TACTICAL ASSET ALLOCATION COMMITTEE MONTHLY COMMENTARY

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1 APRIL 2019 In March, investor sentiment was dominated by headlines surrounding cooling global growth, ongoing US-China trade negotiations, and cautious undertones from major central banks. Equity markets welcomed some encouraging signs of progress towards a trade deal and the dovish pivot from major central banks which boosted risk appetite and saw global equity markets cap their best quarterly gain in a decade. However, bond investors were in panicmode after yield curves flattened (and in some cases, inverted) during the month, which prompted recession fears and sent nervous investors fleeing to government bonds as a refuge. EQUITY MARKETS FINANCIAL MARKET DASHBOARD MAR MAR. YTD 1 YEAR % PRICE CHANGE (LC) S&P % 13.07% 7.33% S&P/TSX % 12.42% 4.78% MSCI EAFE % 9.04% -6.33% MSCI EM % 9.56% -9.51% FIXED INCOME (%) BASIS POINT CHANGE US 10 Year Bond Yield US 2 Year Bond Yield CA 10 Year Bond Yield CA 2 Year Bond Yield CURRENCIES % PRICE CHANGE CAD/USD % 2.17% -3.49% EUR/USD % -2.17% -8.80% USD/JPY % 1.07% 4.16% COMMODITIES % PRICE CHANGE WTI Oil (USD/bbl) % 32.44% -7.39% Copper (USD/pound) % 11.59% -2.96% Gold (USD/oz) % 0.91% -2.25% Global equity markets extended their 2019 gains in March. The upswing was widespread across the globe, with US equity markets leading the charge and displaying some remarkable upward momentum. Of note, the S&P 500 is now sitting just 3% below its September highs, while Canadian, international, and emerging market bourses also thrived in the environment of improved risk appetite. Interestingly, gains were predominately a result of multiple expansion as headline risks pertaining to global trade receded and as the dovish-turn from central banks improved the visibility of the cycle which when taken together saw investors increase what they were willing to pay for equities. Meanwhile, earnings detracted as ongoing concerns regarding the health of the global economy saw analysts revise down their forecasts during the first quarter. Fixed income markets also posted positive results. Yield curves flattened, with bond yields collapsing relentlessly across the curve. North American 10-year yields slipped back to 2017 levels, while German bonds are sporting negative yields for the first time since And at the short-end, yields were pressured lower after the Federal Reserve signalled it would remain sidelined through 2019 with similar rhetoric from the likes of the Bank of Canada, European Central Bank and the Bank of Japan. As a result, markets are now fully discounting two fed funds rate cuts by the end of 2020 and one full rate cut from the Bank of Canada in The greenback strengthened even as the Federal Reserve adopted an increasingly dovish approach, with nervous investors seeking refuge in the safe haven currency. Conversely, the Canadian dollar slumped even in the wake of higher crude prices and the dovish pivot from the Fed. Instead, the loonie came under pressure after investors slashed their wagers for Bank of Canada rate hikes. Similarly, the euro declined after softer-than-expected economic results saw the European Central Bank push the timing for its first rate hike to Finally in commodity markets, oil broke above the $60 threshold for the first time since November as OPEC+ adhered to pledged production cuts and as supply disruptions in Venezuela and Iran helped to overshadow the cloudy demand backdrop. In contrast, gold lost some ground and tumbled lower as the stronger dollar prompted some aggressive selling late in the month, while renewed optimism on the potential for a US-China trade deal reduced the allure of bullion as a safe haven. IM 1

2 Canada Exports (MoM) Canada GDP (MoM) The Canadian economy got off to a decent start in Output grew by 0.3% in January, with broad-based gains reported across the economy. Gains were led by a resurgence in manufacturing and construction, while oil-sands extraction declined amid mandatory output curbs in Alberta. Meanwhile, exports rebounded 2.9% thanks to a 37% increase in the value of oil shipments, while non-energy exports also jumped 1.2% CANADA The Canadian economy hit a soft patch and stalled-out in late However, the economy got off to a strong start in early 2019 and posted its largest output gain in eight months, allaying fears of a prolonged economic downturn. Indeed there are reasons for optimism that the economy will reaccelerate in the coming quarters. Job trends have been stellar and have been tilted towards privatesector and full-time positions, while the impressive comeback in crude prices (and narrowing differentials on Western Canadian crude) should also lend support. Furthermore, temporary weakness in the energy sector is likely to reverse course as oil production returns following mandated cuts, while further clarity on the trade front and a healthy US demand backdrop are expected to entice a revival in investment and export activity Average Hourly Earnings (YoY) ISM Manufacturing Index While the US economic trajectory has indeed softened, prospects for both the consumer and factory sectors remain favourable and should reinvigorate the economy throughout Average hourly earnings rose 3.4% y/y in February, marking the fastest pace in a decade and a boon for consumption. Meanwhile, the March ISM manufacturing gauge ticked higher in a sign of ongoing resilience in the US factory sector USA The pace of US growth moderated in early-2019 as the economy contends with noise related to the government shutdown, weatherrelated disruptions, and other seasonal factors. However, the US economy appears ripe for a rebound this spring. The US consumer remains a pivotal source of strength, with a healthy labour market, accelerating wages, and low interest rates boosting sentiment and inevitably, consumer spending prospects. Furthermore, the manufacturing sector has improved according to the latest ISM survey results, with rebounds in both new orders and production suggesting that factory activity remains robust. Taken together, above-trend growth should help to place upward pressure on prices which should put Federal Reserve rate hikes back on the table in late 2019 should financial and economic vulnerabilities dissipate. INTERNATIONAL China Non-Manufacturing PMI China Manufacturing PMI We are seeing some preliminary signs that the monetary and fiscal impulse from Chinese policymakers may finally be proving successful in stabilizing the economy with positive implications for global growth in general. The manufacturing purchasing managers index (PMI) defied expectations and jumped out of contraction territory in March, while the non-manufacturing gauge also surprised to the upside and ticked higher Chinese policymakers have responded to the erratic macro backdrop with a plethora of stimulus measures that include tax cuts for businesses and consumers, infrastructure spending, and lower reserve requirements for banks. In response, we are seeing some tentative signs of stabilization. According to the latest PMI survey results, the Chinese economy rebounded in a sign that past stimulus measures may finally bearing some fruit with both the factory and services sectors back in expansion territory. And while stagnating growth in the Eurozone prompted the ECB to tweak its policy trajectory in March, the latest rebound in German retail sales and auto production suggests that temporary factors that weighed on the European locomotive last year may be receding, while forwardlooking gauges of economic health have also improved. 2 APRIL 2019

3 MAIN SCENARIO SYNCHRONIZED GLOBAL EXPANSION PROBABILITY 40% The global economy finds a bottom and reaccelerates in a synchronous manner, with all major regions contributing to the advance. The US leads the global charge, though moderates to a still above-trend pace as the fiscal and monetary impetus fades in 2019, which has positive spillover effects for the Canadian economy. Looking abroad, transitory factors that were met with global trade tensions recede and the European and Japanese economies recalibrate, while the Chinese economy stabilizes in response to the plethora of monetary and fiscal stimulus measures that place a floor under the world s second largest economy and by extension, global growth prospects. Taken together, the combination above-trend global growth and a revival in commodity prices should bolster inflation expectations and send major central banks back to the table in late This optimistic, growth-levered scenario bodes well for equities and commodities (ex-gold) at the expense of fixed income and the US dollar. SCENARIO 2 MODERATE GROWTH PROBABILITY 25% In this alternate scenario, the global economy fails to reaccelerate in a meaningful way, but nonetheless continues to grow in-line with (or modestly below) its potential rate. The environment of moderate and self-sustaining growth keeps inflation stable at levels that do not pose a threat to the economic trajectory, allowing major central banks to maintain stimulative policies and remain sidelined throughout 2019 creating a lucrative, not-too-hot, not-too-cold backdrop for both the economy and investors alike. The accommodative impulse from major central banks ultimately nurtures the economic recovery and extends the visibility of the cycle. This reflationary backdrop also bodes well for equities and commodities (ex-gold) at the expense of fixed income and the US dollar though to a lesser magnitude than our base case scenario. SCENARIO 3 POLITICAL INSTABILITY PROBABILITY 20% The trend towards populism and protectionism could ignite a crisis in confidence and destabilize the financial markets. The biggest risk to our base case scenario is a rise in protectionism stemming from the US and the threat of a trade war that would derail the synchronous global expansion. While the US has proven successful in securing a trade deal with Canada and Mexico and extracting some concessions from China, tensions remain due to the sizeable trade deficit in the US. As such, Trump s focus may shift towards other trading partners in Europe and Japan, with the US threatening to use Section 232 (national security grounds) to impose tariffs on auto imports, while tensions between the US and China are surely to prevail. Taken together, any escalation in the trade debacle would be detrimental for trade flows and hence, the global economy. Meanwhile, the stakes are high for this year s European Parliamentary elections where the populists are likely to continue gaining ground, while lingering tensions and a lack of progress in Brexit negotiations raises the odds of a hard Brexit scenario. SCENARIO 4 STAGFLATION PROBABILITY 15% After an extended period of undershooting central bank inflation targets, policymakers tolerate higher inflation (overshoot) and monetize inflation. As a result, inflation expectations start to de-anchor from current subdued levels and surge higher. This would come at the same time that fiscal stimulus is being reigned-in (2020) in the later stages of the economic expansion, causing growth to moderate to well below potential levels in response. In the Stagflation scenario, a stagnation in growth occurs concurrently with an acceleration in inflation as a result of previous excessive monetary stimulation and an exhaustion of productive capacity - creating a tumultuous financial market landscape whereby both equities and bonds experience broad based declines. 3 APRIL 2019

4 FORECASTS FOR THE NEXT 12 MONTHS SCENARIOS MARCH 29, 2019 SYNCHRONIZED GLOBAL EXPANSION MODERATE GROWTH POLITICAL INSTABILITY STAGFLATION PROBABILITY 40% 25% 20% 15% GDP GROWTH (Y/Y) Global 3.70% 3.80% 3.50% 2.00% 2.75% Canada 1.60% 2.50% 1.50% 0.50% 2.75% U.S. 3.00% 3.00% 2.50% 1.00% 2.75% INFLATION (HEADLINE Y/Y) Canada 1.50% 2.50% 1.50% 1.50% 3.00% U.S. 1.50% 2.50% 1.75% 2.00% 3.00% SHORT-TERM RATES Bank of Canada 1.75% 2.25% 1.75% 1.25% 2.00% Federal Reserve 2.50% 3.00% 2.50% 2.00% 2.75% 10-YEAR RATES Canada Government 1.62% 2.60% 2.25% 1.40% 3.00% US Government 2.41% 3.20% 3.00% 2.25% 4.00% PROFIT GROWTH (12 MONTHS FORWARD) Canada 4.4% 12.9% 5.6% -11.6% 8.0% U.S. 6.0% 9.6% 4.6% -7.7% -1.5% EAFE 6.3% 10.6% -3.1% -8.5% -8.5% EM 7.8% 16.8% 2.1% -20.1% -5.3% P/E (FORWARD 12 MONTHS) Canada 15.1X 15.0X 15.5X 14.0X 13.0X U.S. 16.5X 16.5X 17.0X 15.0X 16.0X EAFE 13.5X 14.0X 15.5X 12.0X 13.5X EM 12.1X 13.0X 13.5X 11.0X 11.5X CURRENCIES CAD/USD EUR/USD USD/JPY COMMODITIES Oil (WTI, USD/barrel) APRIL 2019

5 MATRIX OF EXPECTED RETURNS SCENARIOS SYNCHRONIZED GLOBAL EXPANSION MODERATE GROWTH POLITICAL INSTABILITY STAGFLATION PROBABILITY 40% 25% 20% 15% Money Market 2.0% 1.8% 1.5% 1.9% Canadian Bonds -3.1% -0.8% 4.9% -6.2% Canadian Equity 7.1% 3.5% -21.7% -11.2% U.S. Equity -1.7% -0.8% -15.1% -15.4% International Equity 2.6% 2.1% -17.8% -19.1% Emerging Market Equity 10.7% 3.0% -27.7% -21.6% Real Assets 7.0% 7.0% 5.0% 3.0% CURRENT STRATEGY 1 MINIMUM BENCHMARK MAXIMUM STRATEGY ALLOCATION RELATIVE Money Market 0.0% 5.0% 25.0% Underweight 0.0% -5.0% Canadian Bonds 5.0% 25.0% 45.0% Underweight 5.0% -20.0% Canadian Equity 10.0% 20.0% 30.0% Overweight 25.0% +5.0% U.S. Equity 0.0% 10.0% 20.0% Underweight 5.0% -5.0% International Equity 0.0% 10.0% 20.0% Underweight 5.0% -5.0% Emerging Markets Equity 0.0% 5.0% 15.0% Overweight 15.0% +10.0% Real Assets 5.0% 25.0% 45.0% Overweight 45.0% +20.0% 1 Based on a 100 basis point value added objective. The benchmark employed here is based on a model portfolio and for illustrative purposes only. Individual client benchmarks are employed in the management of their respective portfolios. 5 APRIL 2019

6 EVOLUTION OF STRATEGY 1 MONEY MARKET CANADIAN BONDS CANADIAN EQUITY U.S. EQUITY INTERNATIONAL EQUITY EMERGING MARKETS EQUITY REAL ASSETS October 5, % -15.0% +8.0% 0.0% 0.0% 0.0% 0.0% October 12, % -10.0% +4.0% 0.0% 0.0% 0.0% 0.0% November 11, % 0.0% 0.0% 0.0% -5.0% 0.0% 0.0% December 7, % 0.0% +5.0% 0.0% -5.0% 0.0% 0.0% April 20, % -20.0% +10.0% 0.0% -5.0% 0.0% 0.0% July 31, % -15.0% 0.0% 0.0% -5.0% 0.0% 0.0% November 9, % -15.0% +10.0% 0.0% -5.0% 0.0% 0.0% February 19, % -15.0% +10.0% 0.0% 0.0% 0.0% 0.0% August 6, % -15.0% +10.0% +5.0% 0.0% 0.0% 0.0% December 3, % -15.0% +5.0% 0.0% 0.0% 0.0% 0.0% February 5, % -15.0% +10.0% +10.0% -5.0% 0.0% 0.0% October 14, % -20.0% +5.0% +10.0% +5.0% 0.0% 0.0% November 14, % -20.0% +2.5% +2.5% +5.0% 0.0% 0.0% July 13, % -20.0% +7.0% +4.0% +9.0% 0.0% 0.0% October 19, % -20.0% +11.0% +0.0% +9.0% 0.0% 0.0% June 24, % -20.0% +11.0% +0.0% +0.0% 0.0% 0.0% July 12, % -20.0% +15.0% +0.0% +0.0% +5.0% 0.0% July 27, % -20.0% +12.5% +0.0% +0.0% +2.5% 0.0% October 31, % -20.0% +12.5% 0.0% 0.0% +7.5% 0.0% April 5, % -15.0% +7.5% 0.0% -5.0% +7.5% 0.0% December 6, % -15.0% +5.0% -5.0% -5.0% +5.0% 0.0% October 9, % -15.0% +5.0% -10.0% -5.0% +10.0% 0.0% November 9, % -20% +5% -10% -5% +10% +20% December 17, % -20% +5% -5% -5% +10% +20% 1 Based on a 100 basis point value added objective. 6 APRIL 2019

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