Q4/17. Quarterly Market Commentary. Highlights. Canadian & U.S. Fixed Income. U.S. Equities. International Equities.

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1 Q4/17 Highlights Canadian & U.S. Fixed Income The Canadian government bond index rose during Q4/17, outperforming the U.S. government bond index as the Canadian index increased 2.08% Q/Q, compared to a 0.04% Q/Q advance for the U.S. index. Globally, interest rates in developed economies are historically low as central banks are trying to apply sound judgement to complex trade-offs without inadvertently triggering another economic downturn. Canadian and U.S. investment grade corporate bond indices registered returns of positive 1.87% Q/Q and positive 1.12% Q/Q, respectively in Q4/17. Credit markets continued to hold up very well, with investment grade (IG) credit spreads trending tighter during the quarter. U.S. high yield credit spreads remained narrow compared to historical levels, supporting a gain of 0.96% Q/Q for the sector. U.S. Equities U.S. equities delivered a positive return in Q4/17. The S&P 500 Index (S&P500) gained 6.64% Q/Q, the Dow Jones Industrial Average Index (Dow) rose 10.96% Q/Q and the NASDAQ Composite Index (NASDAQ) returned 6.55% Q/Q. Each of the eleven sectors in the S&P 500 showed positive returns as President Trump s tax reform passes through Congress. Large-cap U.S. equities outperformed mid-cap stocks and small cap stocks, U.S. growth stocks outperformed their value counterparts. International Equities Most major developed international markets rose in Q4/17. The MSCI Emerging Markets Index advanced 5.74% Q/Q, outperforming most developed markets. Canadian Equities The Canadian equity market gained in Q4/17 as the S&P/TSX Composite Index (S&P/TSX) returned 4.45% Q/Q. Each of the eleven sectors posted a positive return. The sector significantly led market returns while the Energy sector lagged the group as it faced challenges including hurricanes in the U.S., low cost shale producers and a large amount of one-off maintenance shutdowns. Large-cap stocks outperformed small-cap and mid-cap Canadian equities, and Canadian value stocks outperformed growth stocks during the quarter.

2 Canadian & U.S. Fixed Income Money Market/Bond Issues and Indices Q4/17 Return YTD Return Canadian Yields U.S. Yields 91-Day Treasury Bill 1.05% 1.38% 2-Year Government Bonds 1.69% 1.88% 5-Year Government Bonds 1.87% 2.21% 10-Year Government Bonds 2.05% 2.41% 30-Year Government Bonds 2.27% 2.74% FTSE TMX Canada Universe Bond Index 2.02% 2.52% 2.47% FTSE TMX Canada All Government Bond Index 2.08% 2.18% 2.28% FTSE TMX Canada All Corporate Bond Index 1.87% 3.38% 2.99% FTSE TMX Canada Real Return Bond Index 3.79% 0.73% 0.55% BofA Merrill Lynch US High Yield Index US$ 0.41% 7.48% 5.84% BofA Merrill Lynch High Yield Cdn Issuers Index US$ 0.96% 8.84% Source: Bloomberg Finance L.P. as at December 31, Index returns are reported on a total return basis. The Canadian government bond index rose during Q4/17, outperforming the U.S. government bond index as the Canadian index increased 2.08% Q/Q, compared to a 0.04% Q/Q advance for U.S. Treasuries as measured by the Bloomberg U.S. Treasury Bond Index. Globally, interest rates in developed economies are historically low and are expected to remain so for the foreseeable future, as central banks are trying to apply sound judgement to complex trade-offs as to how to bring extraordinary monetary stimulus and historically low interest rates to more normal levels, without inadvertently triggering another economic downturn. The European Central Bank (ECB), as widely expected, announced a reduction in its monthly pace of asset purchases starting January 2018, and kept its forward guidance on interest rates unchanged, reiterating its expectation to keep interest rates at current levels for an extended period of time, and well past the end of asset purchases. On November 2, 2017, the Bank of England s Monetary Policy Committee raised its key interest rate by 25 bps from a record low 0.25% to 0.50% and voted unanimously to maintain the quantitative easing program at 435 billion. The Federal Open Market Committee, on December 13, 2017, raised the target federal funds rate by 25 bps to a range of 1.25% to 1.50%, with a target effective Canada Treasury Yield Curve U.S. Treasury Yield Curve Today 3 Months Ago 1 Year Ago Today 3 Months Ago 1 Year Ago Source: Bloomberg Finance L.P. as at December 31,

3 rate of 1.375%. The next FOMC meeting is on January 30-31, In their December projections, the Fed is still forecasting for three rate hikes in The median dot projection of FOMC members showed two rate increases in 2019 and two more in The median expectation for the policy rate is 2.125% in 2018 (unchanged from September), 2.688% in 2019 (unchanged), 3.062% in 2020 (up from 2.875%), and 2.75% in the longer run (unchanged). TD Economics is forecasting two rate hikes in Yield curves in North America continued to flatten in Q4/17. The U.S. Treasury (UST) yield curve bear flattened, with yields on longer dated securities rising less than those at the front end of the curve. The 2-year UST bond yielded 1.89% at the end of December, as 2-year yields rose 40 bps during the quarter. The 10-year UST yielded 2.41% at the end of Q4/17, as yields rose 7 bps during the quarter. The Canadian yield curve flattened by 22.5 bps in Q4/17, in response to more forward Bank of Canada rate hike expectations. The 2-year Government of Canada bond yielded 1.69% at the end of December, up 17 bps from the end of Q3/17. The 10-year Government of Canada bond yielded 2.05% at the end of Q4/17, as its yield declined 5 bps during the quarter. On December 6, 2017, the Bank of Canada (BoC) maintained the target for the overnight target rate at 1.00%. The Bank rate was correspondingly left unchanged at 1.25% as was the deposit rate at 0.75%. The next scheduled date for announcing the BoC overnight rate target is January 17, TD Economics is currently of the view that the next rate will likely take place in March (from January previously), with a second hike in July, as they do not see the BoC hiking more than twice in 2018 as the household-debt overhang leaves the Canadian economy on fragile footings (forecast revised on December 14, 2017). Canadian and U.S. investment grade corporate bond indices registered returns of positive 1.87% Q/Q and positive 1.12% Q/Q, respectively in Q4/17. Credit markets continued to hold up very well, with investment grade (IG) credit spreads trending tighter during the quarter. High yield credit spreads remained narrow compared to historical levels, supporting a gain of 0.96% Q/Q for the sector in the U.S. Canadian Equities Indices Q4/17 Return YTD Return S&P/TSX Composite Index 4.45% 9.10% S&P/TSX 60 Index 4.93% 9.78% S&P/TSX Cdn MidCap Index 2.94% 7.04% S&P/TSX Cdn SmallCap Index 4.69% 2.75% S&P/TSX Preferred Share Index 1.49% 8.34% Source: Bloomberg Finance L.P. as at December 31, Total index values and returns, except the S&P/TSX Preferred Share Index which is reported on a price return basis. The Canadian economy appeared to have slowed during the fourth quarter of 2017, compared to the first three quarters where economic output continued to grow, however, challenges in the mining, quarrying, and oil and gas sectors was enough to offset some of the gains from other areas. Strong growth of 3.7% in the first quarter was followed by a 4.5% expansion in the second quarter before dropping to 1.7% in the third quarter. Hurricanes in the U.S. that decreased demand for Canadian oil and larger-than-usual maintenance shutdowns contributed to this slowdown. TD Economics is currently forecasting Canadian GDP growth for 2018 and 2019 at 2.6% and 2.3% respectively. Economic tailwinds for growth included job and income gains, which has lowered the unemployment rate to 5.9% as of December 22 nd, a rise in oil prices towards the US$60 level and the news regarding implementation of multi-level government stimulus action plans. Headwinds for growth included elevated household debt, the looming implementation of B-20 mortgage guidelines and challenging NAFTA negotiations, which has caused the Bank of Canada to change its hawkish tone since two rapid rate hikes in July and September. The Canadian equity market was bullish again in Q4/17 as the S&P/TSX returned 4.4% Q/Q and 9.1% in All of the eleven sectors contributed to the gains with Healthcare, and Consumer Discretionary leading the way. Energy, the second largest 3

4 sector, was the worst performer during the quarter as the sector returned 0.7% Q/Q (-7.0% in 2017). Although global oil prices increased 16.9% Q/Q (12.5% for 2017) in U.S. dollar terms, investors largely ignored the Canadian energy sector despite the positive market sentiment from falling U.S. crude stockpiles as well as the prospect of extended production cuts by OPEC and other major world producers.the health care sector provided strong returns, appreciating 46.7% Q/Q and 34.2% for These gains were led primarily by outsized returns from marijuana companies Canopy Growth Corp. and Aphria Inc., which advanced more than 160% each in Q4/17, as well as Valeant Pharmaceuticals International Inc., which rose more than 45% during the quarter. The price of gold bullion increased marginally 1.8% Q/Q in U.S. dollar terms (13.1% for 2017), recovering after a large dip in mid-december. During the quarter, large-cap stocks outperformed small-cap and mid-cap Canadian equities. The large-cap S&P/TSX 60 Index returned 4.9% Q/Q (9.8% for 2017) compared to 2.9% Q/Q (7.0% for 2017) for the S&P/TSX Canadian Mid Cap Index and 4.7% Q/Q (2.8% for 2017) for the S&P/TSX Canadian Small Cap Index. Canadian growth stocks, as measured by the Morningstar Canada Target Momentum Index, advanced 5.1% Q/Q (12.0% for 2017) and underperformed the comparable value benchmark, the Morningstar Canada Target Value Index, which gained 6.0% Q/Q (12.9% for 2017). The S&P/TSX underperformed the S&P 500 in Canadian dollar terms, which represents the third quarter of relative underperformance during Canadian preferred shares total return was 2.73% during the fourth quarter, to which dividends contributed 1.24% while the remaining 1.49% was due to price appreciation. The Bank of Canada maintained the overnight rate target at 1% following its October and December meetings. Interest rates exhibited some volatility as the five Year Government of Canada Bond Yield declined to 1.59% during the quarter before closing at 1.87%, 11 bps higher than the last print in Q The preferred share market has been supported by a combination of contracting spreads, a number of issues being redeemed and the lack of new issue supply during October and most of November. However, December witnessed a new wave of issues coming to the market that was dominated by pipeline companies. Floating rate and fixed-floating issues were the best performers as they rose 7.05% and 6.13% respectively. Perpetual preferred shares closed the quarter 1.68% higher in response to a 21 bps decline in the 30 Year Government of Canada Bond Yield, which closed the quarter at 2.27%. Fixed rate-resets and floating rate-resets rose 1.41% and 1.05% respectively. S&P/TSX Sector Returns (%) Q4/ YTD Energy 0.7 Energy Telecommunications 4.3 S&P/TSX Composite S&P/TSX Composite Telecommunications Source: Bloomberg Finance L.P., as at December 31, Index Total Returns. 4

5 U.S. Equities Indices Q4/17 Return Q4/17 Return (C$) YTD Return YTD Return (C$) Dow Jones Industrial Average Index 10.96% 11.34% 28.11% 19.32% S&P 500 Index 6.64% 7.01% 21.83% 13.47% S&P 400 Index 6.25% 6.62% 16.24% 8.27% NASDAQ Composite Index 6.55% 6.92% 29.64% 20.74% Russell 2000 Index 3.34% 3.70% 14.65% 6.78% Source: Bloomberg Finance L.P. as at December 31, Total index values and returns. Index returns calculated in local currency and C$. U.S. equities delivered its fourth positive quarterly return of the year in Q4/17. The S&P 500 gained 6.6% Q/Q (21.8% in 2017), the Dow rose 11.0% Q/Q (28.1% in 2017) and the NASDAQ returned 6.6% Q/Q (29.6% in 2017). Each of the eleven sectors in the S&P 500 delivered a positive return during the quarter, with gains led by the, and sectors. Throughout the fourth quarter, the U.S. economy has been experiencing robust economic growth with unemployment at a 17-year low, strong business investment activity and strong household balance sheets. The gains in the stock market was primarily due to anticipation over the recently signed Tax Cuts and Jobs Act (TCJA) where the most notable feature is the drop in corporate income tax rate to 21% from 35%. TD Economics believes there may be a sufficient catalyst for corporate and personal tax changes to incorporate fiscal impacts which could extend the business cycle over the near term. The S&P 500, a benchmark for U.S. large-cap equities, rose 6.6% Q/Q (21.8% for 2017) and outperformed small-cap U.S. stocks, as measured by the Russell 2000 Index, which advanced 3.3% Q/Q (14.7% for 2017). S&P 500 Sector Returns (%) Q4/ YTD 0.2 Telecommunications Energy Telecommunications Energy S&P S&P Source: Bloomberg Finance L.P., as at December 31, Index Total Returns. 5

6 Additionally, the S&P 500 outperformed the S&P 400 Index a measure of U.S. mid-cap stocks, which rose 6.3% Q/Q (16.2% for 2017). U.S. value stocks, as measured by the Morningstar U.S. Value Index, gained 6.3% Q/Q (14.2% for 2017), and underperformed the comparable growth benchmark, the Morningstar U.S. Growth Index, which registered a total return of 7.0% Q/Q (29.5% for 2017). International Equities Indices Q4/17 Return Q4/17 Return (C$) YTD Return YTD Return (C$) FTSE 100 Index 5.02% 6.40% 11.95% 14.23% DAX Index 0.69% 2.91% 12.51% 19.45% CAC 40 Index -0.01% 2.19% 12.73% 19.67% MSCI Europe (LC) Index 1.32% 2.61% 13.72% 17.57% Nikkei 225 Stock Average 12.04% 12.47% 21.33% 17.08% MSCI Emerging Markets Free (LC) Index 5.74% 7.81% 31.00% 27.86% Source: Bloomberg Finance L.P. as at December 31, Total index values and returns. Index returns calculated in local currency and C$. Most major developed international markets rose in Q4/17. In Europe, the year ended with the highest pace of economic growth since 2011 with strong real GDP growth which was helped by accommodative financial conditions, healthy business and household spending, and strong labor market indicators. The European Central Bank kept its monetary policy rate unchanged as it plans on continuing its quantitative easing program into the New Year but with a reduction in the level of its monthly repurchasing program from 60 billion euros to 30 billion euros. The Bank of England joined Canada and the U.S. in November by voting to increase their policy rate from 0.25% to 0.5%. Their decision to increase interest rates for the first time in over a decade came from the high headline inflationary levels which have been running at the top end of their target range since the Brexit vote. The U.K. s FTSE 100 Index gained 5.0% Q/Q (12.0% for 2017) while France s CAC 40 Index dropped a mere -0.01% Q/Q (12.7% for 2017) and Germany s DAX Index rose 0.7% Q/Q (12.5% for 2017). Japan s Nikkei 225 Stock Average rose 12.0% Q/Q (21.3% for 2017) where the index reached a record breaking 16 day winning streak in October. GDP grew during the quarter as global economic optimism and the 2020 Tokyo Summer Olympics gave way to a combination of strong consumption and infrastructure investments. The Bank of Japan voted to keep rates unchanged in December, maintaining its short term rate at -0.1% and the 10-year government bond rate at zero percent. The MSCI Emerging Markets Index finished the year up 5.7% Q/Q (31.0% for 2017), outperforming most developed markets. The South Korean KOSPI Index gained 3.1% Q/Q (21.8% for 2017) and the Taiwan Stock Exchange gained 2.5% Q/Q (15.0% for 2017). The Chinese Shanghai Composite PR Index returned -1.3% Q/Q (6.6% for 2017) as economic data came in trending lower than previous quarters based off weaker fixed asset investment activity and rising levels of debt in the private and public sectors. The Indian Nifty 50 Index returned 7.6% Q/Q (28.7% for 2017) as Moody s Investors Service upgraded India s credit rating for the first time in over 13 years and investors look to the newly elected government to recapitalize the state-run banks and provide tax reform. 6

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