Investing in the New Normal:

2012 Experience2013 Expectations

Presented by:

Jeff Finkelstein, CIM

Vice President & Portfolio Manager

RBC Dominion Securities

December 4, 2012

A Little Market Humor …

2

Part A: Corporate Fundamentals Are Generally Fine

3

Corporate Profits Never Higher

4

Corporate Cash Levels Never Higher

5

Aggregate Employee Income Never Better

6

Cost of Corporate Borrowing Never Lower

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Part B: 2012 A Retrospective

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S&P 500 (1871 to Present)

1

10

100

1000

10000

18

71

18

75

18

80

18

85

18

90

18

94

18

99

19

04

19

09

19

13

19

18

19

23

19

28

19

32

19

37

19

42

19

47

19

51

19

56

19

61

19

66

19

70

19

75

19

80

19

85

19

89

19

94

19

99

20

04

20

08

+531%18-Yrs

19-Yrs

11-Yrs

+1,258%18-Yrs

+141%4-Yrs

+161%10-Yrs

21-Yrs

+290%6-Yrs

19-Yrs

14-Yrs

Sideways Long-Term Market Continues

9

Psychology Drives Market Performance

10

-41%

Volatile Cycles Within the Sideways Bear Market

-41%

+75%

-49%

+90%

July 1999

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Dynamic Balance of Market Forces

LOW VALUATIONS

EXTREME LOW RATES

OTHER MONETARY STIMULUS

STRENGTHENING DOMESTIC ECONOMY

EUROPEAN SLOW DOWN

PERSISTENT US UNEMPLOYMENT

CONSUMER / BUSINESS CAUTION

FISCAL CLIFF / DEBT CEILING

Positive Negative

STRENGTHENING CONSUMER CONFIDENCE

FEARS OF SOVEREIGN DEFAULTS

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A

B

CD

A – European Debt Contagion

B – European & US Debt

C – European Debt

D – US Fiscal Cliff

2012

A Closer Look at the Current Cycle (U.S)

13

2012

A B C D

The TSX Burdened by Resource Emphasis

A – European Debt Contagion

B – European & US Debt

C – European Debt

D – US Fiscal Cliff

14

But Equity Income is Still Doing Fine

2012

A

B

CD

A – European Debt Contagion

B – European & US Debt

C – European Debt

D – US Fiscal Cliff

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Part C: Structural Market Dynamics:

Investor Group Psychology

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Cycles are a Fact of Life

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-41%

Impact of Pessimism Illustrated

Between 1999 and 2012 – Profits more than doubled but with no market price growth over the decade

1999 P/E ratio of 43 2012 P/E ratio of 15

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Yield 2.8% Dividend $1.62 EPS $4.00

Yield 3.2% Dividend $2.00 EPS $4.22

Yield 4.1% Dividend $2.28 EPS $4.96

May 2007 April 2010 November 2012

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Impact on RBC Shares

Short-Term Market Prices Controlled by Psychology

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Equity Correlation

About 20% of the trading volume of an equity actually depends upon its fundamentals.

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Index ETFs + Computer Trading Accelerate This

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Large Caps & Defensive Sectors are Most Highly Correlated

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Part D: Structural Market Dynamics:

Policy and Politics

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MORTGAGES &

HELOCS

DEBT

CREDIT

DERIVATIVES

DEBT

BANKS

NATIONAL GOVERNMENTS

TAXPAYERS CENTRAL BANKS

United States

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Central Bank

Current Objectives:

1. Shrink the relative government debt burden (by stimulating GDP growth)

2. Shrink the government’s debt service cost

3. Increase personal wealth → increased consumer spending → increased US employment

4. Increase business investment

Current Actions:

1. Force down overnight interest rates – Zero Interest Rate Policy to 2015

2. Force down 10-year Treasury rates - $40B/ month in market buying

3. Force down mortgage bond rates - $40B/ month in market buying

Indirect Consequences:

Financial Repression – prolonged low interest rates punish conservative savers

• Worried retail investors

• Conservative pension funds

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Financial Repression in Action

Lowest rates in history are deliberately punitive for cautious savers and deliberately supportive for investors (and other spenders).

10-Year US rate now at 1.61%

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No Impact of Money Printing on Growth or Inflation

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Part E: Search for Yield and Equity Income

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SHORT TERM RATES

Frozen to mid-2015

10-YEAR TREASURIES

Operation Twist

AGENCY MBS

QE Infinity

CORPORATE CREDIT

(Investment Grade)

CORPORATE CREDIT

(High Yield & Emerging)

EQUITY INCOME

(Dividend Payers)

EQUITY INCOME

(Dividend Growers)

Investors Hunt for Investment Income

EQUITY GROWTH

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0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

DIVI

DEND

YIE

LDS&P500 Historical Yield

70s bear

80s & 90s bull

2000 bear

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Generally earnings, dividends & dividend growth track the real economy, not speculative fears.

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Long Term Earnings Consistency

2008 Yield: 7.7%

2009 Yield: 18.5%

2010 Yield: 7.0%

2011 Yield: 6.4%

2012 Yield: 5.1%Consistent Annual Dividend: $1.54 per

Share

-62%

Profit & payout consistency for domestic, defensive, dividend-rich companies

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2008 Yield: 8.8%

Dividends Paid: $0.84

2009 Yield: 15.0%

Dividends Paid: $0.84

2010 Yield: 6.9%

Dividends Paid: $0.90

2010 Yield: 6.0%

Dividends Paid: $0.96

2010 Yield: 4.7%

Dividends Paid: $1.055 Years

Dividend Growth: 25%

Stock Price Growth: 230%

-43%

Profit & payout consistency for domestic, defensive, dividend-rich companies

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Long Term Outperformance of Equity Income

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Low Volatility of Equity Income

Notably less market price volatility than the market

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Altagas +4.3%

Brookfield Infrastructure +7.0%

Enercare +1.8%

InterPipeline +5.7%

Bank of Nova Scotia +3.6%

Bank of Montreal +3.0%

TD Bank +5.9%

Canadian Apartments REIT +4.0%

BCE +10.0%

Telus +10.0%

Medical Facilities +2.3%

Apple +1.8% (Initiated 2012)

Nike +17.0%

VF Corp +21.0%

Yum Brands +17.5%

Some Examples of 2012 Dividend Growers

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  3 Year 5 Year 10 Year

S&P/TSX Income Trust Total Return Index 24.3% 12.8% 16.2%

S&P/TSX Capped REIT Total Return Index 23.4% 9.2% 13.1%

S&P 500 Total Return (US) 13.2% 0.4% 6.9%

DJ Stoxx 50 Price Return (Europe) -2.6% -10.3% 2.6%

MSCI World Index Price Return (World) 5.6% -5.0% 5.1%

Equity Income Investments Outperform

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Part F: 2013 Outlook

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2012

Strong Dividend Support

REITs

TSX

Continued Strength in Equity Income

40

2012

US led by Consumer, Technology and Health Companies

Canada hindered by Resources

U.S

Canada

Continued Strength in the U.S.

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Expectations of Moderate Growth in Canada

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And in the U.S.

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Recovery Leads to a Mild Increase in Long-Term Interest Rates in Canada

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And in the U.S.

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Canadian Dollar Remains at Least at Parity

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Inflation is Controlled

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No Crisis in Canadian House Prices Forecast

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Other Macro Future Trends

Demographics

• Powerful growth needed for reliable retirement income “Personal Pension Plans”

• Desire for low volatility; high confidence investments

US Housing Recovery

• Slow turnaround has implications for consumer confidence, retail, resources, job growth

Technology

• As new technologies mature there is more competition, less dominance among the consumer brand names

• The new “App Economy” has added 500,000 US jobs

• Growth of the “Cloud”

• Technology infrastructure has an interesting risk / reward (telecom services, broadcast towers and data storage)

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Energy

• Based on new drilling technologies, US oil and gas production will eventually outpace Saudi Arabia

• Giant need for new infrastructure (e.g. pipelines)

• Growing environmentalism (indirect impact of Hurricane Sandy)

• US manufacturing benefits from decreased energy input costs

• Will Canada’s oil and gas be stranded?

Consumer

• Increasing wealth transfer to emerging Asia (and they love consuming global brands)

• Slow recovery of NA middle class

• Southeast US labor rates increasingly competitive with Shenzhen

• Global lifestyle changes

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Health Care

• Aging population requires increased services

• “Obamacare” in US, now ratified, increases by 15% the eligible clientele for health services

Financial Services

• Tighter government controls leads to slower long term growth (and renewed interest in the retail client)

• Growing international reputation and global presence of Canadian banks

• RBC sixth in world in wealth management, twelfth in total assets

• Relative decline of the US and European banks

• Fun thought: Toronto as the next Zurich?

Emerging Markets

• New growth centres emerging (SE Asia, East Europe) – but highly speculative

Any further questions?

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Thank You from The Finkelstein Group

Investment Trust Units are sold by RBC Dominion Securities Inc. There may be commissions, trailing commissions, management fees and expenses associated with Investment Trust investments. Please read the prospectus before investing. Investment Trusts are not guaranteed, their values change frequently and past performance may not be repeated. This commentary is based on information that is believed to be accurate at the time of writing, and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns. RBC Dominion Securities Inc. and its affiliates may have an investment banking or other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. RBC Dominion Securities Inc. and its affiliates also may issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC Dominion Securities Inc. or its affiliates may at any time have a long or short position in any such security or option thereon. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund.