You are on page 1of 31

INVESTMENT STRATEGY I RESEARCH

Equity Strategy
Another Positive year for Equities

RBC Dominion Securities Inc.


Myles Zyblock, CFA (Analyst) (416) 842-7805 myles.zyblock@rbccm.com
January 2011
Priced as of market close EST on January 14, 2011.
All values in U.S. dollars unless otherwise noted.
For Required Conflicts Disclosures, please see page 29.
Equity Strategy Summary

Macro Backdrop: Recovery still rolling forward

¾ Economic growth is likely to remain positive and near trend. Business spending, international trade and
gradual improvement in the labor market will offer key pillars of support. Trade tensions and lingering
financial fragility offer important downside risks.

Market Outlook: Maintain a positive bias

¾ Technical indicators are unwinding from overbought and this process probably needs a bit more time to play
out. Nevertheless, stabilization in leading domestic and international macro data, supportive policy settings
and reasonable valuations argue for additional upside in share prices on a 6-9 month basis.

Sector Strategy: Dial down the defense

¾ We raised the economic sensitivity of our portfolio, recently upgrading Industrials and downgrading
Consumer Staples, Utilities and Telecom. We are currently overweight Energy, Info Tech and Health Care
and look for a Q1 pullback to add more cyclicality.

Stock Selection Strategy: Pay for progress

¾ Stock-selection is making a comeback. Performance correlation across asset classes and within the equity
market has started to moderate, offering a clue that investors are loosening their grip on the near complete
“risk on” and “risk off” focus. We prefer companies that can deliver on both the top- and bottom-line, provide
dividend growth and have some foreign exposure.

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 2


Macro Backdrop: Trend growth ahead

GDP Growth Outlook (Next 6 – 9 6


Source: RBC Capital Markets, BEA

5.0
months) 3.7
4 3.2 2.9 2.6
2.3
Above Average 2 1.6 1.7
0.9 0.6
0
Average (~2.75%) X -0.7 -0.7
-2

Below Average & Positive -4


-4.0
-4.9
-6
Recession -6.8
-8
Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10
▲/▼ Directional Bias. Source: RBC Capital Markets
Real GDP (qoq% chg, annualized)

ƒ Robust business spending, a better trade balance and an improved jobs market are likely to support
GDP. The new tax initiatives, particularly the payroll tax cut, could offer an important additional pillar
of support in 2011.

ƒ Capacity use and the inflation rate are too low for the Fed to stop short of completing its $600 billion
asset purchase program.

ƒ Growth will probably average near 3% over the next few quarters while escalating trade tension, armed
conflict in Asia and lingering financial fragility offer key downside risks.

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 3


Macro Backdrop: Key supports for 2011 are government & investment
2.5

2.0 Fiscal drag turns negative ƒ The federal government has offered important
1.5 by Q4, 2011 support for GDP during the recovery.
1.0

0.5 ƒ The 2010 federal budget deficit was ~$1.3 trillion,


0.0 or 10% of GDP.
-0.5

-1.0 ƒ State and local government finances are messy.


-1.5

-2.0
Source: RBC Economics, Macroeconomic Advisers
ƒ Federal outlays have turned negative on a y-o-y
Q2-2009 Q4-2009 Q2-2010 Q4-2010 Q2-2011 Q4-2011 Q2-2012 Q4-2012
basis.
Fiscal Stimulus (percentage points, quarterly annualized rate)
ARRA Impact Obama Tax Package Impact Net Fiscal Stimulus
ƒ However, a spending slowdown will be more
than offset by the new tax initiatives.

22

ƒ Investment spending growth has been Investment rate is barely keeping


20
unmatched since the early-1980s. up with depreciation rate.
18

ƒ Yet, the investment rate is barely keeping up


16
with the depreciation rate.
14

ƒ Low capital costs, robust cash flows, easier


12
lending standards and the accelerated
depreciation tax credit will extend the capex 10

recovery. 8
Source: RBC Capital Markets, BEA

Jan-47 Jan-52 Jan-57 Jan-62 Jan-67 Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07

Gross Private Domestic Investment as a % of GDP Depreciation as a % of GDP

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 4


Macro Backdrop: Labor market will define the pace
10 100

109
8 80
Today’s
On jobsother
par with gains are on
6 60
107 par with other “jobless
“jobless” recoveries.
recoveries”. 4 40

105 2 20

0 0
103
-2 -20

101 -4 -40

Source: RBC Economic Research -6


Leading indicators like -60
99 Source: RBC Capital Markets, BLS, Haver Analytics profits …
t-12 t-10 t-8 t-6 t-4 t-2 trough t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24 -8 -80
U.S. Private Payroll Employment Jan-67 Jan-73 Jan-79 Jan-85 Jan-91 Jan-97 Jan-03 Jan-09

Dec-1982 Feb-1992 Jul-2003 Dec-2009 Total Private Payrolls (yoy% chg) (LS) S&P 500 Earnings (yoy% chg) (RS)

28 6
40
Source: RBC Capital Markets, ISM, NFIB
35
18 4 30
Small business hampered by
25 government…could Obama’s recent swing to
8 2 20 the center be a game changer?
15
10
-2 0
…temp jobs, ISM 5

-12
employment sub-indices -2
0

and overtime hours argue

)
)

)
)

)
)

)
s( %
(%

(%
(%

(%

(%

(%
(%

%
s(
r
tes
r

ion

ty

les
r

se
bo
bo

he

xe
bli
s
for more jobs gains.

Sa
Ra

lat
La
La

Ot

Ta
ine

ila
Inf

va

or
of

of
t

&
us
es

Po
-22 -4

t/A
st

ty

v't
eB
er

ali
Co

Go
s
Int

Co
rg
Qu
&

La

ce
l
cia

an
ro
an

ur
f
Source: RBC Capital Markets, BLS
Fin

Ins
on
titi
-32 -6

e
mp
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Co
NFIB: Single Most Important Problem
US Temp Help Services (yoy% chg, Adv 6mo) (LS) US Total Nonfarm Emp (yoy% chg) (RS)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 5


Macro Backdrop: The message from reliable leading indicators
80 18
Source: RBC Capital Markets, Conference Board Inc.
15
Current reading = 57.0
70
Recent maximum = 60.4 (Apr, 2010) 12 LEI < 0 Î GDP recession
9

60 6

50 0

-3

40 -6

-9
Current reading = 6.2
30
ISM < 50 Î IP recession -12 Recent maximum = 11.6 (Mar, 2010)
Source: RBC Capital Markets, ISM, Haver Analytics
ISM <42 Î GDP recession -15

20 -18
Jan-50 Jan-55 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

US Recessions ISM Manufacturing Index US Recession Periods (Defined by the NBER) US Conference Board LEI (yoy% chg) (LS)

65 40

ISM Non-mfg <50 Î GDP recession 30


60 ECRI <-6.9 Î GDP recession
20

55
10

50 0

-10
45 Current reading = 3.3
-20 Recent maximum = 24.0 (Dec, 2009)
40 Current reading = 57.1
-30
Recent maximum = 57.1 (Dec, 2010) Source: RBC Capital Markets, Haver Analytics
Source: RBC Capital Markets, ISM

35 -40
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08

US Recessions ISM Non-Mfg Index US Recessions ECRI Weekly Leading Index Growth Rate (Avg, %)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 6


Market Outlook: Maintaining a positive bias

Market Outlook (Next 6 – 9 months) Risk Rating


High
Overweight
Market Weight + X▲ Neutral
Market Weight

Market Weight - Low

Underweight
▲/▼ Directional Bias. Source: RBC Capital Markets

10%

8%
Source: RBC Capital Markets, Bloomberg
ƒ 2010 was a year of “risk on” and “risk off”.
6% ƒ We have raised weights twice since early
4% October.
ƒ Technical indicators are unwinding from
2%

0%
overbought, and this process might need more
-2%
time.
-4%

-6%
ƒ However, stabilization in the economic outlook
-8%
and a supportive Fed argue that equities are
-10%
likely to be higher on a 6-9 month view.
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10

S&P 500 2010 Monthly Returns

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 7


Market Outlook: Business cycle + Fed Î Higher Share Prices
60 3.5
* Based on the ISM Mfg and Non-Mfg Indices and Initial Unemployment Claims.

ƒ ISM services turned up in August and its


So urce: RBC C ap ital Ma rkets, ISM, D ep t. of Lab or, Have r A nal ytics

40
2.0 manufacturing counterpart started to act better
in September.
20
0.5
ƒ Meanwhile, the 4-week moving average of initial
0
UI claims has been on an improving track since
-1.0 the third week in August.
-20

-2.5
ƒ The collective message from the macro data
-40
argues against recession, a signal that has
usually proved positive for equities.
-60 -4.0
Jan-55 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

S&P 500 (yoy% chg) (LS) RBC Business Cycle Indicator* (RS)

1.0

ƒ The business cycle’s message has never been 0.8

more important for equities in at least the past


0.6
50 years.
0.4

0.2
ƒ Business cycle indicators are usually most
reliable when the underlying profile for the 0.0

market is flat (U.S. in last decade) to down -0.2


(Japan since 1989). * Based on the ISM Mfg and Non-Mfg Indices and Initial Unemployment Claims.
So urce: RBC Ca pital Marke ts, ISM, D ept. o f Lab or, H aver Ana lytics

-0.4
Jan-58 Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08

Rolling 10-yr Correlation: S&P 500 Returns and RBC Business Cycle Indicator*
Long-run Correlation

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 8


Market Outlook: Business cycle + Fed Î Higher Share Prices (cont’d)
2.60
Source: RBC Capital Markets Quantitative Research, Bloomberg, Haver Analytics
NOTE: Earnings estimates reflect monthly observations, while prices are captured daily. ƒ Valuations have expanded alongside inflation
14.5
2.40
expectations, contrary to the traditional
finance view.
2.20

13.5
2.00

1.80
12.5

1.60

11.5 1.40
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11

S&P 500 P/FE (LS) 10-Year Implied Inflation Rate (RS)

30.0
10yr Bond Yield < 5%
Correlation = +62.6%
ƒ Policy “reflation”, or an upward drift in inflation 25.0
10yr Bond Yield ≥ 5%
Correlation = -77.7%
as Yield ↑ P/E ↑
expectations, is positive for the equity market
S&P500 PE Ratio (from 1/1936-4/2010)
as Yield ↓ P/E ↑

when realized inflation is hovering near 0%. 20.0

15.0

10.0

5.0

0.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
10-Yr Avg Bond Yield (from 1/1936-4/2010)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 9


Market Outlook: Earnings gains + “OK” Value Î Higher Share Prices
80
Source: RBC Capital Markets, BEA, Consensus Economics

Note: Forecast Based on FRB, Consensus Economics, and RBC Economics estimates for input variables. ƒ Our macro model incorporates nominal GDP,
60
labor costs, interest expenses and productivity
40
growth.

20 ƒ Currently, the model’s growth profile is


consistent with our $90 EPS target for 2011.
0

-20

-40
Jan-50 Jan-55 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

US Corp Profits (yoy% chg) Corporate Profits Model

110
Source: RBC Capital Markets, Thomson
ƒ Sell-side bottom-up numbers are above ours
100
for both 2010 and 2011. 96.1
90.0
90
84.6
82.0
80
ƒ The sell-side data imply 130 bps of margin
expansion in 2011, more than double our 70

expectation. 60
60.8 60.8

50

40
2009 2010 2011

RBC Estimate ($) Consensus S&P 500 EPS ($)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 10


Market Outlook: Earnings gains + “OK” Value Î Higher Share Prices (cont’d)
30 35
Source: RBC CM Quantitative Research, First Call Source: RBC CM Quantitative Research

30
25 Most standard valuation
metrics sit near the mid-point +1 STD
25
20 +1 STD of their 30 year ranges.
20
Long-term Average
15
Long-term Average
15

10
-1 STD -1 STD
10

5
5

0 0
Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
Price-to-Forward Earnings: S&P 500 Price-to-Earnings: S&P 500

2.5 6
Source: RBC Capital Markets Quantitative Research
Source: RBC CM Quantitative Research

5
2.0

+1 STD 4
+1 STD
1.5

Long-term Average 3 Long-term Average


1.0

0.5 -1 STD -1 STD


1

0.0
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 0
Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
Price-to-Sales: S&P 500
Price-to-Book Value: S&P 500

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 11


Market Outlook: Will main street return?
7.0

ƒ Equity mutual fund managers have burned down


cash levels to a 25-year low.
6.0
6%

5.0 ƒ Retail remains an important net seller of equities


and buyer of bonds (recent data show a slight
3.7% change).
4.0

3.0
Source: RBC Capital Markets, Haver Analytics, ICI
ƒ Retail probably comes back into equities when
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 the labor market message is more constructive.
ICI: Liquidity Ratio: All Equity Funds (%)

500 600 400


r= 0.72
400 Retail is likely to remain 400 300

300 absent in the equity market


until… 200 200
200
0 100
100

0 -200 0

-100 -400 -100

-200
…the jobs…they
market shows
feel more
Source: RBC Capital Markets, Haver Analytics, ICI -600 much more job
improvement.
security. -200
-300 Source: RBC Capital Markets, ICI, BLS
Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 -800 -300
ICI Equity Fund: Net Inflows (12-mo moving total, $bil) Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
ICI All Bond Funds: Net Inflow (12-mo moving total, $bil) US Nonfarm Payrolls (mom chg, 000s) (LS) ICI: Equity Fund Net Inflows (bil.$) (12-mo sum) (RS)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 12


Market Outlook: The corporate cash mountain & some of its uses
10 $40,000

9 $30,000 $25,455
$20,650
Highest cash levels since $20,000 Large positive
8
the 1950s. $10,000
delta.
7
$0
6
-$10,000

5 -$20,000
-$21,506
4 -$30,000

-$40,000 -$37,302
3 As of December 8, 2010.
Source: RBC Capital Markets, Standard & Poor's
NOTE: Excludes Farms.
Source: RBC Capital Markets, FRB -$50,000
2 2007 2008 2009 2010
Jan-52 Jan-57 Jan-62 Jan-67 Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07
Net Change in S&P 500 Dividends ($ millions)
US Nonfinancial Corporate Liquid Assets as a % of Total Assets

$200.00 1,800
Source: RBC Capital Markets, Bloomberg

$180.00 $172 1,600 $1,540


$158 $1,416
$160.00
1,400
$140.00
1,200
$114
$120.00
Solid growth off of a 1,000
$100.00 $90 $90 low base. $879
$779
$78 800
$80.00
$636
$55
$60.00 $48 $48 600
$31 $35
$40.00 $24 400
$20.00
Source: RBC Capital Markets 200
$0.00
Q3,'07 Q4,'07 Q1,'08 Q2,'08 Q3,'08 Q4,'08 Q1,'09 Q2,'09 Q3,'09 Q4,'09 Q1,'10 Q2,'10 -
2006 2007 2008 2009 2010
S&P 500 Share Repurchases ($ Bil)
US M&A Activity ($ billion)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 13


Canadian Equities: CRB + S&P 500 Î TSX Outperforms…again
100
Source: RBC Capital Markets, Bloomberg

80 ƒ A simple econometric model that includes the


60
CRB and S&P 500 as inputs explains more than
70% of the annual return variation in the TSX.
40

20
¾ The CRB is a good proxy for the TSX’s
0
resource-heavy global exposure.
-20

-40 ¾ The S&P 500 is a proxy used to capture


-60 the strong economic and financial market
-80 linkages between the two countries.
Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

Estimated TSX (yoy% chg) Actual TSX (yoy% chg)

TSX (yoy% chg) Expected Annual Growth in CRB (yoy% chg)


15 10 5 0 -5 -10 -15
Variables Coefficient t-stat
Expected Annual 15 21.7 18.8 15.8 12.8 9.9 6.9 4.0
S&P 500 (yoy% chg) 0.77 23.4 Price Performance 10 17.9 14.9 11.9 9.0 6.0 3.1 0.1
CRB (yoy% chg) 0.59 14.4 S&P 500 5 14.0 11.0 8.1 5.1 2.2 (0.8) (3.8)
Constant 1.25 (yoy%chg) 0 10.1 7.2 4.2 1.2 (1.7) (4.7) (7.6)
2 -5 6.3 3.3 0.3 (2.6) (5.6) (8.5) (11.5)
R = 0.70
-10 2.4 (0.6) (3.5) (6.5) (9.5) (12.4) (15.4)
Source: RBC Capital Markets -15 (1.5) (4.4) (7.4) (10.4) (13.3) (16.3) (19.2)
Source: RBC Capital Markets

ƒ Let’s say the CRB and S&P 500 both appreciated


by 10% over the next 12 months. This model
argues that the TSX would then be up by ~15%.

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 14


Sector Strategy: Dial down the defense

Overweight………………………..Underweight

Health Care, Telcos, Consumer


Technology, Energy Discretionary, Utilities,
Materials

Chronology of Recent Changes


01-Dec-09 Downgrade Financials to Market Weight
01-Mar-10 Upgrade Health Care to Overweight
Upgrade Consumer Staples to Market Weight
Downgrade Consumer Discretionary to Market Weight
05-May-10 Downgrade Materials to Underweight
19-May-10 Upgrade Energy to Overweight
Downgrade Consumer Discretionary to Underweight
07-Jun-10 Upgrade Consumer Staples to Overweight
Downgrade Industrials to Market Weight
02-Jul-10 Downgrade Industrials to Underweight
Upgrade Telecom to Market Weight
Upgrade Utilities to Market Weight
01-Dec-10 Upgrade Industrials to Market Weight
Downgrade Consumer Staples to Market Weight
Downgrade Telcom to Underweight
Downgrade Utilities to Underweight
Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 15
Sector Strategy: Raise the portfolio’s economic sensitivity
80 70
* The S&P 500 Cyclicals Index is a cap-weighted index comprised of those stocks in the Energy, Industrials, Consumer

60
Discretionary, Materials and Info Tech indices in the S&P 500. The S&P 500 Defensives Index is a cap-weighted index
comprised of those stocks in the Consumer Staples, Health Care, Utilities, and Telecom Services indices in the S&P 500. 65 ƒ The relative earnings outlook for cyclical stocks
40 60
outperform alongside brighter economic
conditions.
20 55

0 50 ƒ Regression analysis argues that forward


-20 45 earnings estimates for Telecom, Utilities,
-40 40
Consumer Staples and Health Care are least
sensitive to changing economic conditions.
-60 35
Source: RBC Capital Markets Quantitative Research

-80 30
Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10

Earnings Estimate Revisions: S&P 500 Cyclicals* minus Defensives* (3mma) (LS)
ISM Mfg Composite Index (RS)

80
* The S&P 500 Cyclicals Index is a cap-weighted index comprised of those stocks in the Energy,
70 Industrials, Consumer Discretionary, Materials and Info Tech indices. The S&P 500 Defensives Index is
75
a cap-weighted index comprised of those stocks in the Consumer Staples, Health Care, Utilities, and
Telecom indices.
70
ƒ Return spreads usually favor cyclicals absent a 50
65
red flag raised by leading economic data like the 30 60
ISM.
55
10
50

-10 45

40
-30
35
Source: RBC Capital Markets Quantitative Research, ISM

-50 30
Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
S&P 500 Cyclicals* / Defensives* (yoy % chg) (LS) ISM Mfg Composite Index (RS)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 16


Sector Strategy: Industrials are a recent upgrade
22 50

Capex rate is barely keeping up with 40


Earnings outlook remains
20
the depreciation rate. strong.
30

18 20

10
16
0
14
-10

12 -20

-30
10 Source: RBC Capital Markets Quantitative Research

-40
Source: RBC Capital Markets, BEA
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
8
Jan-47 Jan-52 Jan-57 Jan-62 Jan-67 Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07 RBC CM Consensus Estimate Revisions Index: S&P 500 Industrials minus Composite Equal Weighted
Index (3mma)
Gross Private Domestic Investment as a % of GDP Depreciation as a % of GDP

50 80
16 Source: RBC Capital Markets, Global Financial Data Inc.
Chinese industrials lead 28 * Machinery & Equipment = cap-weighted composite derived by combining Electrical Comp. &
40 Equip, Contr & Farm Mach., and Industrial Machinery groups.
by 4 months. 70
11 30
18
20
60
6
10
8
0 50
1
-10
-2
-4 40
-20

-12 -30 30
-9
-40
Feared collapse in machinery
Source: RBC Capital Markets Quantitative Research, First Call, ISM earnings is fading.
-14 -22 -50 20
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11

Shanghai SE Industrials / 'A' Shares Composite (yoy% chg, 3mma, Adv 4) (LS) 12-Mo Consensus Fwd Earnings: Machinery & Equipment / S&P500 (yoy % chg) (LS)
S&P 500 Industrials / Composite (yoy% chg) (RS) ISM New Orders (adv 6mo) (RS)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 17


Sector Strategy: Consumer Staples/Telcos/Utilities are a recent downgrade
700 50
Source: RBC Capital Markets, Dept. of Labor, Haver Analytics
650 0.30 40

600 30

550 0.25 20
500 10
450 0
0.20
400
-10
350
-20
0.15
300
-30
250
-40
Source: RBC Capital Markets Quantitative Research
200 0.10
-50
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Unemployment Insurance: Initial Claims, 4-wk ma (000s) (LS)
S&P 500 Consumer Staples/Composite (RS) RBC CM Consensus Estimate Revisions Index: S&P 500 Consumer Staples minus Composite Equal
Weighted Index (3mma)

60 0.14 0.18

40 r = 0.86
0.13 0.17
20

0 0.12 Utes and Telcos are the 0.16

-20 same trade!


0.11 0.15
-40

-60 0.10 0.14

-80
0.09 0.13
-100
Source: RBC Capital Markets Quantitative Research Source: RBC Capital Markets, Haver Analytics
-120 0.08 0.12
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11

Estimate Revisions Index: S&P 500 Telecom minus Composite S&P 500: Telecom / Composite (LS) S&P 500: Utilities / Composite (RS)
Estimate Revisions Index: S&P 500 Utilities minus Composite

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 18


Sector Strategy: Remain overweight Technology
0.70 1600

0.65 1500
ƒ Tech stocks have positively resolved from a
0.60 1400
long-base pattern, much like resources did from
0.55 1300
their base between 1998 and 2002.
0.50 1200

0.45 1100

0.40
Positive resolution 1000
of long-base ƒ The sector shows dividend growth and share
0.35 900
pattern. repurchase leadership, benefits from a strong
0.30 800

0.25 700
tech spending cycle, is inexpensive and is
0.20
Source: RBC Capital Markets, Haver Analytics
600
among the more globally-focused sectors.
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

S&P 500: Info Tech/Composite (LS) S&P 500 Composite (RS)

0.70 0.35 100


Source: RBC Capital Markets Quantitative Research

0.60 0.30 80

60
0.50 0.25

40
0.40 0.20

20
0.30 0.15
0
0.20 0.10
Long-term earnings -20
0.10 outperformance, but 0.05
-40
Source: RBC CM Quantitative Research, First Call stocks have lagged. Jan-10 Apr-10 Jul-10 Oct-10 Jan-10 Apr-10 Jul-10 Oct-10 Jan-10 Apr-10 Jul-10 Oct-10
0.00 0.00
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 S&P 500 Relative Estimate Revisions (Group minus Composite)
Info Tech / S&P500 (LS) 12-Mo Consensus Fwd Earnings: Info Tech / S&P500 (RS) Software & Services Technology Hardware & Equipment Semiconductors & Semi Equipment

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 19


Sector Strategy: Remain overweight Energy
0.52 150 70
Source: RBC Capital Markets, Haver Analytics Source: RBC Capital Markets, JPM, Haver Analytics

0.50 Oil prices supported by 65

0.48
100
global growth… 60
Energy sector relative
0.46
performance breaking a 50
55

0.44 two-year downtrend. 50

0.42 0
45
0.40
40
-50
0.38
35
0.36
-100 30
0.34 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11
Crude Oil Prices (yoy% chg) (LS) Global Mfg PMI (RS)
S&P 500 Energy / Composite

120 100
Source: RBC Capital Markets Quantitative Research, Haver Analytics 150
100 80
Oil leads forward
80 60
earnings estimates by 4 100
40
60
months!
20
40
50
0
20
-20
0 0
-40
-20

-40 -50
-60
Estimate revisions
-80 have bottomed.
-60 Source: RBC Capital Markets Quantitative Research
-100
-80 -100 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
RBC CM Consensus Estimate Revisions Index: S&P 500 Energy minus Composite Equal Weighted Index
S&P 500 Energy Forward Earnings (yoy% chg) (LS) Crude Oil (yoy% chg, Adv 4 mo) (RS) (3mma)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 20


Sector Strategy: Market Weight Financials
0.032 0.70
Source: RBC Capital Markets Trend & Cycle Research Source: RBC Capital Markets, Haver Analytics

0.030 0.65

0.028
The post-bubble “Nifty 0.60
Fifty” experience. The post-bubble Tech
0.55
0.026
experience.
0.024
0.50
May '75
0.45
0.022
0.40
0.020
0.35
0.018 Jan '04
0.30
0.016
0.25
0.014 Nov '74 Oct '02
0.20
0.012 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Jan-73 Jan-74 Jan-75 Jan-76 Jan-77
S&P 500 Bear Market S&P 500 Info Tech / Composite
S&P 500 Bear Market Coca Cola / S&P 500

0.40 55
Source: RBC Capital Markets, FRB, BEA

Today’s Financials are more


Source: RBC Capital Markets, Haver Analytics
+1.5 Std Dev
0.35 likely to be trading, rather 50

than trending, vehicles. The Financial industry is still


0.30 45
in the process of working off a
40
fundamental excess.
0.25

0.20 35
?
0.15 30
Mar '09

0.10 25
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Mar-65 Mar-70 Mar-75 Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10
S&P 500 Bear Market S&P 500 Financials / Composite Commercial Banking: Assets: Total Loans as % of GDP Trend +/- 1 Std Dev

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 21


Sector Strategy: Summary recommendations

U.S. Current Recent Change Comments


Equity Sectors Recommendation (Dec 1, 2010)
Energy Overweight None A prime beneficiary of the global economic recovery. Clean balance sheets, robust
dividend growth and enticing value complement the macro story.
Health Care Overweight None Positive estimate revisions and deep value. The sector usually outperforms as index
earnings growth slows.
Information Overweight None Leader in top- and bottom-line delivery accompanied by robust profitability metrics.
Technology Positive estimate revisions and a shareholder friendly sector while awash in cash.
Consumer Staples Market Weight Downgraded from Struggles to keep up when labor market improves and commodity prices remain elevated.
Overweight Provides a hedge against financial market turmoil.
Industrials Market Weight Upgraded from Fundamental supports found in global economic recovery and a strong capex cycle.
Underweight Valuations remain somewhat challenging.
Financials Market Weight None Inexpensive and benefitting from declining loss rates, but loan demand and wholesale
businesses remain sluggish.
Telecom Services Underweight Downgraded from Relatively high dividend yields might not be able to offset the deterioration in estimate
Market Weight revisions and sluggish top-line growth.
Utilities Underweight Downgraded from Fundamental delivery has lagged and estimate revisions are now deteriorating.
Market Weight
Consumer Underweight None Displays stretched valuations at a time of near-peak margins. A stronger labor market
Discretionary recovery would limit downside risk.
Materials Underweight None Valuations look stretched while estimate revisions remain in negative territory.

Source: RBC Capital Markets

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 22


Style & Stock Selection Strategy: Stock picking is making a comeback
Recommended Style Bias Over the Business Cycle
We’re ƒ Correlations within and across
Quality here asset classes are dropping.
Fundamental Growth
Momentum ƒ Quant models have been
working better.

Stability ƒ Emphasize growth as valuation


spreads have collapsed and
Traditional
index earnings growth
Value
moderates.
Source: RBC Capital Markets

2.2 0.6

Small caps are


Source: RBC Capital Markets, Haver Analytics

2.1
0.6
outperforming despite
2.0
better growth abroad.
0.6
1.9
Most common growth
0.6
1.8
benchmarks have
1.7 been outperforming. 0.6

1.6
0.5
1.5

1.4 0.5

Source: RBC Capital Markets, Haver Analytics


1.3 0.5
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
S&P 500 Pure Growth / Pure Value 50 DMA Russell 2000 / S&P 500 50 DMA

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 23


Style & Stock Selection Strategy: Performance correlations moderating
1.0

0.8
ƒ Correlation between broad asset classes has
loosened a bit.
0.6

0.4

0.2
ƒ For example, the correlation between stocks and
bond yields has declined from 0.83 to about 0.20
0.0
since July 2010.
-0.2

-0.4
Source: RBC Capital Markets, Bloomberg

-0.6
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

60-day Correlation: S&P 500 & 10-yr Treasury Yield

0.91
Source: RBC Capital Markets Quantitative Research

ƒ Performance correlation between stocks within


0.78
the market has declined from 0.79 to 0.54 since
July 2010.
0.66

ƒ These data tell us systemic factors are being 0.54

awarded incrementally less weight in the


decision tree as the economic cycle has 0.42

matured.
0.30
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Average Correlation of S&P 500 Stocks vs. Index (60-Days Trailing)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 24


Style & Stock Selection Strategy: Looking for something in addition to value
100 60%
Source: RBC Capital Markets Source: RBC Capital Markets Quantitative Research

Period when Low Quality outperforms High Quality

Feb 09 - Apr 10 50%


Sep 02 - Jan 04
Oct 00 - Jan 01

10 40% Collapse in valuation spreads


Dec 91 - Jun 92 Dec 98 - May 99 is forcing investors to look
30% for other factors.
Jul 86 - May 87

Jul 82 - Mar 84
20%
1
Jun 80 - Apr 81
“Low quality” rallies usually
last 10-12 months.
10%

0 0%
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08

US Recessions U.S. High Quality / Low Quality S&P 500 Earnings Yield Spread: High Yield Quintile minus Composite (%)

18 60
Source: RBC Capital Markets Quantitative Research

16 40

14 20
ƒ Better ranked names have outperformed by ~870
12 0 basis points since April 2010.
10 -20

More factors are working and


8 -40
this is a good sign for stock
pickers.
6 -60
Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

US # of Factors "Working" (12mma) (LS) US Higher Quality/Lower Quality Index (yoy% chg) (RS)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 25


Style & Stock Selection Strategy: Growth is taking leadership
40 -60
Source: RBC Capital Markets Quantitative Research, Global Financial Data Inc.

30 -40 ƒ Company-specific growth is likely to become


-20 more important now that valuations have
20
0
collapsed and lost their importance as a key
10
20
differentiator.
0
40
-10
60
-20 Common growth benchmarks 80

-30 usually outperform as index 100


earnings growth fades.
-40 120
Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11

S&P Citigroup Growth / Value (yoy% chg) (LS)


S&P 500 Operating Earnings (yoy% chg, inverted scale) (RS)

Dividend Growth

ƒ Growth related metrics – such as dividend Price / Book Value

growth, earnings and revenue momentum – Revenue Momentum

remain near the top of the factor leader board. Earnings Surprise

Earnings Momentum

S&P 500 Composite

ƒ Value metrics dominated the performance derby Price / Earnings

9-12 months ago. Earnings Stability

Earnings Growth

Confidence of Earnings Estimates


As of December 31, 2010.
Total Return Stability Source: RBC Capital Markets

4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14%

S&P 500 Factor Performance (3 month % chg)

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 26


Style & Stock Selection Strategy: Russell 1000 growth with income screen

Russell 1000 Screen by Sector


Market Div. Payout 5-yr
Float Yield Ratio Dividend % Revenues
Stocks that made the screen scored
Name Symbol Price ($M) (%) Growth Foreign relatively well on the following
ENERGY
Halliburton Co HAL $40.83 37,136M 0.9 22.6 7.1 64% criteria:
Conoco Phillips COP $68.10 100,054M 3.2 45.2 12.1 33%
Chesapeake Energy Corp CHK $25.91 16,943M 1.2 18.2 10.0 0%
MATERIALS ¾ Fundamental momentum
Cliffs Natural Resources Inc CLF $78.01 10,567M 0.7 9.4 20.6 55%
Newmont Mining Corp NEM $61.43 29,867M 1.0 10.8 4.2 100%
PPG Industries Inc
INDUSTRIALS
PPG $84.07 13,705M 2.6 45.0 3.3 51%
¾ Dividend growth
Parker-Hannifin Corp PH $86.30 13,923M 1.3 23.7 14.0 41%
Deere & Co DE $83.05 35,106M 1.7 26.2 12.9 36%
Norfolk Southern Corp NSC $62.82 22,827M 2.3 36.3 24.5 0% ¾ Growth
CONSUMER DISCRETIONARY
Nike Inc NKE $85.42 33,133M 1.5 26.5 16.3 66%
Home Depot Inc HD $35.06 57,457M 2.7 49.2 15.9 11%
Time Warner Inc. TWX $32.17 35,686M 2.6 36.0 18.0 30%
CONSUMER STAPLES
Walgreen Co WAG $38.96 36,068M 1.8 26.8 21.3 0%
Smucker (Jm) Co SJM $65.65 7,816M 2.4 32.8 9.7 11%
Molson Coors Brewing Co TAP $50.19 8,088M 2.2 26.0 11.7 98%
HEALTH CARE
McKesson Corp MCK $70.38 17,811M 1.0 13.6 24.6 9%
UnitedHealth Group Inc. UNH $36.11 39,719M 1.4 7.0 51.9 0%
AmerisourceBergen Corp ABC $34.12 9,394M 1.2 15.4 59.5 0%
FINANCIALS
American Express AXP $42.92 51,666M 1.7 26.9 9.2 32%
Travelers Cos Inc TRV $55.71 25,654M 2.6 19.3 8.4 6%
Raymond James Financial Corp RJF $32.70 4,086M 1.6 23.9 14.3 N/A
INFO TECH
Applied Materials Inc AMAT $14.05 18,654M 2.0 32.5 20.1 81%
Intl Business Machines Corp IBM $146.76 182,329M 1.8 23.0 25.9 58%
Texas Instruments Inc TXN $32.50 38,160M 1.6 20.3 39.9 89%
TELECOM
Telephone & Data TDS $36.55 1,823M 1.2 32.1 5.1 N/A
AT&T Inc T $29.38 173,636M 5.9 74.3 6.1 0%
CenturyTel Inc CTL $46.17 14,001M 6.3 79.9 86.6 0%
UTILITIES
OGE Energy Corp OGE $45.54 4,439M 3.3 45.6 1.8 N/A
Wisconsin Energy Corp WEC $58.86 6,881M 2.7 42.1 12.8 0%
Entergy Corp ETR $70.83 12,814M 4.7 42.5 9.5 0%
Source: RBC Capital Markets Quantitative Research. As of December 31, 2010.

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 27


Style & Stock Selection Strategy: TSX Quantitative Screen

TSX Quantitative Screen


Market Div. Payout 5-yr RBC
GICS Float Yield Ratio Dividend % Revenues Analyst
Name Symbol Sector Price ($M) Growth Foreign Rating
Barrick Gold Corporation ABX Materials $53.12 52,910M 0.9 15.1 18.7 97% O
AGF Management Limited AGF.B Financials $19.49 1,399M 5.3 72.0 13.3 1% O
Cogeco Cable Inc. CCA Cons.Disc $41.02 945M 1.7 22.2 46.9 19% SP
Canad'n Imp Bank Of Commerce CM Financials $78.33 30,780M 4.4 57.0 7.0 13% O
Canadian Tire Corp. Ltd. 'A' CTC.A Cons.Disc $68.19 5,386M 1.6 17.4 8.8 0% O
Canadian Western Bank CWB Financials $28.36 1,890M 1.8 21.4 20.6 0% SP
Laurentian Bank Of Canada LB Financials $48.06 1,150M 3.2 31.7 6.0 0% SP
Magna International Inc. 'A' MG Cons.Disc $51.91 10,947M 0.8 12.5 8.2 81% O
Nexen Inc. NXY Energy $22.80 11,984M 0.9 13.2 18.5 81% SP
Jean Coutu Group Inc. A PJC.A Cons.Stap $9.63 1,145M 2.3 32.3 13.8 N/A SP
Sun Life Financial Inc. SLF Financials $30.11 17,224M 4.8 61.5 9.5 59% SP
TELUS Corporation T Telecom $45.48 14,646M 4.6 58.7 19.6 0% SP
Note: O = Outperform; SP = Sector Perform; U = Underperform.
Source: RBC Capital Markets Quantitative Research. As of December 31, 2010.

Stocks that made the screen scored relatively well on the following criteria:

ƒ Fundamental momentum

ƒ Dividend growth

ƒ Value

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 28


Required Disclosures
Conflicts Disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to
provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J
2W7.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Distribution of Ratings

Distribution of Ratings
RBC Capital Markets, Equity Research
Investment Banking
Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY[TP/O] 676 50.10 193 28.55
HOLD[SP] 609 45.10 133 21.84
SELL[U] 65 4.80 9 13.85

Conflicts Policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC CM
Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We
reserve the right to amend or supplement this policy at any time.

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 29


Required Disclosures
Dissemination of Research and Short-Term Trading Calls
RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having
regard to local time zones in overseas jurisdictions. RBC Capital Markets’ equity research is posted to our proprietary websites to
ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional
distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third-
party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital
Markets’ research. RBC Capital Markets also provides eligible clients with access to SPARC on the Firm’s proprietary INSIGHT
website. SPARC contains market color and commentary, and may also contain Short-Term Trade Ideas regarding the publicly-
traded common equity of subject companies on which the Firm currently provides equity research coverage. SPARC may be
accessed via the following hyperlink: www.rbcinsight.com. A Short-Term Trade Idea reflects the research analyst’s directional
view regarding the price of the subject company’s publicly-traded common equity in the coming days or weeks, based on market
and trading events. A Short-Term Trade Idea may differ from the price targets and recommendations in our published research
reports reflecting the research analyst’s views of the longer-term (one year) prospects of the subject company, as a result of the
differing time horizons, methodologies and/or other factors. Thus, it is possible that a subject company’s common equity that is
considered a long-term ‘sector perform’ or even an ‘underperform’ might be a short-term buying opportunity as a result of
temporary selling pressure in the market; conversely, a subject company’s common equity rated a long-term ‘outperform’ could be
considered susceptible to a short-term downward price correction. Short-Term Trade Ideas are not ratings, nor are they part of
any ratings system, and the Firm generally does not intend, nor undertakes any obligation, to maintain or update Short-Term
Trade Ideas. Securities and Short-Term Trade Ideas discussed in SPARC may not be suitable for all investors and have not been
tailored to individual investor circumstances and objectives, and investors should make their own independent decisions
regarding any securities or strategies discussed herein.
Analyst Certification
All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the
subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or
indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 30


Disclaimer
RBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets, LLC, Royal Bank of Canada
Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no
representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All
opinions and estimates contained in this report constitute RBC Capital Markets’ judgment as of the date of this report, are subject to change without notice and are provided in good faith but
without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients
and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable
for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a
solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital
Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province in
Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents,
as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be
construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer
in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential
loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC
Capital Markets.
Additional information is available on request.

To U.S. Residents: This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE), which is a U.S. registered broker-dealer and which accepts responsibility for this
report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that wishes further
information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital Markets, LLC.
To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. (member of IIROC). Any Canadian recipient of this report that is not a Designated Institution in
Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information
regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the
foregoing, accepts responsibility for this report and its dissemination in Canada.
To U.K. Residents: This publication has been approved by Royal Bank of Canada Europe Limited ('RBCEL') which is authorized and regulated by Financial Services Authority ('FSA'), in
connection with its distribution in the United Kingdom. This material is not for general distribution in the United Kingdom to retail clients, as defined under the rules of the FSA. However,
targeted distribution may be made to selected retail clients of RBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.
To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This
material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on
this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a
particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision
about whether to acquire the product.
To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited and RBC Investment Management (Asia) Limited, licensed corporations
under the Securities and Futures Ordinance or, by Royal Bank of Canada, Hong Kong Branch, a registered institution under the Securities and Futures Ordinance. This material has been
prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishing to obtain further information on any of
the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited or Royal Bank of Canada, Hong Kong Branch
at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).
To Singapore Residents: This publication is distributed in Singapore by RBC (Singapore Branch) and RBC (Asia) Limited, registered entities granted offshore bank status by the Monetary
Authority of Singapore. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. You are advised to
seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past
performance is not indicative of future performance.
® Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.
Copyright © RBC Capital Markets, LLC 2011 - Member SIPC
Copyright © RBC Dominion Securities Inc. 2011 - Member CIPF
Copyright © Royal Bank of Canada Europe Limited 2011
Copyright © Royal Bank of Canada 2011
All rights reserved

Myles Zyblock Phone: 416-842-7805 myles.zyblock@rbccm.com 31