Transition Period or New Paradigm?

Transition Period or New Paradigm? Megan Greene Chief Economist, Portfolio Solutions Group, Manulife Asset Management February 2018

Who s Right: Bulls (soft data) or Bears (hard data)? 2

US: Grass-Roots Sentiment Soars Post-Election 110 105 100 95 90 85 NFIB Small Business Optimism Index 1997-2017 80 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 120 110 100 90 80 70 60 50 40 30 US Consumer Confidence 2000-2017 20 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Thomson Reuters Datastream; Manulife Asset Management as of December 2017 3

Translating into Broader Business Confidence 65 ISM Manufacturing Index 60 55 50 45 40 35 30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ISM Manufacturing Index Source: Thomson Reuters Datastream; Manulife Asset Management, as of December 2017 4

Euphoria Everywhere: All Markets Are Up 40% 2017 Y/Y% Asset Class Returns 35% 30% 25% 20% 15% 10% 5% 0% MSCI EM NASDAQ Dow FTSE All-World Index S&P500 Gold Oil Global Bonds Thomson Reuters, Manulife Asset Management, as of December 31, 2017 5

Euphoria Everywhere 2,900 S&P 500 2,800 2,700 2,600 2,500 2,400 2,300 2,200 1/26/2017 3/26/2017 5/26/2017 7/26/2017 9/26/2017 11/26/2017 1/26/2018 Source: Thomson Reuter, Manulife Asset Management, as of January 26, 2018 6

Too Much of a Good Thing? Now look, we have the worst revival of an economy since the Great Depression. And believe me, we re in a bubble right now. And the only thing that looks good is the stock market but if you raise interest rates even a little bit, that s going to come crashing down. We are in a big fat ugly bubble, and we better be awfully careful. Donald Trump, First US Presidential Debate, September 26 th, 2016 Dow on Sep 26 th 2016: 18,094 Dow on Jan 29 th 2018: 26,439 ( 39%) Source: Thomson Reuters Datastream; Manulife Asset Management, as of January 29, 2018 7

US: Commercial Bank Loans and Leases Have Decelerated 9% Commercial Banks: Loans and Leases (Y/Y% chg.) 8% 7% 6% 5% 4% 3% 2% 1% 0% 2011 2012 2013 2014 2015 2016 2017 Commercial Banks: Loans and Leases (Y/Y% chg.) Source: Thomson Reuters Datastream; Manulife Asset Management as of January 2018 8

US: Consumer Range-Bound 15% US: Retail Sales Momentum 10% 5% 0% -5% -10% -15% -20% -25% -30% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Retail Sales (3M/3M, Annualized) Source: Thomson Reuters Datastream; Manulife Asset Management as of November 2017 9

US: Hurricane Effects Aside, Vehicle Sales Have Softened US Light Vehicle Sales (Million, annualized) 19 18 17 16 15 14 13 12 11 10 9 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Hurricane noisiness US Light Vehicle Sales (Million, annualized) Source: Thomson Reuters Datastream, Manulife Asset Management as of December, 2017 10

US: Real Wages Subdued 5% United States: Real Average Hourly Earnings 2007 through December 2017 4% 3% 2% 1% 0% -1% -2% 2009 2010 2011 2012 2013 2014 2015 2016 2017 Real Average Hourly Earnings (Y/Y% chg.) Source: Thomson Reuters Datastream, Manulife Asset Management as of December 2017 11

US: Why Wages are Stuck 35% 30% 25% Manufacturing jobs as a % of total 70% 65% 60% 55% Share of Personal Income 20% 15% 10% 50% 45% 40% 35% 5% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 30% 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 Manufacturing jobs as a % of total Goods Services Source: Thomson Reuters Datastream, Manulife Asset Management as of October 2017 Source: Thomson Reuters Datastream, Manulife Asset Management as of December 2016 12

Canadians Look Confident Index Consumer Confidence Accelerating Sharply 140 130 120 110 100 90 80 70 60 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Index Bank of Canada's Business Outlook Indicator Shows Business Sentiment Strong 4 2 0-2 -4-6 -8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: OECD, Bloomberg, Manulife Asset Management. As of December 2017 Source: Bank of Canada, Bloomberg, Manulife Asset Management. As of December 2017 13

As They Should Be YoY (%) 6 5 4 3 2 1 0-1 -2-3 -4 2002 Canadian Wage Growth Accelerating 2003 2004 2005 2006 2007 Real wages 2008 2009 2010 2011 Source: Bloomberg, Statistics Canada, Manulife Asset Management. As of November 2017. 2012 2013 2014 Nominal wages 2015 2016 2017 Manufacturing Sales Being Supported By US/Global Growth YoY (%) 12 10 8 6 4 2 0-2 -4-6 2012 2013 2014 2015 2016 2017 14

Disruptors and Drivers Prevail 15

Growing Debt Levels Continue 400% Credit to the Non-Financial Sector, Breaks Adjusted, as % GDP 350% 300% 250% 200% 150% 100% 50% 0% Europe US Canada Japan China 2008 2016 Source: Bank for International Settlements, Manulife Asset Management, as of March 2017. 16

Productivity Remains Subdued 6 5 4 3 2 1 0-1 -2-3 1978 1984 1990 1996 2002 2008 2014 Source: Thomson Reuters Datastream; Manulife Asset Management as of December 2017. United States: Nonfarm Labor Productivity U.S. Nonfarm Labour Productivity Average 17

Labor Force Participation Rate: A Long-term problem US Labor Force Participation Rate (%) US Labor Force Participation Rate (%) 69% 67% 65% 63% 61% 59% 57% Peak Participation: 2000 90% 80% 70% 60% 50% 40% 55% 1950 1960 1970 1980 1990 2000 2010 Participation Rate 30% 1950 1960 1970 1980 1990 2000 2010 Participation Rate Male Female Source: Bloomberg, Manulife Asset Management, as of December 2017. 18

OECD: The Only Rising Demographic: 65+ 35 OECD: An Aging Population 68 30 67 25 66 65 % 20 15 64 63 % 10 62 61 5 60 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 59 OECD Population: Ages 0-14 (% of Tota -LHSl) OECD Polulation: Ages 15-64 (% of Total - LHS) OECD Population: Ages 65+ (% of Total - RHS) Source: OECD, Thomson Reuters Datastream; Manulife Asset Management as of December 31, 2016 19

Lower for Longer Persists 10% 8% 6% 4% 2% 0% -2% -4% 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 US 10 year less core CPI Source: Thomson Reuters Datastream; Manulife Asset Management as of December 2017. 20

Risks 21

End of the US consumer credit cycle? 12% 10% 8% 6% 4% 2% Personal Savings Rate (%) and Average Hourly Earnings (YoY%) 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0.0% Personal Savings Rate LHS Average Hourly Earnings RHS Source: Bloomberg, Manulife Asset Management, as of December 2017 22

What Goes Up 700% Household Net Worth as a % of Disposable Income 650% 600% 550% 500% 450% 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Thomson Reuters, Manulife asset Management, as of December 2017. 23

NFCs Look OK, But Only in Aggregate 60% 50% 40% 30% 20% Nonfinancial Corporate Liquid Assets 10% 1960 1970 1980 1990 2000 2010 Liquid Assets as a % of Debt Liquid Assets as a % of Short Term Liabilities 50% Debt, Investment as a % of GDP 45% 40% 35% 30% 25% 1960 1970 1980 1990 2000 2010 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% Corporate Debt/GDP - LHS Net Domestic Investment/GDP - RHS 24

Tax Policy: Company Plans for Repatriation Does your company plan to repatriate earnings if a bill is passed that allows advantageous rates? How would the proceeds of repatriated earnings be used? Other Fund Pension Dividend Yes, 64% No, 36% Capex M&A Share Buyback Debt Repayment 0% 20% 40% 60% 80% 100% 0% 10% 20% 30% Source: Bank of America/Merrill Lynch, July 2017 25

Tax Policy: The Tax and Jobs Act Would Increase the Deficit and Debt Billion $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 -$200 Tax Act Could Add $1.7 Trillion to Deficit 10 Years Out 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 $28,000 $26,000 $24,000 $22,000 $20,000 $18,000 $16,000 $14,000 Billion Baseline (LHS) Tax Act (LHS) Tax Act Impact on Debt Service (LHS) Revised Debt Level (RHS) Base Debt Level (RHS) Source: Congressional Budget Office, Manulife Asset Management, as of November 26 th, 2017 26

Fed Could Kill the Party First Hike Last Hike Result October 1950 May 1953 Recession October 1955 August 1957 Recession September 1958 September 1959 Recession December 1965 September 1966 Soft Landing November 1967 June 1969 Recession April 1972 September 1973 Recession May 1977 March 1980 Recession August 1980 December 1980 Recession March 1983 August 1984 Soft Landing January 1987 May 1989 Recession February 1994 February 1995 Soft Landing June 1999 May 2000 Recession June 2004 June 2006 Recession December 2015?????????? Source: Manulife Asset Management, h/t David Rosenberg (Gluskin Sheff & Associates), as of February 2, 2018. 27

Policymakers are People, too Fed Voting 2017 (start) Brainard (Dove) Dudley (Moderate) Evans (Dove) Fischer (Moderate) Harker (Moderate) Kaplan (Dove) Kashkari (Dove) Powell (Moderate) Tarullo (Moderate) Yellen (Moderate) 0 Hawks, 4 Doves Fed Voting 2018 Barkin (Unknown) Bostic (Moderate) Brainard (Dove) Dudley (Retiring, successor unknown) Goodfriend (Hawk?) Mester (Hawk) Powell (Moderate) Quarles (Hawk) Williams (Hawk) Yellen (Retiring) 4 Hawks,1 Dove Source: Manulife Asset Management, as of February 2, 2018. 28

But The List of Risks Is Long And Growing NAFTA Uncertainty Tighter Mortgage Requirements (As of Jan 1) The Levered Consumer 3 Rate Hikes To Work Through The Economy (And Likely More Ahead) Provincial Minimum Wage Increase (Ontario, Alberta) For illustrative purposes only. 29

Trade Policy: NAFTA GDP Sensitivities United States: GDP % 4 3 3 2 2 1 1 0 2016 2017 2018 2019 2020 2021 2022 Canada: GDP % 5 4 3 2 1 0-1 -2-3 -4 2016 2017 2018 2019 2020 2021 2022 Mexico: GDP % 6 4 2 0-2 -4-6 -8-10 2016 2017 2018 2019 2020 2021 2022 Baseline Downside Baseline Downside Baseline Downside Source: Manulife Asset Management. As of December 2017. 30

China: Large Debt Overhang 300 Chinese Debt as a % of GDP 250 200 150 100 50 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Corporates Households Banks Government Source: Bloomberg, Manulife Asset Management. As of December 2016 31

Italian Election 30% Italian Election Poll 25% 20% 15% 10% 5% 0% 5-Star PD Northern League Forza Italia Free and Equal Brothers of Italy Other Source: Index (January 25, 2018), Manulife Asset Management 32

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