Asset Allocation

Investment Advisory Strategy Group

Q3/15 Update

It was a challenging third quarter with stocks selling off and volatility spiking.
During the quarter the MSCI World Index, S&P 500 Index (S&P 500), and the
S&P/TSX Composite Index (S&P/TSX) lost 8.8%, 6.9% and 8.6%, respectively in
local currency terms. There were four main drivers of the sell-off which
included: 1) growing concerns over Chinas slowing economy and the Yuan
devaluation; 2) the prospect of a US Federal Reserve (Fed) rate hike; 3) weak
seasonality; and 4) the equity markets were overdue with the S&P 500 having
not experienced a 10% correction since mid-2011. Since the October equity
market low, global equities have recouped most of their losses with many
indices back near their all-time highs.
The Investment Advisory Strategy Group (IASG) recently met to discuss the
market outlook and review our recommended asset mixes. Overall, the IASG
maintains its bullish outlook for equities, but has become increasingly
concerned about the downside risks for equities. We believe 2016 could prove
to be an important inflection point for the equity markets, and therefore stress
that investors need to be vigilant and flexible in managing their portfolios.

The IASG made no changes to our recommended asset mix and investor
profiles in the quarter.

Within bonds we continue to prefer high-quality corporate bonds, where we

see better value. For example, the yield on US BBB investment grade bonds has
increased from roughly 4.5% in H1/15 to 5.5% currently. On a spread basis
(over government bonds), spreads have widened significantly from roughly 250
bps in H1/15 to 325 bps currently. Similarly, Canadian BBB investment grade
spreads have widened by roughly 50 bps to 250 since the summer. Historically,
credit spreads have averaged 200 and 220 bps respectively for US and
Canadian BBB bonds. Currently, at 325 and 250 bps respectively, credit is
cheap relative to history.

Within equities we continue to prefer developed markets to the emerging

markets, with Europe and the US being our preferred regions. For Canada/US,
we continue to prefer US stocks given: 1) the continued challenging
environment for commodities; 2) the stronger earnings outlook for US stocks;
3) our bullish outlook for the US dollar; and 4) the stronger technical profile of
the S&P 500.

November 25, 2015

Equity Market YTD Returns (%)

S&P/TSX Comp
S&P/TSX Small Cap

-8.1
-14.3

S&P 500

1.6

Russell 2000

-1.4

MSCI World

-0.7

MSCI Europe

10.0

MSCI EAFE

-1.8

MSCI EM

-12.0
-25 -20 -15 -10 -5

Asset Allocation Summary

U/W

10 15

Neutral

O/W

Equities
Fixed Income
Cash
Market Outlook (6 - 9 months)

Risk Assessment

Price Chart
16,000

15,000

2,200
S&P/TSX Comp (LHS)
S&P 500 (RHS)

14,000

1,800

13,000

1,600

12,000

1,400

11,000

1,200

10,000
Nov-10 Nov-11 Nov-12 Nov-13 Nov-14

1,000

Source: Bloomberg, Raymond James Ltd.

Note: U/W = underweight, O/W = overweight

Please read domestic and foreign disclosure/risk information beginning on page 6

Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2.
2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2.

2,000

Asset Allocation

November 25, 2015 | Page 2 of 6

Market Update
It was a challenging third quarter with stocks selling off and volatility spiking. During
the quarter the MSCI World Index, S&P 500, and S&P/TSX lost 8.8%, 6.9% and 8.6%,
respectively in local currency terms. There were four main drivers of the sell-off
which included: 1) growing concerns over Chinas slowing economy and the Yuan
devaluation; 2) the prospect of a US Federal Reserve (Fed) rate hike; 3) weak
seasonality; and 4) the equity markets were overdue with the S&P 500 having not
experienced a 10% correction since mid-2011. Additionally, with valuations getting a
bit stretched in the quarter (S&P 500 forward P/E hit 17x), the equity markets were
vulnerable to a pullback. Since the October equity market low, global equities have
recouped most of their losses with many indices back near their all-time highs.

Equity Valuations Adjusted

For Inflation Are Attractive

The IASG recently met to discuss the market outlook and review our recommended
asset mixes. Overall, the IASG maintains its bullish outlook for equities, but has
become increasingly concerned about the downside risks for equities. We believe
2016 could prove to be an important inflection point for the equity markets, and
therefore stress that investors need to be vigilant and flexible in managing their
portfolios. A few positives supporting our continued bullish stance include:

35

30

25

We expect corporate earnings growth to improve in 2016. Q3/15 S&P 500

earnings are now expected to be down 1.6% Y/Y, which came in better than
previously expected. Seth Allen (SVP and Portfolio Manager) however noted
that ex energy, S&P 500 earnings were up 5% Y/Y, highlighting earnings in
the other sectors are holding up. Consensus estimates point to a bottom in
earnings growth in Q4/15, before turning positive in 2016. The IASG is
forecasting mid-single digit EPS growth for US stocks in 2016. We will
provide our S&P/TSX earnings forecast in our 2016 outlook report.

From a seasonal perspective we are in the best period for equities, with
stocks typically doing well from late-October to May.

The IASG expects the Fed to hike rates at the December 16 meeting. The
IASG views this favourably as it removes an overhang on the stock market
and historically the S&P 500 has gained on average 5% in the 12 months
following the first Fed hike.

Finally, equity valuations, while a bit expensive in absolute terms, appear

reasonable when compared to inflation trends and versus other assets.

S&P 500 P/E + CPI

Average or Rule of 20

"Fair" Valuation

20

15

10
'54 '59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09 '14

Source: Bloomberg, Raymond James Ltd.

Overall, our base case view is for additional gains in 2016, largely being driven by
corporate earnings growth. Michael Gibbs (Managing Director, Portfolio & Technical
Strategy) sees the fair value range for the S&P 500 in 2016 at 1,960 to 2,277.
S&P 500 Earnings Expected To Trough In Q4/15
11%

6%

9.4%
6.4%
5.6%
4.6%
3.8%

S&P 500 Fair Value Ranges

10.6%
9.4%
6.1%

3.7%

EPS
Estimate

4.9%

3.0%

2.4%

0.0%

1%

-1.6%

-4%
S&P 500 Quarterly EPS Growth Y/Y

-3.9%

-9%

Source: Bloomberg, Factset, Raymond James Equity Portfolio & Technical Strategy

Base Case
18 2
15.5

Bear Case
14.5
17

2015
$117.00

1814 1

2106

1872 1

2165

1697 1

1989

2016
$126.50

1960 1

2277

2024 1

2340

1834 1

2151

Fact Set
Using trailing 12 month earnings
3
Using year end estimates
2

P/E Bands
Bull Case
16
18.5

Asset Allocation

November 25, 2015 | Page 3 of 6

Risks To Outlook
While we continue to expect equity gains in 2016, we believe the risks to the market
and our outlook are much higher than in recent years. In our quarterly committee
meeting much of the discussion focused on market risks which include:

The IASG believes that monetary stimulus could peak in 2016. The Fed
ended its QE program in 2014, but the European Central Bank (ECB) and
Bank of Japan (BoJ) will continue their QE programs in 2016. We forecast
that the aggregate bank balance sheets of the Fed, ECB and BoJ will peak at
US$12.2 trillion by end of 2016. As Michael Gibbs succinctly said the global
central banks are pushing on a string. With monetary stimulus being an
important support for stocks, this tailwind could turn into a headwind as
stimulus peaks in 2016.

The bull market is getting older and participation is narrowing. Often at

market tops breadth begins to narrow with fewer and fewer stocks
advancing. We are currently see some signs of this with small and mid-caps
underperforming large caps, and the S&P 500 equal weighted index
underperforming the S&P 500.

One big risk that Seth Allen stressed in the meeting, and subsequently
occurred with the horrific attacks in Paris, is the potential for an escalation
of terrorism and geopolitics. Seth cited tensions with the US and China in
the South Sea and Russia and the US both operating in Syria. This week we
heard that Turkey shot down a Russian jet, adding to the tensions.

If there is a significant event that could impact the global economy and
stock market it is likely something that most are not expecting. Michael
Gibbs pointed out issues such as an increase in subprime lending in US auto
loans or the lack of bond inventory at US dealers as examples of potential
black swan events.

Lastly, the global economy has slowed in recent months, largely due to
weakness in the emerging markets and China. If this continues, it could
weigh further on the global economy and possibly push the global economy
into recession.

There are a number of risks that we are monitoring closely but we do believe the
global economy can work through these issues in 2016. As such, we are maintaining
our bullish outlook on the equity markets and our overweight recommendation of
equities in portfolios.
Global Central Bank Balance Sheets To Peak In 2016
(in USD billions)
$14,000
$12,000

Forecast

$10,000

$8,000
$6,000

$4,000
$2,000

Total Central Bank Balances (Fed, ECB, BoJ)

$0
'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Source: Bloomberg, Raymond James Ltd., FRB, Haver Analytics, Deutsche Bank

Low Bond Inventories Could Be A Liquidity Risk

Asset Allocation

November 25, 2015 | Page 4 of 6

Asset Allocation Changes

The IASG made no changes to our recommended asset mix and investor profiles in
the quarter. As outlined below we continue to prefer stocks to bonds, developed
markets to emerging markets, US to Canadian stocks and corporate bonds over
government bonds.

Credit Spreads Are Elevated

Despite No Recession

We believe the Fed will hike rates in December and slowly through 2016, which
should weigh on bond returns. With our expectation of mid-single digit corporate
earnings growth, and adding in a 2 to 3% dividend yield for US and Canadian stocks,
we expect upper single digit stock returns in 2016. As such, we continue to
recommend an overweight in equities relative to bonds.
Within bonds we continue to prefer high-quality corporate bonds, where we see
better value. For example, the yield on US BBB investment grade bonds has
increased from roughly 4.5% in H1/15 to 5.5% currently. On a spread basis (over
government bonds), spreads have widened significantly from roughly 250 bps in
H1/15 to 325 bps currently. Similarly, Canadian BBB investment grade spreads have
widened by roughly 50 bps to 250 since the summer. Historically, credit spreads have
averaged 200 and 220 bps respectively for US and Canadian BBB bonds. Currently, at
325 and 250 bps respectively, credit is cheap relative to history.

600

Recession
US Credit Spreads (BAA - 10-Year)
Average

500
400
300
200
100
0
'62

'67

'72

'77

'82

'87

'92

'97

Within equities we continue to prefer developed markets to the emerging markets,

with Europe and the US being our preferred regions. For Canada/US, we continue to
prefer US stocks given: 1) the continued challenging environment for commodities;
2) the stronger earnings outlook for US stocks; 3) our bullish outlook for the US
dollar; and 4) the stronger technical profile of the S&P 500. But while we continue to
recommend investors overweight US stocks, we do believe the widening valuation
gap between Canadian and US stocks will create a great future opportunity to
repatriate US funds and shift them back to Canada once the fundamentals here
improve.
RJL Asset Allocation Summary
Asset Class
Equities/Fixed Income

Preference
Equities

Rationale
- continued central bank stimulus supports risk assets
- dividend yields on many major indices are above government bond yields
- expecting improved earnings growth in 2016
- expect Fed rate hikes in coming year which would pressure bond prices

Canadian/US Equities

US

- stronger US earnings trend relative to Canadian earnings

- stronger US dollar and weak EM growth continues to pressure commodities
- technicals remain stronger for US equities

Developed Markets/Emerging Markets

Developed

- better relative growth momentum for DM over EM

- EM equities tend to underperform in rising US dollar environment
- technicals remain stronger for DM equities

Government/Corporate Bonds

Corporates

- we expect a few Fed rate hikes in 2016 which will pressure bond prices
- we expect moderate growth which supports riskier assets like corporates
- high corporate spreads signaling decent value in corporate bonds

Source: Raymond James Ltd.

'02

'07

'12

Source: Bloomberg, Raymond James Ltd.

Asset Allocation

September 9, 2015 | Page 5 of 6

Investor Profiles and Asset Class Weightings

Recommended Asset Allocation
Capital Preservation
US
Equities Cash
2%
5%

Conservative
US
Equities
15%

Can
Equites
20%

Moderate
Intl
Equities
18%

Cash
2%

Growth

Cash
2%

Cash
2%

Intl
Equities
25%

Aggressive Growth
Cash
2%

Bonds
18%

Intl
Equities
33%

Bonds
38%
Can
Equites
20%
Bonds
63%

Bonds
73%

Cash
2% (-38%)
Bonds
73% (+33%)
Can Equities
20%
US Equities
5% (+5%)
Intl Equities
0%
Tactical Asset Mix
Bonds | Equities
75/25 (+5)
Strategic Asset Mix
Bonds | Equities
80/20
Asset Ranges
Cash
0-20
Bonds
60-100
Equities
0-30
Description
May be appropriate for investors with longterm income distribution needs who are
sensitive to short-term losses. The equity
portion of this portfolio generates capital
appreciation, which is appropriate for investors
who are sensitive to the effects of market
fluctuation but need to sustain purchasing
power. This portfolio, which invests primarily in
fixed-income securities, seeks to keep investors
ahead of the effects of inflation with an eye
toward maintaining principal stability.

US
Equities
22%

Can
Equites
25%

Can
Equites
20%
Can
Equites
20%

US
Equities
35%

US
Equities
40%

2% (-13%)
63% (-2%)
20%
15% (+15)
0%

2% (-3%)
38% (-9%)
20% (+10%)
22% (+2%)
18% (+3%)

2% (+2%)
18% (-2%)
20% (+5%)
35%
25% (+5%)

2% (+2%)
0%
25% (+5%)
40%
33% (+8%)

65/35 (+5)

40/60 (+10)

20/80 (+10)

2/98 (+8)

70/30

50/50

30/70

10/90

0-20
50-90
10-50

0-20
20-70
30-75

0-20
10-50
50-90

0-20
0-30
70-100

May be appropriate for investors with

intermediate-term time horizons who are
sensitive to short-term losses yet want to
participate in the long-term growth of financial
markets. The portfolio, which fixed-income
securities tend to make up the largest
proportion of holdings, seeks to keep investors
well ahead of the effects of inflation with an
eye toward maintaining principal stability. The
portfolio has characteristics that may deliver
returns lower than that of the broader market
with lower levels of risk and volatility.

May be appropriate for investors seeking a

balance between capital preservation and
capital growth. This portfolio, which is a split
between fixed-income securities and equities,
seeks to keep investors well ahead of the
effects of inflation with an eye toward
maintaining principal stability. With roughly
half of the portfolio invested in a diversified
mix of Canadian and international equities,
investors should be comfortable with
moderate fluctuations in the portfolios.

May be appropriate for investors with longterm time horizons who are not sensitive to
short-term losses and want to participate in
the long-term growth of the financial markets.
This portfolio, which has a higher weighting in
equities, seeks to keep investors well ahead of
the effects of inflation with principal stability
as a secondary consideration.

May be appropriate for investors with longterm time horizons who are not sensitive to
short-term losses and want to participate in
the long-term growth of the financial markets.
This portfolio, which is primarily invested in
equities, seeks to keep investors well ahead of
the effects of inflation with little regard for
maintaining principal stability. The portfolio
may deliver returns comparable to those of
the broader equity market with similar levels
of risk and volatility.

Asset Allocation

Investment Advisory Strategy Group Committee Members

Ryan Lewenza, CFA, CMT (Chair)
SVP, Private Client Strategist and Portfolio Manager
Research & Strategy

Michael Gibbs
Managing Director, Portfolio & Technical Strategy
Raymond James Financial

Seth Allen
SVP and Portfolio Manager
Private Client Group

Phil Kwon
Fixed Income Specialist
Fixed Income & Currencies

Jordan Benincasa, LL.B, MBA

VP, Asset Management Services

Jacob Leibel
VP, Private Investment Management Group

Jason Castelli, CFA

VP and Portfolio Manager
Research & Strategy

Peter Matter
VP, Product Compliance
Compliance

Andrew Clee
Mutual Fund & ETF Specialist
Research & Strategy

Anderson Lam
Fixed Income Trader
Fixed Income & Currencies

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