The North American equity markets were off to one of the worst starts to the year since 2009. We saw both the TSX and the S&P500 indices decline almost 9% and 11%, respectively, at their low points in January and February of 2016. In Canada, slowing emerging market growth, in particular China, as well as lower oil prices which hit a 13 year low and negative investor sentiment were the main factors driving the TSX Index lower. Oil, which began the year at US $37.04 hit a low in February of US $26 before bouncing back to close at US $38 on March 31st. In January, the Canadian dollar also hit a 13 year low of US $0.685 before recovering to almost US $0.77 by the end of the quarter. The recovery was initially triggered by news that the Bank of Canada (BoC) left its benchmark rate unchanged at its January meeting, rather than making the anticipated cut. In its January statement, the BoC said that inflation in Canada is evolving broadly as expected.

The fourth quarter ended up with a pretty decent bounce in U.S. equities but not much of a recovery for the TSX. While commodities like oil (-17.9%), copper (-8.8%) and gold (-4.8%) continued to see downward pressure during the fourth quarter, the performance of the commodity-related equities was more muted. Instead, some index heavyweight stocks such as Valeant, Canadian Pacific Railway and Magna International weighed down the TSX. Much of this was earnings related, either coming up short of expectations for the current quarter or numbers coming down in future guidance. In Valeant’s case, issues around disclosure, potential regulatory investigations and now the medical leave of the CEO have pressured the stock. During the fourth quarter, the TSX returned -1.4% while the return for 2015 was –8.3% weighed down by Energy, Materials and Industrials sectors. While the annual number might sound bad, it actually looks good in comparison to the equal weighted TSX index, which was down -14.1% for the year. The equal weighted index is a better reflection of what has happened with the broad range of companies in the index during the year as it weighs each company equally while the headline TSX index is a market capitalization weighted index, meaning it can easily be skewed by the performance of a few large companies.

In Canada, after suffering a mild recession in the first half of 2015, the third quarter GDP growth rate was 0.6%. However, October’s GDP at 0% does not point to any real improvement and the recent trends in retail sales and employment continue to look daunting. While the latest reading of October retail sales managed to stay positive at 0.1%, after removing the effects of price changes, retail sales in volume terms declined 0.3%. Employment recovered in October mostly due to temporary work in public administration related to the Canadian elections only to see the unemployment rate move higher in November to 7.1% up from 6.6% in January of 2015. Overall, the Canadian economy continues to look weak especially compared to the U.S. Our Bank of Canada Governor, Stephen Poloz, has made it clear that monetary policy divergence from the U.S. will remain a prominent theme in 2016.

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Third Quarter Review North American Capital Appreciation Strategy September 2015

It’s official, after four years we finally had a market correction. Of course, it is natural to speculate on the worst possible outcome. After all, emerging markets have sold off, commodities have collapsed, volatility has skyrocketed and there is continued uncertainty around future actions of the US Federal Reserve.

Overall however, the economic data in the US is still pretty good and fundamental valuations have improved. Moreover, the signs we consider evident of a bear market are simply not there. We went through this in some detail at our September client quarterly presentation and on a number of our conference calls. As our chief strategist Gerry Connor has said many times in the past, bear markets are usually associated with a recession or at the very least higher interest rates, neither of which appear to be on the horizon. While the Fed is likely to move to raise interest rates before year end, we do not believe there will be significant enough of a change in policy to derail this bull market.

If we recap what happened over the summer, in general the second quarter earnings results came in better than expected. Second quarter earnings estimates at June 30th were expected to be down at -4.6%. However, nine of the ten sectors were above consensus with better than expected growth rates, and overall earnings were only off by -0.7% from original estimates of down -4.6%. While still a negative number, bear in mind we have the energy sector down significantly at -55% in the quarter and without that drag, these earnings results would have been positive.

Clearly, a recognition by the market of slowing industrial profit growth in China, the 40% drop in the Shanghai Composite from mid-June through August and the collateral impact it could have on developed markets had a lot to do with the recent market correction. However, when we take into account the normal shape of the yield curve (see Exhibit 1), which usually inverts prior to a recession or in anticipation of a bear market, positive ISM (Institute of Supply Management) manufacturing data, current low levels of employment as well as the positive consumer confidence readings we are seeing in the US, these just do not support the beginning of a recession or bear market.

While the latest payroll data for September came in weaker than expected, the unemployment rate is still a staggering 5.1% such that the number of people receiving unemployment benefits is the lowest that has been seen in 15 years. The ISM manufacturing data (see Exhibit 2) also remains positive and has been in expansionary territory for most of the past six years. Recessions do not typically coincide with periods like this. Finally, when we look at the latest housing and auto sales data, we note that single-family home prices grew steadily for the 12 months ending July by +4.7% and September US auto sales hit a record at 18 million units, which is the highest seen in ten years. Even Volkswagen had a surprise increase in sales for the month of the September.

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Second Quarter Review North American Capital Appreciation Strategy June 2015

It seems there is never a dull moment in the capital markets. As we headed into the Canada Day and the Fourth of July Independence Day holidays, it looked like an extra-long weekend for some after a relatively uneventful quarter in the North American equity markets. However, the markets ended up facing another bout of volatility as Greece opted to miss a debt payment and called a referendum, asking its people to decide whether they are willing to accept more austerity in return for remaining in the Eurozone and receiving more aid. Overall, the reaction in peripheral country bond yields and global equity markets was relatively subdued compared to the reaction when Greece was in the headlines back in 2012, although the timing from a quarter end return perspective was not ideal. Meanwhile, the Chinese central bank cut rates for a fourth time since November in an effort to stem the correction the Shanghai Composite has endured in the past two weeks as it officially enters a bear market (down -20%) at the time of this writing. While we are concerned about these developments, that are continuing to unfold, we don’t believe these problems pose systemic risks unless they lead to severe deflation or recessionary economic conditions that are beyond the central bank’s ability to reverse them.

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First Quarter Review North American Capital Appreciation Strategy March 2015

Macro events continued to dominate markets during the first quarter. The European Central Bank (ECB)’s decision to implement Quantitative Easing (QE) in January, put downward pressure on the Euro and the collapse in oil continued to hurt the Canadian dollar. While this was positive for the US dollar, it was not positive for US companies that generate earnings abroad, which currently make up about one third of the S&P500 revenues. Adding up the effects of a stronger US dollar and the impact it had on earnings revisions as well as the negative impact from lower energy prices, this managed to keep returns in North America at least in local currencies relatively flat. During the first quarter, the TSX returned 2.58% while the S&P500 returned 0.95% in US dollars.

Year End Review North American Capital Appreciation Strategy December 2014

The fourth quarter did not start off well for the markets. By mid October, both the S&P500 and TSX were down over 7% and 11% from their respective all time highs reached in mid-September 2014. The trigger seemed to be many factors including weaker retail sales in the U.S., weak economic data from Europe and the end of quantitative easing (QE), the U.S. Federal Reserve (Fed) large-scale bond buying program that helped fuel equity markets over the past 5 years. An accelerated sell-off in oil triggering a sudden and significant widening in bond high yield spreads, which has often been an indicator of tougher markets ahead, probably created an additional layer of panic in the market. Once the market adjusted to the fact that the pain in the high yield market was mostly centered on energy companies, which make up about 17% of it, things began to normalize. Then on October 15th, comments by James Bullard, president of the St. Louis Federal Reserve Board, suggested delaying the end of the Fed’s bond buying program and in fact possibly extending it with a new program, sparked a rally in the S&P500. This seemed to be a powerful enough signal to the markets that the Fed would remain accommodative in the face of further volatility notwithstanding its original goal to end QE in October. The TSX initially recovered as well but further pressure from declining crude oil prices reversed these gains. During the fourth quarter the TSX returned -1.5% in C$ while the S&P500 returned +4.9% in US$. Adjusting for currency moves, the S&P500 returned 8.6% as the C$ depreciated slightly more than 3 cents relative to the US$, closing at US $0.86 at December 31st.

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Third Quarter Review North American Capital Appreciation Strategy October 2014

The TSX and the S&P500 started off with gains during the first two months of the third quarter but lost ground in September. The loss in September was enough to pull the TSX into negative territory for the quarter as it returned -0.6% for the third quarter while the S&P500 returned 1.1% in US$. Adjusting for currency moves, the S&P500 returned 6.2% in the third quarter as the C$ lost just over 4 cents, essentially reversing the gains it saw in the second quarter. The biggest drop in Canada occurred in the resource sectors driven by the decline in commodity pricing as West Texas Intermediate (WTI) oil fell 11.5% to US$91.16 per barrel and gold dropped 9.0% to US$1,208.15 per ounce. In the U.S., market trepidation early in the quarter centered around the second quarter earnings releases which in totality actually ended up coming in better than analysts’ expectations as the blended earnings growth rate in Q2 rose to 7.7%. This drove a decent recovery in the S&P500 in August.

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Second Quarter Review North American Capital Appreciation Strategy July 2014

The second quarter of 2014 saw a continuation of the positive performance trend exhibited in the first quarter in North America. Both indices, the TSX and the S&P500, hit new highs during the second quarter with the TSX slightly outperforming the S&P500 as it returned 6.4% while the S&P500 returned 5.2% in US$. Adjusting for currency, the S&P 500 returned 1.6% in C$ as the C$ strengthened by over 3 cents during the quarter reversing the downward trend it exhibited during the first quarter.

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First Quarter Review North American Capital Appreciation Strategy April 2014

The first quarter of 2014 saw returns shift back to Canada as the TSX outperformed the S&P 500 for the first time since the fourth quarter of 2012. The TSX returned 6.1% while the S&P500 returned 1.8% in US$. Adjusting for currency, the S&P500 returned 5.8% in C$ as the C$ declined almost 4 cents against the US closing at $0.9042. The recent decline in our dollar follows an approximate 7 cent US decline in 2013.

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North American Strategy 2013 Year End Review and Outlook January 2014

The fourth quarter ended with a strong finish for the U.S. markets, which resulted in the best annual performance for the S&P500 index since 1997. In the quarter, the S&P500 returned 10.5% in US$ or 14.3% in C$, which helped drive the total return for 2013 to 32.4 % in US$ or 41.5% in C$.Clearly,the weaker Canadian dollarrelative to the US dollar was a significant driver of the returns when viewed in Canadian dollars as the Canadian dollar declined approximately 7% during the year. As we discussed during our last client quarterly meeting and conference call in November, we began moving more assets into the U.S. in 2012 with the U.S. exposure in our North American Equity strategy increasing from approximately 25% to 43% by the end of the first quarter of 2013. We also removed our US dollar currency hedge in the fall of 2012, which had helped protect the portfolios from the prior decline in the US dollar relative to the Canadian dollar. Being unhedged during 2013 allowed our Canadian clients’ portfolios to benefit from the relative strength of the US dollar.

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