RBC Global Asset Management Daniel E. Chornous, CFA Chief Investment Officer RBC Global Asset Management November 212
% Global Investment Outlook PMIs swing upward 65 Global Purchasing Manager's Indices 6 ISM Peak Jan 211: 59.9 55 5 45 16 14 12 1 8 6 4 2 U.S. 1-Year T-Bond Yield Equilibrium Range Last Plot: 1.69% 4 JPMorgan Global Mfg. PMI 35 ISM Mfg. PMI China Mfg. PMI Euro Area Mfg. PMI 3 28 29 21 211 212 213 Source: Haver Analytics, RBC GAM Current Range: 2.31% - 4.14% (Mid: 3.22%) 3311 226 124 759 464 284 174 16 65 S&P 5 Equilibrium Normalized Earnings & Valuations Nov. '12 Range: 1215-245 (Mid: 163) Nov. '13 Range: 133-2192 (Mid: 1747) Current (23-November-12): 149 198 1985 199 1995 2 25 21 215 Source: RBC GAM, RBC CM 4 196 1965 197 1975 198 1985 199 1995 2 25 21 215 Source: RBC GAM 2
X YoY % Change Critical factors Housing sector begins to heal 4.5 4. 3.5 3. 2.5 Home Prices as a Multiple of Median Household Income Existing House Price Divided by Median Income Average Ratio 1986-21: 2.85 Last Plot: 2.59 2% Below peak housing price 3% Below peak housing price 4% Below peak housing price 2. 199 1995 2 25 21 215 Source: National Association of Realtors Peak of Housing Market Median Price $23,9 22% Correction required to achieve average ratio 35 3 25 2 15 1 5-5 -1 U.S. Housing Prices Core Logic National HPI ex-distressed Properties* *Distressed Properties include short sales and real estate owned (REO) -15 199 1995 2 25 21 215 Source: Core Logic 3
Months Million Units YoY % Change Units Sold Critical factors Housing sector begins to heal 2.4 2. 1.6 1.2.8 U.S. Housing New Private Housing Units Started Total Starts Including Farm Housing.4 198 1985 199 1995 2 25 21 215 Source: Census, Housing Starts 5 4 3 2 1-1 -2-3 -4-5 United States Housing Statistics Existing Home Sales -6 2 23 26 29 212 215 Source: National Association of Realtors 12 U.S. Housing Month's Supply of Homes on the Market Existing Single Family Homes 1 8 6 4 Last Plot: 5.4 2 199 1995 2 25 21 215 Source: National Association of Realtors 4
QoQ % Change QoQ % Change Critical factors Credit conditions continue to ease -45-25 Senior Loan Officer Survey on Bank Lending Practices Loan Officers Reporting Tightening Standards Easing 8 6 Senior Loan Officer Survey on Bank Lending Practices Banks Reporting Stronger Demand for C & I Loans -5 15 35 55 75 95 Tightening Mortgage Loans to Individuals (Inverted) Commercial & Industrial Loans (Inverted) 199 1995 2 25 21 215 Source: Federal Reserve, Haver Analytics 4 2-2 -4-6 More Demand Large and Medium Firms Small Firms -8 Less Demand 199 1995 2 25 21 215 Source: Federal Reserve, Haver Analytics 5
QoQ % Change QoQ % Change QoQ % Change QoQ % Change Critical factors Credit conditions continue to ease -4-2 2 4 6 8 ECB Euro Area Bank Lending Survey Banks Reporting Tightening Credit Standards Loans to Individuals for House Purchases (Inverted) 1 Loans to Enterprises (Inverted) 23 26 29 212 Source: European Central Bank, Haver Analytics Easing Tightening 8 6 4 2-2 -4-6 ECB Euro Area Bank Lending Survey Change in Business Loan Demand Large Enterprises Small and Medium Enterprises -8 23 26 29 212 Source: European Central Bank, Haver Analytics More Demand Less Demand 6 ECB Euro Area Bank Lending Survey Change in Demand for Consumer Credit 8 ECB Euro Area Bank Lending Survey Change in Demand for Housing Loans 4 2 6 4 2-2 -4-2 -4-6 -6 23 26 29 212 Source: European Central Bank, Haver Analytics -8 23 26 29 212 Source: European Central Bank, Haver Analytics 6
$ Billions % Critical factors Corporate and household deleveraging largely behind U.S. Consumer Debt Outstanding (Total, SAAR) U.S. Financial Obligations Ratio Total Obligations as a % of Personal Disposable Income 16, 2 14, 19 12, 1, Peak: Q1 '8 $13.9 Tr Last Plot: Q2 '12 $12.9 Tr 18 8, 6, 4, 2, 17 16 15 Last Plot: (Q2'12): 15.8% Average 198-Present: 17.2% 198 1985 199 1995 2 25 21 215 Source: Federal Reserve 14 198 1985 199 1995 2 25 21 215 Source: Federal Reserve 7
Index Level Index Level Critical factors Corporate and household deleveraging largely behind 16 14 12 1 8 6 4 United States Consumer Confidence by Income Level Confidence: Income Over $5, Confidence: Income Under $5, 2 199 1995 2 25 21 215 Source: The Conference Board, RBC GAM 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1..9.8 Luxury Stocks S&P Global Luxury Index Relative to S&P 5.7 26 27 28 29 21 211 212 213 Source: Standard & Poor's, Bloomberg, RBC GAM 8
Tier 1 Risk-Based Capital Ratio (%) Corporate Debt-to-Income Ratio (%) Critical factors Corporate and household deleveraging largely behind U.S. Banks Capital Ratios U.S. Corporate Leverage 14 5 13 45 4 12 35 3 11 25 2 1 15 1 9 1994 1997 2 23 26 29 212 5 198 1984 1988 1992 1996 2 24 28 212 Note: Tier 1 risk-based capital ratio of all FDIC insured institutions. Source: FDIC, Haver Analytics, RBC GAM Source: Federal Reserve Board, Haver Analytics, RBC GAM 9
Critical factors but threats remain Fiscal cliff is nearing FISCAL CLIFF Bush Tax Cuts 212 213 Payroll Tax Cut Budget Control Act UI Extension Other If nothing is done, expiring fiscal policy chops a huge 3% off 213 GDP growth. Politicians will hopefully soften the blow. or a 213 recession could loom Source: RBC GAM, CBO 1
Change in Budget Balance as a % of GDP Critical factors but threats remain Fiscal cliff is nearing U.S. Fiscal Drag Mounts Fiscal boost 4 2 2.2 2.5 RBC GAM base case scenario -2.3 -.6-1.3-1.4-4 "Thelma & Louise" scenario -4.6-6 Fiscal drag 28 29 21 211 212 213 Note: A negative number indicates smaller deficit / bigger surplus versus prior year. Source: International Monetary Fund, Haver Analytics, RBC GAM 11
Basis Points Critical factors but threats remain European debt crisis chronic, but not terminal 22 2 18 16 14 12 1 8 6 4 2 European Banks Ireland, Spain & Portugal CDS 5-Year Spreads Santander Banco Espirito Santo Allied Irish Société Générale BBVA Banco Comercial Portugues Bank of Ireland 21 211 212 213 Source: Bloomberg 12
Level YoY % Change Critical factors but threats remain China growth nearing a bottom? 8 75 7 65 6 55 5 45 4 35 China Purchasing Managers Index and GDP Real GDP (RHS) Purchasing Manager's Index (LHS) 22. 2. 18. 16. 14. 12. 1. 3. 25 26 27 28 29 21 211 212 213 Source: China National Bureau of Statistics, Markit 8. 6. 4. 2. 14 12 1 8 6 4 2-2 Overall CPI China Consumer Price Index -4 CPI Excluding Food 2 25 21 215 Source: China National Bureau of Statistics 13
% % Basis Points % Stress Indicators -2 U.S. Yield Curve vs. VIX Volatility 7 High Yield Bond Spread -1 6 25 Credit Suisse HY Index Spread-to-Worst Last Plot: 63 (LHS) 25. VIX Nov. 23: 15.1 5 4 2 15 Spread-to-Worst Threshold HY Default Loss Rate (7 Months Later) Last Plot:.98% (RHS) 2. 15. 1 2 3 Recession Periods U.S. 1yr-2yr Spread (LHS, Inv, Adv 3 Months) VIX (RHS) 199 1995 2 25 21 215 Source: RBC GAM 3 2 1 1 5 1. 5.. 1986 199 1994 1998 22 26 21 214 Source: Credit Suisse, RBC GAM 588 bps 588 bps 14
YoY % Change % YoY % Change Index Level YoY % Change Employment A critical concern, though signs of healing are beginning to show 2 4 6 8 1 12 14 United States Non-Farm Employment and the Fed Funds Rate Fed Funds Rate (Inverted, Adv 18 Mos, LHS) Non-Farm Employment (RHS) 16-5 199 1995 2 25 21 215 Source: ISI Portfolio Strategy 5 4 3 2 1-1 -2-3 -4 8 75 7 65 6 55 5 45 4 35 United States ISM Manufacturing Index and Non-Farm Employment ISM Manufacturing Index (Adv. 12 Months, LHS) Non-Farm Employment (RHS) 3-8 199 1995 2 25 21 215 Source: Institute for Supply Management, BLS 1 8 6 4 2-2 -4-6 8 6 United States Real Consumer Spending and Non-Farm Employment Non-Farm Employment Real Personal Consumption 4 2-2 -4-6 199 1995 2 25 21 215 Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Citigroup 15
Index Level % of Reports Economic indicators Move past a period of negative surprise 3 Chicago Fed National Activity Index Three Month Moving Average 8 Westpac United States Data Surprise Index Positive Surprise 2 1 +.7 Risk of Inflation 7 6-1 -2-3 -4 -.7 Risk of Recession 5 4 3-5 198 1985 199 1995 2 25 21 215 Source: Federal Reserve Bank of Chicago, RBC GAM 2 22 24 26 28 21 212 Source: Westpac Strategy Group 16
Economic indicators PMIs turn higher 65 6 55 5 45 4 35 Global Leading Indicators JP Morgan Global Purchasing Managers Index 3 1998 2 22 24 26 28 21 212 Global Purchasing Managers Indices Manufacturing - as of October 212 Current Recent Trough Cycle Peak Canada 58.3 46.8 (Jul-11) 73.2 (Mar-11) Russia 52.9 49.8 (Jul-11) 55.6 (Mar-11) India 52.9 5.4 (Sep-11) 59. (May-1) United States 51.7 49.6 (Aug-12) 59.9 (Jan-11) Brazil 5.2 45.5 (Sep-11) 57.8 (Jan-1) China 49.5 47.6 (Aug-12) 57.4 (Jan-1) United Kingdom 47.5 45.2 (Jul-12) 59.5 (Nov-1) Japan 46.9 45.7 (Apr-11) 54.7 (May-1) Germany 46. 43. (Jul-12) 62.7 (Feb-11) Italy 45.5 43.3 (Oct-11) 59. (Feb-11) France 43.7 42.7 (Sep-12) 57.9 (Nov-1) Source: Markit, Haver Analytics Source : Haver Analytics 17
% % Above/Below Equilibrium Fixed Income Short rates near crisis levels as central banks continue to ease U.S. Fed Funds Equilibrium Range 24 22 Last Plot:.16% 2 Current Range:.3% - 2.57% (Mid: 1.43%) 18 16 14 12 1 8 6 4 2-2 198 1985 199 1995 2 25 21 215 Source: Federal Reserve, RBC GAM 1 8 6 4 2-2 -4-6 -8 Global (ex-japan) Short-Term Interest Rate Composite Short-Term Interest Rates Relative to Equilibrium -1 198 1985 199 1995 2 25 21 215 Source: RBC GAM Last Plot: -71.% 18
% Fixed Income Long term bond yields held down by risk aversion and unorthodox policy 16 14 12 1 % 8 6 4 2-2 36-month Centred CPI Inflation Actual Monthly CPI Inflation United States CPI Inflation -4 196 1965 197 1975 198 1985 199 1995 2 25 21 215 Source: RBC GAM, RBC CM 36-month Centred CPI Last Plot : 2.3% 12-month Forecast: 1.8% 16 14 12 % 12. 1. 8. 6. 4. 2.. -2. U.S. 1-Year T-Bond Yield Equilibrium Range +1 SD -1 SD Real T-Bond Yield United States Real 1 Year T-Bond Yield Real 1-Year Time Weighted Yield -4. 196 1965 197 1975 198 1985 199 1995 2 25 21 215 Source: RBC GAM, RBC CM Average: 2.5% 12-month Forecast: 1.14% Last Plot: -.6% 1 8 Last Plot: 1.69% Current Range: 2.31% - 4.14% (Mid: 3.22%) 6 4 2 198 1985 199 1995 2 25 21 215 Source: RBC GAM, RBC CM 19
% % % % Fixed Income Ultra-low yields not just a domestic issue Canada 1-Year Bond Yield Equilibrium Range Eurozone 1-Year Bond Yield Equilibrium Range 17 15 13 Last Plot: 1.79% Current Range: 2.5% - 4.18% (Mid: 3.34%) 18 16 14 11 12 9 1 7 8 5 6 3 1 198 1985 199 1995 2 25 21 215 4 Last Plot: 2.58% Current Range: 3.2% - 4.41% (Mid: 3.8%) 2 198 1985 199 1995 2 25 21 215 Source: RBC GAM, RBC CM Source: RBC GAM, RBC CM Japan 1-Year Bond Yield Equilibrium Range United Kingdom 1-Year Gilt Equilibrium Range 14 12 1 Last Plot:.74% Current Range: 1.22% - 2.7% (Mid: 1.65%) 18 16 14 12 Last Plot: 1.84% Current Range: 2.33% - 4.41% (Mid: 3.37%) 8 1 6 8 4 2 6 4 2 198 1985 199 1995 2 25 21 215 Source: RBC GAM, RBC CM 198 1985 199 1995 2 25 21 215 Source: RBC GAM, RBC CM 2
% Above/Below Equilibrium Fixed Income Long term bond yields held down by risk aversion and unorthodox policy 6 Global Bond Market Composite 1-Year Government Bond Yields Relative to Equilibrium 4 2 Last Plot: -41.5% -2-4 -6 198 1984 1988 1992 1996 2 24 28 212 Source: RBC GAM 21
YoY % Change % Bullish Fixed Income Technical indicators suggest elevated risk in fixed income markets 8 U.S. 1-Year T-bond Yields Rate of Change 1 U.S 1-Year T-Bond Bullish Consensus Too Many Bulls 6 4 2 Last Plot: -18.3% Oversold 8 6 4 Last Plot: 74% Bulls -2 Current Yield: 1.69% -4 Sell bonds as yield moves above 1.65% -6 Overbought 198 1985 199 1995 2 25 21 215 Source: RBC GAM 2 1995 2 25 21 215 Source: Market Vane, RBC GAM Too Many Bears US TSY 1YR BOND YLD Long-term Price Momentum 1 MONTHS AUG4-23NOV12 HI-JUN6 HI/LO DIFF TREND: TURN (TU-CL)%: SMO TPL: U1Y.ZZ.U 5.1364-71.42% 1.5234 1.168-31.31 1326 4.5 4. 3.5 CLOSE 1.6899 3. 2.5 2. 1.5 24 25 26 27 28 29 21 211 212 LO-JUL12 1.4679 Source: RBC CM 22
Equity Markets Global markets far below fair value 3311 226 124 S&P 5 Equilibrium Normalized Earnings & Valuations Nov. '12 Range: 1215-245 (Mid: 163) Nov. '13 Range: 133-2192 (Mid: 1747) Current (23-November-12): 149 759 464 284 174 16 65 4 196 1965 197 1975 198 1985 199 1995 2 25 21 215 2899 1881 1221 792 514 334 217 141 Source: RBC GAM Eurozone Datastream Index Normalized Earnings & Valuations Nov. '12 Range: 1217-2288 (Mid: 1752) Nov. '13 Range: 145-2643 (Mid: 224) Current (23-November-12): 15 198 1985 199 1995 2 25 21 215 Source: Datastream, Consensus Economics, RBC 394 33 233 179 137 16 81 62 Emerging Market Datastream Index Normalized Earnings & Valuations Nov. '12 Range: 21-37 (Mid: 29) Nov. '13 Range: 227-4 (Mid: 314) Current (23-November-12): 258 48 1995 2 25 21 215 Source: Datastream, RBC GAM 23
% Above/Below Fair Value Equity Markets Global markets far below fair value 1 Global Stock Market Composite Equity Market Indexes Relative to Equilibrium 8 6 4 Last Plot: -15.7% 2-2 -4-6 198 1985 199 1995 2 25 21 215 Source: RBC GAM 24
Above Consensus Reports Consensus Earnings Estimates ($US) Earnings Sluggish economy/rising expectations are a growing challenge 15 S&P 5 Composite Index Consensus Earnings Estimates 14 13 12 11 1 9 211 212 213 214 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Companies Reporting Results Above Consensus Forecasts % Greater Than Expectations Long-Term Average: 62% 8 7 26 27 28 29 21 211 212 213 Source: ThomsonReuters % 23 24 25 26 27 28 29 21 211 212 Source: ThomsonReuters Last Plot: 64% 97% Companies Reporting $11 $15 $1 $95 $9 U.S. Analyst Overoptimism in S&P 5 EPS Estimates (Monthly Pattern, Averages for 1985-21) Average Forecast Error Rebased to Feb. 212 Forecast 212 Mean Earnings Estimate Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Chopra, ThomsonReuters, RBC GAM 25
X Equity Markets Valuations still depressed 35 3 S&P 5 Index Normalized (Equilibrium) Price/Earnings Ratio Nov. '12 Range: 1 Std. Dev.: 12.9x - 2.9x (Mid: 16.9x) Nov. '12 Range: 2 Std. Dev.: 8.9x - 24.8x (Mid: 16.9x) Current: 14.4x 25 2 15 1 5 P/E on Trailing 12 Months Earnings +/- 1 Standard Deviation from Equilibrium P/E +/- 2 Standard Deviations from Equilibrium P/E 196 1965 197 1975 198 1985 199 1995 2 25 21 215 Source: RBC GAM 26
Equity Markets Valuations still depressed Earnings Estimates & Alternative Scenarios for Valuation and Outcomes for the S&P 5 Consensus 212 Top Down 212 Bottom Up Trailing 12 Months Recessionary* P/E $11.4 $12.6 $97.8 $73.4 Equilibrium 16.9 1712.4 1731.6 1651. 1238.2 1 Standard Deviation 12.9 139.5 1324.1 1262.5 946.9 2 Standard Deviation 8.9 96.5 916.6 874. 655.5 Consensus 213 Top Down 213 Bottom Up P/E $16.3 $113.7 Equilibrium 16.9 1794.6 1918.9 1 Standard Deviation 12.9 1372.3 1467.4 2 Standard Deviation 8.9 95. 115.8 *Trailing 12-Month Earnings to November 212 less 25% Source: Bloomberg, Thomson Reuters, RBC GAM 27
Styles What s working 2.% U.S. Factor Returns Relative to the S&P 15 Cumulative Returns to Small Cap 1.% U.S. Factor Returns Relative to the S&P 15 Cumulative Returns to Value 15.% 1.% 7.5% 5.% 5.%.% -5.% 2.5% -1.% 29 21 211 212 213 Source: RBC GAM *Returns to small cap vs. S&P 15 starting 3/29.% 29 21 211 212 213 Source: RBC GAM *Returns to value vs. S&P 15 starting 3/29 28
Styles What s not working 2.5% U.S. Factor Returns Relative to the S&P 15 Cumulative Returns to Momentum (Technical) 5.% U.S. Factor Returns Relative to the S&P 15 Cumulative Returns to Growth.% 2.5% -2.5%.% -5.% -7.5% -2.5% -1.% 29 21 211 212 213 Source: RBC GAM *Returns to momentum vs. S&P 15 starting 3/29 *Returns to growth vs. S&P 15 starting 3/29-5.% 29 21 211 212 213 Source: RBC GAM 29
Quarterly Returns Styles Macro/beta trade continues to dominate 1..9.8.7.6.5.4.3.2.1 Long-term Average:.46. 1972 1976 198 1984 1988 1992 1996 2 24 28 212 Source: Ned Davis Research S&P 5 Stock Correlations Median Correlations of S&P 5 Stocks to the S&P 5 Index Last Plot:.57 9% 8% 7% 6% 5% 4% 3% S&P 5 - Returns to Perfect Foresight Difference Between Median Performance of Top and Bottom Deciles Average: 47.8% Foresight = 1 quarter in advance High Spreads Low Spreads 2% 1986 199 1994 1998 22 26 21 214 Source: Bank of America Merrill Lynch 3
% % Equity Markets Technical indicators AAII Sentiment Survey Percent Bearish AAII Sentiment Survey Percent Bullish 8 7 Too Many Bears 8 7 Too Many Bulls 6 6 5 5 4 4 3 3 2 2 1 Not Enough Bears 21 23 25 27 29 211 213 Source: American Association of Individual Investors (AAII) Last Plot: 4.8 1 21 23 25 27 29 211 213 Source: American Association of Individual Investors (AAII) Not Enough Bulls Last Plot: 35.8 31
Equity Markets Technical indicators 75% S&P 5 & Strategists' Recommended Allocation for Stocks 22 17 S&P 5 & Equity Mutual Fund Flows 35 7% 65% 6% 55% 5% 45% Allocation to Equities (LHS) S&P 5 (RHS) 4% 2 23 26 29 212 Source: Bloomberg, RBC GAM, Bank of America Merrill Lynch 2 18 16 14 12 1 8 6 4 15 13 11 9 7? Domestic Equity Flows (13-Week Moving Average, RHS) S&P 5 (LHS) 15-5 -25-45 -65 5-85 27 28 29 21 211 212 213 Source: ICI, Ned Davis Research, RBC GAM 32
Equity Markets Technical indicators Emerging markets turn a corner Absolute Price with Price Momentum MSCI EMERGING MARKET GLOBAL 1 MONTHS AUG4-23NOV12 HI-OCT7 LO/HI DIFF TREND: TURN (TU-CL)%: SMO TPL: 12 Relative Price with Price Momentum EMGL.ZZ.I MSCI EMERGING MARKET GLOBAL Rel. S&P 5 1337.63 1 MONTHS AUG4-23NOV12 24.18% 931.439 81.868-18.58.9 1311 HI-SEP1 LO/HI DIFF TREND: TURN (TU-CL)%: SMO TPL: EMGL.ZZ.I.94245 136.66%.67524.63184-1.6 1215.8 1 CLOSE 995.94.7 CLOSE.7677 8.6 6.5 LO-AUG4 439.75 24 25 26 27 28 29 21 211 212.4 24 25 26 27 28 29 21 211 212 LO-AUG4.39823 Source: RBC CM Source: RBC CM 33
Stock Market Outperformance % Asset Mix Trailing 1-year Stock vs. Bond Market Performance 7 6 5 4 3 2 1-1 1-Year U.S. Stock and Bond Performance Stock Market 1-Year Total Return minus Long Bond Total Return S&P 5 1-Year Total Return minus Barclays Capital Long-Term T-Bond 1-Year Total Return -2-2 Std Dev 1935 1945 1955 1965 1975 1985 1995 25 215 Source: Ned Davis Research +2 Std Dev +1 Std Dev Mean: 12.5% -1 Std Dev 34
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