monthly perspectives - politics - august 2016

The politics of it allAugust 2016Monthly Perspectives Portfolio Advice & Investment Research

This document is for distribution to Canadian clients only. Please refer to the last page of this report for important disclosure information.

Martha Hill, CFA, Associate Vice President

In this issue

Rocket man �� 2 - 4

The politics down south �� 5

General elections map �� 6

Monthly market review �� 7

Important information �� 8

The ebb and flow of financial markets brings with it a shift in focus from one theme to another, often amplifying the different factors affecting the market� As discussed in our latest issues of Monthly Perspectives, risk has moved to the forefront for investors� Most recently, the unexpected outcome of the Brexit vote brought a wave of political uncertainty and with it, an increased focus on a broader theme: geopolitical risk�

Geopolitics is one source of risk that is expected to contribute to anticipated heightened volatility� To help you prepare for this, we identify political events that could impact economic growth and financial markets� Starting with our Chief Wealth Strategist, we take a step back to look at the big picture; a view that separates emotions from facts and puts long-term thinking into perspective� Closer to home, our Senior North American Equity Portfolio Manager digs into the potential investment implications of the outcome of the upcoming U�S� election�

Although risk can’t be avoided, it can be managed� It is important to remain focused on the long term and structure your portfolio to meet your investment goals�

2 Monthly Perspectives August 2016

Rocket manBrad Simpson, Chief Wealth Strategist

Imagine that you just arrived on an intergalactic spaceship from a place where you spent the last decade without internet or data reception� You stroll towards the luggage retrieval area and while you wait to claim your bags you decide to get caught up on what has been happening on earth during your absence� You turn on your Blackberry (remember you’ve been away for ten years) and start to read Yahoo to get caught up� You peruse the political news first because financial markets have never been your biggest concern� You are confident that your numerous revenue condos in Miami have been compounding at a nice mid-teen clip since you left� You tell yourself that you will look at your Lehman Brothers statement later to find out how your stock portfolio has fared� Not wanting to worry about it while you were gone you had put your fixed income money into a 10 Year U�S� Treasury bond that matured August 1, 2016, telling yourself that rolling it over should be easy enough� You are particularly interested to find out how that new Bear Stearns mortgage backed securities fund you bought just before you left is doing� You clearly have a lot of catching up to do�

After doing some reading, you quickly surmise that all is not well on your home planet, especially when it comes to geopolitics� First you learn that the UK has voted to leave the European Union�

Figure 1: S&P 500 Index and 10-year U�S� Treasury Yield

Source: Bloomberg Finance L.P. As at August 5, 2016.

You then read about a paper prepared by the German finance ministry indicating that France, the Netherlands, Austria, Finland and Hungary could all follow Britain out of the European Union in a rash of anti-Brussels rebellions� All of this strikes you as odd because back when you boarded your spaceship in 2006, globalism, free trade and diversity were all in vogue� You recall reading Thomas L� Friedman’s “The World is Flat,” which was perched atop the New York Times Best Seller list when you left� Then, to your horror, you read an article about ISIL and the atrocities in Nice� You notice a headline about Turkey contending with a military coup� Your concerns mount� Scrolling to the next page you discover that Donald Trump has just been nominated as the Republican candidate for the President of the United States� You stop and think to yourself, “This can’t be the character from The Apprentice?!” Your anxiety increases while simultaneously your confidence in your own economic health wanes� You click over to the Wall Street Journal and read their review of Mr� Trump’s acceptance speech, which paints a grim view of the U�S� economy and world affairs� At this point, whatever modicum of serenity you had is long gone� Surely the American and global economies are in deep recessions and equity markets in tatters!?

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S&P 500 Index (LHS) 2182�87 10-Year U�S� Treasury Yield (RHS)


Rocket man (cont’d)Brad Simpson, Chief Wealth Strategist

Based on emotions, a dire economic outlook is an understandable conclusion for our Rocket Man to come to, but the facts paint a very different and more balanced picture:

Fact 1: While global economic growth continues to languish as demographics, overcapacity and elevated debt levels all weigh on it, the U.S. economy is doing quite well:

1. Manufacturing is healthy�

2. Recent jobs reports were blockbuster, reporting 292 and 255 thousand positions added to non-farm payrolls in June and July, respectively� Recently published jobless claims were also low�

3. The housing market has continued its long recovery�

All in all, if U�S� domestic data continues to be healthy and financial markets remain calm, the U�S� Federal Reserve could raise rates as early as December 2016�

Fact 2: Global equity markets continue to fare well:

1. The S&P 500 Index and the Dow Jones Industrial Average are at all-time highs�

2. The FTSE 100 and the MSCI All Country World Indices are trading near all-time highs�

3. Market volatility is low�


Figure 4: Dow Jones Industrial Average


Figure 2: CBOE Volatility Index (VIX)

Figure 3: Non-farm Payrolls

Source: Bloomberg Finance L.P. As at July 31, 2016.

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Rocket man (cont’d)Brad Simpson, Chief Wealth Strategist

The current view from the TD Wealth Asset Allocation Committee (WAAC) is to expect mid-single digit returns from an equity market that is fully valued but not expensive� This return could potentially be enhanced with a focus on high-quality equities that have the ability to increase their earnings and dividends in a low growth environment and thereby protect the real value of investors’ savings�

Right now, geopolitical risk is the big concern for market participants

The big concern right now for market participants seems to be the potential for future geopolitical storms� According to a recent fund manager survey from Bank of America Merrill Lynch, geopolitical risk is at the top of most fund managers’ worry list� This view is shared by WAAC� Much of this concern is derived from the fact that there are a number of significant elections in the coming months, the outcomes of which could dramatically change political leadership and thus, the direction of the economy� Based on this knowledge, WAAC remains cautious and has adopted a more conservative asset allocation position�

The critical piece to remember about all of this is that ongoing trials and tribulations are all part of the human experience� The simple fact is that time heals a lot of wounds, even the geopolitical ones� Consider the experience of our fictional rocket man� His portfolio experienced an incredible array of ups and downs over the past ten years, but today he would still be in a good place� The key is to retain a long-term perspective, maximize diversification benefits within portfolios and be mindful of actively managing risk factors�


Figure 6: FTSE 100 Index

Figure 7: MSCI All Country World Index


Figure 5: S&P 500 Index


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Figure 8: S&P Case Schiller Miami Home Price Index

Source: Bloomberg Finance L.P. As at July 14, 2016.

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The politics down southCatherine Carlin, CFA, Senior North American Equity Portfolio Manager

Table 1: Potential Impacts on Key North American Sectors

There are a wide range of issues up for debate in any country during an election year, and the U�S� at present is no exception� The rhetoric south of the border seems to be particularly virulent this year, and encompasses many broad issues such as immigration, gun control and climate change� More important for our purpose are issues that could pose legislative and/or regulatory risks for companies in our clients' investment portfolios�

Markets look for clarity, and at this point, politics is a potential source of market volatility since there is anything but clarity� It is too early to guess which party will prevail and investors may be wary of the guessing game since everyone was so wrong in predicting the outcome of the UK referendum in June� There is also a lack of clarity about the specific policies of each party on a number of influential issues�

To provide you with some perspective, we outline several important items of legislation that could influence the performance of key industry sectors: health care via the Affordable Care Act (ACA; Obamacare) and financials (Dodd-Frank law)� While the candidates have indicated divergent positions, we note that the situation is fluid, and may change as the candidates articulate more details about their platforms� Nevertheless, we highlight the issues below as ones to watch going forward throughout the election campaign�

Clinton Trump

Health Care Defend Repeal

Always a political hot-button issue

Affordable Care Act (ACA) has been beneficial for the sector

Despite rhetoric, actual change could be difficult depending on Congress

Potential beneficiaries are health care facilities & services

Focus on costs and drug pricing a risk to biotech & pharma

This would be very disruptive and would introduce material uncertainty to the sector

Financials Support / Enhance Dismantle

Dodd-Frank Act of 2010 (post financial crisis) contains complex provisions relating to oversight of financial institutions

Potential for increased regulatory burden on large banks

Some large insurance companies could become subject to increased oversight

Not part of official platform, just informal commentary

Few specifics provided at this time

Energy

Focus on environmental issues; potential implications for coal, nuclear and renewable energy

Opposes Keystone XL pipeline

Opposes clean energy policies supports energy independence including protection of coal industry

Supports Keystone XL pipeline

Other issues that the candidates have discussed that bear watching for their impact on corporate America across a number of sectors include: employment standards including minimum wage legislation, foreign income and tax reform�

Increasing minimum wages could increase costs for service industries such as restaurant chains as well as retail companies, both of which rely on a lesser skilled workforce� That being said, a potential offset could be for companies who cater to a lower-income customer base� While Clinton has been a vocal supporter of labour rights and increasing the minimum wage, Trump has so far indicated that such legislation should be under state rather than federal jurisdiction�

While both candidates seem to be aligned with the view that high-income earners should pay higher taxes, there are marked divergences with respect to corporate taxation� Trump has suggested that the corporate tax rate should be lowered to 15%� Further, he has put forward the idea of a “one-time deemed repatriation of corporate cash held overseas at a significantly discounted 10% tax rate�” We know that a number of large companies, including Apple Inc� and Microsoft Corp� have significant cash hoards outside of the U�S�, which has been punitive to repatriate� In contrast, Clinton has argued that she will seek to close “loopholes” allowing corporations to maintain assets overseas� This has been interpreted by some as an indication that the direction of taxes for some large, multinational corporations could be higher under Clinton’s platform�


General elections map

Politics is likely to remain in focus over the coming months and through next year� In addition to the U�S� election, there are a number of elections in Europe, which could impact political leadership and potentially change the direction of the economy�

Source: Portfolio Advice & Investment Research

Upcoming General Elections

United States

November 2016

Netherlands

March 2017

France

April 2017

Germany

September 2017

Italy

February 2018


Monthly market review

(%) (%) (%) (%) (%) (%) (%) (%)

Canadian Indices ($CA) Return Index Level 1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years 20 Years

S&P/TSX Composite (TR) 46,658 3�91 5�30 14�13 4�02 8�52 5�54 5�13 8�04

S&P/TSX Composite (PR) 14,583 3�68 4�52 12�09 0�79 5�31 2�41 2�11 5�57

S&P/TSX 60 (TR) 2,191 3�89 4�71 12�89 2�49 9�08 6�10 5�31 8�49

S&P/TSX SmallCap (TR) 983 5�51 10�75 35�03 23�81 8�26 0�89 2�22 -

U�S� Indices ($US) Return Index Level 1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years 20 Years

S&P 500 (TR) 4,115 3�69 5�82 7�66 5�61 11�16 13�38 7�75 8�31

S&P 500 (PR) 2,174 3�56 5�24 6�34 3�32 8�84 10�96 5�47 6�30

Dow Jones Industrial (PR) 18,432 2�80 3�71 5�78 4�20 5�95 8�70 5�12 6�21

NASDAQ Composite (PR) 5,162 6�60 8�10 3�09 0�66 12�49 13�37 9�46 8�13

Russell 2000 (TR) 5,884 5�97 8�29 8�32 0�00 6�74 10�43 7�17 8�42

U�S� Indices ($CA) Return Index Level 1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years 20 Years

S&P 500 (TR) 5,366 3�94 9�98 1�44 5�57 20�30 20�70 9�29 8�03

S&P 500 (PR) 2,835 3�82 9�38 0�20 3�27 17�80 18�12 6�98 6�02

Dow Jones Industrial (PR) 24,038 3�06 7�78 -0�33 4�15 14�66 15�72 6�63 5�93

NASDAQ Composite (PR) 6,732 6�86 12�34 -2�87 0�62 21�75 20�69 11�03 7�85

Russell 2000 (TR) 7,673 6�23 12�54 2�06 -0�04 15�53 17�56 8�71 8�13

MSCI Indices ($US) Total Return Index Level 1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years 20 Years

World 6,698 4�25 3�81 5�31 0�13 7�19 8�52 5�39 6�60

EAFE (Europe, Australasia, Far East) 6,432 5�08 0�80 0�83 -7�07 2�45 3�49 2�46 4�79

EM (Emerging Markets) 1,838 5�09 5�33 12�02 -0�38 0�07 -2�41 4�24 5�89

MSCI Indices ($CA) Total Return Index Level 1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years 20 Years

World 8,736 4�51 7�88 -0�77 0�09 16�01 15�53 6�90 6�32

EAFE (Europe, Australasia, Far East) 8,389 5�34 4�75 -4�99 -7�11 10�88 10�17 3�93 4�51

EM (Emerging Markets) 2,396 5�35 9�47 5�55 -0�42 8�31 3�89 5�74 5�61

Currency Level 1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years 20 Years

Canadian Dollar ($US/$CA) 76�68 -0�25 -3�78 6�13 0�04 -7�60 -6�06 -1�42 0�26

Regional Indices (Native Currency)

Price ReturnIndex Level 1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years 20 Years

London FTSE 100 (UK) 6,724 3�38 7�73 7�72 0�42 0�52 2�95 1�27 3�03

Hang Seng (Hong Kong) 21,891 5�28 3�91 -0�11 -11�14 0�01 -0�49 2�58 3�65

Nikkei 225 (Japan) 16,569 6�38 -0�58 -12�95 -19�51 6�63 11�00 0�70 -1�11

Benchmark Bond Yields 3 Month 5 Year 10 Year 30 Year

Government of Canada Yields 0�53 0�60 1�03 1�64

U�S� Treasury Yields 0�28 1�03 1�46 2�18

Canadian Bond Indices ($CA) Total Return Index Level 1 Month 3 Months YTD 1 Year 3 Years 5 Years 10 Years

FTSE TMX Canada Universe Bond Index 1043�84 0�84 3�56 4�92 4�60 5�83 4�93 5�47

FTSE TMX Canadian Short Term Bond Index (1-5 Years) 697�79 0�14 0�92 1�21 1�33 2�65 2�51 3�81

FTSE TMX Canadian Mid Term Bond Index (5-10) 1140�10 0�49 3�33 4�45 4�66 6�31 5�55 6�21

FTSE TMX Long Term Bond Index (10+ Years) 1716�13 2�05 7�36 10�47 9�06 10�06 8�10 7�63

Sources: TD Securities Inc., Bloomberg Finance L.P. TR: total return, PR: price return. As at July 29, 2016.


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Research Ratings

Overall Risk Rating in order of increasing risk: Low (7.4% of coverage universe), Medium (35.6%), High (43.0%), Speculative (14.0%)

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Percentage of subject companies under each rating category—BUY (covering Action List BUY, BUY and Spec. BUY ratings), HOLD and REDUCE (covering TENDER and REDUCE ratings). As at August 2, 2016.

Distribution of Research Ratings

0%10%20%30%40%50%60%70%80%

BUY HOLD REDUCE

REDUCE3.5%

BUY56.3%

HOLD40.1%

63.59%

34.78%

1.63%

Percentage of subject companies within each of the three categories (BUY, HOLD and REDUCE) for which TD Securities Inc. has provided investment banking services within the last 12 months. As at August 2, 2016.

Investment Banking Services Provided

0%10%20%30%40%50%60%70%80%

BUY HOLD REDUCE

REDUCE3.5%

BUY56.3%

HOLD40.1%

63.59%

34.78%

1.63%

monthly perspectives - politics - august 2016

Economy & Finance