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1 RBC WEALTH MANAGEMENT August 10, 2017 Global Weekly Insight A closer look Geopolitical knots Kelly Bogdanov San Francisco Geopolitical risks are back as the saber-rattling between North Korea and the U.S. could have implications for markets until the tension unwinds. We explain how investors should approach decision-making and how geopolitical risks should factor into portfolio positioning. With President Trump s sharp rhetoric toward North Korea and Pyongyang s forceful response, global financial markets find themselves confronted with an issue that doesn t crop up often: tangible geopolitical risks. Predictably, equity markets weakened worldwide when the U.S. and North Korea faced off rhetorically. On Wednesday and Thursday, the two sessions since the rhetoric and risks escalated, the Dow Jones Industrial Average closed down 241 points in total, or -1.1%, and the safe-haven 10-year Treasury yield declined modestly to 2.20%. South Korea s equity market understandably was under more pressure, sliding 1.5%. Gold, considered the ultimate safe haven, rose 2.0% in the two sessions. Heretofore, global markets have been focused on bread-andbutter economic, central bank, and corporate developments rather than geopolitical or even domestic political risks. Now markets must contemplate a variety of scenarios and news related to North Korea that could overshadow the bread-andbutter issues for some time. More broadly, the North Korea risks raise pertinent questions for equity investors: How much is too much equity exposure? How should geopolitical risks be factored into portfolio decisions? Be aligned with your objectives It s always the right time for investors to assess whether their equity exposure is appropriate given their full financial profile and if equity allocations are properly calibrated to match one s Markets performance during the heightened North Korea/ U.S. tensions 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Source - RBC Wealth Management, Bloomberg; data period 7/31 8/10/17 Market pulse Japan TOPIX U.S. S&P 500 Korea KOSPI Jul 31 Aug 2 Aug 4 Aug 6 Aug 8 Aug 10 3 Signs the U.S. equity market s momentum is slowing 3 What to expect from Canadian banks upcoming results 4 How euro strength affects Europe s second-half outlook 4 Spotlight on two of Asia s telecom giants -0.1% -1.3% -1.8% Click here for authors contact information. Priced (in USD) as of 8/10/17 market close, EST (unless otherwise stated). For important disclosures and required non-u.s. analyst disclosures, see page 6.

2 2 Global Insight Weekly liquidity needs, risk tolerance, and time horizon, among other factors. Equity portfolios should be able to withstand a normal 10% pullback or a full-fledged 20% correction without disrupting one s day-to-day life, near- and medium-term financial plans, or decision-making process about financial matters. Funds earmarked for equities should be long-term allocations given the steep swings the equity market can (and usually does) have. This is a particularly important issue now because equity volatility has been very low for a significant time. Volatility spikes, pullbacks, and corrections are usually par for the course, but have been few and far between during this bull market cycle. We suspect a 10% pullback, which would be normal and is overdue considering how much the market has gained in the past year, would actually feel much more outsized to many investors given how extraordinarily low volatility has been. If an investor s current allocation to equities can t sustain these types of declines then there may be a mismatch between the equity weighting and liquidity needs, risk tolerance, or time horizon that should be addressed right away. Expect the unexpected The difficulty in budgeting for geopolitical risks is that they are often unquantifiable and include multiple, complex scenarios that can be outside of the market s ability to recognize or grasp. Also, geopolitical events can occur unexpectedly (9/11 terrorist attacks, for example). At other times, the market may overreact (the first Iraq war in the early 1990s). When equity allocations are established, investors would be prudent to assume that significant geopolitical risks can crop up from time to time that could push the equity market into a pullback or even a deep correction. Ultimately, as geopolitical events play out, the market gauges the potential economic implications. When the global and U.S. economies are threatened, the market becomes vulnerable to a correction. Keep things in perspective Currently we are slightly Overweight global equities with a tilt toward Europe and a Market Weight position in the U.S. The global and U.S. economies are stable overall, Europe is improving, and China s trends are better than expected. But we acknowledge the North Korea risks could linger for a time and at the very least could provide investors with a reason to lock in the hard-fought gains of the past year. This issue could weigh on markets in the coming weeks or months. Valuations at a discount for the Asia and EAFE indexes Trailing 12-month price-to-earnings ratios S&P 500 Average since MSCI World (developed markets) MSCI EAFE Current MSCI Asia Pacific Source - RBC Wealth Management; Current data reflects 8/4/ MSCI Emerging Markets Manufacturing is expanding globally and in major economies Manufacturing Purchasing Managers Indexes; above 50 is expansion, below 50 is contraction Eurozone U.S. Global Japan China 46 Jan '16 May '16 Sep '16 Jan '17 May '17 Source - RBC Wealth Management, Bloomberg; data through July 2017; index providers: Eurozone Markit, U.S. ISM, Global JPMorgan, Japan Nikkei, China Caixin Even before the North Korea risks escalated, portfolio repositioning was warranted, particularly by trimming any sectors or securities that have ballooned during the rally. The amplified geopolitical risks underscore this message.

3 3 Global Insight Weekly United States Kelly Bogdanov San Francisco Even though the major U.S. equity indexes are still near all-time highs, there are signs the market s momentum is slowing and could morph into a pullback or correction. The trend began before the concerns about North Korea escalated. The majority of stocks within the S&P 500 and NASDAQ 100 have lagged the indexes lately. For example, the market-cap weighted NASDAQ 100 has been significantly outperforming its equal-weighted peer index since early July, by 3.4% to 0%, and the gap has widened this month. This indicates stocks with the largest market capitalizations have represented the lion s share of gains while most other stocks have trailed behind. Market breadth the ratio of advancing to declining stocks has also slipped for the NASDAQ 100, the S&P 500, and other major indexes. Transportation stocks, often considered bellwethers for the broader market, have underperformed. Since reaching an all-time high in mid-july, the Dow Jones Transportation Average has dropped 6.4% compared to only a 0.9% decline for the S&P 500. Furthermore, small-cap stocks have underperformed large caps since February, and the performance gap widened in the past couple weeks, soon after small-cap indexes reached new all-time highs. This indicates investor risk appetite is shifting toward a more conservative posture. All of these are signals the market s leadership is narrowing. The narrower the leadership, the tougher it is to sustain positive momentum. The softening beneath the market s surface is normal given the S&P 500 has surged 22% since June 2016, although admittedly the most recent catalyst for weakness tensions with North Korea is anything but normal. The market is overdue for a rest, if not a pullback, whether or not North Korea risks persist. We recommend holding Market Weight exposure to U.S. equities in portfolios rather than Overweight exposure at this stage. Portfolio repositioning is warranted, particularly by trimming any sectors or securities that have ballooned during the rally, as there may be more attractive entry points in the coming months if a pullback materializes. Canada Alicia Buckiewicz & Farazeh Mahboob Toronto Canadian bank stocks may catch a bid during the upcoming reporting season with net interest margins Market leadership has narrowed Relative performance A declining relative performance trendline for small caps 0.95 against large and equal weight indexes against market weight indicates the rotation from broad market leadership post-election to the more narrow leadership currently Nov Jan Mar May Jul Small cap vs. large cap Equal weight vs. market weight Source - RBC Wealth Management, Bloomberg; data through 8/9/17; small caps defined as S&P 600 small cap index, equal weight defined as S&P 500 equal weight index, market weight defined as S&P 500 market weight index now anticipated to expand. RBC Capital Markets is also expecting conservative EPS growth of 4% for its coverage universe in Q3, so bank stocks could perform well if results exceed expectations. However, significant valuation improvement will likely remain limited, in our view, given ongoing concerns over the Canadian housing market and elevated consumer debt levels. Going forward, banks could face headwinds as mortgage growth will likely slow as a result of regulatory changes in the housing industry. A downward revision to guidance by a U.S. pipeline company has exacerbated the negative sentiment in the Canadian midstream and pipeline sector. However, RBC Capital Markets notes that there are some key differences between Canadian and U.S. companies. Firstly, there are regional differences, as the Canadian pipeline sector is more diversified throughout North America. Canadian midstream companies also have much stronger dividend coverage than their U.S. peers. Finally, none of the Canadian pipeline/midstream stocks have material commodity-exposed businesses. While Canadian oiloriented midstream stocks have been weak, RBC Capital Markets believes that weaker margin assumptions have already been incorporated into earnings guidance, and dividends remain well covered. Housing starts and building permits data released on August 9 kicked off a strong second half for homebuilders. There were 222,000 (annualized) housing starts for July, above the 205,000 expected by economists and also above the 215,000 average for the first half of the year. Building permits increased in total value by 2.5% against expectations for a 1.9% drop. Housebuilding

4 4 Global Insight Weekly activity is not yet reflecting the negative trend seen in resale data but should feed into building activity later this year. Europe Frédérique Carrier & Thomas McGarrity London A sound, if not exceptional, European earnings season is drawing to a close with over three-quarters of results now released. Thanks to revenues expanding by 6% y/y, eurozone Q2 EPS growth has reached 11%. This is less than the 20% generated in Q1, but that quarter had benefitted from a particularly low base effect as Q earnings had been very weak. From a low base, it is relatively easy to show strong growth. Despite a more difficult comparative base this quarter, as well as weaker commodity prices and a stronger euro, more than half of companies beat expectations. This is encouraging but with expectations having risen over the past few months, further upgrades in forecasts are unlikely at this stage. A recurring theme from the management comments on current business conditions is the return of order growth in Europe. This is welcome, but needs to continue if earnings expectations for the full year are to be met. Moreover, a number of corporates, including chip maker Infineon Technologies, sports equipment maker Adidas, and tire manufacturer Michelin & Cie, are starting to warn that euro strength could affect sales and/or margins in the second half of the year. The euro has appreciated 12% vs. the dollar, and 7.5% on a trade-weighted basis since mid-april, reaching a two-year high of 1.19 earlier this European equities suffered as the euro accelerated from May onwards European equities and currency Euro STOXX 600 (left axis) Euro (right axis) 350 Jan Feb Mar Apr May Jun Jul Aug month, a level last seen at the start of 2015, just before the European Central Bank embarked on its ambitious quantitative easing programme. RBC Capital Markets expects the euro strength to reverse, and forecasts EUR/USD to reach 1.12 at year end, from 1.17 today due to the absence of clear signs that inflation is picking up rapidly and sustainably given the high levels of underemployment. Continuing euro strength would risk restricting economic growth through lower exports, and corporate earnings expectations would likely have to be reined in. Asia Pacific Yufei Yang Hong Kong China s yuan strengthened to the highest level in almost 10 months. Both onshore and offshore RMB dropped below 6.7 per dollar amid North Korea tension and stable economic data. China s foreign-exchange reserves climbed $23.9B to $3.081T in July, posting a sixth-straight monthly increase. Factory inflation held steady at 5.5% y/y in July, which is positive for industrial profits, while consumer inflation remained muted at 1.4%. SoftBank (9984 JP) reported solid Q1 results. Operating profit rose 50% to 479.2B yen ($4.3B) thanks to a strong contribution from Sprint (S). The U.S. wireless carrier returned to profit for the first time in three years through cost reduction and indicated it is considering several consolidation plans. The $100B SoftBank Vision Fund was included in the results for the first time. The Fund segment generated a profit of 105.2B yen, which is the change in the fair value of NVIDIA (NVDA) shares. SoftBank now owns 4.9% of NVIDIA. The Fund added another two companies to its shopping list during the week. Bloomberg News reported that Vision Fund will invest about $2.5B in Indian e-commerce Flipkart Group and $1B in online sports store Fanatics. In addition, Chairman Masayoshi Son also expressed interest in the U.S. ride-hailing market, saying that he would be willing to invest in Uber Technologies Inc. or Lyft Inc. China Mobile (941 HK), the world s largest mobile carrier, jumped in Hong Kong after announcing a special dividend to mark its 20th anniversary of listing. The stock has underperformed this year, given intensifying competition among China telecom operators. In the first half, total sales grew by 5% to 389B yuan, driven by 3.5% growth in mobile subscribers. Net profit increased by 3.5% y/y, largely in-line with market expectations. Source - RBC Wealth Management, Bloomberg; data through 8/10/17

5 5 Global Insight Weekly MARKET SCORECARD Data as of August 10, 2017 Equities (local currency) Level MTD YTD 1 yr 2 yr Govt bonds (bps chg) Yield MTD YTD 1 yr 2 yr S&P 500 2, % 8.9% 12.1% 15.9% Dow Industrials (DJIA) 21, % 10.5% 18.1% 24.0% NASDAQ 6, % 15.5% 19.4% 21.9% Russell , % 1.1% 12.2% 12.3% S&P/TSX Comp 15, % -1.4% 2.0% 4.2% FTSE All-Share 4, % 4.6% 8.5% 10.3% STOXX Europe % 4.0% 9.3% -5.9% EURO STOXX 50 3, % 4.3% 13.8% -6.6% Hang Seng 27, % 24.7% 22.0% 11.9% Shanghai Comp 3, % 5.1% 8.0% -17.0% Nikkei , % 3.2% 17.9% -5.2% India Sensex 31, % 18.4% 13.5% 12.2% Singapore Straits Times 3, % 15.4% 15.6% 4.0% Brazil Ibovespa 66, % 11.2% 17.7% 35.7% Mexican Bolsa IPC 50, % 11.5% 6.5% 12.3% Commodities (USD) Price MTD YTD 1 yr 2 yr Gold (spot $/oz) 1, % 11.6% -4.5% 16.4% Silver (spot $/oz) % 7.5% -15.1% 12.2% Copper ($/metric ton) 6, % 16.4% 33.4% 21.3% Oil (WTI spot/bbl) % -9.5% 16.5% 8.1% Oil (Brent spot/bbl) % -8.9% 17.5% 2.7% Natural Gas ($/mmbtu) % -20.0% 16.3% 4.8% U.S. 10-Yr Tsy 2.203% Canada 10-Yr 1.855% U.K. 10-Yr 1.082% Germany 10-Yr 0.415% Fixed Income (returns) Yield MTD YTD 1 yr 2 yr U.S. Aggregate 2.49% 0.3% 3.0% -0.2% 5.9% U.S. Invest Grade Corp 3.14% 0.0% 4.6% 1.6% 10.9% U.S. High Yield Corp 5.59% -0.3% 5.7% 9.4% 17.1% Currencies Rate MTD YTD 1 yr 2 yr U.S. Dollar Index % -8.7% -2.4% -3.9% CAD/USD % 5.5% 2.5% 2.0% USD/CAD % -5.2% -2.4% -2.0% EUR/USD % 12.0% 5.4% 6.9% GBP/USD % 5.2% -0.2% -16.8% AUD/USD % 9.2% 2.2% 6.2% USD/JPY % -6.6% 7.9% -12.3% EUR/JPY % 4.6% 13.6% -6.3% EUR/GBP % 6.3% 5.6% 28.4% EUR/CHF % 5.7% 4.0% 4.6% USD/SGD % -5.8% 1.6% -1.3% USD/CNY % -4.3% 0.2% 7.0% USD/MXN % -13.3% -2.4% 11.3% USD/BRL % -2.4% 1.6% -7.6% 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 8/10/17. Examples of how to interpret currency data: CAD/USD 0.78 means 1 Canadian dollar will buy 0.78 U.S. dollar. CAD/USD 5.5% return means the Canadian dollar rose 5.5% vs. the U.S. dollar year to date. USD/JPY means 1 U.S. dollar will buy yen. USD/JPY -6.6% return means the U.S. dollar fell 6.6% vs. the yen year to date. UPCOMING EVENTS Fri, Aug 11 Mon, Aug 14 Tue, Aug 15, cont. Thu, Aug 17 Germany CPI (0.4% m/m, 1.7% y/y) Eurozone Industrial Production U.S. NAHB Housing Market Index Eurozone CPI U.S. CPI (0.2% m/m, 1.8% y/y) Tue, Aug 15 Wed, Aug 16 Eurozone Core CPI U.S. Core CPI Japan Industrial Production Eurozone Q2 GDP ECB Account of Policy Meeting U.S. Real Average Weekly Earnings Germany Q2 GDP U.S. Housing Starts U.K. Retail Sales Sun, Aug 13 U.K. CPI (0.0% m/m, 2.7% y/y) U.K. Average Weekly Earnings U.S. Industrial Production (0.2% m/m) China Retail Sales (10.8% y/y) U.K. Core CPI (2.5% y/y) U.K. ILO Unemployment (4.5%) U.S. Leading Index (0.3% m/m) China Fixed Assets (8.6% YTD y/y) U.K. House Price Index U.S. Housing Starts (1.23M) Thu, Aug 24 Sat, Aug 26 China Industrial Production (7.1% y/y) U.S. Retail Sales (0.4% m/m) Fed Releases FOMC Meeting Minutes Jackson Hole Central Bank Symposium Japan Q2 GDP (0.6% q/q, 2.5% annl'zd) U.S. Retail Sales Control Group The dates reflect North American time zones. All data reflect Bloomberg consensus forecasts where available.

6 6 Global Insight Weekly Authors Kelly Bogdanov San Francisco, United States RBC Capital Markets, LLC Alicia Buckiewicz, CFA Toronto, Canada RBC Dominion Securities Inc. Farazeh Mahboob 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. Yufei Yang Hong Kong, China RBC Dominion Securities Inc. 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: Alicia Buckiewicz, Farazeh Mahboob, and Yufei Yang, 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 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, 60 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), the Guided Portfolio: ADR (RL 10), and the Guided Portfolio: All Cap Growth (RL 12), 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 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 June 30, 2017 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] 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.

7 7 Global Insight Weekly Risk Rating: As of March 31, 2013, 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. 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The authors are employed by one of the following entities: RBC Wealth Management USA, a division of RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in Minnesota and New York, USA; by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada; by RBC Investment Services (Asia) Limited, a subsidiary of RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Hong Kong, China; and by Royal Bank of Canada Investment Management (U.K.) Limited, an investment management company with principal offices located in London, United Kingdom. Research Resources This document is produced by the Global Portfolio Advisory Committee within RBC Wealth Management s Portfolio Advisory Group. The RBC WM Portfolio Advisory Group provides support related to asset allocation and portfolio construction for the firm s Investment Advisors / Financial Advisors who are engaged in assembling portfolios incorporating individual marketable securities. The Committee leverages the broad market outlook as developed by the RBC Investment Strategy Committee, providing additional tactical and thematic support utilizing research from the RBC Investment Strategy Committee, RBC Capital Markets, and third-party resources. Third-party disclaimers The Global Industry Classification Standard ( GICS ) was developed by and is the exclusive property and a service mark of MSCI Inc. ( MSCI ) and Standard & Poor s Financial Services LLC ( S&P ) and is licensed for use by RBC. 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