2014 First Quarter Equity Market Update

Transcription

1 Portfolio Strategy Published by Raymond James & Associates Michael Gibbs, Director of Equity Portfolio & Technical Strategy, (901) , David Hydrick, (901) , Joey Madere, (901) , Barbara Metcalf, (901) , April 4, First Quarter Equity Market Update Please read domestic and foreign disclosure/risk information beginning on page 28 and Analyst Certification on page 28. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

2 Contents Executive Summary Our Base Case... 3 Downside Risk to Base Case... 4 Upside Risk to Base Case... 5 Quarter in Review... 6 Fed Policy Will Continue to be a Focal Point... 7 Stat Pack of 2013 Actuals and 2014 Estimates... 8 Stock Market Performance in the Years Following 30+% Return... 9 Previous Bull Markets: How This One Stacks Up Retail Investor Possible Source of Equity Market Demand Technical Trends: Favorable Fair Value Ranges: Next 12 Months Supplemental Pages Previous Leaders: Russell 2000 and NASDAQ Begin to Lag in March NYSE New High to New Low Global Asset Class Returns S&P 500 Quarterly Returns S&P 500 Valuation: No Longer Overly Cheap S&P 500: Long-Term P/E S&P 500 Inflation-Adjusted P/E S&P 500: Price to Sales S&P 500: Price to Cash Flow S&P 500: EV to EBITDA Returns: Size & Style Definitions International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

3 Executive Summary Short-Term (one to two months): Stocks Could Struggle to Advance Dramatically Issues such as the Ukraine/Russia conflict, the ongoing removal of Quantitative Easing (QE) as well as sluggish economic data points especially from China may be an overhang short term. Macro: Growth in China has slowed and the U.S. economic advancement has been negatively impacted by adverse weather. Until we get readings that support a second-half acceleration, the market could be subject to hiccups if negative economic data points develop. 1Q Earnings: Earnings are expected to be soft in 1Q due to the weather. The softness is probably already reflected in stock prices as earnings growth expectations have come down to 2% vs. the 6.5% projected as the year began. Yet, if companies do not deliver a message of better trends later in the year stocks may experience weakness The previous leaders, NASDAQ and small caps, have begun to underperform in recent weeks. A weakening pattern amongst the previous leaders will often be a sign the general market may struggle to advance or even pullback near term (page 15). Intermediate-Term (9-12 months): Risk-Reward Still Attractive and Supports Buying the Pullbacks Despite potential choppiness in the coming months, a solid intermediate-term trend, a calming of the negative headlines and an expected pick-up in economic activity (in the U.S. and China) later in the year suggests stocks will advance over the next six to nine months. S&P 500 fair value over next nine months: 1776 to % to 7.7% (including current S&P 500 dividend) from 3/31/ close): (page 13) International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

4 Executive Summary - Downside Risk to Base Case What could go wrong and cause stocks to retreat beyond our fair value downside level of 1776 for the S&P 500 over the near term? QE removal: QE was unprecedented; removing it is as well. Capital flows around the globe and the resulting impact on currencies are being influenced by the Fed s action. If a scare in the currency market emerges, investor emotion could cause prices to decline beyond current expectations. Upside surprise in U.S. economy might cause investors to expect the tightening cycle to be pulled forward. China economy: If growth slows well beyond current market expectations stocks will no doubt correct and could be pressured to levels below our current expectations China lending: Speculative lending (and borrowing) has occurred in recent years and such practices often lead to trouble for financial markets. Ukraine/Russia: The importance of the Ukraine as a conduit for energy moving from Russia to Europe cannot be overlooked as an incentive for Putin to push forward with his land grab. We feel this is a low probability given the impact the ensuing economic sanctions would have on the already weak Russian economy. Additionally, the main weapon at Putin s disposal, cutting off energy to Europe, will unlikely be used since 56% Russian government revenue comes from energy. European economy: Recovering, but with expectations of sub-1% GDP growth for 2014, setbacks could occur; additionally the risk of deflation remains and as of now the ECB has yet to prove they have the courage to fight it. Current Bull Market: Duration and total return exceeds the averages (page 10) while valuation is near historical averages. The weakness in the former leaders (NASDAQ and small caps) could be a warning of choppy markets ahead. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

5 Executive Summary - Upside Risk to Base Case What could go right and cause stocks to rally well beyond our fair value upside level of 1989 for the S&P 500 over the next nine months. Although we do not place a high probability to any of the outcomes below, they are always possible? Multiple expansion: With inflation at a low level the price to earnings multiple (P/E) could theoretically be higher as previous low inflationary periods corresponded with higher P/E s. For example, the average peak P/E multiple of the previous 11 bull markets was 17.6x, but if the two multiples negatively impacted by inflation (1970 & 1974 page 16) are removed, the peak multiple expands to 19.6x 1 (page 10). If the multiple expanded to 18x by year-end, the fair value expectation would move to 2109, at current expected earnings, or 5.9% above Fund flows: Increased demand due to a massive move out of fixed income funds and into equity funds could cause stock prices to move higher. Upside earnings surprises that push S&P 500 year-end earnings beyond the current expected $117 would raise our fair value estimate. The surprises would potentially spur investor confidence and a willingness to pay-up for earnings (i.e. higher P/E). ECB enacts QE to fight deflation or to stimulate growth. Some of the liquidity from such action would probably find its way to the U.S. equity market. Chinese economic growth returning to levels safely above 7.5%. 1 If the other extremes (bubble period 1998 and 2000) are factored out, the average peak multiple is 17.85x (adds 5% to our upside fair value). International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

6 First Quarter 2014 in Review: Positive Return Despite a 6% Pullback March 2014 S&P 500: +.84% NASDAQ: -2.45%. Year-to-date (and quarter return) 1.80% 0.83% Stocks react 2.3% as the Ukraine/ Russia clash unfolds A 5.9% pullback develops as a trifecta of weak economic readings in China, weak economic readings in the U.S. and lingering currency worries in select emerging market Earnings: 4Q13 earnings +9% y/y frighten investors. vs. 7.6% expected when 1Q began 1Q Forecasts: +2% down from 6.5% One-year Daily Chart on 1/1/14 International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

7 2014: Fed Policy Will Continue to be a Focal Point All Good Things Must End The Fed s unprecedented Quantitative Easing (QE) program has been a MAJOR reason stocks have rallied since Knowing the Fed was there gave investors confidence to buy stocks in recent years despite the tumultuous headwinds associated with sluggish economic conditions, sovereign debt issues in Europe, a U.S. debt downgrade, and counterproductive political contention around the globe. In late 2013, the beginning of the end of the QE program began. Implementing the program took the Fed into uncharted territory; removing it does as well. Thus far the impact of the reduction of QE (or hint of reduced QE) has had an impact on equities. The 7.5% pullback from May to June of 2013 was the result of a rise in interest rates as the Fed hinted on QE reduction. The 5.9% pullback in early 2014 was, in part, influenced by the unrest in the currency markets as money reallocated around the globe in anticipation of QE reduction and 2011: Every time the Fed took away the punch bowl stocks rolled over S&P 500 QE 1 Ends POMO & QE2 Fed's QE & The S&P 500 QE 2 Ends Operation Twist Fed extends Twist 6/20/12 '09 '10 '11 '12 '13 Source: FactSet Research Systems. QE , 2011 & 2012: Unprecedented and unique easing measures helped end weak stock market periods S&P : Although the reduction and eventual removal of QE may continue to contribute to stock weakness we do not think it will cause market drawdowns to the degree seen in 10, 11 & 12 2,000 1,800 1,600 1,400 1,200 1, FactSet Research Systems International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

8 Stat Pack 2013 vs Stat Pack of Forecasts EPS Growth S&P 500 ~4% 1 6% 1 EPS S&P 500 $ $117 1 GDP 1.9% 2.7% 2; 2.9% 3 CPI 1.5% 1.7 %2; 1.4% 3 Dividend Growth S&P % % 2 Revenue Growth Per Share S&P % 2 3.8% 2 Price to Earnings 17x ( trailing 12-month earnings) 15.9x 1 (consensus year-end estimates) 17x (trailing 12-month earnings) Earnings Yield S&P % (using top-down consensus) 6.3% 1 (using top-down consensus) 10-Year Treasury Yield 2.99% (12/30/13) 3.1% Year-End S&P Fair Value (17x top down consensus) Thomson Reuters Consensus 2 Bloomberg 3 Raymond James Chief Economist Scott Brown International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

9 Years Following 30+% Total Returns: Pullbacks of at Least 6% Since 1926 Remains Intact In 2013, the S&P 500 joined 17 other years since 1926, when large company stocks produced a total return in excess of 30%. In the years following the 30+% return years the average return for equities was 10%. Although the average gain was double digits, pullbacks were numerous and often deep. In 15 of the 17 years (88%) a pullback of at least 10% was seen while 100% of the time a pullback of at least 6% occurred (a 6% pullback occurred from Nov.-Dec. in 1996 is not shown on the chart). The 6% pullback streak remains alive after a 5.9% pullback in the 1Q14. We would not be frightened by some of the extreme downside levels on the chart as most of those occurred in periods of extremes such as the Great Depression ( 33-38), World War (1945) or periods influenced by high inflation or a recession ( 75, 80). None of these factors are present today, nor are they expected to surface. Source: Stocks, Bonds, Bills, and Inflation by Ibbotson Associates; RJ Equity Portfolio & Technical Strategy International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

10 How This Bull Market Stacks Up Various factors will influence the P/E and generally high inflationary periods ( 80) or periods just before inflation picked up ( 73) resulted in lower a P/E Be careful when trying to apply the averages to guide an investment decision especially in the current low inflationary environment The duration of the current bull market is well beyond the average bull market since Yet, we caution against basing an investment decision on averages alone as three of the twelve periods making up the average lasted longer than the current bull market. Three periods also produced larger gains. Removing the inflation influenced low P/E s of 73 and 80 the average climbs to 19.6x International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

11 2014: Retail Investor Possible Source of Equity Market Demand The nearly $1 trillion of flows into bond funds from represents a lot of fuel for equities if the great rotation ever develops. Equity fund flows have remained positive for an extended time (over 12 months) for the first time since the credit crisis. The return of the retail investor could serve as a catalyst to support higher prices. It also, for the contrarian investor, will raise a cautionary flag especially after stocks have appreciated 190% over the past five years. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

12 Favorable Technical Backdrop (see supplemental pages for additional technical measures) Healthy Technical Trend Our fair value range of 1989 to 1776 is supported by technical analysis As of now, just a few divergences have surfaced and the market continues to respect technical support levels. Absent internal deterioration in the periods ahead we would continue to put longterm money to work in equities and would especially be interested in buying the pullbacks as they reach support levels. Multiple support levels converge in the 1740 to 1800 area Support to Fair Value Range Technically, the top of the trend channel should reach a level near 2000 by year end at the current rate of ascent and lends support to our 1989 fair value estimate. On the downside, ample support in the area brackets our fair value estimate of 1776 reflected on the next page. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

13 S&P 500 Fair Value Range Short term : oneto three-month: neutral From 3/31/14 S&P and before dividends: Lower end of assumed range: - 5% (using 1Q estimates and 16x P/E) Upper end of assumed range +2-3% (using 2Q estimates and 17x P/E) Potential S&P 500 Values Current Favored F.V. Range: xp/e YEAR EARNINGS Q 1 $ Q 2 $ YE 3 $ Trailing 12 months earnings as of 1Q14 End using Thomson Reuters consensus year over year growth for 1Q of ~2%. 2 Trailing 12 months earnings as of 2Q14 using consensus growth rates expectations for 1Q (+2%) and 2Q (+8%) as reported by Thomson Reuters 3 Year Consensus earnings estimates reported by Thomson Reuters for Top down strategists and Bottom Up analysts. Quarterly progression forecast: 1Q +2%; 2Q +8%; 3Q 11.5%; 4Q +11.2% will require a lot of pent-up demand to result in the second half of the year Intermediate Term : 9-12 months: positive From 3/31/14 S&P and before dividends: Lower end of range: flat (using 2014 YE estimates and 16 PE Upper end of assumed range: +6.3%(using 2014 YE estimates and 17 PE) Please note: Our fair value range assumptions are based on numerous inputs such as historical averages, our anticipation of investor psychology, along with consensus estimates for earnings. All of these are subject to changing rapidly or misjudgment on our part. If these ranges are used to help form investment decisions, they should only be one consideration. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

14 Supplemental Pages International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

15 Previous Leaders: Russell 2000 and NASDAQ Begin to Lag in March A late quarter pullback (from March 6) saw the Russell 2000 and NASDAQ decline 5.5% and 5.4%, respectively versus the 2.2% decline for the S&P 500. During the decline both the Small caps and NASDAQ undercut short term technical support levels whereas the S&P 500 did not. Often, relative underperformance by the previous leaders can signal a generally soft period for equities may be on the horizon. A big rally on the last two days of the quarter along with a strong day on April 1 repaired some of the technical damage. A follow-through to this rally in the coming days (written on April 1) and more importantly a new price high will reduce or remove the worries created by the lagging performance of these former leaders. Until then this is something we will continue to monitor. Small caps and NASDAQ undercut technical support whereas the S&P 500 does not. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

16 NYSE New High to New Low Fewer New Highs Reflects a Narrowing Market The chart below reflects the NYSE new 52-week highs and new 52-week lows relative to the NYSE price. The green line at the top of the chart reflects the net new high line or new 52-week highs minus new 52-week lows. The blue line is the NYSE price. Notice the series of lower peaks in the net new high line as the NYSE has continued to produce new price highs. The non-confirmation of NYSE net new high line is a potential sign of a narrowing market. Maturing markets often narrow as fewer and fewer stocks participate in the rally. Although narrowing markets do reflect maturity, they are not useful as short-term indicators. Instead, when, and if, they appear let them be a catalyst to encourage selectivity with new investments (i.e. focus commitments to those areas and stocks that are participating). Other Indicators Do Not Reflect Narrowing At this point, many other indicators used to monitor participation do not reflect the same narrowing trend of the net new high line. For this reason, the declining trend in the net new highs should not discourage a positive outlook for equities. Source: FactSet Research Systems. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

17 Global Asset Class Returns Data Thru 3/31/14 Price Change Indices Close Q1 '14 YTD 12 Mo S&P % 1.30% 19.32% Dow Jones % -0.72% 12.89% NASDAQ Composite % 0.54% 28.51% Russell % 0.81% 23.28% NYSE Alerian MLP % 0.39% 2.44% MSCI U.S. REIT % 8.92% 0.24% Intermediate G/C Bond % 0.54% -2.09% MSCI The World % 0.77% 16.69% MSCI EAFE (Developed) % 0.00% 14.42% MSCI Emerging Markets % -0.80% -3.89% Euro Stoxx % 1.69% 20.49% Japan Nikkei % -9.20% 19.31% Commodities CRB Index % 8.74% 2.79% Crude Oil ($/bbl) % 3.21% 4.47% Natural Gas ($/btu) % 4.25% 8.62% Gold ($/ozt) % 6.78% % Currencies U.S. Dollar / Euro % 0.02% 7.33% Japan Yen / U.S. Dollar % -2.02% 9.54% Sovereign Bond Yields Current 10 Yr Avg U.S. 10-Year Treasury 2.72 S&P 500 Metrics Current Yr Avg Dividend Yield 2.14 P/E Ratio - Next 12 Mo P/E Ratio - Last 12 Mo Source: FactSet; Raymond James Equity Portfolio & Technical Strategy International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

18 S&P 500 Quarterly Returns The big 4Q13 return of approximately 10% for the S&P 500 robbed return from 1Q, causing the first quarter gain to come in below the average gain seen in the quarter since Source: FactSet; Raymond James Equity Portfolio & Technical Strategy International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

19 S&P 500 Valuation: No Longer Overly Cheap but Has Room for Slight Expansion The three valuation metrics highlighted have set new high levels relative to three-, five-, 10- and 15-year averages. Metric Current 1 Yr Ago 3 Yr Avg 5 Yr Avg 10 Yr Avg 15 Yr Avg Price to Earnings (Last 12M) Price to Earnings (Next 12M) Long Term EPS Growth Price to Book Value Price to Cash Flow Price to Sales P/E to Growth (PEG Ratio) Free Cash Flow Yield 5.0% 6.0% 6.3% 6.4% 6.3% 6.3% Dividend Yield 2.14% 2.22% 2.22% 2.18% 2.09% 1.91% Source: FactSet; Raymond James Equity Portfolio & Technical Strategy S&P 500 Valuation Valuations are no longer cheap but we warn against using simple valuation as a sole barometer. Some of the best returns have been generated in periods of overvaluation, whereas some of the worst returns have been generated in periods of undervaluation. Although it should not be the sole decision driver, it is an important component to an overall strategy that considers multiple input variables. The current level of valuation does not deter our positive intermediate-term outlook for equities due to low interest rates, low inflation, expectations of an improving economy and few other attractive areas for investors to invest monies in the liquid public markets. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

20 S&P 500: Long-Term P/E The most widely used valuation measure has climbed back to a level just above the long-term average. Although expanding the multiple from here may be difficult, earnings growth in line with consensus estimates produces an attractive risk/reward for equity investors. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

21 Inflation-Adjusted P/E: One of the Few Measures Still Below Average If valuations (P/E) for equities are adjusted for inflation, they look more attractive as depicted by the adjacent chart. The current inflation-adjusted P/E is below the long-term average of 20x. Inflation is not a fear as wage pressures and other items are not problematic, for now. Yet, given the impact inflation can have on equity valuations, it is something we will watch closely in the future. Two periods to note are the early 1980 s and early 1970 s. P/E multiples contracted in the high inflationary period of the early 1980 s and during the early 1970 s as inflation accelerated. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

22 S&P 500: Price to Sales No surprise here the tepid top-line growth has left the Price to Sales valuation rich to the long-term average. Taken alone, this is not a reason to alter a bullish stance as the ratio was near the current level for much of the bull market period of The ratio also remained elevated for multiple years (beginning in 1998) as the equities ran to bubble status in Nonetheless, this is a data point reiterating that stocks are no longer inexpensive relative to history. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

23 S&P 500: Price to Cash Flow Cash flow and the willingness of companies to share cash flow with shareholders in the form of dividends and share buybacks has been a catalyst for stock appreciation in recent years. This trend should continue, but with cash flow expected to decline in for the S&P 500, the P/CF measure will join the various other measures near or above longterm averages. 1 Bloomberg consensus cash flow per share estimates: 2013: $196.03, 2014: $ International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

24 S&P 500: EV to EBITDA (Enterprise Value to Earnings Before Interest, Taxes, and Depreciation) EV to EBITDA, like many other valuation measures, is back above the 20 plusyear average. Note: Enterprise value is generally equity plus debt, minus cash. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

25 Returns: Size & Style Not Annualized and Without Dividends % Return by Market Cap and Style 3 Mo. YTD LTM 2 Yrs 3 Yrs 5 Yrs 10 Yrs Large Cap Growth Value Mid Cap Growth Value Small Cap Growth Value Year to Date (% Return) Growth Blend Value Large Mid Small Last 12 Months (% Return) Growth Blend Value Large Mid Small Source: FactSet; Raymond James Equity Portfolio & Technical Strategy International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

26 Definitions / Explanations Past performance does not guarantee future results. There is no assurance these trends will continue. The market value of securities fluctuates and you may incur a profit or a loss. This analysis does not include transaction costs and tax considerations. If included these costs would reduce an investor s return. Material is provided for informational purposes only and does not constitute a recommendation. It has been obtained from sources believed to be reliable, but accuracy is not guaranteed. Fair Value Range: In our opinion, two of the influences of stock prices are profits generated at the company level and conditions influencing how much investors are willing to pay for such profits. Ranges offered in this publication are a rough estimate of levels we feel the S&P 500 might trade at in periods of positive investor emotion and negative investor emotion for the near term (one to three months). We utilize historical P/E s (16.4x average since 1953) as a starting point. Next, current global conditions are accessed to determine if P/E s above or below historical levels are warranted. In the current environment, sluggish global economic growth, government influence in the marketplace, stressed government budgets, investor fund flows, and Mid-East tension lead us to believe P/E s will remain below average on the upside. On the downside, expected actions from central banks around the world to put liquidity into the global system make us believe that a reasonable downside multiple of approximately 16x is reasonable. Price Earnings Ratio (P/E) is the price of the stock divided by its earnings per share. QE or Quantitative Easing is unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. Fed- U.S. Federal Reserve Price to Cash Flow: S&P 500 price divided by S&P 500 cash flow; cash flow= cash receipts minus cash payments from operations Price to Sales: S&P 500 price divided by sales of companies in the S&P 500 CPI: Consumer Price Index DJ Industrial Average The Dow Jones Industrial Average is a priceweighted average of 30 blue-chip stocks that are generally the leaders in their industry. NASDAQ Composite Index The NASDAQ Composite Index is a broadbased capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market, and Capital Market. S&P 100: index weighted for market capitalization of the top 100 stocks on the S&P 500 S&P 400: index serves as a barometer for the U.S. mid-cap equities sector. Capitalizations range from $750 million to $3 billion dollars. S&P 600: index serves as a barometer for the U.S. small cap equities sector. MSCI EAFE: index serves as a barometer of the major international markets to a U.S. investor S&P The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

27 Definitions / Explanations (cont.) MSCI EM (Emerging Markets) index serves as barometer for emerging international markets Euro STOXX 600: index represents 600 large-, mid-, and small-capitalization companies across 18 countries of the European region. Japan Nikkei The Nikkei 225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed on the Tokyo Stock Exchange S&P Sectors: represents the 10 major sectors of the S&P 500 CRB Index Commodity Research Bureau Index measures the overall direction of commodity sectors Crude Oil A naturally occurring, unrefined petroleum product that is used to produce gasoline, diesel, and various forms of petrochemicals Natural Gas A naturally occurring, hydrocarbon gas mixture consisting primarily of methane and used primarily to provide heating and electricity Silver A precious metal commonly used in jewelry, coins, electronics, and photography U.S. euro/dollar Pair or cross for the currencies of the European Union (EU) and the United States (USD). The currency pair tells one how many U.S. dollars (the quote currency) are needed to purchase one euro (the base currency) U.S. pound/dollar Pair or cross for the British pound and U.S. dollar. The currency pair tells one how many U.S. dollars (the quote currency) are needed to purchase one British pound (the base currency) U.S. Treasury 10-year bond A debt obligation issued by the United States government that matures in 10 years and pays a fixed amount semiannually. The Treasury bond is exempt from state and local taxes, but is taxable at the federal level. Spanish 10-year bond A debt security issued and backed by the credit and taxing power of Spain German 10-year bond A debt security issued and backed by the credit and taxing power of Germany Italian 10-year bond A debt security issued and backed by the credit and taxing power of Italy Investing in small- and mid-cap stocks are riskier investments which include price volatility, less liquidity and that threat of competition. Dividends are not guaranteed and will fluctuate. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic stability. These risks are greater in emerging markets. Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of diversified portfolio. There may be sharp fluctuations even during periods when prices overall are rising. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

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29 Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Latin American rating definitions Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Euro Equities, SAS rating definitions Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

30 Rating Distributions Coverage Universe Rating Distribution Investment Banking Distribution RJA RJL RJ LatAm RJEE RJA RJL RJ LatAm RJEE Strong Buy and Outperform (Buy) 52% 65% 50% 46% 22% 37% 0% 0% Market Perform (Hold) 43% 33% 50% 40% 9% 22% 0% 0% Underperform (Sell) 6% 2% 0% 14% 0% 33% 0% 0% Suitability Categories (SR) Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal. Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small dividend, and the potential for long-term price appreciation. Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets. High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and risk of principal. Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, and a substantial risk of principal. Valuation Methodologies Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies. Risk Factors General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/disclosures/index. Copies of research or Raymond James summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see raymondjames.com for office locations) or by calling , toll free or sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6 th Floor, 880 Carillon Parkway, St. Petersburg, FL International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

31 International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small-cap stocks generally involve greater risks. Dividends are not guaranteed and will fluctuate. Past performance may not be indicative of future results. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds carefully before investing. The prospectus contains this and other information about mutual funds. The prospectus is available from your financial advisor and should be read carefully before investing. For clients in the United Kingdom: For clients of Raymond James & Associates (London Branch) and Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and is not intended for use by clients. For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJA, RJFI, and Raymond James Investment Services, Ltd. are authorised and regulated by the Financial Conduct Authority in the United Kingdom. For clients in France: This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in Code Monétaire et Financier and Règlement Général de l Autorité des Marchés Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For institutional clients in the European Economic Area (EEA) outside of the United Kingdom: This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted. Raymond James International and Raymond James Euro Equities are authorized by the Autorité de contrôle prudentiel et de résolution in France and regulated by the Autorité de contrôle prudentiel et de résolution and the Autorité des Marchés Financiers. For Canadian clients: This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements. Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows: This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This is RJA client releasable research This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida