Global Economic Highlights The Jamaican equity market continued its strong performance during the second quarter, with the JSE Main Index increasing by.80%. Year to date the Index increased by 6.02%. This increase was driven in part by sound fundamental performance of listed companies, various stock split announcements, and the declining interest rate environment. The local yield curve showed relative decline during the year as instruments on the shorter end of the curve (<5 years) recorded an average decrease of 2 basis points while longer dated instruments (>=5 years) recorded an average decline of 24 basis points. The Jamaican Dollar depreciated by 4.% against the US Dollar during the year and by.50% during the quarter. Despite the depreciation, foreign exchange liquidity levels continue to increase with stable current account balances alongside robust tourism receipts and remittance levels. The Jamaican economy grew by.4% in the first quarter of 208 when compared to the similar corresponding quarter of 207. This was as a result of improved performance in both the Goods Producing (2.8%) and the Services (0.9%) industries. Fitch, the credit rating agency, maintained its B rating for Jamaica with a positive outlook, while Moody s affirmed its B rating and raised its outlook to positive from stable. The agencies cited the consistent primary surplus, improved external finances and the positive debt dynamics due to the downward trend of the public debt ratio. Fitch also indicated its expectation of debt falling to 05% of GDP at the end of the fiscal year ending March 208. Despite this review, GOJ global bonds experienced a moderate decline due to the increase in US Treasury yields. The US economy has benefited from moderate growth, strengthening leading indicators, modest inflation, gradually rising interest rates, recent tax cuts and increases to fiscal spending. Unemployment is at historic lows and inflation has increased significantly. Tariffs on imported goods have however resulted in heightened trade tensions. Source: Scotia Investments Jamaica Limited, July 208 Scotiabank Global Economics, Global Outlook, July 208 Historical Fund and Portfolio Performance, all data is reported in the base currency of the Fund. Returns are net of management fees and fund expenses are expressed as a percentage which are based on Class A assets and currencies. Returns are annualized with the exception of periods less than one year. Funds Inception Date Month Months 6 Months YTD Year Years 5 Years 0 years Since Inception Scotiabank Money Market Fund (USD) 0/27/999 0.2 0.4 0.56 0.56 0.88 0.8 0.24 0.2.50 BofAML US Treasury Bills 0- Mon Total Return USD 0.6 0.44 0.78 0.78.0 0.62 0.8 0.0 Scotiabank US Dollar Bond Fund (USD) 2/2/992-0.2-0.54-2.47-2.47-2.9-0.7 0.27.8.8 BofAML US Corp & Govt Master Total Return USD -0.7-0.0 -.86 -.86-0.58.8 2.7.79 Scotia Caribbean Income Fund (USD) 0//2009-0.40 -.47 -.47 -.47 0.82 2.6 2.84 5.05 Scotia Caribbean Bond Index -0.02 -.46 -.9 -.9.82 4.04.4 N/A Scotiabank Global Growth Fund (USD) 06/2/994-0.48 2.80.2.2 8.40 0.26.22.74 5.28 MSCI All Country World Net Return USD -0.54 0.5-0.4-0.4 0.7 8.9 9.4 5.80 Scotiabank US Growth Fund (USD) 0/27/999 0.96 4.04.4.4 2.95.45.6 7.78 2.87 S&P 500 Total Return USD 0.62.4 2.65 2.65 4.7.9.42 0.7 Scotiabank Canadian Growth Fund (USD) 06/2/994-0..72-7.92-7.92-2.2 -.9-0.90-2.56 5.47 S&P/TSX Composite Total Return USD 0.28 4.64-2.90-2.90 9.00 5. 4.5.57 Scotia Premium Money Market Fund (JMD) 07/06/20 0.2 0.5.. 2.58 4.05 5.0 N/A 5.08 -month GOJ T-Bill* 0.22 0.70.58.58 4.2 N/A N/A N/A Scotia Premium US Dollar Indexed Fund (JMD) 0/5/206 2.0 2.6.0.0 2.47 N/A N/A N/A 5.56 SIJL Customized US Dollar Indexed Bond Benchmark 2.0 2.24...82 N/A N/A N/A Scotia Premium Fixed Income Fund (JMD) 02//994.66.2 5.06 5.06 0.00 7. 6.95 8.80 0.8 SIJL Customized Medium Term JA$ Bond Benchmark 4.45 8.44.48.48 25.08 N/A N/A N/A Scotia Premium Growth Fund (JMD) 06/2/987.7.8 4.46 4.46 20.5 6.8 24.97.0 6.22 SIJL Customized Jamaican Equity Benchmark** 4. 6.56 0.66 0.66 26.8 50.78 40.47 N/A *Benchmark returns are based solely on the -month GOJ T-Bill rates for the -month and -month periods, while for the remaining periods the returns are based on a combination of the -month and -month GOJ T-bill rates **Comprises the top 25 most liquid stocks on the Jamaica Stock Exchange, with a 5% carve out for cash
Fund Highlights Below is information on what specifically affected the performance of each fund, and how the Portfolio Manager is positioning the fund going forward. Scotiabank Money Market Fund (US$) Portfolio Manager: 82 Asset Management L.P. The yield of the Fund, before fees, increased from.87% to 2.7% during the quarter The Fund s holdings of floating rate notes were the primary contributor to performance due to their higher income resulting from an increase in interest rates Scotiabank US Dollar Bond Fund (US$) Portfolio Manager: 82 Asset Management L.P. The Fund s holdings of conservative corporate bonds contributed to returns as credit spreads widened less compared to bonds with a lower credit quality The lower duration for the Fund relative to the index, had a marginally positive impact on returns due to an increase in yield The Fund s return was lower than it could have been due to a low allocation to commercial paper. Corporations have issued less commercial paper and more long-term bonds due to the low interest rate environment Fund returns were impacted, on an absolute basis, by an increase in yields on both short and longer term bonds, and the widening of credit spreads The Fund increased its exposure to government guaranteed and Canadian provincial money market issues during the first quarter Holdings of floating rate notes and short-term bonds dropped during the quarter due to a low market supply The Fund s duration was slightly lower than the benchmark, helping to reduce interest rate risk The Fund holds high quality corporate bonds to reduce credit risk The yield of the fund is expected to increase, as two interest rate hikes are expected for the remainder of 208, and two more in 209 Higher interest rates are expected due to low unemployment, accelerating inflation, moderate growth and strengthening economic indicators The yield on both the key short-term 2-Yr and longer term 0-Yr bonds increased during the quarter but the difference between them narrowed to bps at the end of Q2 The potential for higher interest rates will likely continue to result in higher yields on short-term bonds and a flattening of the yield curve Continued economic growth, higher deficit spending and rising inflation may result in an increase in yields on longer term bonds Credit spreads increased from.7% to.0% at the end of Q2, due to increased default risk, and neared their 5-year average of.5% 2
Scotia Caribbean Income Fund (US$) The Fund s underweight exposure to Caribbean sovereigns and non-caribbean bonds was a positive contributor The Fund s overweight exposure to money market securities was also positive, as bond prices and returns were generally negative while money market securities generated a positive return The Fund s selection of corporate bonds and Caribbean sovereign bonds contributed to its performance relative to the benchmark. Scotiabank Global Growth Fund (US$) Portfolio Manager: Davis Advisors The Fund s exposure to Barbados bonds was a detractor as the country is going through a selective default and debt restructuring The Fund s overweight exposure to corporate bonds detracted from performance when compared to the benchmark. During the quarter there were notable declines in Petrobras, Petrotrin, Unicomer, Cosice and PBS bonds Reduce exposure to money market securities and deploy cash to purchase bonds based on reduction in global bond prices Monitor to increase exposure to attractive Caribbean and non-caribbean sovereign bonds Monitor to increase exposure to attractive corporate bonds Continue to manage the duration of the Fund to mitigate the impact of rising rates Expectation of at least two additional interest rate increases by the US Federal Reserve in 208 Continued market volatility given ongoing trade tensions between the US and its major trading partners Ongoing geopolitical risks including the outworking of Brexit and surprising elections results in developed and emerging markets Slowdown in issuance of fixed income securities as interest rates continue to increase Continued volatility in oil prices is expected as OPEC considers increasing supply to the market The Fund s investments within the industrials and information technology sectors were the leading contributors to returns during the quarter, relative to the index The Fund s top contributors to performance were iqiyi, China s largest video streaming service, Amazon, a US-based multinational e-commerce and cloud computing company, and Facebook, the world s largest online social networking service Investments within the materials sector detracted from returns during the quarter, relative to the index The largest detractors from returns were Adient, a US automotive seating company, Sul America, the 2nd largest insurance company in Brazil, and Yirendai, a leading Chinese online lender The Fund s holdings in the consumer discretionary sector were 8.8% higher than the index at the end of Q2 The Fund did not have any holdings in the consumer staples sector compared to 8.% for the index The Fund generally does not invest in the telecommunications or utilities sectors due to low expected earnings growth The Fund had a regional allocation of 49% US, 2% China, 6% Europe and 0% to other countries The continued expansion of economies around the world remains broadly supportive of equity markets Corporate earnings growth remains solid in the US compared to other international markets, and is supported by recent tax cuts and modest wage growth Valuation ratios for non-us markets remain reasonable compared to their longer term averages Market volatility remains elevated given the late stage of the business cycle and elevated trade tensions between the US and other countries
Scotiabank U.S. Growth Fund (US$) Portfolio Manager: Davis Advisors The Fund s investments within the information technology, energy and consumer staples sectors were the leading contributors to returns during the quarter, relative to the index The Fund s top contributors to performance, relative to the index, were Amazon, a US-based multinational e-commerce and cloud computing company, Apache, an energy exploration and production company, and Facebook, the world s largest online social networking service Scotiabank Canadian Growth Fund (US$) Portfolio Manager: 82 Asset Management L.P. The Fund s top relative contributors to performance during the quarter were Canadian National Railway, and Canadian Natural Resources and Suncor, both Canadian energy producers Investments in the financials and utilities sectors were the largest contributors to returns during the quarter, relative to the benchmark Scotia Premium Money Market Fund (JM$) Overweight exposure to corporate bonds positively contributed to performance for the period Selection of fixed rate local bonds was also a contributor Investments within the financial sector were the leading detractors from returns during the quarter, relative to the index The largest detractors from returns, relative to the index, were Berkshire Hathaway, an American multinational conglomerate, JP Morgan, an American multinational financial services firm, and Adient, a US automotive seating company The Fund underperformed the benchmark during the quarter primarily due to negative security selection The Fund s top relative detractors to performance during the quarter were Linamar, an auto parts manufacturer, Prairiesky Royalty, an energy producer and Winpak, a packaging manufacturer Selection of variable rate GOJ bonds was the primary detractor during the quarter Scotia Premium US Dollar Indexed Fund (JM$) Security selection was the primary contributor to performance, as USDindexed corporate bonds, GOJ global bonds, and Caribbean sovereigns were all positive Underweight exposure to cash & cash equivalents was the primary detractor during the quarter At quarter-end, the financial sector (+26%) was the only significantly large relative overweight sector in the Fund Investments in the financial sector were diversified across banks (Wells Fargo, JP Morgan, US Bancorp), securities custodians (BNY Mellon), credit card companies (Capital One, AMEX), Insurers (Chubb, Markel) and holding companies (Berkshire, Loews) The Fund had a large underweight position to the consumer staples (-8%) and healthcare (-9%) sectors The Fund does not generally invest in the telecommunications or utilities sectors due to low expected earnings growth The Fund had a lower allocation than the benchmark to the energy, healthcare and financial sectors The Fund had a higher allocation than the benchmark to the consumer discretionary, consumer staples and real estate sectors The Fund had.9% exposure to US securities Increase exposure to variable rate and short-duration instruments Manage the Fund s duration within its limit of 0.25 years Increase holdings to short duration USD investment grade securities Manage liquidity for net redemptions US equities are supported by a solid domestic economy and corporate earnings growth, in addition to the repatriation of offshore cash Additional stimulus has been provided by lower corporate taxes and higher fiscal spending Market volatility remains elevated due to the late stage of the business cycle and elevated trade tensions between the US and other countries The US Fed is forecast to raise interest rates over the next several years Economic growth has moderated but remains supported by higher oil prices in Q2, exports, and an economy that is near full capacity The Canadian Dollar depreciated relative to the USD due to concerns over trade and risks of a weaker housing market The Bank of Canada is expected to increase interest rates in 208 due to higher inflation and low unemployment The expectation is for interest rates to decline over the short-term Jamaican Real GDP for calendar year 208 is expected to be between.0% and.5%, barring poor weather conditions moderate pace during 208 The US Federal Reserve is expected to raise interest rates at least two more times in 208 which could adversely affect bond prices 4
Scotia Premium Fixed Income Fund (JM$) Underweight exposure to local GOJ VR instruments was the primary contributor to performance during the quarter Scotia Premium Growth Fund (JM$) The year to date depreciation of the JMD had a positive currency effect on the USD assets Major contributors during the quarter were the Fund s selection of stocks in the Junior Market and the financial sector which showed strong price appreciation Overweight exposure to GOJ and Caribbean sovereign bonds detracted from performance Selection of local GOJ fixed rate instruments was also a detractor Underweight exposure to local equities compared to the benchmark, particularly within the conglomerate and manufacturing sectors, was the primary detractor A decline in Carreras, one of the Fund s top holdings, was also a significant detractor Increase exposure to local fixed rate GOJ bonds, JMD corporates, and short duration investment grade USD securities Manage duration within the policy limit of 4 years Increase exposure to Jamaican and US equities Manage liquidity moderate pace during 208 Inflation is expected to continue to be modest between 4-6 percent The Jamaican stock market is expected to continue to post moderately positive returns for 208 Volatility in the US equities market is expected to continue, however, fundamentals remain strong as solid earnings growth is anticipated moderate pace in 208 Jamaican Real GDP for calendar year 208 is expected to be between.0% and.5%, barring poor weather conditions Important information concerning the investment goals, risks, charges and expenses of investing in the mutual funds and unit trusts contained in the Portfolio are contained in the relevant prospectus or offering circular. Investors should carefully consider these before investing. Copies are available from the financial institution where you are buying the portfolio and should be read carefully before investing. Commissions, management fees and expenses all may be associated with investing in mutual funds and unit trusts. Mutual funds and unit trusts are not guaranteed or covered by your local deposit insurance corporation, other government deposit insurer, the Bank of Nova Scotia, or its subsidiaries/ affiliates. Their values change frequently, including the amount of income that you may receive (where applicable), and you may not get back the original amount you invested. Information on performance provided herein is subject to variation and is likely to change over time. Past performance may not be repeated and should not be treated as an indicator of future performance. The indicated rates of return are the historical returns including changes in share value and reinvestment of all distributions and do not take into account sales charges or fees, redemptions, distributions or optional charges or income taxes payable by any security holder that would have reduced returns. The foregoing is for informational purposes only and is subject to change without notice. Always consult your professional tax and legal advisors with respect to your particular circumstances. Nothing herein is intended to constitute an offer or solicitation to transact business for products or services in any jurisdiction where such an offer or solicitation would be unlawful. This does not constitute an invitation to purchase or sell shares of the mutual funds or unit trusts. Scotiabank Mutual Funds is the brand name under which the Scotiabank Group of Companies, including Scotiabank & Trust (Cayman) Ltd. and Scotia Investments Jamaica Limited, markets and distributes mutual funds and unit trusts. Davis Advisors is not a Bank of Nova Scotia subsidiary nor an affiliate. It is an independent investment management firm that provides portfolio management services. 82 Asset Management L.P. is a limited partnership, the general partner of which is wholly owned by Scotiabank and is the Investment Fund Manager for ScotiaFunds and Dynamic Funds. Net asset value information of the Scotiabank Mutual Funds can be found on Bloomberg, in the Equities section, and on the Cayman Islands Stock Exchange (CSX), website www.csx.ky under Scotiabank. Net asset value information of the unit trusts can be found on scotiainvestmentsjm.com. Registered Trademark of the Bank of Nova Scotia, used under license. 5