coping with rising yields and higher valuations...valuations, share buybacks, the cost of equity...

Long-term investment expectations

Martin Lefebvre Chief Investment Officer Summary In this review we present our long-term return

expectations for major asset classes such as bonds, equities, and some alternatives.

With U.S. economic growth and inflation firming up, higher short-term interest rates are to be expected over the next five years as the Federal Reserve continues to normalize its monetary policy.

We find that the path of least resistance for longer-term bond yields will be up over the next five years. Because duration risk is at historical levels, such an event would likely entail negative nominal returns in the first few years, before stabilizing around coupon rates, leaving the annualized rate of return well below its long-term historical average.

In that environment, shorter-duration higher-coupon corporate bonds would seem a better investment, on an absolute, relative and risk-adjusted basis.

After eight years of exceptional returns during the financial crisis recovery, we find that equity markets are not a bargain anymore and we expect an annualized total return of 6% for U.S. large cap equities over the next five years. This is lower than the long-term historical growth rate.

All in all, as traditional portfolio returns will be lower than in the past, it is time to think outside the box. As such, strategies aiming at higher absolute returns or less volatility should be contemplated at this point.

We continue to advocate the inclusion of non-traditional fixed-income funds, such as those linked to interest rate spread strategies, unconstrained global bond funds, or structured products. To limit volatility and downside, idiosyncratic risk should be diversified with smart beta strategies.

Finally, we feel that private investments – whether linked to real estate, infrastructure, farmland or timberland – will offer higher returns with much less volatility than traditional assets.

Introduction Because we live in an ever-changing world, trying to forecast what is going to happen in the near future is difficult and sometimes being right is just plain luck. In 2016 alone, not many predicted that the Brexit would occur nor that Donald Trump would become the 45th President of the United States. And those who did, were probably wrong on the implications for financial markets. In that context, establishing a five-year average return path for different asset classes seems nothing short of futile. The reality is that while history doesn’t repeat itself, it often rhymes. That is, clear patterns (whether well-defined trends, or reversions to the mean or a steady state), are observable and setting long-run assumptions can be achieved with some degree of accuracy. It is also important to do so because it serves as the anchor to any good portfolio strategy. The difficulty is to decipher how much the macroeconomic environment will change over the next few years in comparison to the recent past. Our methodology for establishing average return expectations for five-year is simple, but thorough: 1. Based on the capital asset pricing model (CAPM), which

formulates that an asset class should earn a return equal to the risk free rate plus a premium, we start by looking at historical risk premiums for every major asset class. This serves as the equilibrium state or what we should expect in the very long run.

2. We then turn to valuations and compare them to long-run assumptions to see if markets have been running ahead of themselves or if the best is yet to come. To be sure, we think of what could possibly modify the investment horizon by looking at trends in inflation, economic growth, and interest rates, and we adjust our forecast qualitatively.

3. After comparing our results with other research, we compute the optimal capital market line for the next five years, based on historical asset volatility and correlations. Expected returns are then converted to Canadian dollars for a local investor point of view.

While long-term assumptions serve as the first building block of our portfolio strategies, our five-year outlook is fundamental in our efforts to capture tactical opportunities and establish a more dynamic allocation.

Coping with rising yields and higher valuations

April 28, 2017

For investment professionals only

LONG-TERM INVESTMENT EXPECTATIONS April 2017

1. Long-run assumptions Rational investors will only take on more risk if they are adequately compensated with a higher expected return. Risk can be broken down into the beta (the sensitivity of the asset class towards the market portfolio) and premiums. Premiums are excess returns demanded by investors for holding riskier assets. For fixed-income securities, they are linked to the curve structure, credit quality and liquidity. For stocks, above the equity risk premium, additional risk can be found in foreign markets (governance or depth of financial markets) or in smaller capitalizations. Liquidity may be an issue for non-listed markets, such as private equity, infrastructure and real estate (Chart 1).

With more than 90 years of data from Ibbotson/Morningstar covering multiple economic cycles, we first compute long-term annualized returns for most major U.S. asset classes. The nominal returns are then adjusted for inflation to make the results comparable and to get the true measure of purchasing power over time. We then calculate premiums – or excess returns over cash – for each asset classes. Figures are rounded to the nearest 25 basis points (Table 1).

1.1 Cash For liquidity we use 30-day U.S. T-Bills. Cash is an important aspect of portfolio construction because it represents the risk-

free interest rate above which premiums are calculated. Going back to 1925, the annualized nominal return on cash was about 3.5%. With inflation running an average of 2.9% over the period, this leaves the real return on cash at a mere 0.5% annually, after rounding. This is a tad below the historical median of 0.8% due to sharp periods of negative performance in the high inflation years (Chart 2).

1.2 Government bonds Because of the risk that the value of long-term bonds could fluctuate owing to changes in interest rates, the term premium compensates investors for lending money over longer periods of time. Going back to the end of 1925, we find that nominal geometric returns on long-term bonds have averaged 5.5%, with gains in the latter part of the study far exceeding cash returns. However, bonds happen to be particularly poor hedges against inflation as real returns (although positive on average throughout the period) were negative for long stretches of time during years of sharp increases in prices (Chart 3 on next page). For example, from 1966 to 1981, the annualized real return on long-term notes was -3.8%, far below the 10% real return one could obtain by being invested in T-Bills. We estimate the equilibrium real return on notes to be 2.5%, or the sum of a 0.5% real return on cash plus a term premium of 2% that compensates investors for the risk of holding a longer-term asset. 1.3 Credit Investment grade (IG) and high yield (HY) credit usually earn excess returns over government bonds due to premiums pertaining to default risk and liquidity issues. According to Ibbotson data, real returns on long-term IG have been 3.0%, at an annualized rate, since 1925, yielding a credit premium of 0.5 percentage points above long-term government bonds. While this doesn’t seem to be much of a premium, it is interesting to know that it was obtained at a lower volatility.

1

Source: Banque nationale

Components of assets’ expected returns

Small cap Foreignpremium equity

Liquiditypremium Equity Equity Equity

Credit Credit risk risk risk Liquiditypremium premium premium premium premium Premium

Term Term Term Term Term Term Term premium premium premium premium premium premium premium

Risk-free Risk-free Risk-free Risk-free Risk-free Risk-free Risk-free Risk-freereal rate real rate real rate real rate real rate real rate real rate real rate

Inflation Inflation Inflation Inflation Inflation Inflation Inflation Inflation

Cash Govt.Bonds

Corp.Bonds

H-YBonds

Large cap equities

Small cap equities

EMEquities

Expected returns

Asset Classes

Alternative assets

Riskpremiums

that should

generate consistent

returns

Table 1 Long-term risk premiums and volatility (since 1925)

Asset ClassNominal Returns

Real Returns

Risk Premium

Historical volatility

US Inflation 3.00% --- ---US 30-day T-Bills 3.50% 0.50% --- 0.75%US Mid-term Treasuries 5.10% 2.25% 1.75% 4.25%US Long-term Treasuries 5.50% 2.50% 2.00% 8.50%US Long-term Corporations (IG) 6.00% 3.00% 2.50% 7.50%US Large Cap Equities 12.50% 7.00% 6.50% 18.75%US Small Cap Equities 14.50% 9.00% 8.50% 28.00%Gold price* 4.50% 1.50% 1.00% 22.00%Oil price* 3.50% 0.50% 0.00% 35.00%* Annual dataSource: Morningstar, British Petroleum and National Bank

2

Source: Morningstar

Cash bearly covers for inflation

-15%

-10%

-5%

0%

5%

10%

15%

20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1926 1936 1946 1956 1966 1976 1986 1996 2006 2016

Cash total return vs inflation

InflationNominal T-BillsReal T-Bills

Returnsince 1926

(annualized)2.90%3.38%0.47%

2


Moreover, this serves as a minimum reference point, as other research using a time frame going back to 1936 points to a premium of 1.4% (Asavunt and Richardson 2017).

1.4 Large cap equities The equity risk premium (ERP) compensates investors for bearing additional risk associated with estimation errors linked to future economic growth, profit margins, dividends, valuations, share buybacks, the cost of equity capital, etc. Unlike inflation or the term-structure premium, the ERP is not observable and, therefore, it must be estimated. This can be done through a series of methods ranging from the demand side (based on utility function analysis), the supply side (based on the earnings’ yield), or simply by annualizing the return differentials between stocks and bonds. The latter method reveals that the ERP is, by far, the largest premium. In the course of the past 90 years or so, the excess real return of U.S. stocks over the inflation-adjusted return of the risk-free rate was 6.5% at an annualized rate, and 5% over long bonds (Chart 4).

Other research using a longer data frame suggests that this may be a little bit overstated. For example, Dimson, Marsh and Staunton (DMS) in the Credit Suisse Global Investment Returns Yearbook 2017 concludes that the annualized equity risk premium is 5.6% (or 4.4% above bonds), using data from 1900 to 2016. While that is lower than Ibbotson’s estimate by close to a full percentage point, it can be explained by the inclusion of the earlier part of the 20th century when returns were much lower (annualized real returns were -0.5% from 1900 to 1925). Going back even further in time, Jeremy Siegel in his “Stock for the long run concludes that the historical ERP was also lower from 1871 to 1925 (+2.9% above bonds), and even more so from 1802 to 1871 (+2.2%). However, these periods were very distinctive from the one that characterizes the post-WWII expansion years – the former being linked to the assertion of the political and economic power of the United States, while the latter marked the passage from an agricultural base to an industrial one. Therefore, we do not think that much weight should be put on these too distant times. 1.5 Style premiums Over recent years, factor investing has become an important part of discussions on portfolio construction. It represents the investment process that aims to capture risk premiums through different factors. While it was rooted in the 70s (Ross and Stephen, 1976), its popularity only came later in the 90s when Fama and French enhanced the CAPM with the addition of small cap value stocks as an explanatory factor of returns. Today, we can identify many more with momentum, value, small caps, quality, and low volatility stocks all having earned historical risk premiums and representing proven exposure to a systematic source of risk (Chart 5).

5

Sources: AQR

Style premiums (long/short factor investing)

$10

$100

$1,000

$10,000

$100,000

$1,000,000

$10,000,000

$10

$100

$1,000

$10,000

$100,000

$1,000,000

$10,000,000

1930 1940 1950 1960 1970 1980 1990 2000 2010

Factor investing (1931=100)

Quality

Momentum

Value

Size

S&P 500

Although compelling, the problem with these theoretical strategies is that they constitute long/short investments that require excessive turnover (high transaction costs). As a result, they are hardly replicable and not suited for retail investors.

3

$50

$100

$200

$400

$800

$1,600

$3,200

$6,400

$12,800

$25,600

$50

$100

$200

$400

$800

$1,600

$3,200

$6,400

$12,800

$25,600

1925 1935 1945 1955 1965 1975 1985 1995 2005 2015

Bonds vs Inflation

InflationLong-term CorpsLong-term BondsReal bonds

Returnsince 1926

(annualized)2.90%6.00%5.53%2.57%

Source: Morningstar

Real return on bonds can be negative over long periods

4

Source: Morningstar

Evidence of an equity risk premium over the long run

$10

$100

$1,000

$10,000

$100,000

$10

$100

$1,000

$10,000

$100,000

1925 1935 1945 1955 1965 1975 1985 1995 2005 2015

Total real returns

StocksBondsT-Bills

Real returnsince 1926

(annualized)6.94%2.57%0.47%

3


This doesn’t mean that style premiums cannot be captured on a long-only basis. For one, the small cap premium, which constitutes the excess return of small capitalization equities over larger ones, is well established. Going back to the end of 1925, it appears that small caps averaged real growth of 8.9%, compared to 7.1% for large caps, resulting in an historical small cap premium of 1.8 percentage points (Chart 6). However, this premium comes at a high cost – namely, more volatility – that tends to result in underperformance for small cap equities during downturns.

Going back to 1973, value tilted portfolios generated something like 1% of excess return above cap-weighted equity indices. Low volatility portfolios, for their part, produced returns similar to those of the equity benchmark, but – yes, you’ve guessed it right! – with less volatility. 1.6 Alternative assets As implied by the name, this asset class gives investors an alternative to more traditional assets, such as stocks and bonds. Alternative assets comprise commodity futures, precious metals, real estate, infrastructure, timberland, farmland, private equity, fine wines, collectibles, and so on. Because they are less liquid or less accessible, there tends to be a risk premium associated with this asset class. However, the main advantage, as we will see in a later section, is that their returns are often uncorrelated to stocks and bonds and their volatility – with the exception of private equity – can be quite low. As the inclusion of this type of asset in portfolio construction is fairly new, indices do not go back as far in time as other major asset classes followed in this research. But, we are nonetheless able to infer some conclusions on some of the most popular ones. For commodity prices, we use aggregated data (agricultural, raw materials, precious metals and energy) from the Commodity Research Bureau that goes back to 1950. Commodities do not bear interest and, therefore, their returns are only subject to price moves. Because of innovation, real commodity prices have historically been on a downtrend. As such, we find that the excess real return of aggregated commodity prices over cash to be negative since 1951 (chart 7).

This is mostly owing to agricultural prices, which are the most sensitive to technological advances. In contrast, energy and precious metal real prices both tend to be on a slightly positive trend, but they exhibit mean reverting behaviour suggesting that timing is of the utmost importance for this asset class. One point to consider is that the difference between the trends for each products can be subtle. For example, food production is less subject to constraints than energy. Farmland is readily available and cheap, and the operating costs such as fertilizers, water, or machinery are also easier to control or they abound. On the other hand, energy suffers from exploration and production becoming more and more complex due to the lack of new and easily accessible projects. The consequence is that while technical advancements may increase the supply base, they cannot fully translate to lower production costs. Of course, this only serves as our long-haul estimate. Cyclicality, which is treated in the next section, usually plays a particularly big role for this volatile asset class, and real returns could differ significantly from equilibrium in the next five years. For private investment, our dataset is even shorter: starting at the earliest in 1977, for the U.S. property market; in 1986, for timberlands; in 1991, for farmland and; in 1996, for private equity. Nevertheless, with at least 20 years of data, covering more than two economic cycles, we are able to draw interesting long-term implications. For a start, going back to 1977, the U.S. private property market (+9.3%) delivered returns a touch below that of large cap equities (+10.3%), but with less volatility, resulting in a much higher risk-adjusted return throughout the period (Chart 8). What is also interesting is that a direct investment in publicly-traded real-estate investment trusts (REITS) would have yielded a premium of 5% above equity returns, but the standard deviation of the returns, at 25.5%, makes it one of the most volatile asset classes there are.

6

Source: Datastream

Size matters for equities

$10

$100

$1,000

$10,000

$100,000

$1,000,000

$10

$100

$1,000

$10,000

$100,000

$1,000,000

1925 1935 1945 1955 1965 1975 1985 1995 2005 2015

Equity real total return vs Inflation

InflationLarge cap US equitiesSmall cap US equities

Real returnsince 1926

(annualized)2.90%6.94%8.96%

7

Sources: Datastream, Commodity Reasearch Bureau, British Petroleum

Commodities: Low premium… high volatility

$10

$100

$1,000

$10

$100

$1,000

1925 1935 1945 1955 1965 1975 1985 1995 2005 2015

Real commodity prices (1951=100)

Food stuff

Oil prices

Gold

US 3-month T-Bills

4


Interestingly, annualized returns in timberlands (+9.6%) and farmlands (+11.8%) have respectively matched and outpaced large cap equities (+9.9%) since 1991 (chart 9). But the beauty of it is that it was achieved with about one third of the volatility, making investments in these asset classes among the best on a risk-adjusted basis. However, this is mainly owing to the slow mark-to-market characteristics of these assets. Of course, although promising, these indices are not readily accessible, liquidity is scarce, and future returns depend a lot on the choice of the active portfolio manager. Moreover, the performance features imbedded in the fee structure can result in much lower net returns for investors than implied by the gross returns of benchmark indices. This is particularly the case with private equity. According to Thomson Reuters’ Buyout Research index, this asset class has delivered annualized returns 8% above that of large cap equities since 1996 (Chart 9). But once management and distribution fees are excluded, the net excess returns to equities can be questionable considering the high volatility of the asset class and the long-term capital commitment required on the part of investors.

9

Sources: Datastream

Private investments

$100

$200

$400

$800

$1,600

$3,200

$100

$200

$400

$800

$1,600

$3,200

1996 2001 2006 2011 2016

Private investment (1996=100)

Private equity

Farmland

S&P 500

Timberland

8

Sources: Datastream

Private real estate vs public

$100

$500

$2,500

$12,500

$62,500

$100

$500

$2,500

$12,500

$62,500

1976 1981 1986 1991 1996 2001 2006 2011 2016

US private vs public real estate (1977=100)

REITS

US property value

S&P 500

5


2. Valuations and Economic Backdrop Since past performance is not necessarily indicative of the future, long-term assumptions are just a starting point. Despite the empirical evidence of risk premiums, asset classes are not immune from the possibility of negative growth from one year to another, depending on the economic environment. Therefore, other factors must be taken into considerations. This is where valuations come into play. Different methods of valuations, whether for bonds or equities, can be useful in the sense that if an asset class has recently known growth above historical average, there is a fair chance that it was done to the detriment of future growth. A good recent example of this would be longer-term bonds. If you bought a Canadian 10-year note at the beginning of 2014, you were in line for a 1.8% annual return if held until maturity. But as yields were driven down aggressively, reflecting a bit of deflation fears, global growth uncertainty, and major central banks’ monetary purchases, most bonds gained in value, and the 18% total return recorded over the first two years assuredly meant that the next eight would, on average, be closer to 0%. In this section, we start by looking at inflation trends and potential growth, which form the basis for the risk-free rate. Then, we estimate expected returns for different asset classes based on valuation-adjusted market premiums and the current economic backdrop (Table 4 on p.12). 2.1 Inflation Since inflation is a common part of all assets’ returns, a good way to start would be to look at recent trends in price fluctuation. A common measure of inflation is the annual change in the core index – which excludes food and energy, two of the more volatile components in the consumer price basket. The reality is that ever since major central banks have worked at anchoring expectations around a 2% target, underlying inflation has been levelling off, reaching a trough in the aftermath of the global financial crisis (Chart 10).

Because core inflation is currently running above trend, and because prices are a lagging indicator of the economic cycle, there is a fair chance that a pullback may be seen in the next year or so. This is in line with many measures of economic activity, which signal that core inflation will remain tame in the near future (Chart 11).

However, with deflation risks diminishing following a rebound in commodity prices and a pick-up in global growth, inflation expectations have firmed up and should stabilize around the Fed’s target of 2%. The risk to this scenario resides in fiscal policy where the Trump administration could implement tax cuts, tariffs, and infrastructure spending, all of which would help push inflation higher. 2.2 Potential growth Turning to real rates, a good proxy is potential GDP growth, which can be distilled further into labour growth and gains in productivity. For the U.S. economy, the reality is the potential is fairly limited. On the one hand, the labour force has been growing at an annualized pace of just 0.8% for the last five years, down from an average of 1.6% in the 90s and 2.4% in the 80s. Although the situation has improved since the recession of 2008, demographic trends and immigration restrictions imposed by the Trump administration do not favour a sustained acceleration of the labour force over the next few years. On the other hand, productivity has also been slowing, the annualized five-year change going from a peak of 4.6% at the end of 2003 to an historical low of just 0.6% in 2016. However, it is highly probable that productivity reached a trough last year. One reason is that although it is difficult to envision that future innovations will ever have as much impact on output per worker as the steam engine, electricity, or computers, new developments in the fields of robotics, artificial intelligence, and biotechnologies are very promising. Moreover, much of the recent slowdown has been on the back of years of underinvestment in infrastructure and the growth in capital 10

Source: Datastream

Inflation well anchored around 2%

0%

1%

2%

3%

4%

5%

6%

7%

0%

1%

2%

3%

4%

5%

6%

7%

1982 1987 1992 1997 2002 2007 2012 2017

U.S. Core Inflation

11

Source: Datastream

Core inflation should remain tame

0.0

0.5

1.0

1.5

2.0

2.5

3.0

30

35

40

45

50

55

60

65

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

% YoYIndex United States

ISM Manufacturing (left, 2-year lead) Core inflation (right)

6


stock has just started to rebound from a record low point. This means that potential GDP growth will remain low, but should begin to slowly accelerate (Chart 12).

This is in line with forecasts from the Congressional Budget Office (CBO), which estimates that potential growth could go from 1.6% today to 1.9% in five years’ time. But, this has no impact on how things may evolve from one year to another, as suggested by the National Bank Financial economics and strategy team’s forecast for inflation and economic growth for the next five years (Table 2).

2.3 Risk-free interest rate Cash returns are linked to central bank policy moves. After years of zero interest rate policy (ZIRP) and quantitative easing (bond purchases programs), the Federal Reserve started tapering some of its easing measures in 2013 and hiked its key

interest rate three times in the last 15 months. According to the last FOMC meeting (March 2017), the vast majority of voting members expect that short-term rates will be above 1.0% at the end of 2017, close to 2.0% at the end of 2018, and then gradually increase towards a long-run steady state of 2.75-3.0%. This is above what market participants are currently pricing, but it is slightly below what the terminal rate could be. For argument’s sake, the terminal rate, or neutral rate – the rate at which the economy is running at its full potential without causing inflationary pressure – should be in line with potential GDP growth and inflation expectations. If inflation remains anchored at 2% and average real growth accelerates to 1.9% over the next five years, this means that the terminal rate should be just under 4% in 2022. Unless the policy-makers overshoot that target – as they tend to do – there shouldn’t be a recession on the horizon anytime soon (Chart 13).

If short-term interest rates gradually rise from 0.5% today to 4% in 2022, they will average 2.4% over the five-year period. Of course, that would be if all worked according to plan! As some form of a slowdown is to be anticipated going forward, we would lower our expectations for cash returns to 2.0%, on average. 2.4 Government bonds Returns on fixed-income securities have been phenomenal over the past 35 years, coinciding with a steady decline in inflation. This is owing to the globalization of trade, the relative strength of the U.S. dollar and the impact on import prices. Despite extremely low levels of interest rates, the last several years have continued to offer better risk-adjusted returns for bonds than for Canadian equities (Table 3 on next page), with yields on many maturities and in many countries – although not in North-America – falling in negative territory. For example, annualized returns over the last six years are less than half of what they have been since 1980. But, bond volatility and the risk-free rate were so low recently that the Sharpe ratio was more than twice that of Canadian equities over the same period.

13

Source: Datastream

Still far from neutral rate: No recession in sight!

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1980 1985 1990 1995 2000 2005 2010 2015 2020

% % United States

Fed funds rate Real GDP potential + inflation expectations

Forecast

Table 2 Economic and Financial Projections (%)2017 2018 2019 2020 2021

Canadian Economic Indicators Total inflation (CPI) 1.8% 2.0% 1.6% 1.5% 1.5% Real GDP 2.2% 1.7% 1.4% 1.4% 1.4% Unemployment rate 6.7% 6.5% 6.5% 6.5% 6.5%

Canadian Interest Rates and FX Bank of Canada rate 0.50% 1.00% 2.00% 2.50% 2.50% 5-year GoC bond 1.32% 1.97% 3.05% 3.35% 3.15% 10-year GoC bond 1.90% 2.47% 3.42% 3.65% 3.55% 30-year GoC bond 2.49% 2.89% 3.69% 3.90% 3.87% CAD/USD 1.34 1.31 1.30 1.26 1.23

US Economic Indicators Total inflation (CPI) 2.3% 2.2% 1.7% 1.6% 1.5% Real GDP 2.2% 2.4% 1.7% 1.7% 1.7% Unemployment rate 4.7% 4.6% 4.5% 4.5% 4.5%

US Interest Rates Fed funds rate 1.14% 1.94% 2.50% 2.75% 2.75% 5-year US treasury notes 2.11% 2.80% 3.20% 3.58% 3.21% 10-year Treasury notes 2.62% 3.19% 3.49% 3.85% 3.65% 30-year Treasury bonds 3.19% 3.61% 3.81% 4.10% 3.95%Source: NBF Economics and Strategy team

12

Source: Datastream

Potential growth is limited in the U.S.

0%

1%

2%

3%

4%

5%

6%

0%

1%

2%

3%

4%

5%

6%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

5-year change (annualized rate)

U.S. Output per hour U.S. Labor force

7


In 2016, yields have backed up a little bit, in line with the improvement of the economy and following reflation policy promises from the Trump administration, and bond returns were flat. Was that just the beginning? To be sure, we look at valuations for fixed-income securities and compare with periods where bond yields felt upward pressure starting off from very low levels. From our fair value estimate, we find that even though yields rose from their historical troughs in 2016, they remain quite low in the current macro backdrop, and they should continue to feel upside pressure in the coming years (Chart 14).

In the short run, because of duration risk, rising yields would likely lead to important capital losses and dominate bond returns. If 10-year U.S. Treasuries rise from the current yield of 2.5% to a terminal rate of near 4% over the next few years and stabilize at that level thereafter, this means that annual returns will likely be negative in the first two to three years. These expectations are in line with periods when yields have risen from a very low point. For example, yields rose by 250 basis points from 2.2% in January 1950 to 4.7% at the end of 1954, resulting in negative annual returns in four years out of five. At an annualized rate, losses amounted to 1.7% in nominal terms and 3.5 % in real terms over the five-year period (Chart 15 and 16). However, over the longer run, bond returns are mostly explained by the yield and the roll-down effect. As such, starting from the current yield of 2.3%, if we add on an expected roll-down return of 0.6% (the gain from the ageing of the bond in an upward sloping yield curve) plus the pro-rated effect of duration risk over the next five years (-1.6%), we get

an expected annualized return of about 1.3% for U.S. 10-year Treasuries.

2.4 Credit For credit, we look at current spreads to U.S. 10-year notes and compare them historically. We then control for the macroeconomic environment as IG and HY tend to behave differently than government bonds in periods of rising inflation and monetary tightening. For IG credit, we find that yield-to-maturity explains 79% of subsequent five-year returns, with periods of outperformance when spreads to Treasuries are narrowing (Chart 17). With a current yield of approximately 3.30%, future returns on IG bonds are not overly promising at first glance. But with spreads to the Treasury benchmark barely below the historical average of 120 basis points, there is still room for improvements, which should help alleviate downward pressure, if any, from rising nominal yields. Therefore, we anticipate IG to return about 2.75%, on average, over the next five years. This is more than the 1.3% expected return for Treasuries over

Table 3 Annualized Total returns: Canadian bonds vs equities

From TSX DEX TSX DEX TSX DEX1980 8.9% 8.9% 16.6% 7.3% 26.1 58.91986 8.2% 7.5% 15.5% 5.8% 31.7 72.82000 6.1% 5.8% 17.3% 3.3% 25.9 127.52010 5.2% 4.3% 10.9% 3.6% 46.7 115.0

Source : Datastream

VolatilityReturns Sharpe ratio

14

Source: Datastream

10-year bonds still below faire value

-4

-2

0

2

4

6

8

10

12

14

16

-4

-2

0

2

4

6

8

10

12

14

16

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

%% US Treasuries' fair value

Spread Inflation expect. + GDP potential US 10-year notes

15

Source: Morningstar

From very low bond yields…

-5%

0%

5%

10%

15%

20%

-5%

0%

5%

10%

15%

20%

1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

US bond market

Subsequent five-year annualized returns Long-term bond yields

Five-year returns are oftennegative when yields risefrom very low levels

16

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1954 1955 1956 1957 1958 1959

US Long-term bond annual returns

Capital gains Interest rate returns Total returns

Source: Morningstar

… negative returns can emerge!

8


the same period as IG credit is usually of higher coupon and shorter duration, i.e. less sensitive to a rise in interest rates. The excess return to Treasuries is also above the long-term credit premium of 0.5%, but it is consistent with premiums in narrowing spreads’ environment.

For HY issuers, we find that yield-to-maturity explains about 60% of future returns. Therefore, default and liquidity premiums play a bigger role and a more important weight has to be put on spreads to Treasuries, than for IG credit analysis. Usually, when spreads narrow to one standard deviation below average, subsequent five-year returns are at their lowest level. In contrast, buying HY when spreads are two standard deviation above average has always yielded double-digit returns for the subsequent five years (Chart 18).

In the current macro backdrop, HY bond defaults should remain contained, and spreads to Treasuries (currently at 380 basis points) will likely continue to narrow down toward the bottom of the historical range. This should offset some of the upside pressure coming from rising nominal yields. But, as the latter are probably at their lowest point of the past 90 years, we

expect returns for this asset class to average 5%, at an annualized rate, over the next five years. 2.5 Large cap equities There are many ways to measure how much equity markets are overvalued or undervalued. For a start, you could look at spreads to long-term trends to get a sense of how fast things may have evolved. Other measures, such as the ratio of market value to GDP usually provides a good sense of equity returns over the next ten years. The same can be said about the price-to-earnings (PE) ratio and future equity returns. In this section, we will take a look at each of these measures to shape our five-year return expectations. Starting with the latter, a common measure is the Cyclically Adjusted Price-to-Earnings ratio (CAPE), calculated by Robert Shiller. One advantage of this method is that it smooths out the volatility of earnings by taking a ten-year average. Applying this method, the U.S. large cap equity index (S&P 500) was running at a multiple of 29 times the earnings in March 2017, which is 75% higher than the historical average of 16.7 (Chart 19).

On that basis alone, equities tend to be richly priced currently, but it doesn’t necessarily mean that future returns will be negative. The main reason is that PEs have been on a slightly upward trend historically, reflecting the transformation of the U.S. economy throughout the 20th century, i.e. from a very industrial basis (lower multiples) up until the early 30s to a service-led technology-supported basis (higher multiples) from the 80s onward (Chart 20). Therefore, we find that making an adjustment for trend yields interesting conclusions. For one, the all-time high CAPE level recorded during the dotcom bubble is now second to what valuations were during the speculative era of the late 20s that led to the Great Depression (Chart 21).

18

Source: Datastream

High-Yield: Buy high (spreads), sell low (spreads)

-4

0

4

8

12

16

20

-4

0

4

8

12

16

20

1986 1991 1996 2001 2006 2011 2016

%% US High yield vs 10-year notes

HY spread Average Subsequent 5-year ann. returns Nominal yield

19

Source: Shiller

Equities are expensive based on the CAPE ratio

0

5

10

15

20

25

30

35

40

45

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Cyclically-adjusted Price Earnings Ratio

CAPE level Long-term trend

75% above

average

17

Source: Datastream

For IG, returns are mostly explained by yield level

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

1986 1991 1996 2001 2006 2011 2016

%% IG vs 10-year notes

IG spread Average Subsequent 5-year ann. returns Nominal yield

9


Working from this development, we map the downward pattern of high PEs and lower future equity returns in a scatter plot (Chart 22). With the CAPE level currently sitting 19% above trend, the regression line suggests that equity returns over the next ten years should average 6%. This is more than what the unadjusted Shiller earnings yield (E/P), at 3.3%, would indicate.

To be sure, we look at market value to GDP, which gives you an indication whether equities are moving in synch with economic activity (Chart 23). The same can be said of households’ wealth, as the amount of equity they own as a percentage of total financial assets has always been a good harbinger of future returns.

Since market value is only available from 1973, we take the S&P 500 index to nominal GDP figures from 1925 as a proxy. With a reading of 89%, this measure indicates that the total return over the next ten years should also be around 6% at an annualized rate (Chart 24).

After having run at an annualized pace of 15% over the past five years, an expected return of 6% for the next five to ten years may still seem too high. One caveat is that recent past returns were achieved on the back of a catch-up effect following one of the worst economic downturns of history. Therefore, adjusting for trend, equities seem to be fairly valued – which is a stark difference from the situation that prevailed in the years that formed the speculative bubble on info-tech stocks at the end of the 90s (Chart 25). This means that as long as the economy is growing, company earnings will improve and the stock market will continue to thrive.

20

Source: Credit Suisse Global Investment Returns Yearbook 2017

Change in U.S. industry weightings from 1900 to 2017

1900 2017

22

R² = 0.6194

-75%

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

Spread to trend

S&P 500 subsequent 10-year annualized total returns

CAPE vs S&P 500

1925 to 2006CAPE March 2017

Source: Datastream

High PEs today doesn’t mean low returns

23

Source: Datastream and measuringworth.org

When equities grow faster than the economy…

20%

60%

100%

140%

180%

220%-24%

-16%

-8%

0%

8%

16%

24%1925 1932 1939 1946 1953 1960 1967 1974 1981 1988 1995 2002 2009 2016

S&P 500 vs GDP level (annual data)

S&P 500 subsequent ten-year annualized total return (inverted, left)Price index to U.S. nominal GDP ratio (1925=100, right)

21

Source: Datastream

The 30s were the most expensive on trend-adjusted basis

-75%-50%-25%0%25%50%75%100%125%150%175%200%-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Trend-adjsuted Shiller CAPE vs S&P 500

S&P 500 subsequent 10-year ann. total returns (inverted, left)Shiller PE (spread to trend, right)

24

R² = 0.839

0%

50%

100%

150%

200%

-10% -5% 0% 5% 10% 15% 20% 25%

S&P 500/GDP

S&P 500 subsequent 10-year ann. total returns

From 1925 to 2006

Price index vs nominal GDP (right)Sept. 2016

Source: Shiller and measuringworth.org

… future equity returns are generally lower

10


Consequently, using our forecast for economic growth (+1.9%) and inflation (+1.8%) as a proxy, nominal earnings should rise by about 3.7%. Add a dividend yield of 2.1% (average of the past five years) and net buybacks (gross buybacks and gross issuance tend to average 0% historically) and you get, again, a total return of about 6% for U.S. large cap equities. Doing the same for Canadian equities, we proxy nominal earnings growth to 3.1% and the dividend yield to 2.9% for an average expected return of around 6%. 2.5 Style premiums Small cap equity total returns have been phenomenal over the past few years. The 21% annualized gain recorded following the end of the great financial crisis in March 2009 is much above the small cap equity historical trend growth of 12%. With large cap equities yielding an annualized total return of 18% during the same period, this means that the small cap premium has also been greater than its historical average. As such, we find small cap equities to be expensive. Specifically, the price-to-earnings ratio at 27 is at its highest level ever recorded (series started in 1973), and much of the rebound from the 2015 correction occurred due to the expansion of multiples (Chart 26). All in all, we expect the small cap premium to be lower in the foreseeable future.

2.6 Alternatives While we’ve determined in the previous section that inflation-adjusted returns for commodities were on a long historical downtrend, nominal prices tend to be stable for long periods and then move in leaps and bounds depending on the economic cycle or the supply and demand dynamics. For example, aggregated prices dropped abruptly following the war effort and were stable for about 20 years from the early 50s to the beginning of the 70s (Chart 27).

Then came the energy shock and the inflation years, and commodity prices increased three-fold over ten years. Starting in 1980, commodity prices were range-bound for another twenty years. This set the stage for a very prosperous period that started in the 2000s when prices again increased three-fold over ten years, propelled by a weakening U.S. dollar and the industrialization of China. In 2012, matching a reversal in the U.S.-dollar trend, global growth uncertainty, and oversupply in many areas (namely, the energy sector), commodity prices were severely impacted, losing 35% of their value over four years. After stabilizing in early 2016, there is a fair chance that commodity prices will be range-bound for a very long while. Whether it will last five, ten or twenty years remains to be seen. But one thing is sure, years ahead will be volatile, offering a lot of opportunity to buy and sell. Last year was a good example of this with WTI oil prices doubling from a cyclical low of US$26 per barrel in February to a high of $54 in December, owing to an agreement between OPEC members and with Russia to cut down production. Because of this volatility and the mean-reversion pattern of real commodity prices, we think our best forecast for the next five years is the historical nominal returns of 3% annually.

25

Source: Datastream

U.S. Equities : Fairly valued and cheap relative to bonds

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1930 1940 1950 1960 1970 1980 1990 2000 2010Standardized S&P 500 (left) Ratio of CAPE/Bond PE (right)

+1 S.D.

Trend

-1 S.D.

26

Source: Datastream

US small cap expensive on an earnings basis

500

1000

2000

10

12

14

16

18

20

22

24

26

28

2009 2010 2011 2012 2013 2014 2015 2016 2017

Index, log scaleMultiple Small cap PE

S&P 600 PE (right) S&P 600 Small cap index (left)

27

Source: Datastream

Commodity prices are very cyclical

75

150

300

600

75

150

300

600

1950 1960 1970 1980 1990 2000 2010 2020 2030

$US (log scale)$US (log scale) Commodity prices

3X

3X

20 years

20 years

10 years

10 years

20 years?

11


3. Capital Market Line To put it all together, we first determine historical volatility and asset correlation for all asset classes under study. After comparing our results with other firms, we derive expectations in Canadian dollars to come up with the optimal capital market line. 3.1 Volatility When forecasting figures in which the underlying is exhibiting mean-reversion properties, the best prediction is the average itself. Because volatility is mean reverting, we find the historical average to be the most representative of what the next five years should look like. For equities, things are pretty straightforward. There can be bouts of price swings, especially following stock market corrections or recessions. But, usually these episodes are followed by windows where risk seems to be less of a concern and equities are slowly recovering. Of this cycle, which lasts around 10-12 years, we are currently in the lower part of the range, suggesting that volatility should pick up over the next few years, to finish around the historical average (chart 28). For bonds, however, things are a little bit trickier. This is due to more factors entering the risk calculations of the asset class. Return fluctuations are mainly tied to the duration risk, but inflation and the central bank policy response also play roles in the realized volatility of the asset class. This means, fixed-income risk is subjected to different regimes and in setting our assumptions we will need to take into account the environment in which bonds will evolve. Duration risk continuously increased from the 80’s onward due to the downward march of yields throughout the decades. From the get-go, we can assume that the 1980-2000 period is not representative of the type of environment we should expect

in the next five years, as 1) it was mainly caused by inflationary pressures abating and 2) the level of yields was much higher than it is today. Accordingly, the sweet spot is from 2004 to 2008, a period when the Fed was hiking interest rates from a very low 1% rate and U.S. 10-year notes were hovering around 4%. During that period, long-term Treasuries were averaging 9% volatility. As we expect the Fed to continue hiking and Treasury yields to follow suit toward our 4% target, we expect duration to slowly decrease over the next five-year period and volatility to decrease from the current 10.5% toward a 9% target in 2022. This would translate to an average volatility of 9.75% for the 2017-2022 period (Chart 29). For credit, IG durations are much lower than long-term bonds and they vary very little over time. Consequently, unless we live another crisis where creditworthiness is at risk (like the one we witnessed in the great financial crisis), we think the regime of volatility that prevailed after 1995 should be the norm.

28

Source: Datastream

Mean reverting process for equities

5%

10%

15%

20%

25%

5%

10%

15%

20%

25%

1980 1985 1990 1995 2000 2005 2010 2015

Equity markets (Rolling 5-year Volatility of returns)

S&P 500 S&P/TSX

Long-termaverage

Table 4 Annualized Five-year Expectations

Asset Class (local FX)Expected returns

Expected volatility

Returns 2012-2016

Return differential Asset Class (C$)

Expected returns

Expected volatility

Returns 2012-2016

Return differential

Fixed income Fixed income US 30-day T-Bills 2.0% 0.0% 0.1% 1.9% CAD 30-day T-Bills 2.0% 0.0% 0.8% 1.2% US 10-year notes 1.3% 11.0% 2.5% -1.2% CAD 10-year notes 1.1% 8.0% 3.8% -2.7% US IG bonds 2.8% 10.0% 4.2% -1.5% CAD IG bonds 3.0% 7.0% 3.2% -0.2% US HY bonds 5.0% 12.0% 7.4% -2.4% US HY bonds (hedged) 5.0% 12.0% 13.4% -8.4%0.0%Equities Equities Canadian large cap 6.0% 15.5% 8.2% -2.2% Canadian large cap 6.0% 15.0% 21.2% -15.2% US large cap 6.0% 15.0% 14.5% -8.5% US large cap 4.5% 15.0% 21.2% -16.7% US small cap 7.5% 17.5% 16.4% -8.9% US small cap 6.0% 17.0% 23.0% -17.0% EAFE equities 6.5% 16.0% 7.0% -0.5% EAFE equities 5.0% 16.0% 13.1% -8.1% EM 7.5% 18.0% 5.5% 2.0% EM 6.0% 17.5% 7.4% -1.4%0.0%Alternatives Alternatives Private equity buyout 10.0% 22.0% 20.4% -10.4% Private equity buyout 8.5% 22.0% 27.2% -18.7% Commodities 3.0% 20.0% -8.7% 11.7% Commodities 1.5% 20.0% -3.5% 5.0% Private property 5.0% 9.0% 10.9% -5.9% Private property 3.5% 9.0% 17.2% -13.7% Timberland & Farmland (50/50) 6.0% 8.0% 10.4% -4.4% Timberland & Farmland (50/50) 4.5% 8.0% 16.7% -12.2%

Source: Datastream and National Bank

12


High-yield volatility is much more correlated to default risk which seems to follow a cycle where the length is similar to equity markets. This is no surprise as high-yield bonds are very correlated to most stock indices (see next section). As a result, we think using the historical average, standing at 8% volatility, is appropriate under the circumstances. 3.2 Correlations In this section, we derive correlation between assets based on the last 20 years of data available. This takes into account more than two complete economic cycles, permitting us to circumvent recent trends or behaviours. Monthly data are used for traditional asset classes, while quarterly data are used for alternative classes with the exclusion of commodities (Table 5 on next page). 3.3 Capital market line When comparing our results on major asset classes with other firms, we find that we are well within the range of expectations, except for our long-term bond forecast which lies on the low end of the dispersion (chart 30). Perhaps, this could be explained by the reluctance of economists/analysts to put too low of a number after having been burnt so many times in

the past several years for saying that yields had nowhere to go but up, while they kept going down. Whether we are right or not that interest rates will be higher in five years’ time, one thing is certain, our forecast for long bonds (lower bound of the range) is in line with our call for rising short-term rates (upper bound). Putting it all together, we find that the optimal capital market line has shifted down and to the right in local currencies (Chart 31). This means that returns on a diversified portfolio should be lower than for the last five years.

In Canadian dollar adjusted terms, the impact could be even more pronounced (Chart 32) due to the sharp depreciation of the loonie from 2012 to 2017, and our expectation that the currency will gradually firm up until 2022.

31

Source: Datastream

Less returns for the next five years in local currencies…

0.0%

3.0%

6.0%

9.0%

12.0%

0% 3% 6% 9% 12% 15% 18% 21% 24%

Expe

cted

ann

ualiz

ed re

turn

s

Expected annualized volatility

Local FX

Capital Market Line:Last five yearsNext five years

Cash

TSXS&P 500

LT bonds

HY

IG

Private property

Farm/TimberEAFE

US small cap

Private equity

Commos

EM

29

Source: Datastream

Fixed income should exhibit volatility above average

2%

4%

6%

8%

10%

12%

14%

16%

2%

4%

6%

8%

10%

12%

14%

16%

1980 1985 1990 1995 2000 2005 2010 2015 2020

Fixed Income (rolling 5-year volatility of returns)

US HY US IG US treasuries LT

Long termaverage

32

Source: Datastream

… and even more so on a Canadian-dollar adjusted basis

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

21.0%

0% 3% 6% 9% 12% 15% 18% 21% 24%

Expe

cted

ann

ualiz

ed re

turn

s

Expected annualized volatility

Canadian dollars

Capital Market Line:Last five yearsNext five years

Cash

TSX

S&P 500

LT bonds

HY

IGPrivate property

Farm/Timber EAFE

US small cap

Private equity

Commos

EM

30

Source: JPM, GS, Pimco, AQR, RBC, Robeco, BMO and Voya

The more volatile the asset… the larger the dispersion

0 1 2 3 4 5 6 7 8 9

0 1 2 3 4 5 6 7 8 9

Cash

US Long-Term Treasuries

US Investment-Grade

US High-Yield

US Large-Cap Equities%

%

Five-Year annual performance Projections vs. Other providers

Provider Range 1859 Projections

13


3.4 Investment conclusions With U.S. economic growth and inflation firming up, higher short-term interest rates are to be expected over the next five years, as the Federal Reserve will continue to normalize its monetary policy. Downside pressure on yields from central banks’ monetary purchases should also slow down as we foresee the ECB move to taper its QE program in early 2018. Consequently, we find the path of least resistance for longer-term bond yields is up over the next five years. Because duration risk is at historical highs, such an event would likely entail negative nominal returns in the first few years, before stabilizing around coupon rates, leaving the annualized rate of return well below its long-term historical average. With a lower yield-to-maturity and, consequently, a higher duration, Canadian bonds should underperform their U.S. counterparts. In that environment, shorter-duration higher-coupon corporate bonds would seem a better investment on an absolute, relative, and risk-adjusted basis. After eight years of exceptional returns during the great financial crisis recovery, we find that equity markets are not a bargain anymore and expect an annualized total return of 6% for U.S. large cap equities over the next five years. This is lower than the historical growth rate, but the ERP over bonds (at 4 percentage points), remains in line with long-term assumptions. With the ECB monetary stance still very accommodative, and with the worst of the banking sector foe probably behind us, we feel European stocks may finally catch-up to their U.S. counterparts. Canadian equities will do well, but much of their future returns will depend on the outlook for commodities. The same goes for emerging markets, which tend to do well in the

later stages of the U.S. economic cycle, particularly as we expect most of the USD appreciation to be behind us. All in all, as traditional portfolio returns will be lower than in the past, it is time to think outside the box. Therefore, strategies aiming at higher absolute returns or less volatility should be contemplated at this point. We continue to advocate the inclusion of non-traditional fixed-income funds, such as those linked to interest-rate spread strategies, unconstrained global bond funds, or structured products. To limit both volatility and downside, idiosyncratic risk should be diversified with smart beta strategies. Finally, we feel private investments – whether linked to real estate, infrastructure, farmland or timberland – will offer higher returns with much less volatility than traditional assets, while continuing to be uncorrelated to both stocks and bonds (Table 5).

Table 5 Correlation* Matrix

Assets(local currency)

Std dev

Beta vs S&P 500

Cash

US treas. LT

US Corp.

US H

Y

Can. Large Cap.

EAFE

US large cap

US sm

all cap

EM equity

Comm

od.

Private equity

Farmland

Private real estate

Timber-land

Cash 0.6% (0.00) 1.00US treas. LT 10.2% (0.16) 0.06 1.00US Corp. 5.3% 0.08 0.01 0.59 1.00US HY 9.1% 0.37 (0.13) (0.12) 0.55 1.00Can. Large Cap 14.9% 0.76 (0.02) (0.20) 0.26 0.59 1.00EAFE 16.9% 0.94 (0.05) (0.23) 0.31 0.66 0.76 1.00US large cap 15.3% 1.00 (0.02) (0.25) 0.22 0.62 0.78 0.85 1.00US small cap 20.0% 1.07 (0.06) (0.28) 0.16 0.63 0.76 0.75 0.82 1.00EM equity 23.8% 1.16 (0.07) (0.22) 0.28 0.66 0.78 0.83 0.74 0.72 1.00Commodities 16.9% 0.35 0.04 (0.19) 0.20 0.37 0.51 0.43 0.31 0.33 0.48 1.00Private equity 10.2% 1.11 (0.05) (0.52) 0.10 0.65 0.81 0.88 0.97 0.88 0.75 0.22 1.00Farmland 4.9% 0.07 (0.04) (0.06) (0.14) (0.04) 0.08 0.17 0.13 0.11 0.11 (0.10) 0.13 1.00Private real estate 0.9% 0.02 0.30 0.01 (0.14) (0.08) 0.13 0.15 0.20 0.14 0.02 0.16 0.20 0.17 1.00Timberland 3.7% 0.01 0.25 0.11 (0.08) (0.14) 0.03 0.05 0.02 (0.11) (0.03) (0.08) (0.02) 0.66 0.32 1.00

Source: Datastream Historical data since March 1997

* Cash, U.S. 10-year Treasury notes, HY bonds, equity values and commodities are calculated using monthly returns

Private real estate, Timberland, Farmland and Private equity values are calculated using quarterly returns

14


National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada which is a public company listed on the Toronto Stock Exchange (NA: TSX). The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. National Bank Financial may act as financial advisor, fiscal agent or underwriter for certain companies mentioned herein and may receive remuneration for its services. National Bank Financial and/or its officers, directors, representatives or associates may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time on the open market or otherwise.

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coping with rising yields and higher valuations...valuations, share buybacks, the cost of equity...

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