Making America Great Again A quick note on the upcoming regime change

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1 TRUMPONOMICS has quickly become synonymous for the pro-growth and America-first agenda anticipated under the new presidential regime. The prospect of new economic policies and their effect on investors are contributing, at least in part, to inflationary trades pushing markets to record highs. President elect Donald Trump s inauguration is scheduled for January 20 th His mandate, as illustrated on both the campaign trail and since his election victory, has signalled a large emphasis on pro-growth and Americafirst policies. While his victory was viewed by many spectators to be shocking, it should not have been such a huge surprise what the immediate and swift impact he s had to the markets sharp upticks as a result of an inflationary mindset. This has primarily been centered along the following themes: Protectionist Trade Policy A distinguishing feature of Trump s policies is that its global policy disproportionately favors the U.S., and in some instances, come at the expense of foreign economies. International trade policy will likely tilt towards being protectionist towards U.S. companies, impacting a transfer from foreign to domestic firms, while U.S. fiscal policy tightens financial conditions abroad. Specifically from a Canadian perspective, Trump s policies in preserving and prioritizing American jobs may result in the renegotiating or outright exit of the North American Free Trade Agreement ( NAFTA ) policy, potentially impacting Canadian trades and jobs. However, one thing to consider is that NAFTA has been in effect for over 20 years and forms of free-trade arrangements between Canada and the U.S. have been in effect for nearly 30 years. Terms and provisions between companies from both countries have been deeply rooted in how we conduct business with each other, and any major changes from this would result in negative consequences for U.S. companies as well. To what extent changes will be enforced and implemented are unknown at this point, but will be something to keep an eye on as it will be front and center after Trump s inauguration. Tax Reform U.S. companies are taxed on income earned worldwide if the profits are returned domestically to the U.S. The resulting federal tax rate is approximately 39%, making it the highest tax burden amongst developed nations (for comparison, Canada s federal corporate income tax rate is 27%). While details of tax cuts are unclear at this point, the expectation is that a lower tax rate would encourage companies to repatriate some of the profits they've kept abroad to avoid taxes. In theory, that could encourage improved economic conditions through investment and hiring, though historically, shareholders have been the main benefactors of corporate tax cuts primarily through capital Corporate Income Tax Rates 4 35% 3 25% 2 15% 5% expenditures, mergers & acquisitions, and buybacks. Source: OECD, January 39% 27% United States France Belgium Italy Germany Australia Mexico Japan Portugal Luxembourg Greece New Zealand Canada Austria Israel Netherlands Norway Spain Denmark Sweden Switzerland United Kingdom Czech Republic Hungary Poland Ireland 1/5

2 De-Regulation When President elect Donald Trump takes office, he will lead a White House many expect to reduce regulations introduced during the previous administration, chief among them are financial reforms. The main benefactors for this will be the Financial Services sector, with anticipation from market participants having already resulted in companies in this sector like JPMorgan Chase JPM (up 24%* since Election Day) and Goldman Sachs Group GS (up 34%* and a key factor in the Dow s leap toward 20,000) to surge, - even as such firms downplay talk that they'll shift gears to taking on more risk under the new regime. *, for the period Nov 8 th - Jan 13 th, 2017 The Canadian economy has generally been very correlated with the U.S., and has moved lockstep in previous years. As a growing U.S. economy takes hold, the overall benefit should be expected to permeate to Canada as well. Specifically, increased growth should result in boosting businesses and investor confidence, resulting in higher loan growth for Canadian banks. This should be even more pronounced for Canadian banks with large U.S. operations. Funding Restoration Even prior to the election, there was a shift in developed market fiscal policies towards being more accommodative. With the U.S. at the forefront of this trend, and with the prospect of additional easing in the near future, the direct growth effects of fiscal policy appear to be a huge tailwind for the U.S. markets. Sectors that will best benefit from this trend are those that traditionally have been highly correlated with economic activity, namely the cyclical sectors - Energy, Industrials, and Materials. narrative S&P500 Financials Index: the impact of de-regulation /Nov 18/Nov 28/Nov 08/Dec 18/Dec 28/Dec 07/Jan Canadian Banks vs. S&P/TSX Composite Index 1 14% 12% 8% 4% 2% TD RBC BMO TSX De-regulation is expected to be a positive catalyst for the Financial Services sector -2% 08/Nov 18/Nov 28/Nov 08/Dec 18/Dec 28/Dec 07/Jan Cyclicals are outpacing Defensive sectors 8% 7% 5% 4% 3% 2% 1% Defensive Sectors Cyclical Sectors 14% 12% Pre-Election 1 Post-Election 2 (Jan 1 Nov 7 ) (Nov 8 Jan ). Data is based on equal-weighted cumulative price returns of defensive sectors (S&P 500 consumer staples, REITs, telecom, utilities) and cyclical sectors (S&P 500 energy, consumer discretionary, financials, health care, industrials, technology, materials). 2/5

3 Further,theupcomingregimechangehasthepotential to make small capitalization stocks great again. As Trump s policies are generally inward facing, this bodes well for companies that have little exposure to foreign markets. Because they rely less on exports, they re not negatively impacted by a strong U.S. dollar. This narrative is also fueled by a number of other factors: better credit availability (favorable financial regulations means less capital constraints, resulting in better credit availability) and a rising rate environment (investors are willing to take on more risk on small caps relative to traditional large cap dividend payers). Small Cap vs. Large Cap stock performance 125 Russell 2000 Index 120 S&P 500 Index Dec Jan Jan Mar Feb Mar May Apr May Jun Jul 2015 Small cap & large cap stocks tracked each other relatively closely before the Nov 8 th election results Jul POST ELECTION Aug Sep Sep Nov Oct Nov Dec Jan 2017 Finally, evidence of the shifting expectations around inflation can be found in the 10-year U.S. Treasury yields, which surged from 1.83% before the Presidential Election to 2.6 in December. In the minutes from the December Federal Open Market Committee ( FOMC ) meeting, which included a quarter-point rate hike to a 0.5 policy target, FOMC members agreed that Trump's proposed policies and infrastructure spending promises could boost economic growth, and, in turn move inflation higher. 10-year Treasury Yields 2.8% % 2.2% % % POST ELECTION 1.2% Jan Mar May Jul Sep Nov Jan 2017 Conclusion The recent shifts in the markets may have already resulted in a change to the makeup of your portfolio. Thus, you might have a greater allocation of equities than you had previously planned for and your intra-asset class exposures (i.e., small cap equities vs. large cap equities) may have shifted. There may be opportunities to evaluate the makeup of your investment portfolio and to further assess the potential impact of rising inflation and interest rates. If you are looking for opportunistic investment ideas that align with your objectives, BMO Global Asset Management has the expertise and capabilities through a robust selection of both mutual fund and ETF products to create the right solution for you. 3/5

4 Trade Opportunities: Mutual funds & ETFs BMO U.S. Equity Plus Fund Led by Brian Belski, a leading investment strategist on both Bay Street and Wall Street (correctly forecasted Canadian equities would recover from 2015 lows to outperform U.S. equities, - the first time in six years) BMO U.S. Equity Plus Fund typically invests 8 of its portfolio in U.S. equities, with the remaining allocation opportunistically invested across Canadian blue-chip companies The Fund is positioned with an overweight in Financials, Technology, and Consumer Discretionary to take advantage of the coming market opportunities. BMO North American Dividend Fund Focused on dividend growth, typically with an allocation of 7-8 to the U.S (led by Ernesto Ramos), and 2-3 to Canada (led by Phil Harrington & Lutz Zeitler) Superior risk-adjusted returns as proven by its 5 star rating 1 by Morningstar Canada Dividend growth strategies, where certainty and visibility of cash flows is a key driver for performance, have not only performed well in rising rate environments, but have also historically exhibited less volatility than the broad-market (an especially important factor during times of change). BMO U.S. Equity Fund Led by Ernesto Ramos, the Fund is a core strategy giving you broad-based exposure to the U.S. market Superior risk-adjusted returns as proven by its 4 star rating 2 by Morningstar Canada With the expectation of higher rates, the Fund is positioned with an overweight in Financials and underweight in defensive sectors. BMO Equal Weight US Banks Index ETF Provides exposure to U.S. banks, equally weighted to lessen security specific risk Higher exposure to regional banks (relative to the broad market) will benefit investors as Trump continues to realize his America-first agenda (these banks have less of a reliance to international operations vs. larger U.S. bank firms) American banks are well positioned to benefit from the financial tailwinds as a result of the regime change (namely the expected rate hikes and de-regulation of financial reforms). BMO US High Dividend Covered Call ETF Provides exposure to high dividend U.S. equities through sustainability screens Enhanced yield by writing call option contracts while owning the underlying stocks (yielding 5.57% as at Dec/31/) Maintains the sweet spot for call writing 5 of the portfolio is covered allowing for enhanced yield, while the remaining 5 is left to participate in rising markets. BMO S&P 500 Index ETF Provides broad-based market exposure to the S&P 500 at a low cost (management fee of 0.08%) Superior risk-adjusted returns as proven by its 5 star rating 3 by Morningstar Canada. Source: Morningstar Direct. Morningstar Ratings as at December 31 st. 1 BMO North American Dividend Fund Series F has an Overall Rating of 5 stars; other classes may have different performance characteristics. BMO North American Dividend Fund Series F received a Morningstar Rating of 5 stars over 3 years (49 funds rated). 2 BMO U.S. Equity Fund Series F has an Overall Rating of 5 stars; other classes may have different performance characteristics. BMO U.S. Equity Fund Series F received a Morningstar Rating of 4 stars over 3 years (754 funds rated), and 4 stars over 5 years (477 funds rated). 3 BMO S&P 500 Index ETF has an Overall Rating of 5 stars. BMO S&P 500 Index ETF received a Morningstar Rating of 5 stars over 3 years (754 funds rated). Past performance is not a guarantee of future results. Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is not a guarantee of future results. 4/5

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