert Kaplan reiterated that he is sticking with his call for two additional rate hikes this year, but said the decline in core PCE (which strips out food and energy prices) for three consecutive months is concerning. The market-implied rate hike probability for a 25 basis point increase in the Fed Funds rate at the Federal Open Market Committee s June 14 meeting remains all but certain at nearly 9%. But we, along with the market, are less certain about an additional hike later this year if inflation doesn t move back toward 2.%. The Financials sector experienced weakness to start the holiday-shortened trading week, with the KBW Bank Index down 2.1% through Wednesday after the largest two U.S. banks, JPMorgan Chase and Bank of America, announced Q2 trading revenue is on pace to fall 1% from last year due to less volatile market conditions. Morgan Stanley s CEO pointed to the same slump the following day. The lack of massive market-moving events such as Brexit and the U.S. election experienced in 216 has subdued client trading activity, which impacts Wall Street trading revenue. RBC Capital Markets U.S. bank analyst said, Investors were aware that volatility was muted but were expecting trading revenues to fall only about 5% from the year-earlier. He pointed to the Fed s potential unwinding of its balance sheet later this year as the next big trading catalyst. Canada Diana Di Luca Toronto Canadian Q1 GDP soars higher but misses stellar expectations. Possibly the only thing that can be taken away from the strength of a 3.7% annualized Q1 GDP growth rate is that it is below the whopping 4.2% that the Inflation remains stubbornly below Fed s target despite strong employment 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Core PCE y/y Fed's 2.% inflation target Unemployment rate Fed's 4.7% unemployment rate target Source - RBC Wealth Management, Bloomberg; data through 5/31/17 market was expecting; the Bank of Canada had it pegged at 3.8% as per its April Monetary Policy Report. The growth builds on the 2.7% and 4.2% rates in Q4 and Q3 216, respectively, with the majority of the growth this quarter coming from households. This includes consumer spending and residential investment, which were 4.3% and 15.7% higher (annualized) over the quarter, respectively. Unlike previous quarters, business investment was a significant support to headline growth, rising 1.3% over the period, the largest gain in almost five years. The Big Six banks reported earnings over the past week, and these reports were of particular interest given recent headlines around the housing market and potential spillover effects of the challenges faced by alternative lenders. Earnings came in ahead of analyst expectations for most of the Big Six. The earnings releases were followed by bond and preferred share new issuance in the sector. The TSX Preferred Share Index ended the month of May 2.1% lower, and has declined 3.9% from the April 1 high. The index currently stands at its lowest level since late January. Supply has recently pressured the market, with CA$1.325B in rate-reset new issuance in May. In addition to rate resets, the perpetual new issue market has seen a flurry of activity after a lull since September 215, with CA$575M in new supply in May. Lower rates have also contributed to the decline in the preferred share market, with the 5-year Government of Canada yield seven basis points lower than a month ago. We continue to recommend investors dial back credit risk in their preferred share portfolios and look for opportunities to trim positions that have crept towards CA$25. June 1, 217 RBC Wealth Management

4 4 Global Insight Weekly Europe Frédérique Carrier & Thomas McGarrity London The tightening of the U.K. general election race ahead of the June 8 vote has begun to weigh on the British pound. The ruling Conservative Party s lead in opinion polls has narrowed during the campaign, from as much as 2 percentage points over the Labour Party at the start, to around half that amount, with one recent poll (Times/ YouGov) suggesting the lead being as little as three points. There are concerns that should the Conservatives lose their overall majority, leading to either a coalition government or a hung parliament, it would negatively impact the U.K. s Brexit negotiations, as it could be harder to develop a consensus amid balancing the views of different political parties. We would remain cautious of placing too much emphasis on any single opinion poll, especially given the recent history of Conservative support being underestimated in polls. Instead, we continue to focus on the economic picture in the U.K., where we have concerns about a potential slowdown in consumer spending as disposable incomes get squeezed by rising inflation. Eurozone inflation fell in May, down to 1.4% y/y from 1.9% y/y in April, largely as a result of lower energy prices. More significant from the perspective of policymaking by the European Central Bank (ECB) is that core inflation (which excludes energy and food prices) also fell back, to.9% y/y in May compared to 1.2% y/y in April. This suggests that Easter falling a month later than last year explains much of the rise in core inflation in April. With China s currency posts a surprising rally after Moody s downgrade USD/CNY exchange rate YTD U.S. dollar stronger Chinese renminbi stronger Source - RBC Wealth Management, Bloomberg; data as of 1:35 pm GMT 6/1/ Jan Feb Mar Apr May Jun scarce indication of a conclusive rebound in core inflation, RBC Capital Markets believes that while the ECB will likely upgrade its economic assessment at its meeting on June 8, the central bank will maintain its overall dovish stance. Eurozone economic data continues to improve, with the expansion of its manufacturing sector gathering further momentum in May. The eurozone s manufacturing Purchasing Managers Index rose to a six-year high of 57., with improved business conditions signalled in all nations covered by the survey except Greece. Particularly encouraging is that the upturn is being supported by strong jobs growth across the region, suggesting companies are investing for future growth. Europe s improving economic fundamentals is one of the key tenets to our recent upgrade of European equities to Overweight. Asia Pacific Jay Roberts Hong Kong Asian equities continue to perform well in 217. The MSCI AC Asia Pacific Index is close to its high of 215. Korea s KOSPI Index has risen to an all-time high, while the main index in Taiwan is at its highest level in over 25 years. The KOSPI has been helped by the powerful rally in shares of Samsung Electronics, by far the largest index component, over the past 18 months. There has been a surprise rally in the Chinese renminbi since Moody s downgraded China s credit rating on May 24 for the first time since The dollar fell from USDCNY 6.89 to 6.79 in a week, meaning a 1.5% rally for CNY. This may be something of a show of strength from the Chinese authorities, who were critical of the downgrade. The currency pair has been stable throughout 217. Although the move is not particularly large, it does take the renminbi to its highest level against the dollar in seven months. The rally coincides with a government proposal to change the fixing method for the currency in order to allow it to trade more broadly by as much as 2% around the daily fixing point. The official leading economic indicators for China in May remained reasonable with the official manufacturing Purchasing Managers Index (PMI) at 51.2, unchanged. The strongest sectors were high tech and machinery equipment. The services PMI, which has been consistently robust, rose to However, the Caixin manufacturing PMI, which has a different survey universe, ticked down to 49.6 from 5.3. This was a relatively weak reading and the lowest since June 216. Going forward there may be a moderation in parts of the Chinese economy from the strong start seen in 217. June 1, 217 RBC Wealth Management

5 5 Global Insight Weekly MARKET SCORECARD Data as of June 1, 217 Equities (local currency) Level MTD YTD 1 yr 2 yr Govt bonds (bps chg) Yield MTD YTD 1 yr 2 yr S&P 5 2,43.6.8% 8.5% 15.8% 15.1% Dow Industrials (DJIA) 21, % 7.% 18.9% 17.2% NASDAQ 6, % 16.% 26.1% 22.9% Russell 2 1, % 2.9% 2.% 11.7% S&P/TSX Comp 15, % 1.2% 1.% 2.6% FTSE All-Share 4, % 6.6% 21.1% 9.% STOXX Europe % 8.4% 13.8% -2.2% German DAX 12, % 1.3% 24.1% 1.7% Hang Seng 25, % 17.3% 24.3% -6.5% Shanghai Comp 3, %.% 6.5% -35.7% Nikkei , % 3.9% 17.1% -3.5% India Sensex 31, % 16.9% 16.6% 11.8% Singapore Straits Times 3, % 12.3% 16.% -4.6% Brazil Ibovespa 62, % 3.4% 27.1% 17.5% Mexican Bolsa IPC 49, % 7.6% 7.8% 9.7% Commodities (USD) Price MTD YTD 1 yr 2 yr Gold (spot $/oz) 1, % 9.9% 4.4% 6.5% Silver (spot $/oz) % 8.7% 8.4% 3.2% Copper ($/metric ton) 5, % 2.4% 22.1% -5.9% Oil (WTI spot/bbl) % -1.% -1.3% -19.7% Oil (Brent spot/bbl) % -11.3% 1.3% -22.3% Natural Gas ($/mmbtu) % -18.2% 28.% 15.% U.S. 1-Yr Tsy 2.215% Canada 1-Yr 1.427% U.K. 1-Yr 1.73% Germany 1-Yr.35% Fixed Income (returns) Yield MTD YTD 1 yr 2 yr U.S. Aggregate 2.46%.% 2.4% 1.6% 5.1% U.S. Invest Grade Corp 3.15%.% 3.5% 4.3% 8.9% U.S. High Yield Corp 5.48%.% 4.8% 13.8% 12.7% Currencies Rate MTD YTD 1 yr 2 yr U.S. Dollar Index % -4.9% 1.8% -.2% CAD/USD % -.6% -3.3% -7.4% USD/CAD %.6% 3.4% 8.% EUR/USD % 6.6%.3% 2.6% GBP/USD % 4.4% -1.6% -15.3% AUD/USD % 2.3% 1.6% -3.% USD/CHF % -4.7% -1.7% 2.7% USD/JPY % -4.8% 1.7% -1.8% EUR/JPY % 1.6% 1.9% -8.4% EUR/GBP % 2.% 12.2% 21.1% EUR/CHF % 1.6% -1.5% 5.4% USD/SGD % -4.2%.7% 2.2% USD/CNY % -2.% 3.5% 9.8% USD/BRL % -.3% -9.9% 2.4% Source - Bloomberg. Note: Equity returns do not include dividends, except for the German DAX and Brazilian Ibovespa. Bond yields in local currencies. Copper Index data and U.S. fixed income returns as of Wednesday s close. Dollar Index measures USD vs. six major currencies. Currency rates reflect market convention (CAD/USD is the exception). Currency returns quoted in terms of the first currency in each pairing. Data as of 8:35 pm GMT 6/1/17. Examples of how to interpret currency data: CAD/USD.74 means 1 Canadian dollar will buy.74 U.S. dollar. CAD/USD -.6% return means the Canadian dollar fell.6% vs. the U.S. dollar year to date. USD/JPY means 1 U.S. dollar will buy yen. USD/JPY -4.8% return means the U.S. dollar fell 4.8% vs the yen year to date. UPCOMING EVENTS Fri, Jun 2 Mon, Jun 5, cont. Wed, Jun 7 Thu, Jun 8, cont. U.S. Trade Revision ( data) U.S. Markit Composite/Services PMI Japan Q1 17 GDP (Final Revision) Canada Housing Starts U.S. Nonfarm Payrolls (18K) U.S. ISM Non-Manufacturing PMI (56.9) Eurozone OECD Economic Outlook Canada New Housing Price Index U.S. Unemployment (4.4%) U.S. Durable and Capital Goods Orders Eurozone GDP (Final Revision) BoC Releases Financial System Review U.S. Avg. Hourly Earnings (2.6% y/y) Tue, Jun 6 Thu, Jun 8 Wed, Jun 14 Sun, Jun 4 Eurozone Markit Composite/Services PMI China CPI (1.4% y/y) Fed Meeting China Caixin Composite/Services PMI Eurozone Sentix Investor Confidence ECB Meeting Thu, Jun 15 Japan Nikkei Composite/Services PMI Eurozone Retail Sales Germany Industrial Production BoE Meeting Mon, Jun 5 Germany Markit Composite/Services PMI U.K. General Election Fri, Jun 16 U.K. Markit Composite/Services PMI U.S. JOLTS Job Openings U.S. Change in Household Net Worth BoJ Meeting The dates reflect North American time zones. All data reflect Bloomberg consensus forecasts where available. June 1, 217 RBC Wealth Management

6 6 Global Insight Weekly Authors Kelly Bogdanov San Francisco, United States RBC Capital Markets, LLC Bill Kuehn Minneapolis, United States RBC Capital Markets, LLC Diana Di Luca Toronto, Canada RBC Dominion Securities Inc. Frédérique Carrier London, United Kingdom Royal Bank of Canada Investment Management (U.K.) Ltd. Thomas McGarrity, CFA London, United Kingdom Royal Bank of Canada Investment Management (U.K.) Ltd. Jay Roberts Hong Kong, China RBC Dominion Securities Inc. placed on a Recommended List. The abbreviation RL Off means the date a security was removed from a Recommended List. Distribution of Ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm s own rating categories. Although RBC Capital Markets, LLC ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP) and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described below). Distribution of Ratings - RBC Capital Markets, LLC Equity Research As of March 31, 217 Inv estment Banking Serv ices Provided During Past 12 Months Rating C ount Percent C ount Percent Buy [Top Pick & Outperform] Hold [Sector Perform] Sell [Underperform] Disclosures and Disclaimer Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Important Disclosures In the U.S., RBC Wealth Management operates as a division of RBC Capital Markets, LLC. In Canada, RBC Wealth Management includes, without limitation, RBC Dominion Securities Inc., which is a foreign affiliate of RBC Capital Markets, LLC. This report has been prepared by RBC Capital Markets, LLC. which is an indirect wholly-owned subsidiary of the Royal Bank of Canada and, as such, is a related issuer of Royal Bank of Canada. Non-U.S. Analyst Disclosure: Diana Di Luca and Jay Roberts, employees of RBC Wealth Management USA s foreign affiliate RBC Dominion Securities Inc.; and Frédérique Carrier and Thomas McGarrity, employees of RBC Wealth Management USA s foreign affiliate Royal Bank of Canada Investment Management (U.K.) Limited; contributed to the preparation of this publication. These individuals are not registered with or qualified as research analysts with the U.S. Financial Industry Regulatory Authority ( FINRA ) and, since they are not associated persons of RBC Wealth Management, they may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts. In the event that this is a compendium report (covers six or more companies), RBC Wealth Management may choose to provide important disclosure information by reference. To access current disclosures, clients should refer to com/gldisclosure/publicweb/disclosurelookup.aspx?entityid=2 to view disclosures regarding RBC Wealth Management and its affiliated firms. Such information is also available upon request to RBC Wealth Management Publishing, 6 South Sixth St, Minneapolis, MN References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Dividend Growth (RL 8), and the Guided Portfolio: ADR (RL 1), and former lists called the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Midcap 111 (RL 9), and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios. The abbreviation RL On means the date a security was Explanation of RBC Capital Markets, LLC Equity Rating System An analyst s sector is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst s view of how that stock will perform over the next 12 months relative to the analyst s sector average. Although RBC Capital Markets, LLC ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described below). Ratings: Top Pick (TP): Represents analyst s best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Rating: As of March 31, 213, RBC Capital Markets, LLC suspends its Average and Above Average risk ratings. The Speculative risk rating reflects a security s lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility. Valuation and Risks to Rating and Price Target When RBC Wealth Management assigns a value to a company in a research report, FINRA Rules and NYSE Rules (as incorporated into the FINRA Rulebook) require that the basis for the valuation and the impediments to obtaining that valuation be described. Where applicable, this information is included in the text of our research in the sections entitled Valuation and Risks to Rating and Price Target, respectively. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of RBC Capital Markets, LLC, and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets, LLC and its affiliates. Other Disclosures Prepared with the assistance of our national research sources. RBC Wealth Management prepared this report and takes sole responsibility for its content and distribution. The content may have been based, at least in part, on material provided by our third-party correspondent research services. Our third-party correspondent has given RBC Wealth Management general permission to use its research reports as source materials, but has not reviewed or approved this report, nor has it been informed of its publication. Our third-party correspondent may from time to time have long or short positions in, effect transactions in, and make markets in securities referred to herein. Our third-party correspondent may from time to time perform investment banking or other services for, or solicit investment June 1, 217 RBC Wealth Management

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