IP Strategies 2016 Q3 Quarterly Review and 2016 Q4 Outlook

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1 IP Strategies 2016 Q3 Quarterly Review and 2016 Q4 Outlook Global growth and not just Brexit is the real concern. Q3 was a pleasant surprise for investors as stocks recovered nicely from the Brexit vote and rallied on pockets of respectable economic data in July (please refer to your Q3 statement). Investors were led to believe that the US economy was on the mend and that Federal Reserve Chair Janet Yellen was set to raise rates in the United States. However, a series of mixed economic data over the recent months has brought into question the strength of the US economic recovery. This has allowed the Federal Reserve to put any rate increase on hold for now, or at least until after the US elections. Japan continues to struggle and China keeps experiencing false starts. Europe, with record low interest rates, continues to meander along as the consumer remains careful about how they spend their Euros. The UK experienced some pull back in their economy post the Brexit vote, mainly in the real estate and financial markets but their stock market recovered to pre-brexit levels as the Bank of England reassured investors by providing more monetary stimulus via a rate cut and their form of quantitative easing. What is also concerning is that major economic institutions, such at the International Monetary Fund ( IMF ) or the World Trade Organization( WTO ), keep lowering their growth rates for 2016 and more than once this year. The WTO now sees international trade growth at 1.7% for 2016, down from an estimate of 2.8% in April. This trade forecast is below global GDP growth for the first time in 15 years.

2 Market Performance Table MARKETS Current Level/Price** % change for September YTD % Change 52 week % Change Current Market Yield** FIXED INCOME FTSE TMX Universe Bond Index ETF (XBB) $ % 2.75% 2.88% 2.64% FTSE TMX All Corporate Bond Index ETF (XCB) $ % 2.73% 2.73% 3.04% S&P/TSX Laddered Preferred Share Index ETF(ZPR) $ % -6.12% 0.50% 5.18% US Corporate Bond Index in US$ ETF (LQD) $ % 8.04% 5.97% 3.21% ishares iboxx High Yield Corp Bond Index (HYG) $ % 8.29% 5.85% 5.43% S&P/TSX Capped REIT Index ETF (XRE) $ % 11.76% 5.55% 4.96% EQUITY MARKETS S&P/TSX Composite Index 14, % 13.19% 10.39% 2.81% S&P 500 Index in US$ 2, % 6.08% 11.12% 2.04% Nasdaq Index in US$ 5, % 6.08% 12.84% 1.05% MSCI EAFE ETF (EFA) in US$ $ % 0.70% 1.11% 2.85% Shanghai Stock Index 3, % % -1.57% n/a COMMODITIES (all in US$) Gold $1, % 24.23% 16.30% n/a Oil-WTI $ % 30.24% -1.95% n/a Natural Gas $ % 22.98% 8.07% n/a Copper $ % 3.54% -5.43% n/a CURRENCY CDN$ per US$ $ % -5.14% -0.06% n/a CDN$ per EURO $ % -1.81% 0.14% n/a Source: Thomson Reuters, Morningstar CPMS ** Current Price or Yield as of September 30, 2016 As seen in the table above, September was another month of mixed returns. Furthermore, equity returns year to date are modest due to the effect of currency, except in Canada where commodities, mainly gold, have been the main driver. Ongoing global growth and corporate earnings concerns and the pending US elections have investors nervous and anxious. With earnings growth on the decline these past few quarters, investors are driving up valuations purely on P/E expansion which means investors have to pay more for less earnings.

3 Given our fundamental approach to investing, we are governed by economic data and policy and their impact on the ability of companies to increase earnings and dividends, which help determine if we are heading into a recession. At this time, we still do not expect a global recession; however we continue to believe global growth will be muted at best and therefore little earnings growth for the rest of 2016 with some improvement expected in Fixed Income Interest rates, both domestically and globally, continue to trade around historic lows with over $11.5 trillion worth of government bonds trading with negative yields in Europe and Japan. There is concern about the longer term effects of negative rates on the banks and the economy. Governments may want to keep rates low to stimulate their economies and do not want their cost of borrowing to increase because that would increase their debt servicing costs. A rise in interest costs means less money for governments to spend on other programs or projects, so there remains a bias to keeping rates artificially low, even as core inflation continues to creep higher. Interest rates in Canada have not changed much in the last quarter and the Bank of Canada ( BoC ) is in a quandary. It would like to cut its overnight rate to 0.25% but the benefits won t flow through to the consumer as the big six Canadian banks will likely only cut prime by 0.10% and not 0.25%, as they have with the last two BoC cuts. In the USA, the Fed continues to hold off raising rates given concerns about a slowing global economy, volatile markets, their short term concerns on Brexit and the upcoming US elections. We believe low interest rates are here to stay for an extended period of time, baring no inflationary pressures and a robust US economy to get the ball rolling. Country 2 year 5 year 10 year Canada 0.55% 0.62% 1.00% US 0.77% 1.16% 1.60% England 0.11% 0.23% 0.65% Germany -0.68% -0.58% -0.12% France -0.63% -0.43% 0.19% Japan -0.28% -0.24% -0.08% Australia 1.56% 1.61% 1.92% Source: Thomson Reuters Yields as of September 30, 2016 The BoC has expressed concerns over the economic progress in Canada and their low dollar policy. It appears that a low dollar in a highly integrated global economy is not the competitive advantage it used to be. However, the BoC still cannot afford for the Canadian dollar to trade in the 80 cent range and we continue believe they do not want it trading in the 60 cent range either, because of inflation implications. We

4 projected the Canadian dollar to trade between $0.74-$0.80 range this past quarter, the Canadian dollar traded as low as $ and as high of $ averaging $ Heading into Q4, we believe the Canadian dollar will be range bound from $0.72 to $0.78, depending on the economic data and the central bankers decisions after the US election. Therefore managing currency will be a zero sum game for the remainder of the year. Alternative Fixed Income Allocation Given the current government of Canada and US yields curves (see above table, as of September 30, 2016), there is no benefit of investing in a five- or ten-year government of Canada bond, which are yielding 0.62% and 1.00%, respectively. These rates do not cover the cost of inflation and taxes. For that reason, we increased the allocation to alternatives by 5% in order to reduce month to month volatility given the low correlation for market activity and to improve portfolio income. The combined yield of our current fixed income ETFs and alternative investments generate you an average of 5% of income annually, which is roughly eight times the current yield of the government of Canada fiveyear bond. Equity Markets The Canadian market has shown resiliency but that is mainly due to a bounce in oil and a flight to save havens such as gold, however with some significant volatility. Oil has recovered from its eight year low in February but traded as low as $39 in July and has not breached the fundamental level of $50 even after a recent OPEC agreement in late September to curb production, albeit by only 750,000 barrels a day from their peak production of 33 Million barrels a day. This agreement may keep prices supported at current levels but this will only invite more US shale producers to start pumping again and create more downward pressure on oil prices. Earnings Price Earnings (P/E) valuations The S&P 500 has experienced declining earnings for the past five quarters and rising P/E multiples (see CHART 1) which is concerning given a sixth consecutive quarter of declining earnings has not been experienced since 2008, albeit the drop in 2008 was precipitous. The S&P 500 is holding up as investors pay up via a higher price to earnings multiple (20X vs. historical levels of 14.6X) given the low interest rate environment; however gains in the US market for Canadian investors were offset by a drop in the US dollar this year as commodities recovered.

5 Chart 1: S&P 500 Price, Earnings and P/E Multiple From this chart you can see: 1. Earnings (red line) has been steadily dropping 2. PE ratio (orange line) has been increasing leading to higher valuations with a sudden rise in July The S&P 500 (greed line) has been range bound for the past 16 months with no meaningful market share appreciation. The sharp drops in the index can be timed to discussions as to whether Fed will increase rates or hold rate increases The same is true with all North American indexes. The Canadian TSX has been one of the better world indexes as the rise in values was driven by the gold miner sub index rising by 83% year to date despite gold increasing only 24%. Furthermore, the miners balance sheets are weak, earnings are non-existent and constant new issue in debt and/or stock is not accretive to fundamental values. According to Bloomberg, the PE ratios (or equivalent) of the main indexes are: Source: Morningstar CPMS as at September 30, 2016 Nasdaq (stocks like Amazon, etc.): 41.9X Dow Jones (blue chip): 17.6X TSX (resource based): 20X Canadian Universe Bond Index: 38X Real estate with a cap rate of 3%-4%: 33X or 25X

6 Therefore with lofty valuations, we maintain a defensive positioning and remain focused on large stable companies with lower PE multiples that have sustainable and proven dividend policies with a focus on shareholder value creation through earnings and dividend growth. We are currently underweight Canadian and US stocks given the market volatility and stretched valuations in select sectors. We will only add new stocks or to our current holdings once we have confirmation of earnings and positive guidance otherwise, we will continue to hold 7% to 10% cash. We continue to watch India since they cut interest rates and are motivated to stimulate their economy, but we still need more evidence of growth before investing. Also recent geopolitical events between India and Pakistan have made some investors nervous, allowing a possible attractive entry price into India. We do not expect matters to escalate, however we are watching the situation carefully. Equity Attributes Dividend Yield Price to Earnings (P/E) Annual Dividend Growth Qtr over Qtr EPS Growth IP Strategies Cdn Equities 3.80% % 3.1 S&P/TSX Composite Index 2.82% % -4.1 Difference 0.98% % 7.2 IP Strategies US Equities 3.51% % 7.3 S&P500 Composite Index 2.08% % 1.9 Difference 1.43% % 5.4 Source: Morningstar CPMS as of September 30, 2016 As you can see, you are earning a higher level of dividend income than the general markets but paying less for each dollar of earnings via lower P/E ratios. Earnings growth is also greater than the market averages; especially in Canada given we have no oil and commodity exposure. Our focus on value, earnings and dividend growth is our ongoing theme and strategy.

7 The dividend growth value based investment strategy provides stable long term results with downside protection. Our annual growth in dividends in both Canada and the US are 8.8% and 9.9% greater than their respective market index. Our prudent, disciplined and focused approach to investing with strict risk management processes should provide you with peace of mind. We will not chase hot stocks or trends. Q3 showed improvements even with ongoing concerns about global growth, Brexit, and China. We remain focused on dividend paying and growing stocks that trade at attractive valuations, however our value strategy appears to be out of favour right now as investors seek ultradefensive investments like gold, government bonds and utility companies. In the meantime, the strategy benefits from companies growing their dividends. In the past year, 34 of 34 companies in the equity strategy increased their dividends by an average of 8.0%. This growth rate in dividend income is a natural hedge against inflation which is approximately 2%. Research has shown that dividend paying strategies perform well over an economic cycle and that dividends make up a significant part of investment returns. Until market sentiment improves, the strategy is to stay the course and get paid while you wait. Summary and Outlook As global economic growth remains soft, Britain, Europe, Japan, Canada and the US are sticking to low or negative interest rate policies in hopes that this will prop up struggling equity markets, force banks to lend, spur capital investment and consumer spending. There remain many challenges regardless of how stimulative monetary policy may be. The global oil sector continues to struggle and oil could trade down to $40 in Q4 if OPEC cannot commit. Oil at $40 per barrel along with low rates should help restart economic growth in the US and parts of Europe. Japan and China have structural problem that still need to be addressed. Canada s economic fate is dependent on the pace of growth in the US, because the Canadian consumer is too much in debt to be spending, which is why we are selective on which stocks we own in our portfolio. We believe the BoC will monitor the global situation and likely hold rates low for the next few quarters. Given the upcoming US election, we do not expect the Fed to raise rates until after the election and may be on hold until there is greater economic visibility going into Until there is some sign of sustainable and significant global growth, interest rates in general are expected to remain low for the next few quarters.

8 Ongoing uncertainty is creating the volatility but global monetary stimulus and prudent politics should stabilize the markets heading into Although we are cautious in the short term, we do expect equity markets to trend modestly higher once there is clarity in the US election. What would a Trump victory do to global trade and financial markets? Given his rhetoric and approach to politics, we believe the markets would not respond positively to a Trump win. We will be monitoring the situation carefully and will act in advance should the polls lean in favour of a Trump win. The chart to the right illustrates that we are neutral to bearish on our outlook with risk slightly elevated from neutral to high, for the fourth quarter. Therefore our current asset allocation is overweight cash, fixed income and alternative allocations, and underweight Canadian, US and international equities. On average, our portfolios are currently structured to provide a total income yield of approximately 4.0% which is seven to eight times greater than the current 5-year Government of Canada rate. Also our dividend growth rate is greater than inflation which ensures purchasing power and stability while these quality stocks recover and grow in value over the long term. Market Outlook RISK Assessment Bearish Neutral Bullish High Neutral Low Asset Allocation Summary Underweight Target Overweight Cash Fixed Income Alternative Fixed Income Canadian Equities US Equities International ETFs Source: IP Strategies The key to investment success has never changed: Buy low and sell high Collect an income while waiting for securities to appreciate Be patient and disciplined. As stated by Warren Buffet: Mr. Market will only under value or over value the intrinsic price of a stock. In our opinion we are entering into the overvalued spectrum unless earnings improve and/or the Fed does not raise rates over consecutive meetings. Our clients have entrusted their saving with us to provide a prudent and disciplined investment strategy bound by the following principles; 1. Preserve capital 2. Provide income for retirement 3. Seek capital growth when rational and not at any cost 4. Avoid sharp market downturns such as 2008, 1999, etc. (back to rule #1) Thank you for your business and entrusting us in helping you meet your financial goals.

9 This newsletter has been prepared by Habib Saikali and Richard Kluska and expresses the opinions of the authors and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources believed to be reliable but accuracy cannot be guaranteed. It is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. RJL, its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. The information contained in this Portfolio Valuation is drawn from sources believed to be reliable but information accuracy is not guaranteed. Nor in providing it does Raymond James Ltd. assume any liability. The information is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential or subject to copyright. The information provided is as of the date appearing in the summary and Raymond James Ltd. assumes no obligation to update the information or advise on further developments relating to these securities. Definitive reference should be made to your account statement. Part or all of the Book Value on this securities position has been provided by you, which has not been independently verified by us. RJL is not responsible for any errors in book value. Securities-related products and services are offered through Raymond James Ltd., member-canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member-canadian Investor Protection Fund