The Professionals’ Financial — Private Management team

QUICK REVIEW OF THE GLOBAL ECONOMYThe first half of 2016 ended better than it started, although global economic growth is at its lowest level in seven years. While some indicators point to a pickup in growth over the next few months, many organizations have revised their forecasts downwards. Here are some factors that have impacted economic conditions and that could continue to do so.

BREXIT: THE BRITISH SURPRISE After many months of anxiety, uncertainty and heated debates, Great Britain, to everyone’s surprise, finally voted to leave the European Union. The results of the June 23 referendum were close, with the anti-Brexit camp garnering 48% of the votes versus 52% for those in favour of the United Kingdom’s economic independence. The day after this historic decision, the pound sterling fell to its lowest level since 1985, while European stock markets tumbled, followed by sharp declines on other global markets. This correction was short-lived, however, as investors began to anticipate an extended period of expansionary monetary policy. In addition, the big drop in the pound sterling favours British exporters.

OIL REBOUNDS AND THE LOONIE FOLLOWS SUITAt the end of 2015, oil was trading at $37.04 a barrel, representing a drop of 30.5% for the year. However, the price of crude has rebounded thanks to a quicker-than-expected rebalancing of production and inventories. At the end of June, oil had risen to around US$50, which should give a small boost to the Canadian economy. The Canadian dollar benefited from this turnaround, climbing from US$72.23 at the end of 2015 to US$78.08 on the first day of summer 2016.

CENTRAL BANKS STILL VERY ACCOMMODATIVEAround the world, many central banks intervened once again to add more stimulus to their respective economies. The British decision to leave the EU will prompt central banks to extend their quantitative easing programs. The substantial measures put in place by the European Central Bank in 2015 have been slow to take effect, so the ECB announced in June the launch of a major corporate bond purchase program. As for Canada and the United States, their already highly accommodative monetary policies remain unchanged.

Despite three massive injections of liquidity, the Japanese economy continues to stagnate, and the Bank of Japan decided to implement negative rates in January and then to postpone the planned increase in the sales tax.

ANTICIPATED POLICY RATE HIKES IN THE U.S.: THE SUSPENSE CONTINUES

In mid-December 2015, the U.S. Federal Reserve announced the first increase in its benchmark rate in close to 10 years and said that other rate hikes would gradually follow in 2016. Since then, at each of its meetings, the Fed has maintained the status quo, raising speculation about the number and timing of future rate hikes. Many observers thought that mid-June would be the right time for the Fed to move, but a loss of momentum in the U.S. job market and fears about Brexit have changed things. Given the risk of slower economic growth, investors are not expecting a policy rate hike in 2016.

GROWTH BELOW FULL POTENTIALAfter a disastrous start to the year, the financial markets turned up on a change in sentiment, as investors finally realized that economic conditions would be better than expected. The economy has continued to grow weakly, but with no recession in sight. Money supply and manufacturing indicators suggest an improvement, but the International Monetary Fund (IMF), the World Bank, the Organisation for Economic Cooperation and Development (OECD) and some central banks have revised their global economic growth forecasts downwards.

HIGHLIGHTS

/ U.K. vote in favour of leaving the European Union

/ Dramatic turnaround in the price of oil

/ Renewed strength of the Canadian dollar

/ Continued accommodative monetary policies on the part of central banks

/ Reduced expectations for U.S. policy rate hikes

FINANCIAL LETTERSUMMER 2016

LOW

RISK OF RECESSION ACCORDING TO OUR TEN INDICATORS

Professionals’ Financial offers you investment solutions whose emphasis on greater diversification will prove effective in the current environment of prolonged low bond yields and market volatility. These solutions meet the following objectives:

/ Lessen the impact of low bond yields.

/ Better withstand major financial market fluctuations.

/ Increase our agility in a changing environment.

Here are the key characteristics of these strategies, which enable investors to protect their investment portfolio in times of volatility, while optimizing their return potential.

SEMI-ANNUAL FOCUS OUR INVESTMENT SOLUTIONS TO COPE WITH MARKET VOLATILITY

FDP ALTERNATIVE STRATEGIES PRIVATE PORTFOLIO

/ Seeks a positive absolute return and reduces volatility.

/ Adds protection against stock market declines.

/ Achieves a long-term rate of return similar to that of stocks, with volatility like that of bonds.

/ Offered exclusively to Private Portfolio Management or Private Security Management clients.

FDP CANADIAN CORPORATE BOND PRIVATE PORTFOLIO

/ Offers greater diversification and higher income.

/ Holds high-quality Canadian bonds.

/ Includes more than 125 corporate bonds, which reduces issuer risk.

/ Provides better protection if rates rise due to favourable economic conditions.

/ Offered exclusively to Private Security Management clients.

FDP GLOBAL FIXED INCOME PORTFOLIO

/ Provides access to markets offering more attractive yields.

/ Limits currency risk through Canadian dollar hedging.

/ Gives the manager latitude to position the portfolio in categories offering the best risk/return ratio.

MARKET WATCH

WILL GIANT FOREST FIRES CLOUD THE CANADIAN ECONOMY?

According to the governor of the Bank of Canada, the Canadian economy is adjusting little by little to the oil shock and will finally regain some momentum, after having been adversely impacted by the slow U.S. recovery, weak exports and low commodity prices. The historic forest fires that hit Alberta in May and June will leave their mark, however. The interruption in oil production that they caused will likely reduce second-quarter Canadian economic growth by 1% to 1.25%. Nevertheless, the head of the Bank of Canada sees better-than-expected growth for the next three months.

BRAZIL SUFFERS, BUT ITS STOCK MARKET IS HEALTHY

Brazil remains in a recession that began in 2014, and the growth outlook for the rest of the year is hardly encouraging. The country has as an abnormally high sovereign debt level, social problems, the Zika virus, and a political corruption scandal involving the state-owned oil company Petrobras, not to mention the State of Rio, which is on the verge of bankruptcy. Despite all this, Brazil has one of the top performing stock markets, with a return of close to 15% year to date. How is this possible? Like Canada, Brazil has various natural resources and is a major oil producer. The rebound in the price of oil and in many other commodities partially explains the strong performance of the country’s stock market.

EVOLUTION OF THE INDICES’ CUMULATIVE RETURNS* FROM DECEMBER 31, 2015 TO JUNE 30, 2016

MARKET PERFORMANCE OVERVIEWSTOCK MARKET FLUCTUATIONS AND LOW CURRENT BOND YIELDS WERE THE MAIN THEMES ON THE FINANCIAL MARKETS IN THE FIRST HALF. WE SHALL NOW EXAMINE THE SITUATION IN GREATER DETAIL.

/ Fixed-income securities

Against all expectations, bonds generated a very attractive total return, considering the fact that interest rates continued to fall in the first quarter. Very low rates in Europe are putting downward pressure on North American rates. In addition, the bond market seems to have become detached from actual economic conditions. Our portfolio managers added value during the quarter.

/ Canadian equities

In mid-June, the Canadian stock market was up by around 8% year to date. The rebound in the price of oil had a positive impact, as did the strong performance of mining shares. Gold stocks, real estate trusts and utilities were among the leaders. Canadian banks posted better-than-expected results, and Canadian small caps picked up. Since our Canadian equity portfolios focus more on quality large caps, they underperformed the S&P/TSX Composite Index.

/ Global equities

South American stock markets were the best performers, with Brazil and Peru doing particularly well because of their exposure to resources. U.S. equity markets were up by only about 2.5%, while European markets were hit by the U.K.’s decision to leave the European Union. As for Japan, its market reacted negatively to the inaction of its central bank, which did not put in place new quantitative easing measures. Although the absolute returns on global equities in Canadian dollar terms were negative, the sub-managers as a whole outperformed their benchmark indices and added value to the portfolios. The Canadian dollar appreciated against the U.S. dollar and the euro, reducing the return on foreign equities for Canadian investors.

AND IF DONALD TRUMP BECOMES PRESIDENT?Who would have thought six months ago that Donald Trump would become the Republican nominee in the next U.S. presidential elections? The financial markets are very concerned about this possibility, questioning the candidate’s economic program and his incendiary comments concerning renegotiating NAFTA, establishing tariffs on Chinese imports, and deporting illegal immigrants.

Observers believe that the protectionist measures he advocates could be extremely harmful to the U.S. economy and to that of its trading partners, like Canada. The current situation is due in large part to the rise of the populist movement in the U.S., which paved the way for the billionaire’s candidacy. Another observation: Donald Trump and Hillary Clinton are the least popular and least liked presidential candidates ever. We’ll have to see how the markets react to the choice of the American people.

WILL CHINA REGAIN ITS MOMENTUM?The situation in China undoubtedly represents one of the biggest systemic risks, although the Chinese authorities say there is no reason to be concerned about the high debt levels observed, as long as growth remains within a reasonable range.

The Bank of China injected considerable liquidity and cut interest rates in the first quarter, but it did not implement other easing measures subsequently, which did not reassure investors.

Faced today with a depreciated currency and substantial industrial overcapacity, China must take steps to refocus its economy on more productive and more profitable sectors. But this type of shift takes time, so patience is in order.

TWO RISKS TO CONSIDER

Source: Bloomberg

*In Canadian dollars, unless otherwise indicated.

VALU

E IN

CAD

2016-01 2016-02 2016-03 2016-04 2016-05 2016-06

110

105

100

95

90

INDICES

S&P/TSX

S&P 500 US

S&P 500

MSCI World

NEGATIVE-YIELD GOVERNMENT BONDS: WHO WOULD HAVE BELIEVED IT?

Since 2008, the major central banks have put in place unconventional monetary policies in order to stimulate borrowing and economic growth. They have lowered their policy rates to unprecedented levels, while injecting huge amounts of liquidity by means of massive quantitative easing programs.

With the mitigated success of these measures, the Bank of Japan and the European Central Bank have used a new tool, which may appear surprising at first glance: negative interest rate policies. They believe that offering below-zero yields on their sovereign bonds will result in a higher volume of bank loans and, consequently, an increase in spending and in inflation.

Other central banks follow suit

As illustrated in the table to the left, many other central banks have used this strategy, although it has yet to produce the desired results. It would seem that in a context of negative rates, consumers are more interested in saving and cutting back on their spending. Consequently, inflation expectations remain low in countries that have adopted this approach. The situation is also affecting the profitability of banks and has not been conducive to increased consumer lending.

As long as global growth and inflation remain at current levels, interest rates will stagnate. Only a strong economic recovery over many quarters could reverse this trend, and central banks will undoubtedly put in place other initiatives to achieve this.

The opinions expressed here do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Advisor.Professionals’ Financial – Mutual Funds Inc. and Professionals’ Financial – Private Management Inc. are wholly owned by Professionals’ Financial Inc. Professionals’ Financial – Mutual Funds Inc. is a portfolio manager and a mutual fund dealer which manages the funds of its family of funds and which offers financial planning advisory services. Professionals’ Financial – Private Management Inc. is an investment dealer member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF) which offers portfolio management services.

ACTUAL LEVEL VARIATION

June 30, 2016 1st quarter 2nd quarter 6 months

Interest Rates

CAD 10 years 1.06 -0.17 -0.17 -0.33

USD 10 years 1.47 -0.50 -0.30 -0.80

Currency

CAD -> USD 0.77 6.93% -0.40% 6.49%

EUR -> USD 1.11 4.74% -2.71% 1.91%

Commodities

WTI Oil 48.33 3.51% 26.06% 30.48%

GOLD 1,322.20 16.14% 7.26% 24.57%

MARKET INDICESNorth America (CAN$)

S&P/TSX (T.R.) 14,065 4.54% 5.07% 9.84%

S&P 500 (T.R.) 2,099 -5.22% 2.87% -2.50%

International (CAN$)

MSCI World (T.R.) 4,535 -6.81% 1.42% -5.48%

MSCI Europe (T.R.) 5,169 -8.82% -2.29% -10.91%

MSCI AC Asia Pacific (T.R.) 258 -8.05% 1.11% -7.03%

NIKKEI Japan 15,576 -11.72% 1.35% -10.53%

MSCI Emerging Markets (T.R.) 364 -1.13% 1.07% -0.08%

Bond

FTSE/TMX Universe 1,035 1.39% 2.62% 4.05%

Source: Bloomberg

BOND YIELDS OVER 10 YEARS2 years 5 years 10 years

Portugal 0.56% 1.80% 2.99%

United States 0.58% 1.00% 1.47%

Italy -0.11% 0.29% 1.26%

Spain -0.20% 0.18% 1.16%

Canada 0.52% 0.57% 1.06%

United Kingdom 0.10% 0.35% 0.87%

Sweden -0.63% -0.29% 0.25%

France -0.54% -0.35% 0.18%

Netherlands -0.60% -0.42% 0.08%

Germany -0.66% -0.57% -0.13%

Japan -0.30% -0.31% -0.22%

Switzerland -1.07% -1.00% -0.58%

Source: RBC Capital Markets