Month in Review: FEBRUARY 2012

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1 Portfolio Advisory Group RBC Dominion Securities Inc. Month in Review: FEBRUARY 2012 What moved the markets The S&P/TSX Composite Index rose 1.5% in February to close at 12,638. Companies in the Financials sector pushed the index up while the Materials sector lagged. In Financials, lifecos led the group as Sun Life Financial (SLF) advanced 8.3% and Manulife Financial Corp. (MFC) gained 5.7%, while Royal Bank of Canada (RY) led the banks with a gain of 6.3% for the month. In Materials, Teck Resources (TCK.B) declined 6.8% while Barrick Gold Corp. (ABX) fell 4.3%. The S&P 500 finished up 4.1%, and the Dow Jones Industrial Average advanced 2.5%. WTI finished the month up 8.7%, closing at $ per barrel, while natural gas closed up 4.5%. Precious metals were mixed; gold fell 2.3% while silver gained 4.5%. The Canadian dollar strengthened relative to the U.S. dollar, closing at CAD/USD. The Bank of Canada ( BOC ) published research in February on household borrowing and the property market. While the BOC noted that the Canadian housing market lacks some of the excesses that preceded housing crises in other countries, it did point to the possibility of a relatively large shock to domestic consumption if property values were to decrease 10% or more. Economic data was mixed as the unemployment rate rose from 7.5% to 7.6% while housing starts decreased less than expected. The S&P/TSX Composite s gain for the month was led by the Financials sector, as life insurance companies recovered from selling pressure in January caused by the Fed s extended outlook for low interest rates. The S&P/TSX Capped Financials Index gained over 3.5% for the month. Meanwhile in the Materials sector, a 1.8% monthly loss was caused by weakness in the price of gold coupled with rising energy costs. Earnings season continued as Canadian companies posted mixed results. Telus Corp. (T) and Rogers Communications (RCI.B) posted Q4 results that were largely in line with expectations, while Manulife Financial Corp. (MFC) and Loblaw Companies Ltd. (L) posted results that missed expectations. February saw a host of cross-border M&A deals as Fortis (FTS) expanded its footprint in the U.S. with the purchase of CH Energy Group (CHG) for ~$1.5B, Encana (ECA) agreed to sell 40% of its Cutback Ridge asset to Mitsubishi Corp (8058) and China s largest oil & gas firm PetroChina (0587) purchased 20% of the shale gas assets owned by Royal Dutch Shell PLC (RDS.A) in British Columbia. Professional Wealth Management Since MONTH IN REVIEW FEBRUARY 2012

2 What moved the markets continued February was mostly a positive month for U.S. economic data releases. Unemployment fell from 8.5% to 8.3%, as the private sector added 257,000 jobs versus a forecast of 140,000. Midmonth saw the ECRI s U.S. Weekly Leading Index rise to its highest level since August Later in the month, the Conference Board s measure of consumer confidence rose to 70.8 points, gaining 9.3 since January and exceeding market expectations of The S&P 500 Index s growth throughout February saw the Information Technology sector outperform for a second consecutive month as Apple (AAPL), Microsoft (MSFT) and Google (GOOG) advanced. Financials also pushed the index higher as Bank of America Corp. (BAC) gained 13.9% and Citigroup (C) advanced 9.2%, while Utilities lagged with flat monthly performance for the sector. February was an active month for the tech industry as Facebook filed for an initial public offering of $5B, the largest internet IPO in history. Meanwhile, Google (GOOG) received antitrust approval from U.S. regulators to purchase Motorola Mobility Holdings Inc. (MMI) for $12.5B, which will expand its portfolio of mobile phone patents. In Europe, economic data was generally better than expected; however, the ongoing struggle to find a resolution to the Greek debt situation caused significant volatility. By month end, a deal was struck that would reduce Greek debt-to-gdp to 120% by 2020 through a 130 billion bailout package that included significant losses for Greek bondholders. At month end, results from the second tranche of the LTRO window were announced with 529 billion of take-up (slightly Number Crunching Equity Indices* Month YTD* S&P/TSX Composite Index TR 1.7% 6.1% Dow Jones Industrial Average TR 2.9% 6.5% S&P 500 Index TR 4.3% 9.0% NASDAQ Composite Index TR 5.6% 14.1% MSCI EAFE TR (USD) 5.8% 11.4% MSCI World TR (USD) 4.9% 10.2% S&P/TSX Sector Performance* Month YTD* S&P/TSX Financials TR 3.5% 6.8% S&P/TSX Energy TR 2.7% 6.4% S&P/TSX Materials TR -1.7% 8.5% S&P/TSX Industrials TR -0.8% 1.8% S&P/TSX Consumer Discretionary TR 5.9% 9.5% S&P/TSX Telecom Services TR -0.2% -2.7% S&P/TSX Information Technology TR -2.1% 4.1% S&P/TSX Consumer Staples TR -1.2% -1.3% S&P/TSX Utilities TR 3.8% 2.8% S&P/TSX Healthcare TR 8.2% 12.7% more than expected). Under the LTRO, European banks can pledge collateral in order to borrow monies for up to three years at the overnight rate (currently 1%). This cash infusion has likely in part contributed to the rally in euro bond markets as banks recycle the LTRO funds into higher yielding sovereign bonds. Currencies (in Canadian Dollars) Commodities (US$) Spot Price Month YTD* Crude Oil (WTI per barrel) $ % 8.3% Natural Gas (per million btu) $ % -12.5% Gold (per ounce) $1, % 8.5% Silver (per ounce) $ % 24.6% Copper (per pound) $ % 11.9% Nickel (per pound) $ % 2.4% Aluminum (per pound) $ % 14.6% Zinc (per pound) $ % 14.5% * All returns are on a Total Return basis All indices are in local currency unless otherwise noted. Exchange Month YTD* US Dollar % -3.1% Euro % -0.4% British Pound % -0.7% Japanese Yen (100) % -8.2% Like January, momentum in China was predominantly driven by speculation over whether the central bank would loosen monetary policy or continue tightening. The People s Bank of China followed through with a reserve ratio cut later in the month, reducing it by 50 basis points to 20.5%. This, coupled with better than expected economic data, drove strong equity market performance into month end. 2 MONTH IN REVIEW FEBRUARY 2012

3 What moved the markets continued Fixed Income Month in Review The above all acted to put pressure on Canadian and U.S. government bond prices for the month. Canadian economic news was relatively soft this month. Employment increased 2.3K in January, much smaller than the consensus estimate of 22.0K. However, the increase marked the second straight monthly increase following declines in November and October of 5.5K and 52.7K, respectively. The unemployment rate inched up to 7.6% in January, a nine-month high, from 7.5% in December as the labour force increased by 23.7K. GDP activity in November unexpectedly fell 0.1% following unchanged activity in October which was lower than the market s expectation for a 0.2% gain. CPI rose 0.4% in January, slightly higher than the average economist estimate of 0.3% while the year-overyear rate edged up to 2.5% versus 2.3% expected. This was still below the average pace of 2.9% in the previous six months. In the Federal Reserve s Beige Book report, economic activity was said to have increased at a modest to moderate pace in January and early February. Chairman Bernanke did not discuss another leg of quantitative easing in his Humphrey-Hawkins testimony before Congress on February 29th, which sent the U.S. 10-year yield and U.S. dollar higher and pushed the S&P500 and gold lower on the day. The U.S. 10-year benchmark rose 18bps this month to close at 1.98%. Corporate credit spreads in the U.S. tightened as the CDX Investment Grade Index fell 7bps to close the month at 94bps and the CDX High Yield Index fell 16bps to close the month at 550bps. S&P/TSX Index - Target Overnight Rate, LTM S&P/TSX Index - Target Overnight Rate, LTM S&P/TSX Index Target Overnight Rate 1.2 % 15, % 14, % 13, % 12, % 11, % 10,000 3/16/11 4/13/11 5/12/11 6/10/11 7/11/11 8/9/11 9/7/11 10/5/11 11/3/11 12/1/11 1/3/12 1/31/12 2/29/12 3 MONTH IN REVIEW FEBRUARY 2012

4 North American Equity Highlights February ,000 14,500 Feb. 2: Facebook files for a $5B initial public offering Feb. 14: Google Inc. (GOOG) wins regulatory approval to acquire Motorola Mobility Holdings Inc. (MMI) for $12.5B Feb. 21: Greece receives approval for another bailout, worth 130B euros Feb. 27: G20 finance ministers reject a eurozone plea for more IMF aid resources 1,450 1,400 S&P/TSX 14,000 13,500 13,000 Feb. 3: PetroChina (0587) buys a 20% stake in a Royal Dutch Shell PLC (RDS.A) shale gas property in B.C. Feb. 3: U.S. unemployment falls to 8.3% in January, down from 8.5% Feb. 15: Moody's places 17 global banks on ratings review, including Morgan Stanley (MS) and Bank of America (BAC) Feb. 10: Telus Corp. (T) reports Q4 EPS of $0.76 vs. consensus of $0.81 Feb. 16: U.S. jobless claims drop to 361K, near a 4-year low Feb. 21: Bank of Montreal (BMO) acquires a 19.9% stake in Cofco Trust Co., a Chinese state-owned investment firm Feb. 24: U.S. new home sales for January rise to 324K, up from 307K in December Feb. 28: SNC Lavalin (SNC) falls 20.6% as the board of directors investigates an undisclosed $35M charge for Q4 1,350 1,300 1,250 1,200 12,500 12,000 1,150 1,100 11,500 1,050 11,000 1,000 02/01/12 02/02/12 02/03/12 02/06/12 02/07/12 02/08/12 02/09/12 02/10/12 02/13/12 02/14/12 02/15/12 02/16/12 02/17/12 02/21/12 02/22/12 02/23/12 02/24/12 02/27/12 02/28/12 02/29/12 S&P 500 Feb. 3: Canadian unemployment rises from 7.5% to 7.6% in January Feb. 9: Manulife Financial Corp (MFC) reports a $69M loss in Q4 Feb. 17: Enbridge (ENB) reports Q4 results in line with expectations; raises dividend by 15% Feb. 21: Encana (ECA) agrees to sell 40% of its Cutback Ridge asset to Mitsubishi Corp (8058) in a joint-venture agreement Feb. 23: Loblaw Companies (L) falls 5.7% on lowered 2012 outlook related to IT expenses S&P/TSX S&P MONTH IN REVIEW FEBRUARY 2012

5 World Markets February 2012 Markets advanced across the world in February. Positive economic data releases in the U.S. provided momentum to global markets, as new home sales and consumer confidence improved while unemployment decreased from 8.5% to 8.3%. Meanwhile in Europe, Germany continued to benefit from a weak Euro as economic sentiment remained upbeat, while Greece secured yet another crucial bailout. In Asia, the Chinese markets were dominated by speculation of monetary easing, while small-cap companies led growth in Japan on a weakened yen. All returns are on a total return basis unless otherwise noted All returns calculated in local currency except for MSCI World ** These indices are calculated on a price return basis Canada: S&P/TSX M/M: 1.7% YTD: 6.1% U.S.: S&P 500 M/M: 4.3% YTD: 9.0% Brazil: Bovespa M/M: 4.3% YTD: 16.0% U.K.: FTSE 100 M/M: 4.0% YTD: 6.1% Germany: DAX M/M: 6.1% YTD: 16.2% MSCI World Index: Global USD CAD M/M: 5.0% M/M: 3.1% YTD: 10.3% YTD: 7.0% India: Sensex M/M: 3.3% YTD: 15.0% China: Shanghai Index M/M: 5.9% YTD: 10.4% Hong Kong: Hang Seng M/M: 6.3% YTD: 17.6% Japan: Nikkei M/M: 10.5% YTD: 15.1% Australia: S&P/ASX 200 M/M: 2.3% YTD: 7.5% 5 MONTH IN REVIEW FEBRUARY 2012

6 Canadian and U.S. Economic Data Higher Than Expected Event Period Consensus Actual Prior 3-Feb US Change in Nonfarm Payrolls JAN 140, , ,000 2-Feb US Continuing Claims JAN 3,535,000 3,567,000 3,554, Feb US Continuing Claims FEB 3,495,000 3,526,000 3,515, Feb US Housing Starts JAN 675, , , Feb US New Home Sales JAN 315, , ,000 2-Feb US Initial Jobless Claims JAN 371, , ,000 9-Feb US Initial Jobless Claims FEB 370, , ,000 8-Feb CA Housing Starts JAN Feb US Empire Manufacturing FEB Feb US U. of Michigan Confidence FEB Feb US Consumer Price Index NSA JAN Feb US Durable Goods Orders JAN -1.00% 3.20% 3.00% 21-Feb CA Retail Sales MoM DEC -0.20% 0.40% 0.30% 17-Feb CA Consumer Price Index YoY JAN 2.30% 2.50% 2.30% 17-Feb CA Bank Canada CPI Core YoY JAN 1.90% 2.10% 1.90% 3-Feb CA Unemployment Rate JAN 7.50% 7.60% 7.50% 17-Feb US Consumer Price Index (YoY) JAN 2.80% 2.90% 3.00% 17-Feb US CPI Ex Food & Energy (YoY) JAN 2.20% 2.30% 2.20% 17-Feb CA Consumer Price Index MoM JAN 0.30% 0.40% -0.60% 17-Feb CA Bank Canada CPI Core MoM JAN 0.10% 0.20% -0.50% As Expected 9-Feb CA New Housing Price Index YoY DEC 2.50% 2.50% 2.50% 17-Feb US CPI Ex Food & Energy (MoM) JAN 0.20% 0.20% 0.10% Lower Than Expected 9-Feb CA New Housing Price Index MoM DEC 0.20% 0.10% 0.30% 17-Feb US Consumer Price Index (MoM) JAN 0.30% 0.20% 0.00% 16-Feb CA Manufacturing Sales MoM DEC 2.00% 1.90% 2.00% 3-Feb US Unemployment Rate JAN 8.50% 8.30% 8.50% 16-Feb US Producer Price Index (MoM) JAN 0.40% 0.10% -0.10% 7-Feb CA Building Permits MoM DEC 1.00% -2.60% -3.60% 1-Feb US ISM Manufacturing JAN Feb US Consumer Confidence FEB Feb US Initial Jobless Claims FEB 365, , , Feb US Building Permits JAN 680, , ,000 6 MONTH IN REVIEW FEBRUARY 2012

7 Canadian & U.S. Equities S&P/TSX Composite Sector Movement S&P/TSX Composite Sector Movement -20% -15% -10% -5% 0% 5% 10% 15% 20% Healthcare Consumer Discretionary Financials Utilities Energy Telecom Services Industrials Consumer Staples Materials Information Technology Top 10 S&P/TSX Contributors/Decliners by Index Points Top 10 S&P/TSX Contributors / Decliners by Index Points Royal Bank of Canada Toronto-Dominion Bank/The Bank of Nova Scotia Suncor Energy Inc Talisman Energy Inc TransCanada Corp Cenovus Energy Inc Magna International Inc Manulife Financial Corp Valeant Pharmaceuticals International Inc Kinross Gold Corp Nevsun Resources Ltd Canadian Oil Sands Ltd IAMGOLD Corp Potash Corp of Saskatchewan Inc Research In Motion Ltd Teck Resources Ltd Barrick Gold Corp SNC-Lavalin Group Inc Canadian Natural Resources Ltd S&P 500 Sector Movement S&P 500 Sector Movement Top 10 S&P 500 Contributors/Decliners by Index Points % -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% Information Technology Energy Financials Consumer Discretionary Telecom Services Consumer Staples Industrials Healthcare Utilities Materials Apple Inc Microsoft Corp Philip Morris International Inc Exxon Mobil Corp Procter & Gamble Co/The Chevron Corp ConocoPhillips Wells Fargo & Co Google Inc Bank of America Corp Union Pacific Corp Johnson & Johnson Pfizer Inc Monsanto Co Gilead Sciences Inc Freeport-McMoRan Copper & Gold Inc Wal-Mart Stores Inc PepsiCo Inc/NC Hewlett-Packard Co Amazon.com Inc 7 MONTH IN REVIEW FEBRUARY 2012

8 8 MONTH IN REVIEW FEBRUARY 2012 The information contained in this report has been compiled by RBC Dominion Securities Inc. ( RBC DS ) from sources believed by it to be reliable, but no representations or warranty, express or implied, are made by RBC DS or any other person as to its accuracy, completeness, or correctness. All opinions and estimates contained in this report constitute RBC DS s judgment as of the date of this report, are subject to change without notice, and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Additionally, this report is not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to Investment Advisors and does not have regard to the particular circumstances or needs of any specific person who may read it. RBC DS and its affiliates may have an investment banking or other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. RBC DS and its affiliates may also issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC DS or its affiliates may at any time have a long or short position in any such security or option thereon. Neither RBC DS nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. This report may not be reproduced, distributed or published by any recipient hereof for any purpose. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member Canadian Investor Protection Fund. Registered trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under licence. Copyright All rights reserved.