Global Investment Outlook The Year Ahead RBC Global Asset Management

T HE G LOBAL I NVESTMENT O UTLOOK
RBC Investment Strategy Committee
NEW YEAR 2010
THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 1

THE RBC INVESTMENT STRATEGY COMMITTEE
The RBC Investment Strategy Committee consists of senior investment professionals drawn
from individual client focused business units within RBC Financial Group. The Committee
regularly receives economic and capital markets related input from internal and external
sources. Important guidance is provided by the Committee’s regional advisors (North
America, Europe, Far East), from the Global Fixed Income & Currencies Subcommittee and
from the global equity sector heads (financials and healthcare, consumer discretionary
and consumer staples, industrials and utilities, energy and materials, telecommunications
and technology). From this it builds a detailed global investment forecast looking one year
forward.
The Committee’s view includes an assessment of global fiscal and monetary conditions,
projected economic growth and inflation, as well as the expected course of interest rates,
major currencies, corporate profits and stock prices.
From this global forecast, the RBC Investment Strategy Committee develops specific
guidelines that can be used to manage portfolios.
These include:
the recommended mix of cash, fixed income instruments, and equities
the recommended global exposure of fixed income and equity portfolios
the optimal term structure for fixed income investments
the suggested sector and geographic make-up within equity portfolios
the preferred exposure to major currencies
Results of the Committee’s deliberations are published quarterly in The Global Investment
Outlook.
an
THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

CONTENTS
EXECUTIVE SUMMARY 2
The Global Investment Outlook
Daniel E. Chornous, CFA – Chief Investment Officer, RBC Global Asset Management
Allan Seychuk, CFA – Economist & Institutional Portfolio Manager,
Phillips, Hager & North Investment Management Ltd.
Sarah Riopelle, CFA – Portfolio Manager,

RBC Asset Management Inc.
ECONOMIC & CAPITAL MARKETS FORECASTS 4

RECOMMENDED ASSET MIX 5

CAPITAL MARKETS PERFORMANCE 8

Milos Vukovic, MBA, CFA – V.P. Investment Policy, RBC Asset Management Inc.
GLOBAL ECONOMIC OUTLOOK 10

Patricia Croft – Chief Economist, RBC Global Asset Management
GLOBAL INVESTMENT OUTLOOK 16

Global Economy on the Path to Normalcy
Daniel E. Chornous, CFA – Chief Investment Officer, RBC Global Asset Management
Allan Seychuk, CFA – Economist & Institutional Portfolio Manager,
GLOBAL FIXED INCOME MARKETS 43

Robin Gullason, CFA – V.P., Fixed Income Portfolio Advisory Group, RBC Dominion Securities Inc.
CURRENCY MARKETS 50
Dagmara Fijalkowski, MBA, CFA – Head, Global Fixed Income and Currencies (Toronto and London),
REGIONAL EQUITY MARKET OUTLOOK

United States 60
Raymond Mawhinney – Senior V.P., U.S. & Global Equities, RBC Asset Management Inc.
Brad Willock, CFA – V.P. & Senior Portfolio Manager, RBC Asset Management Inc.
Canada 62
Stuart Kedwell, CFA – Senior V.P. & Senior Portfolio Manager, RBC Asset Management Inc.
Europe 64
Dominic Wallington – Chief Investment Officer, RBC Asset Management UK Limited
Asia 66
Yoji Takeda – Director & V.P., Asian Equities, RBC Investment Management (Asia) Limited
RBC INVESTMENT STRATEGY COMMITTEE 68

DISCLAIMER 71

DANIEL E. CHORNOUS, CFA
Chief Investment Officer– RBC Global Asset Management
ALLAN SEYCHUK, CFA
Economist & Institutional Portfolio Manager –
SARAH RIOPELLE, CFA

Portfolio Manager – RBC Asset Management Inc.
EXECUTIVE SUMMARY
THE ECONOMIC RECOVERY IS WELL UNDERWAY AND THE NECESSARY PRECONDITIONS FOR A SUSTAINED REBOUND
CONTINUE TO FALL INTO PLACE. EPIC DOSES OF MONETARY AND FISCAL STIMULUS HAVE YET TO HAVE THEIR FULL
IMPACT ON THE ECONOMY AND WILL REMAIN IN PLACE, SUPPORTING MARKETS, FOR SEVERAL MORE QUARTERS.
DESPITE THE IMPRESSIVE REBOUND IN EQUITY AND CREDIT MARKETS SINCE MARCH, MEMORIES OF THE CRISIS
REMAIN FRESH AND MANY INVESTORS ARE MAINTAINING A VERY CAUTIOUS STANCE. DESPITE THE RECOVERY
IN PRICES SINCE MARCH, EQUITY MARKET VALUATIONS REMAIN UNUSUALLY ATTRACTIVE. THE WINDOW OF
OPPORTUNITY REMAINS OPEN, AS THE GLOBAL ECONOMY REMAINS ON THE PATH TO NORMALCY, AND WE HAVE
NOTCHED OUR EXPOSURE TO STOCKS SLIGHTLY HIGHER TO TAKE EVEN GREATER ADVANTAGE OF IT.
OUTLOOK HINGES ON growth. Despite this relatively recovery to growth of 1.10% next
SELF-SUSTAINING RECOVERY optimistic longer-term outlook, year. Finally, we have boosted our
we’d be the fi rst to agree that some 2009 GDP forecast for Japan to
The deepest U.S. recession since the key conditions for a self-sustaining -5.50%, increasing to +1.00% in 2010.
Great Depression came to an end recovery remain somewhat
sometime this past spring or early elusive. In particular, the U.S. job Inflation remains low and
summer. New sources of economic market remains weak and credit contained. However, there are
growth are surfacing. Home prices availability continues to be severely several signs that suggest today’s
are no longer falling, and both constrained for all but the largest benign inflation environment
buyers and builders are re-emerging. and most creditworthy borrowers. may not last beyond 2010. As last
While we are uncomfortable Additionally, there are broader year’s sharp drop in energy prices
with the sheer volume of homes concerns about the ability of falls out of the yearly inflation
moving through the foreclosure authorities to reduce their support figures, headline CPI is expected to
pipeline, the fact remains that the for the economy without tipping rebound into positive territory. In
root of the credit crisis – the bust it back into recession, and how addition, the rebound in commodity
in housing – is fi nally stabilizing. they go about timing their efforts. prices and the added impact from
Inventory re-stocking is another Finally, the ballooning debt burden a falling dollar raising the cost
potential source of growth in the casts a long, dark shadow over the of imports are both expected to
coming quarters. As companies future potential of the U.S. economy push inflation upward. We will
see the economy stabilize and and for many major industrialized be monitoring these metrics
sales pick up, they will have nations in Europe and Asia. closely for signs that the trillions
less and less motivation to pare in global monetary and fiscal
inventories. In fact, before long, stimulus are pushing expectations
inventory levels will have to be MODEST GROWTH, for future price growth higher.
rebuilt in order to meet demand. CONTAINED INFLATION
SHORT-TERM WEAKNESS,
The main economic issue is how We have raised our U.S. growth
close the U.S. is to a self-sustaining forecast to -2.60% for 2009 and BUT DOLLAR SHOULD FIND
recovery. In our view, even in the 1.80% for 2010. Our expectation SUPPORT IN MEDIUM TERM
absence of government support, for growth in Canada is lowered
the likelihood of the economy to -2.50% in 2009, while the 2010 The U.S. dollar has continued
falling back into recession is low forecast remains unchanged at to grind lower as dollar-bearish
given the building and broadening 2.00%. We expect U.K. GDP to stories dominate the media. The
momentum in the sources of decline by 4.20% in 2009, with a list of negative arguments is long
2 THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

EXECUTIVE SUMMARY • DANIEL E. CHORNOUS, CFA • ALLAN SEYCHUK, CFA • SARAH RIOPELLE, CFA
and well disseminated, with the and confidence in the recovery, key reasons. First, while earnings
market positioned for further dollar pressure will build for central banks have already rebounded sharply
weakness. While sheer momentum to send a message about vigilance on aggressive cost-cutting, they
may push the greenback lower in regarding future inflation. We look do not yet reflect the increase in
the short term, it should fi nd some for the fi rst, minor rate hikes to sales volumes that we think will
support in the medium term. Many begin in mid-2010, but the bulk of occur with the improving economy.
developed-market currencies are the move in global short rates above Second, U.S. stocks remain very
getting extremely overvalued. At the current levels remains a 2011 story. attractively valued and are close
same time, many emerging-market to their greatest discount to fair
governments continue to prevent value in a half-century. Global
their domestic currencies from EXPECT LONG-BOND equity markets appear to be
appreciating, and in the process YIELDS TO DRIFT HIGHER even more deeply undervalued.
are accumulating large foreign- Though the current economic
exchange reserves. This cannot As the threat to the fi nancial system environment is characterized
continue indefi nitely, and emerging- dissipates and economic growth by a higher-than-usual level of
market currencies will eventually is gradually restored, we expect uncertainty, we are confident
have to appreciate. In the meantime, bond yields to move higher. A rise markets will eventually value
the negative correlation between in inflation expectations and the companies based on their earnings
the dollar and the stock market in demand for “real” returns present power through the cycle instead
2009 should be put to the test once a risk to fi xed-income markets and of during an economic trough.
the Fed begins a new tightening set the stage for very limited total-
cycle. In anticipation of that change, return prospects for government
currencies will be very sensitive bonds in the quarters ahead. We INCREASE OVERWEIGHT IN
to shifting rate expectations in look for U.S. 10-year yields to reach EQUITIES, LOWER CASH
2010. Fed hikes should support 4.25%, while yields in the U.K.
the dollar in the medium term. are forecast to be 4.75%. Yields in We have increased our overweight
Canada are expected to be 4.00%, in equities by 2.5 percentage
EXPECT SHORT RATES TO and our forecast for the Eurozone points to 62.5%, sourcing the
is unchanged at 3.75%. We expect funds from cash and leaving fi xed-
REMAIN AT RECORD LOWS Japanese yields to rise to 1.75%. income exposure unchanged. This
FOR NOW reflects our view that market and
economic signals are still pointing
Given the fragility of the recovery, EQUITY VALUATIONS to greater rewards from equities,
central banks are widely expected REMAIN ATTRACTIVE given attractive valuations, relative
to hold short-term interest rates to other asset classes. We remain
at rock-bottom levels for at least Equity markets have spent the past underweight bonds versus the
the next six months in North eight months in one of the strongest benchmark, as we believe that the
America, Europe and Japan. and most impressive rallies most likely longer-term direction
Monetary authorities will want to since the 1930s. Unfortunately, for yields is higher, while near-
be confident that the recovery is many investors have stayed on term total return prospects seem
self-sustaining before beginning the sidelines, waiting for an limited. For a balanced global
the long trek back to a neutral appropriately sized correction as an investor, we recommend an asset
policy setting. In our view, they are entry point, only to watch markets mix of 62.5% equities (allowed
likely to delay as long as possible climb inexorably higher. While range 40% to 70%), 35% bonds
provided inflation expectations we don’t deny that there is a risk (allowed range 30% to 60%), with
remain stable. Eventually, with of correction, we are increasing the balance of 2.5% in cash.
the return of sustained growth our overweight in equities for two

ECONOMIC & CAPITAL MARKETS FORECASTS
ECONOMIC FORECAST (RBC INVESTMENT STRATEGY COMMITTEE)
UNITED STATES CANADA EUROPE UNITED KINGDOM JAPAN CHINA

CHANGE CHANGE CHANGE CHANGE CHANGE CHANGE
NEW YEAR FROM NEW YEAR FROM NEW YEAR FROM NEW YEAR FROM NEW YEAR FROM NEW YEAR FROM
2010 FALL 2009 2010 FALL 2009 2010 FALL 2009 2010 FALL 2009 2010 FALL 2009 2010 FALL 2009
REAL GDP
2008A 1.10% 0.50% 0.80% 0.70% -0.70% 9.00%
2009E -2.60% 0.10 -2.50% (0.50) -3.80% 0.20 -4.20% (0.30) -5.50% 0.50 9.00% 0.50
2010E 1.80% 0.50 2.00% N/C 0.80% 0.30 1.10% (0.20) 1.00% 0.50 10.00% 0.40
CPI
2008A 3.80% 2.40% 3.30% 3.60% 1.30% 5.90%
2009E -0.40% N/C 0.40% (0.30) 0.50% N/C 2.00% 0.60 -1.20% N/C -0.70% N/C
2010E 1.90% 0.10 1.70% N/C 1.00% N/C 2.00% N/C -0.25% N/C 2.50% N/C
A = ACTUAL E = ESTIMATE
TARGETS (RBC INVESTMENT STRATEGY COMMITTEE)
FORECAST CHANGE FROM 1-YEAR TOTAL RETURN

NOV. 2009 NOV. 2010 FALL 2009 ESTIMATE (%)
CURRENCY MARKETS AGAINST USD
USD–CDA 1.06 1.12 (0.03) (5.5)
EURO–USD 1.50 1.35 0.07 (9.9)
USD–JPY 86.29 105.00 (3.00) (18.1)
GBP–USD 1.64 1.58 0.03 (3.8)
FIXED INCOME MARKETS
U.S. Fed Funds Rate 0.25 0.75 N/C 0.5
U.S. 10 Year Bond 3.20 4.25 N/C (3.2)
Canada Overnight Rate 0.24 1.00 N/C 0.6
Canada 10 Year Bond 3.22 4.00 0.25 (0.8)
Eurozone Repo Rate* 0.47 1.25 0.25 0.9
Eurozone 10 Year Bond* 3.48 3.75 N/C 2.5
U.K. Base Rate 0.50 1.25 0.25 0.9
U.K. 10 Year Gilt 3.52 4.75 0.50 (2.9)
Japan Overnight Call Rate 0.13 0.10 N/C 0.1
Japan 10 Year Bond 1.27 1.75 N/C (1.9)
EQUITY MARKETS
S&P 500 1096 1200 50 11.8
S&P/TSX Composite 11447 12500 750 12.0
MSCI Europe 1422 1575 100 14.6
FTSE 100 5191 5550 150 10.7
Nikkei 9274 10750 (750) 17.6
* GDP weighted average of Germany, France and Italy. Source: RBC AM

RECOMMENDED ASSET MIX
Asset mix – the allocation within further divided into recommended specific asset classes with a goal
portfolios to stocks, bonds and cash exposures to the variety of global of tilting portfolios toward those
– should include both strategic and fi xed income and equity markets. markets that offer comparatively
tactical elements. Strategic asset mix Our recommendation is targeted attractive near-term prospects.
addresses the blend of the major at the Balanced profi le where the
benchmark setting is 55% equities, This tactical recommendation for the
asset classes offering the risk/return
40% fi xed income, 5% cash. Balanced profi le can serve as a guide
tradeoff best suited to an investor’s
for movement within the ranges
profile. It can be considered to be
A tactical range of +/- 15% around allowed for all other profi les. If, for
the benchmark investment plan that
the benchmark position allows example, the recommended current
anchors a portfolio through many
us to raise or lower exposure to Continued on next page...
business and investment cycles
independent of a near-term view
of the prospects for the economy GLOBAL ASSET MIX
and related expectations for capital BENCHMARK PAST NEW YEAR SPRING SUMMER FALL NEW YEAR
POLICY RANGE 2009 2009 2009 2009 2010
markets. Tactical asset allocation
CASH 5.0% 1.5% – 16% 7.5% 5.0% 5.0% 5.0% 2.5%
refers to fine tuning around the
strategic setting in an effort to add BONDS 40.0% 25% – 54% 32.5% 35.0% 35.0% 35.0% 35.0%
value by taking advantage of shorter STOCKS 55.0% 36% – 65% 60.0% 60.0% 60.0% 60.0% 62.5%
term fluctuations in markets.
REGIONAL ALLOCATION
Every individual has differing return CWGBI* PAST NEW YEAR SPRING SUMMER FALL NEW YEAR
GLOBAL BONDS
expectations and tolerances for NOV. 2009 RANGE 2009 2009 2009 2009 2010
volatility, so there is no “one size fits North America 25.4% 9% – 46% 18.7% 24.3% 25.4% 19.9% 22.9%
all” strategic asset mix. Based on a Europe 45.0% 40% – 90% 48.6% 42.1% 49.5% 50.6% 50.0%
35-year study of historic returns and
Asia 29.6% 0% – 29% 32.6% 33.6% 25.1% 29.6% 27.1%
the volatility of returns (the range
Note: Based on anticipated 12-month returns in $US hedged basis
around the average return within MSCI** PAST NEW YEAR SPRING SUMMER FALL NEW YEAR
GLOBAL EQUITIES
which shorter-term results tend to NOV. 2009 RANGE 2009 2009 2009 2009 2010
fall), we have developed five broad North America 52.6% 15% – 60% 55.0% 56.0% 56.0% 53.0% 53.5%
profiles and assigned a benchmark Europe 32.1% 30% – 70% 31.0% 30.0% 31.0% 33.0% 33.0%
strategic asset mix for each. These
Asia 15.4% 10% – 39% 14.0% 14.0% 13.0% 14.0% 13.5%
profiles range from income through
balanced to aggressive growth. It GLOBAL EQUITY SECTOR ALLOCATION
goes without saying that as investors MSCI** RBC ISC RBC ISC CHANGE FROM WEIGHT vs.
accept increasing levels of volatility, NOV. 2009 FALL 2009 NEW YEAR 2010 FALL 2009 BENCHMARK
and therefore greater risk that the Energy 11.38% 11.00% 13.00% 2.00 114.24%
actual experience will depart from Materials 7.15% 8.00% 8.50% 0.50 118.88%
the longer-term norm, the potential
Industrials 10.44% 10.50% 10.75% 0.25 102.97%
for returns rises. The five profiles
presented below may assist investors Utilities 4.56% 3.25% 3.00% (0.25) 65.79%
in selecting a strategic asset mix best Consumer Discretionary 9.28% 10.25% 9.50% (0.75) 102.37%
aligned to their investment goals.
Consumer Staples 10.33% 10.00% 10.25% 0.25 99.23%
Each quarter, the RBC Investment Health Care 9.88% 9.75% 8.25% (1.50) 83.50%
Strategy Committee publishes a Financials 20.95% 21.00% 20.75% (0.25) 99.05%
recommended asset mix based on
our current view of the economy and Information Technology 11.60% 13.00% 13.00% N/C 112.07%
return expectations for the major Telecom. Services 4.43% 3.25% 3.00% (0.25) 67.72%
asset classes. These weights are * Citigroup World Global Bond Index **MSCI World Index Source: RBC Investment Strategy Committee

...Continued from previous page
equity exposure for the Balanced The value-added of tactical strategies returns and risk tolerances best
profile is set at 62.5% (i.e.: 7.5% above its are, of course, dependent on the degree suited to individual investors.
benchmark of 55% and part way toward to which the expected scenario unfolds.
its upper limit of 70% for equities), that Anchoring portfolios with a suitable
would imply a tactical shift of + 5.02% Regular review of portfolio weights strategic asset mix, and placing
to 25.02% for the Income profile (i.e.: is an essential part of the ultimate boundaries defining the allowed range for
success of an investment plan as it tactical positioning imposes a discipline
a proportionate adjustment above
that can limit the damage caused by
the benchmark equity setting of 20% ensures that current exposures are
swings in emotion that inevitably
within the allowed range of +/- 15%). aligned with the level of long-term
accompany both bull and bear markets.
1. Average Return: The average total return produced by the asset class over the period 1973 – 2008, based on monthly results.
2. Volatility: The standard deviation of returns. Standard deviation is a statistical measure that indicates the range around the
average return within which 2/3 of results will fall into, assuming a normal distribution around the long-term average.
VERY CONSERVATIVE
ASSET CLASS
BENCH-
RANGE
LAST CURRENT Very Conservative investors will seek income with
MARK QUARTER RECOMMENDATION
CASH & CASH EQUIVALENTS 5% 0-15% 5.4%
maximum capital preservation and the potential for
2.8%
modest capital growth, and be comfortable with small
FIXED INCOME 75% 55-95% 71.0% 72.2%
fluctuations in the value of their investments. This
TOTAL CASH & FIXED INCOME 80% 65-95% 76.4% 75.0%
portfolio will invest primarily in fixed-income securities
CANADIAN EQUITIES 10% 5-20% 11.8% 12.6%
and a small amount of equities to generate income while
U.S. EQUITIES 5% 0-10% 5.9% 6.3%
providing some protection against inflation. Investors
INTERNATIONAL EQUITIES 5% 0-10% 5.9% 6.1%
who fit this profile generally plan to hold their investment
TOTAL EQUITIES 20% 5-35% 23.6% 25.0%
for the short to medium term (minimum one to five years).
RETURN VOLATILITY
35-YEAR AVERAGE 9.8% 6.4%
LAST 12 MONTHS AVERAGE 11.7% 5.2%
CONSERVATIVE
ASSET CLASS
BENCH-
RANGE
LAST CURRENT Conservative investors will pursue modest income
and modest capital growth with reasonable capital
CASH & CASH EQUIVALENTS 5% 0-15% 5.2% 2.6%
preservation, and be comfortable with moderate
FIXED INCOME 60% 40-80% 54.9% 55.4%
fluctuations in the value of their investments. The
portfolio will invest primarily in fixed-income
securities with some equities to achieve more
U.S. EQUITIES 10% 0-15% 11.4% 12.1%
consistent performance and provide a reasonable
INTERNATIONAL EQUITIES 10% 0-15% 11.4% 11.7% amount of safety. The profile is suitable for investors
TOTAL EQUITIES 35% 20-50% 39.9% 42.0% who plan to hold their investment over the medium
RETURN VOLATILITY to long term (minimum five to seven years).

BALANCED
ASSET CLASS
BENCH-
RANGE
LAST CURRENT The Balanced portfolio is appropriate for investors
5.0%
seeking balance between long-term capital growth
and capital preservation, with a secondary focus on
FIXED INCOME 40% 20-60% 35.0% 35.0%
modest income, and who are comfortable with moderate
fluctuations in the value of their investments. More than
half the portfolio will usually be invested in a diversified
U.S. EQUITIES 20% 10-30% 21.8% 23.0%
mix of Canadian, U.S. and global equities. This profile is
suitable for investors who plan to hold their investment
TOTAL EQUITIES 55% 40-70% 60.0% 62.5%
for a medium to long-term (minimum five to seven years).
RETURN VOLATILITY
GROWTH
ASSET CLASS
BENCH-
RANGE
LAST CURRENT Investors who fit the Growth portfolio profile will
3.0%
seek long-term growth over capital preservation
and regular income, and be comfortable with
FIXED INCOME 25% 5-40% 21.2% 21.1%
considerable fluctuations in the value of their
investments. This portfolio primarily holds a
diversified mix of Canadian, U.S. and global equities
U.S. EQUITIES 25% 15-35% 27.0% 27.7%
and is suitable for investors who plan to invest for
the long term (minimum seven to ten years).
TOTAL EQUITIES 70% 55-85% 75.8% 76.7%
RETURN VOLATILITY
AGGRESSIVE GROWTH
ASSET CLASS
BENCH-
RANGE
LAST CURRENT A ggressive Growth investors seek maximum long-term
growth over capital preservation and regular income,
CASH & CASH EQUIVALENTS 5% 0-15% 3.0% 2.0%
and are comfortable with significant fluctuations
FIXED INCOME 0% 0-10% 0.0% 0.0%
in the value of their investments. The portfolio is
almost entirely invested in stocks and emphasizes
exposure to international equities. This investment
U.S. EQUITIES 30% 15-45% 30.7% 31.3%
profile is suitable only for investors with a high risk
tolerance and who plan to hold their investments
TOTAL EQUITIES 95% 80-100% 97.0% 98.0%
for the long term (minimum seven to ten years).
RETURN VOLATILITY

MILOS VUKOVIC, MBA, CFA
CAPITAL MARKETS PERFORMANCE V.P. Investment Policy – RBC Asset Management Inc.
The U.S. dollar declined against EXCHANGE RATES (USD RETURNS)

all four major currencies between PERIODS ENDING NOVEMBER 30, 2009
September 1, 2009, and November Current 3 months YTD 1 year 3 years 5 years
USD (%) (%) (%) (%) (%)
30, 2009. The greenback dropped
USD–CAD 1.0556 -3.55 -13.21 -14.77 -2.57 -2.31
most against the yen, depreciating
7.1%, while posting declines USD–EUR 0.6663 -4.53 -6.98 -15.42 -4.10 -2.41
of 4.5% against the euro, 3.6% USD–GBP 0.6079 -1.06 -11.31 -6.35 6.11 3.04
versus the Canadian dollar and USD–JPY 86.4496 -7.11 -4.73 -9.54 -9.27 -3.43
1.1% against the British pound. Note: all changes above are expressed in US dollar terms
Over the latest 12-month period, CANADA (CAD $ BASIS)

the U.S. dollar has fallen 15.4% PERIODS ENDING NOVEMBER 30, 2009
versus the euro, 14.8% versus the 3 months YTD 1 year 3 years 5 years
Fixed Income Markets: Total Return (%) (%) (%) (%) (%)
Canadian dollar, 9.5% versus the
DEX Universe Bond Index 2.19 6.93 10.01 5.40 5.75
yen and 6.4% against the pound.
U.S. (USD $ BASIS)
PERIODS ENDING NOVEMBER 30, 2009
Global equity markets turned in
3 months YTD 1 year 3 years 5 years
another decent three months in Fixed Income Markets: Total Return (%) (%) (%) (%) (%)
the period ended November 30,
Citigroup US 2.08 -1.15 2.23 6.77 5.61
2009, adding to the year’s already
Barclays Capital Agg. Bond Index TR 2.86 7.61 11.63 6.40 5.49
significant gains. Most global fi xed-
income markets also performed GLOBAL (USD $ BASIS)
well, with the continued decline PERIODS ENDING NOVEMBER 30, 2009
in the U.S. dollar helping to fuel 3 months YTD 1 year 3 years 5 years
Fixed Income Markets: Total Return (%) (%) (%) (%) (%)
the gains. The DEX Universe
Citigroup WGBI 5.02 10.07 17.04 8.47 5.99
Bond Index, a measure of the
performance of the broad Canadian Citigroup Europe 5.68 14.11 24.54 8.14 6.36
bond market, returned 2.2% the Citigroup Japan 8.40 5.79 13.43 12.88 5.28
Note: all rates of return presented for periods longer than 1 year are annualized
past three months, measured in Source: Bloomberg/MSCI
local currency. During this period,

the Citigroup World Government in line with other major equity cap stocks, though outperformance
Bond Index gained 5.0% in U.S. markets, while the 12-month return versus the S&P 500 reversed.
dollar terms. The European bond was 27.8%. Gains in the largest The S&P 400 index, a measure of
market gained 5.7% measured by companies in the index, based on performance for mid cap, climbed
the Citigroup Europe Total Return market capitalization, were weaker 5.0% during this period, while the
Index, while Japanese bonds gained at 4.9% for the three-month period S&P 600 index, a gauge of small cap
8.4% measured by the Citigroup and 24.7% in the past 12 months. performance, gained 1.8%. Since
Japan Total Return Index, both in The smallest companies in the December 1, 2008, the S&P 400 has
U.S. dollar terms. U.S. bonds, as index posted a return of 17.4% for gained 35.5%, and the S&P 600 has
measured by the Citigroup U.S. Total the recent three-month period and gained 22.6%. Over the past three
Return Index, returned 2.1%. During 62.4% for the 12-month period, as months, the Russell 3000 Value
the past 12 months, European measured by the S&P/TSX Small Cap Total Return Index gained 5.9%,
bonds have performed best, gaining Index. The S&P 500 Composite Index compared with an 8.6% return
24.5%, while Japan gained 13.4% gained 7.9% over the three months for the Russell 3000 Growth Total
and the U.S. 2.2%, with declines ended November 30, 2009, pushing Return Index. The Russell value-
in the U.S. dollar accounting for gains over the past 12 months to tilted index has underperformed its
most of the differences. The S&P/ 25.4%. The period September 1, growth counterpart on a one-year
TSX Composite Index returned 6.1% 2009, to November 30, 2009, was basis, with the value index recording
in the latest three-month period, also good for U.S. mid cap and small

CAPITAL MARKETS PERFORMANCE • MILOS VUKOVIC, MBA, CFA
a gain of 19.2%, compared with a CANADA (CAD $ BASIS)

35.1% rise for the growth measure. PERIODS ENDING NOVEMBER 30, 2009
3 months YTD 1 year 3 years 5 years
Equity Markets: Total Return (%) (%) (%) (%) (%)
Most major global equity indices
S&P/TSX Composite 6.09 31.22 27.75 -0.67 7.60
continued to climb, albeit at a
S&P/TSX 60 4.94 29.10 24.67 0.13 8.77
slower pace than in the previous
S&P/TSX Small Cap 17.35 52.50 62.36 -5.42 1.17
three-month period. The MSCI
World Index gained 6.3% in the
three months ended November U.S. (USD $ BASIS)
30, 2009. Gains for major world 3 months YTD 1 year 3 years 5 years
regions ranged from a loss of 5.2% Equity Markets: Total Return (%) (%) (%) (%) (%)
for the MSIC Japan to a 13.9% gain S&P 500 7.91 24.07 25.39 -5.79 0.71
for the MSCI Emerging Markets S&P 400 5.01 29.27 35.53 -3.96 2.86
Index. The MSCI UK led the major S&P 600 1.75 15.59 22.64 -7.39 0.13
European markets, returning 7.1% RUSSELL 3000 Value 5.94 17.17 19.23 -8.94 -0.04
in the three-month period, followed
RUSSELL 3000 Growth 8.63 32.40 35.13 -3.08 1.66
by MSCI Germany at 6.9%. In the
NASDAQ Composite Index 6.75 35.98 39.65 -4.10 0.46
12-month period, the MSCI UK
Index rose 35.6%, and the MSCI
GLOBAL (USD $ BASIS)
Germany climbed 39.5%, measured PERIODS ENDING NOVEMBER 30, 2009
in U.S. dollars. The MSCI Europe 3 months YTD 1 year 3 years 5 years
returned 40.8% in the period, while Equity Markets: Total Return (%) (%) (%) (%) (%)
the MSCI Emerging Markets made a MSCI World* 6.31 27.70 31.79 -5.56 2.41
remarkable recovery, gaining 85.1%. MSCI EAFE* 4.58 29.91 37.72 -5.52 4.13
MSCI Europe* 6.43 33.81 40.83 -5.55 4.48
All 10 global equity sectors have MSCI Pacific* 1.01 22.58 31.77 -5.46 3.41
posted positive returns since the last MSCI UK* 7.13 39.63 35.61 -7.11 2.50
publication of the Global Investment
MSCI France* 5.83 28.79 39.78 -5.03 4.94
Outlook, with the Materials sector
MSCI Germany* 6.85 23.66 39.49 -1.96 7.35
performing best. This was followed
by Energy and Consumer Staples, MSCI Japan* -5.17 5.44 14.01 -9.85 0.04
which returned 10.3% and 9.4%, MSCI Emerging Markets* 13.90 71.72 85.12 5.29 15.70
* Net of Taxes
respectively. The laggards were the
Financials sector, which gained less GLOBAL EQUITY SECTORS (USD $ BASIS)
than 1% after two strong quarters, 3 months YTD 1 year 3 years 5 years
and Utilities, which returned 2.1%. Sector: Total Return (%) (%) (%) (%) (%)
Since December 1, 2008, the Utilities Energy 10.28 24.72 20.46 -0.50 8.46
sector performed worst, with a gain Materials 13.67 57.22 66.04 2.49 10.30
of 7.9%. The Telecommunication Industrials 6.89 24.39 30.67 -5.73 2.24
Services sector was next, with a
Utilities 2.14 3.31 7.94 -3.09 7.34
gain of 18.7%. The best performing
Consumer Discretionary 5.71 34.36 42.32 -7.87 -0.42
sectors for the 12-month period
Consumer Staples 9.37 20.49 23.12 3.91 7.66
were Materials and Information
Technology, which returned Health Care 7.72 16.47 25.07 -1.46 3.84
66.0% and 48.4%, respectively. Financials 0.63 32.53 34.89 -16.76 -4.15
Information Technology 6.41 44.21 48.41 -2.35 1.90
Telecommunication Services 7.31 12.54 18.73 -1.61 2.44
Note: all rates of return presented for periods longer than 1 year are annualized Source: Bloomberg/MSCI

PATRICIA CROFT,
GLOBAL ECONOMIC OUTLOOK Chief Economist – RBC Global Asset Management
GLOBAL RECOVERY EXHIBIT 1. OECD Leading Economic Indicator and Industrial Production
EXPANDING – KEY ISSUE IS
SUSTAINABILITY 10.0 6.0
4.0
5.0
The world economic recovery 2.0
Annual % Change
Annual % Change
continues to unfold, supported 0.0 0.0
by a powerful inventory cycle and -2.0
-5.0
epic policy responses enacted by -4.0
governments and central banks -10.0 -6.0
in the wake of the financial crisis. -8.0
-15.0
Led by China, most developed and -10.0
Source: Organization for Economic Cooperation & Development
developing economies returned -20.0 -12.0
to growth in the third quarter. The 1998 2000 2002 2004 2006 2008 2010 2012
list included much of Continental Industrial production (LHS) Leading economic indicator (RHS)
Europe, Japan, Brazil, Russia,
Canada and the U.S., although the
U.K. was the notable exception to EXHIBIT 2. Asia
Industrial Production
this trend as real GDP fell again.
Financial conditions continue to 30.0
improve as evidenced by the strong 20.0
global equity rally, which has been
10.0
Annual % Change
powered by emerging markets, firmer

0.0
commodity prices, narrower credit
spreads and a flurry of M&A activity. -10.0
-20.0
With recovery now underway, -30.0
the debate has shifted to the -40.0
sustainability of the economic Source: National Statistical Agencies
-50.0
rebound and the critical issue of
Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10
exit strategies. The crucial challenge Taiwan Korea Thailand Singapore
will be for central bankers and
governments to unwind the massive
policy stimulus put in place during In November, the OECD raised the production will require evidence of
the crisis without inadvertently overall 2010 growth forecast for its 30 a sustainable economic recovery,
triggering new problems. If stimulus member countries to 1.9% from 0.7%. supported by stronger domestic
is withdrawn too quickly, the risk of Industrial production has rebounded demand rather than by government
a double dip in the economy rises strongly in Asia, in particular, led by policy action (exhibits 1 and 2).
considerably. However, if policy were countries with strong trading ties
to remain too loose for too long, the to China such as Taiwan and South
risk of higher inflation and asset Korea, and Latin American output is WHERE DO WE GO
bubbles increases significantly. also recovering. Production is playing FROM HERE?
catch up, driven by an increase in
Evidence of a V-shaped recovery in demand coupled with low levels While the recovery itself is
world trade and industrial production of inventories, which were slashed uncontestable, debate rages as to
abounds, while leading indicators during the deep synchronized where the world economy is headed
have also moved sharply higher global recession as demand and in 2010 – rarely has there been such a
from extremely depressed levels. credit dried up. Further gains in divergence of opinion in this regard.

GLOBAL ECONOMIC OUTLOOK • PATRICIA CROFT
Key to the recovery is the outlook EXHIBIT 3. China

for the G2 – China and the U.S. Real GDP Growth
China’s economy has rebounded
quickly, supported by sizeable and 16
timely government stimulus that 14 Source: National Bureau of Statistics of China, PH&N
Cumulative % Change/QoQ Ann.

has resulted in soaring growth in 12
money supply and bank credit,
10
raising some concerns of a possible
bubble in residential real estate and 8
strains on the banking system. Net 6
exports remain a drag on growth, 4
with strength centered in fi xed
2
investment and consumer spending.
In our view, China’s recovery is 0
durable – we expect real GDP growth 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
this year of around 9%, followed
by a 10% gain in 2010 (Exhibit 3).
Chinese policy is increasingly EXHIBIT 4. The Great Debate
directed at shifting the source of
economic growth away from exports 3. Robust
Output
and toward domestic demand. The Recovery Actual Output
recent softening of the government’s Boom

stance in considering a gradual 4. Growth
Recession
appreciation in the renminbi
is in line with this objective.
Trend Output
Bust 2. Stagnation
ODDS OF A
DOUBLE DIP QUITE LOW “Green Shoots ” 1. Double-Dip
Recession
While China’s recovery appears Time

Source: Financial Times
to be on track, this is not the case
in the U.S. In our view, there are
four scenarios that may play out the single largest risk to the outlook aggressively responded to the credit
over the next 12 to 18 months and will adjust our probabilities and economic crisis and have made
for the U.S. economy (Exhibit 4). as the cycle proceeds. However, it clear that they will maintain their
The fi rst scenario is the dreaded authorities are keenly aware of the accommodative stance for some
double dip – a short recovery from complexity and importance of the time. For example, the government
a prolonged recession followed by task at hand and have committed recently extended the $8,000 fi rst-
a relapse into economic decline. to sustaining growth at any cost. time homebuyers tax credit to April
This outcome is certainly possible 2010 and is applying it to existing
but not highly probable, and we A second scenario is an era of homeowners who wish to trade
would assign odds of less than 10% economic stagnation a la Japan, up. Unemployment insurance
that a renewed recession takes whereby the U.S. economy benefits have also been extended
hold. Double dips are quite rare and recovers and then treads water for to people who have exhausted
require two elements: either a shock a prolonged period. Once again, existing state and federal benefits.
to the economic system or a policy this is possible, but unlikely (a 10%
mistake. We feel a policy mistake is probability), as U.S. officials have

BASE CASE: EXHIBIT 5. U.S. Recessions

A HALF-SPEED RECOVERY Companies Quick to Shed Labour This Cycle
CUMULATIVE % CHANGE HOURS
Our base case, and the scenario with START END GDP EMPLOYMENT WORKED PRODUCTIVITY
by far the highest odds of unfolding AUG-57 APR-58 3.1 3.4 N/A 1.6
(60%), is the growth recession – or APR-60 FEB-61 0.5 1.4 N/A 0.5
as we called it – the half-speed DEC-69 NOV-70 0.2 0.8 -3.9 2.8
recovery. Economic growth will NOV-73 MAY-75 2.4 1.5 -6.7 2.0
continue to be restrained by JAN-80 JUL-80 2.2 0.6 -3.0 -1.1
numerous challenges including the JUL-81 NOV-82 2.6 2.8 -5.6 -0.8
weak labour market, deleveraging, JUL-90 MAR-91 1.4 1.0 -2.1 -0.7
credit restraint and the inevitable
MAR-01 SEP-01 0.4 0.6 -1.2 2.4
policy reversal that we foresee
DEC-07 SEP-09 3.0 5.2 -8.6 6.2
beginning in earnest in 2011.
These same factors will weigh on AVERAGE -1.7 -2.0 -4.4 1.4
the recovery in Europe, while the Source: BEA, BLS
weaker pound should prove to be a
positive factor for the U.K. Japan's levels and credit to become more of the economic scenarios: the U.S.
economy expanded by just 1.3% readily available, particularly labour market, central-bank exit
in the third quarter and remains for small and medium-sized strategies and the availability of
in the grip of deflation, which the businesses. A positive feedback loop credit (for details see page 26). The
Bank of Japan predicts will persist is underway, with higher equity U.S. unemployment rate climbed
for the next two years. In contrast, prices and modest house-price gains to 10% in November 2009 from less
Canada’s economic prospects are supporting some improvement in than 5% before the downturn, with
relatively bright, in part owing to consumer confidence, net worth 7.2 million net job losses during the
the health of the country's fi nancial and consumer spending from very recession. This is the most severe
system and manageable fiscal depressed recessionary lows. A increase in the unemployment
deterioration, but challenges lie robust recovery is plausible and rate and the greatest number
ahead. The strength of the Canadian in line with the strong historical of job losses in any recession of
dollar is a major source of concern correlation between the depths the postwar period. The true
for the Bank of Canada, threatening of the economic downturn and unemployment rate (including
both the export sector and the the strength of the subsequent involuntary part-time workers and
bank’s inflation projections. recovery. However, economic cycles discouraged workers who have
associated with fi nancial crises left the labour force) is a daunting
Upside risks to our base case tend to exhibit lackluster recoveries, 17.2%. The average duration of
forecast are also evident, and in part as the provision of credit unemployment sits at a record 28.5
the fourth scenario captures this remains constrained, and the weeks and the average workweek at
possibility in the form of a robust cost of the increased federal debt a near record low 33.2 hours. Long-
recovery. This possibility is unlikely burden weighs on the economy. term unemployment (defi ned as
(20% odds), however, because being out of work for six months or
numerous obstacles still stand in CHALLENGES: LABOUR more) accounts for a record one-
the way of a powerful upturn. third of total unemployment.
MARKET, CREDIT
The economic recovery could AVAILABILITY AND EXIT Companies were very quick to
be strong and durable if the STRATEGIES shed labour as the recession took
unemployment rate was to quickly hold and may be quite cautious
decline, house prices were to post We will monitor three key areas to about staffi ng up in a half-speed
positive gains versus year-ago assess any shift in the probabilities recovery (Exhibit 5). However,

initial claims for unemployment EXHIBIT 6. Fed Hikes and the U.S. Unemployment Rate
insurance peaked in the spring
and are trending lower while
monthly job losses are subsiding. 20
The drop in payroll employment 18 Unemployment
Unemployment
peaks Dec '82,
averaged 104,000 per month in 16 Unemployment peaks in May '75, Fed starts hiking by Unemployment
Unemployment
Fed starts hiking peaks Jun '03,
14 peaks in Dec '70 and Mar '84 peaks
the four months ended November, by May '76 Jun '92, Fed starts Fed starts hiking by
12 again in Aug '71, Fed
hiking by Mar '94 Jul '04
compared to losses averaging starts hiking by
10
%
August '71
560,000 per month in the fi rst half 8
of the year. However, absorbing 6
new entrants into the workforce 4
requires an estimated 100,000 2
Source: Federal Reserve, BLS, PH&N
job gains per month, suggesting 0
the unemployment rate will rise 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
further. Indeed, claims have yet Fed Funds Rate Unemployment Rate
to fall into the range consistent
with gains in employment. The
soft labour market remains a England, along with the Bank of critical to monitor 2-year Treasury
major impediment to growth. Japan and the European Central yields as a harbinger of Fed rate
Bank, will undertake a timely hikes. Two-year yields have traded
The silver lining in the weak reduction in the elevated levels of in a narrow range of 70 to 90 basis
labour market is the remarkably assets currently on their balance points since the start of the year,
strong productivity performance. sheets. To date, central bankers in tune with the Federal Reserve’s
This cycle was unprecedented have been extremely transparent stated intention to keep interest
– a deep recession with a large in communicating their intentions rates low for a prolonged period.
drop in employment and hours in this regard. The critical issue for
worked resulted in a sharp gain the economy and capital markets To date, inflation expectations
in productivity. This came at the is the timing of interest rate hikes, remain fairly well anchored,
expense of labour income, however, particularly for the Federal Reserve. although the spread between
as hourly compensation (which The Reserve Bank of Australia has nominal and real yields on 5-year
includes wages and benefits) fell already increased overnight rates Treasury bonds has begun to rise.
to 0.5% year on year in the third three times as the economy is Gold prices have soared to record
quarter, a record low. Strong growing strongly and inflation has highs and are elevated not only in
productivity growth is a significant become a greater concern. Norway U.S. dollars but also when priced
benefit to corporate profit margins and Israel have followed suit. in other major currencies. This is
and earnings, but this will wane as Markets are currently pricing in one an indication that the rise in gold
companies begin to add to payrolls. Fed rate hike in the fi rst half of next is not related solely to concerns
year, but we feel this is premature. of a weaker U.S. dollar, but also
MARKETS AHEAD OF Core inflation in the U.S. stood to a desire for diversification
at 1.7% as of October and is set to into hard assets by investors and
THEMSELVES IN PRICING IN move lower owing to considerable central banks. It may also be an
SPRING FED TIGHTENING excess capacity and a yawning indication of longer-term inflation
output gap. As well, historically the concerns. Real interest rates are
Central bank exit strategies are Fed does not raise interest rates deep in negative territory in every
contingent in large part on the until roughly a year after the peak G-7 country except Japan (exhibits
outlook for inflation and inflation in the unemployment rate (Exhibit 7 – 8). Historically, there is a strong
expectations. We feel confident the 6). This would place the timing of a correlation between gold prices
Federal Reserve and the Bank of rate increase in late 2010. It will be and negative real interest rates.

BOND YIELDS ARE EXHIBIT 7. Real Short-Term Interest Rates

ULTIMATELY HEADED HIGHER
AS DEBT CONCERNS MOUNT 5.0
Canada and the United States
7.0
United Kingdom and Eurozone
4.0 6.0
Investors should bear in mind that
5.0
at some point, the Federal Reserve 3.0
4.0
will begin to raise interest rates and 2.0 3.0
bond yields will move higher. A recent 1.0 2.0
%
%
Bank Credit Analyst report points 1.0

0.0
out that the economy will probably 0.0
-1.0
run into headwinds at bond-yield -1.0
levels that are lower than in the past. -2.0 -2.0 Source: Datastream
Source: Datastream
For example, the bursting of the -3.0 -3.0
tech bubble coincided with 10-year 2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012
Treasury yields of about 6.50% while Canada US UK Eurozone
the real estate bubble burst when

bond yields touched 5.25% (Exhibit
EXHIBIT 8. Real Short-Term Interest Rates
9). If this trend persists, it suggests
that the tipping point for the U.S.
Japan China
economy may occur at much lower 2.0 6.0
yields this time around. This is
consistent with concerns surrounding 1.5 5.0
a potential debt crisis – a doubling of
4.0
the debt-to-GDP ratio in a four-year 1.0
time frame significantly increases the 3.0
%
debt burden and the sensitivity of 0.5

the economy to rising interest rates. 2.0
0.0
Indeed, a critical factor that may 1.0
restrain growth in many developed Source: Datastream Source: Datastream
-0.5 0.0
economies over the near term is
2000 2002 2004 2006 2008 2010 2012 2000 2002 2004 2006 2008 2010 2012
the substantial increase in federal
government indebtedness in the
aftermath of the recession and global EXHIBIT 9. U.S. 10-Year Treasury Bond Yield
credit crisis. According to the IMF,
gross debt-to-GDP ratios are set to
rise dramatically in countries such 16.0
Double Dip
as the U.S., U.K. and Japan, whereas 14.0
the increase in Canada and China Mid-Cycle
12.0 S&L Crisis Slowdown/
is expected to be much less severe. Mexican Peso
Indeed, while the credit crisis is now 10.0 crisis Tech Bubble
Burst
%
largely behind us, a funding crisis Real Estate

8.0
lies ahead for countries such as the Bubble Burst
U.S. and U.K. (Exhibit 10). Much of 6.0

the deterioration in fiscal balances is
4.0
structural in nature, and a credible Source: Federal Reserve
deficit-reduction plan to reverse large 2.0
structural deficits will be required. 1980 1985 1990 1995 2000 2005 2010 2015

The issue could otherwise continue EXHIBIT 10. Fiscal Balances and General Government Debt
to play out in currency markets, (as a share of GDP)
with investors pushing down the
FISCAL BALANCE GROSS GOVERNMENT DEBT
pound and U.S. dollar even more.
COUNTRY 2007 2009 2010 2014 2007 2009 2010 2014
In summary, economic recovery is CANADA 1.6 -4.9 -4.1 0.0 64.2 78.2 79.3 68.9
underway and despite considerable
headwinds, the odds of a double dip CHINA 0.9 -3.9 -3.9 -0.8 20.2 20.2 22.2 20.0
remain quite low. Financial conditions GERMANY -0.5 -4.2 -4.6 0.0 63.4 78.7 84.5 89.3
have improved markedly, setting the
INDIA -4.4 -10.4 -10.0 -5.7 80.5 84.7 85.9 78.6
stage for positive feedback loops. In
the near term, inflation is a non-issue, JAPAN -2.5 -10.5 -10.2 -8.0 187.7 218.6 227.0 245.6
and central bankers in North America U.K. -2.6 -11.6 -13.2 -6.8 44.1 68.7 81.7 98.3
have clearly stated their intention
to keep short-term interest rates at U.S. -2.8 -12.5 -10.0 -6.7 61.9 84.8 93.6 108.2
low levels for an extended period. Source: IMF World Economic Outlook, October 2009 Update
These factors provide fundamental
support for global equity markets.
Bond yields are ultimately headed
higher, but not until the Federal
Reserve signals an interest rate hike
is at hand. Monitoring the labour
market and 2-year Treasury yields
will be critical in this regard.

Chief Investment Officer – RBC Global Asset Management
ALLAN SEYCHUK, CFA

Economist & Institutional Portfolio Manager –
GLOBAL INVESTMENT OUTLOOK Phillips, Hager & North Investment Management Ltd.
GLOBAL ECONOMY ON THE PATH TO NORMALCY
We have increased our overweight experience, faith in capital markets the subsequent 24 months would
in equities by 2.5 percentage has been shaken, the outlook is be 5.5% (as compared to doing
points to 62.5% (allowed range: murky and investors continue to nothing with the portfolio’s asset
40%-70%), sourcing the funds from de-risk their portfolios. History mix). Such a decision ensures that
cash and leaving fi xed-income suggests this is the wrong move. the recovery of losses will take
exposure unchanged at 35%. The longer. While simply leaving the
necessary preconditions for a EXCESSIVE CAUTION AFTER portfolio’s asset mix alone would
sustained recovery continue to be a better choice, increasing the
fall into position. The epic dose THE DROP MEANS THAT allocation to equities at the trough
of monetary and fiscal stimulus RESULTS WILL LAG IN THE would be better still. Increasing the
has yet to have its full impact and RECOVERY equity allocation by 20 percentage
will remain in place, supporting points at the trough would result
markets, for several more quarters. Each market cycle presents unique in a 6.7% outperformance of the
Meanwhile, equity-market challenges and this one is no “no-rebalance” option and a 13.2%
valuations remain unusually exception. A common element of outperformance of the de-risked,
attractive despite the huge recovery each cycle, however, is that recovery bond-heavy option. Of course,
in prices since March. The window eventually comes, seemingly active management throughout
of opportunity remains open, as against all odds. Exhibit 1 shows the cycle would be best, but this
the global economy remains on the effects of a decision to de-risk is very difficult for professional
the path to normalcy, and we have a balanced portfolio following a and individual investors alike,
boosted our exposure to stocks to significant sell-off. If an investor as market peaks and troughs
take even greater advantage of it. succumbed to fear after each are only obvious in hindsight,
sell-off in the postwar era and especially when the catalysts for
THE OUTLOOK, NOT RECENT shifted an additional 20 percentage change are highly improbable
points of the portfolio from stocks “tail risk” events. However, we
EVENTS, SHOULD BE OUR to bonds after the trough, the can all recognize when we’ve
GUIDE median underperformance over experienced a sharp decline. It is
Despite the impressive rebound

in equity and credit markets since
March, memories of the crisis EXHIBIT 1. Asset Mix
remain fresh and many investors Implications for Returns Following Bear Market Trough
are maintaining a very cautious
stance. We acknowledge that the 125
Median Index Level as a % of Level at
risks remain high in this recovery. 120 50% Equity, 45% Bonds,
5% Cash, letting Asset Add 20% Allocation to Equities
Date of Prior Market Peak
However, many investors appear 115 Mix Drift to Market

to be succumbing to fear of the Trough and Rebalance No Rebalance
110 Only at Trough
past instead of looking forward.
Recent data in the U.S. shows that 105
Add 20% Allocation to Bonds
inflows into bond funds outnumber 100
flows into stocks by a factor of 5 Bear Market Trough
95 Prior Market Peak
to 1; Canadian data shows bond Source: RBC AM
funds taking in three of every 90
-12 -9 -6 -3 0 3 6 9 12 15 18 21 24
four dollars in net sales year-to-
Months Prior to & Following Bear Market Trough
date to October. After a painful

GLOBAL INVESTMENT OUTLOOK • DANIEL E. CHORNOUS, CFA • ALLAN SEYCHUK, CFA
at these times that we need to have EXHIBIT 2. Bear Markets and Recoveries
faith that markets will eventually Average Duration and Returns
recover, and take on more risk.
100 9 Month
28.7% Return from Low
THE REBOUND HAS BEEN 90
Indexed Return Levels

12 Month 30.3%
FASTER THAN EXPECTED… 80 6 Month Return from Low 24 Month
13 Months, -28.0% 21.0% Return All Losses 39.6% Return from Low
Return 3 Month Recaptured
There are concerns that the recovery 70 From Market Peak 10.9% Return
in equity markets has occurred "too Current Cycle

60 8 Months of Increase,
quickly.” Gains since the market 62% Return From Market Trough
troughed in March are more than 50 Bear Market Low 18 Months of Decline,
56.7% Below Prior Peak Source: RBC AM
double the expected return based
40
on the prior 12 bear markets. This
1 5 9 13 17 21 25 29 33 37 41 45
argument dwells excessively on how Months Since Peak of Prior Bull Cycle
far markets have moved instead of
why the rebound has been so strong.
Recall that only a year ago, there EXHIBIT 3. Bull Markets: 1st Year Recovery vs. GDP
First Year Returns as a Function of GDP
seemed a very real possibility that
the global fi nancial system would 30%
% Increase Over 1st Year of Bull
collapse and that major companies

(and even whole industries) faced 25%
extinction. A large contingent 20%
section of listed equities were
Market
being priced to reflect a reasonable 15%

threat of bankruptcy, or at least a 10%
long and wrenching downsizing.
Fast-forward to now and those 5%
fears have largely dissipated. Source: RBC AM
0%
Business conditions, while still 0.0% 0.5% 1.0% 1.5% 2.0%
subdued in many sectors, are slowly Average Qrtrly GDP Growth for the 4 Quarters Following Bull Market Onset
improving and official support
is being gradually and prudently
dismantled. As a result, equities … BUT HAS NOT GOTTEN conditions. Four, an external shock
that were most dependent on the AHEAD OF ITSELF is on the way that will change the
light at the end of the tunnel are current environment for the worse.
once again priced as going concerns To make the argument that the
that will benefit from the expected market recovery has gotten well
economic recovery and expansion. ahead of itself, one would need to NEW SOURCES OF ECONOMIC
It is no wonder we’ve seen a sharp make some or all of the following GROWTH ARE SURFACING
snapback in stock prices; a more arguments. One, the renewed
normal economic environment economic growth evident worldwide The deepest U.S. recession since the
has returned (Exhibit 2). “Too is a mirage which will fade upon Great Depression came to an end
fast” does not mean “too far.” closer inspection. Two, the risks sometime this past spring or early
facing the key U.S. economy are summer. Real GDP growth for the
insurmountable. Three, markets are July-to-September quarter came in
priced inappropriately for current at a healthy 3.5%, powered by gains

in a wide range of areas. Oftentimes EXHIBIT 4. Bull Markets: Valuations vs. 1st Year Recovery
investors get caught up in the First Year Returns as a Function of Valuations at Onset
nuances of the economic data, but at
this point in the cycle pretty much 70%
% Increase Over 1st Year of Bull Market

the only thing that matters is that Source: RBC AM Actual Current Cycle
60% Recovery as at Nov 30
recovery is in fact at hand, at which
50%
point equity investors can begin to
40% Current Cycle Projection
price in the upside of the economic
from Trendline
cycle without much regard for when 1974
30%
1982
strong growth appears (exhibits 1990 1987
20% 1998
3 and 4). So the only relevant 1978
10% 1962 2002
economic issue right now is how 1966 1960 1970
close the U.S. is to a self-sustaining 0%
recovery. Once government support 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60%
is removed, will the economy S&P 500 Under/Overvaluation at Onset of Bull Market
grow on its own or slide back
into recession? In our view the
likelihood of a double dip (defi ned EXHIBIT 5. S&P/Case-Shiller Home Price Index
10 and 20 City Composite Indices
as a return to negative rates of GDP
growth) is low, given the building 25
and broadening momentum 20 Most recent plot: Sept. 2009
in the sources of growth. 15
10
YoY % Change
Counter-intuitively, housing is one 5

area we look to for renewed growth 0
in the quarters ahead. Recent -5
housing news has been negative. -10
-15
Construction is losing some of its
-20 Source: Standard & Poors
prior momentum and the tally of
-25
delinquencies and foreclosures
1988 1992 1996 2000 2004 2008 2012
continues its troubling upward 10 City Composite 20 City Composite
march. But after a four-year period
in which housing consistently
subtracted from overall economic from a year ago, even steady price some volatility, housing starts appear
growth, residential construction performance for the next year would to have found a bottom. Modest
managed a sharp 23% jump in produce a sharp V-shaped recovery growth in homebuilding and real
activity in the third quarter as sales in the S&P/Case-Shiller home price estate commissions will start to feed
and starts picked up off cycle lows, index chart shown in Exhibit 5. through on the positive side of the
adding about 0.5 percentage point GDP ledger. Will it last? The sharp
to overall GDP growth. House prices 45% year-over-year drop in the
are fi nally creeping higher again, EXCESS HOUSING INVENTORY supply of homes available for sale
up just over 3% in the five months OVERHANG IS CLEARING suggests that the excess inventory
since the April low. Of the 20 cities overhang is starting to clear – albeit
tracked by the Case/Shiller index, With home prices no longer falling, at rock-bottom prices (Exhibit 6).
only Las Vegas continues to put in buyers and builders alike are While we’re uneasy with the sheer
new lows. Though average prices re-emerging. Home sales are up volume of homes moving through the
nationally are still down about 9% about 10% year over year and despite foreclosure pipeline, the fact remains

that the root of the credit crisis – the EXHIBIT 6. U.S. Housing – Month's Supply of Homes on the Market
bust in housing – is finally stabilizing. Existing Single Family Homes
The recovery will be sluggish and
rocky, and price growth will be 12.0
dampened by bank-sponsored real
estate fire sales for many quarters, 10.0
but at least the direction is right.
Months 8.0
PRODUCTION IS TOO LOW 6.0 Last Plot: 6.8 Mths
RELATIVE TO SALES
4.0
Another source of growth in the Source: National Association Of Realtors
coming quarters is expected to come 2.0
from inventory re-stocking. A notable 1990 1995 2000 2005 2010 2015
feature of this recession was the
speed with which inventories shot up
and then collapsed in relation to sales EXHIBIT 7. U.S. Inventories/Sales Ratio
Total Business
(Exhibit 7). A reduction in inventories
subtracts from GDP, but a smaller 1.6
reduction in inventories from one
quarter to the next actually adds to
GDP. As companies see the economy 1.5
stabilize and sales pick up, they will
have less and less motivation to pare 1.4
inventories. In fact, before long, just
to meet demand, inventory levels
will have to be rebuilt (Exhibit 8). 1.3
This has already started to bolster
Source: U.S. Census Bureau
growth and will be increasingly 1.2
additive in the quarters ahead. 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
REPLACEMENT DEMAND AND

EXHIBIT 8. United States
STRONG EXPORTS SHOULD Sales/Production Gap
SPUR NEW INVESTMENT
13500
Investment in productive capacity 13400

is another area that is ripe for a 13300
pick-up. While U.S. firms continue
13200
to slash spending on structures,
they have started to increase outlays 13100
on capital equipment. There is a 13000
good reason to be optimistic on 12900
this front. Capital depreciates over Source: BEA, TD Newcrest
12800
time, and after six consecutive
2007 2008 2009 2010
quarters of cuts to investment
Real GDP Final Sales

spending some replacement EXHIBIT 9. U.S. ISM Manufacturing Index and the Fed Funds Rate
demand is to be expected. Fed Funds Inverted and Advanced Six Months
The weaker U.S. dollar and recovering

70 0
global economy have already caused
65 1
a sharp rebound in U.S. exports.
60 2
Structurally, the large amount of
idle manufacturing capacity and 55 3
50 4
%
the surplus of available workers
create compelling reasons to bring 45 5
some types of production back 40 6
onshore. Meanwhile, somewhat 35 7
Source: Institute for Supply Management
lower consumer spending growth 30 8
in the years ahead suggest import 1998 2000 2002 2004 2006 2008 2010 2012
growth could run below growth in ISM Diffusion Index (LHS) Fed Funds Rate (Inverted, Adv 6 Months) (RHS)
exports, making net trade another
potential source of growth.
EXHIBIT 10. U.S. Net Worth
Finally, as credit markets recover we Median Net Worth by Percentile
can expect rock-bottom borrowing
costs to begin to have their typically
900
powerful stimulative effect on the
800 Source: Federal Reserve Board Survey of Consumer Finances (2007) 738
economy. Although the lift from new
700
borrowing will be muted this cycle
600
$US Thousands
given the emphasis on deleveraging,

500
the encouraging rebound in the ISM
400
suggests ultra-low interest rates are
300 205
beginning to work. Exhibit 9 shows
200
the tight historical correlation 88
100 8 38
between the level of the fed funds
0
rate and manufacturing activity. The
<20 20–39.9 40–59.9 60–79.9 80–100
severe credit crunch of late 2008/early Percentile of Income
2009 distorted the usual relationship
between the level of short-term
interest rates and economic activity in considerable detail in past this time” thinking. The trouble
as lending channels simply closed. quarters. A widespread consensus with the gloomy scenario is that it
Beginning in mid-summer, a more has emerged that U.S. consumers focuses excessively on the average
normal relationship reappeared. have changed in profound ways; consumer. This is misguided,
Barring additional shocks, the that in the absence of freely since there is no such thing.
epic easing in monetary policy available credit, households have
will have its targeted impact. entered a “New Normal” of frugality In past publications we have
characterized by more saving, highlighted how the highest 20% of
less borrowing, and far, far less income earners earn four times the
CONSUMER SPENDING WILL shopping. We think this gloomy average income of the bottom 80%
RECOVER TO “NORMAL” LEVELS outlook overstates the weakness of workers and more than 13 times
in U.S. household balance sheets, that of the bottom 20%. The wealth
Another source of potential upside ignores the ability of segments distribution is even more skewed.
surprise comes from consumer of the U.S. population to bounce The top quintile’s net worth was
spending, an area we have discussed back, and falls prey to “it’s different over 8.5 times larger than that of

the bottom 80% and over 80 times EXHIBIT 11. U.S. Consumption Growth Betas
the bottom quintile’s (Exhibit 10). Sensitivity to Total Consumer Spending Growth
3.0
HIGHER-INCOME Source: Parker, J.A. and Annette Vissing-Jorgenson, 2009. "Who Bears Aggregate 2.5
HOUSEHOLDS DRIVE OVERALL 2.5 Fluctuations and How?" NBER Working Paper 14665.
2.0
SPENDING 2.0 1.7
1.5
This concept becomes especially 1.0
interesting when applied to 1.0
0.6
behaviour. It makes intuitive sense 0.5
that households that earn more,
spend more. These households are 0.0
also better able to carry debt if they All Households Bottom 80% Top 20% Top 10% Top 5 %
desire. Finally, asset-rich households Percentile of Income
are not necessarily required to save
a portion of their paychecks in the
way that an average worker might. EXHIBIT 12. Debt Ratios by Income Level
And because the amounts saved
and spent by the richest Americans Debt to Net Worth Debt to Assets
are so large in aggregate, they 1.2
overwhelm the amounts saved and 99% Source: Federal Reserve Survey of Consumer Finances, 2007
1
spent by the rest of the population.
0.8
66%
These intuitive predictions are
brought to life by data from the 0.6 50%
39%
annual Consumer Expenditure 0.4 28%
Survey (CES), which is conducted 22%
by the Bureau of Labor Statistics. 0.2
According to the most recent survey 0
using 2007 data, the top 20% of Lowest 20% of Earners Bottom 80% of Earners Top 20% of Earners
earners account for 39% of total
consumer spending and 43% of
discretionary spending. So more compensation for high-income WIDE DISPERSION IN
than $4 of every $10 in “shopping” earners, and these payments can HOUSEHOLD BALANCE-SHEET
comes from the wallets of this small be especially volatile. In contrast,
HEALTH
group, while the remaining 80% of the bottom three quintiles
households contribute less than $6. generally have a pretty good idea Our contribution to this line of
of their annual income well in thinking this quarter has to do with
Even more striking, the change in advance, commit that income to the state of household balance
consumption by the highest-income certain steady expenditures such sheets on the eve of the crisis and
quintile was five times as large as mortgage payments and the what has likely happened since. By
as the change in consumption of like, and have little flexibility. decomposing and analyzing the
the remaining 80% of consumers data, we know that towards the end
(Exhibit 11). This makes sense – of 2007 (the “eve” of the recession)
bonuses, dividends and other balance sheets within the uppermost
forms of variable compensation quintile of U.S. earners were in
make up a large share of total excellent shape (Exhibit 12).

We then used the Federal Reserve’s EXHIBIT 13. Composition of Balance Sheet Assets
Survey of Consumer Finances Average Holdings, by Major Type of Asset
to construct an estimate of
the composition of assets by 60%
Source: Federal Reserve Survey of Consumer Finances, 2007
income quintile. As expected, 50%
the principal residence makes up
40%
the largest chunk of total assets
for all households. However, the 30%
uppermost income quintile holds 20%
a higher percentage of total assets
in fi nancial assets than does the 10%
remaining population. Exhibit 0%
13 depicts the estimated average Real Estate Stocks Bonds Cash Pooled Inv + Business All Else
holdings by major type of asset. Ret Accounts Equity
A clear pattern emerges from the Bottom 80% Top 20% Top 10%
data. The share of wealth held
in real estate declines as income portfolios of America’s wealthiest ARE THE OBSTACLES
rises. The average share of stocks, households, this snapback makes
bonds and holdings of pooled TO FULL RECOVERY
sense. The disparity with the
investment and retirement accounts average household will persist until INSURMOUNTABLE?
rises with income. Finally, average residential real estate prices stage a
ownership of business equity more meaningful increase, which Despite this relatively optimistic
also rises sharply with income. is not likely to occur for some time. longer-term outlook, we’d be the first
to agree that some key conditions
FINANCIAL MARKET The implications of stratifying for a self-sustaining recovery remain
U.S. households are clear. Higher- somewhat elusive. In particular,
RECOVERY HELPS WEALTHY income households spend more. the U.S. job market remains weak
HOUSEHOLDS THE MOST Due to their fi nancial heft, and credit availability continues to
they drive the behaviour of the be severely constrained for all but
Given our estimates of the relative
broader U.S. spending and saving the largest and most creditworthy
importance of each asset class
aggregates. During the downturn, borrowers. Additionally, there are
to the various income quintiles,
their assets took a significant hit broader concerns about the ability
we can derive an estimate of how
and their sources of income and of authorities to reduce their support
each income quintile has been
wealth were thrown into question. for the economy without tipping
affected by the fi nancial crisis
With their income more volatile it back into recession, and how
and the subsequent recovery. By
than the average, their spending they go about timing their efforts.
plugging in the performance of
is similarly more volatile. The Finally, the ballooning debt burden
each asset class from the survey
wealthy cut spending dramatically casts a long dark shadow over the
period in 2007 through the market
during the credit crisis but now future potential of the U.S. economy,
and economic trough in early 2009
have the ability to resume spending and for many major industrialized
and ending with the recovery to
at a more normal level given the nations in Europe and Asia.
date, we fi nd that the dollar value
recovery that is underway. Although
of this recovery has been sizeable
relatively small in numbers, the Of these challenges, the labour
and dramatic at the upper end of
spending and saving patterns of market may be the most crucial,
the income distribution. Given the
this portion of the population will at least in the near term. The
overrepresentation of fi nancial
determine the scale and durability economy as measured by GDP
and business interests in the
of the economic cycle ahead. may already be recovering, but

the economy as measured by job EXHIBIT 14. U.S. Initial Unemployment Claims Filed
creation is not. Ultimately, creating Four-Week Moving Average
new jobs is the key to creating a
durable recovery, not to mention 700
a lasting rebound in profits. 650
600
Last Plot: 497 Peak:
THE U.S. JOB MARKET IS STILL 550
March 27,
500
WEAK… 2009
450
November’s payroll survey unveiled 400 Median: 355
some very good news as only 11,000 350
jobs were lost, a figure too small in
300
the context of the U.S. labour force to Source: BLS, Haver Analytics
250
be considered statistically different
1990 1995 2000 2005 2010 2015
from zero. Average monthly job
losses over the past three months
sit just under 90,000, significant
EXHIBIT 15. United States
progress from the peak rate of over Non-Farm Employment and the Fed Funds Rate
700,000 lost jobs per month last
winter. However, the total number 0.0 6.0
of jobs lost this recession continues 2.0
4.0
to mount and has reached 7.2 4.0
million, or 5.2% of pre-recession 2.0
YoY % Change
6.0
levels, the most severe labour
8.0 0.0
%
market environment since the Great

10.0
Depression. Most of the details -2.0
remain grim. Hours worked hit a 12.0
-4.0
record low in October, a sign there 14.0
Source: ISI Portfolio Strategy
is still simply not enough work out 16.0 -6.0
there. At 10%, the unemployment 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
rate sits just shy of the 1982 post-war Fed Funds Rate (Inverted, Adv 18 Mos) Non-Farm Employment (RHS)
high of 10.8%. The average duration
of unemployment hit a record high of
remain fragile. However, as we have ISM employment sub-index shot up
about six months. And not everyone
already highlighted, average levels to 53.1 in October, the highest level
exiting unemployment is doing so
of sentiment matter less than does in 3½ years and a sign that factories
with a new job – frustrated, many are
confidence at the upper end of the are fi nally creating jobs again (likely
quitting the job market altogether.
income and wealth distribution. due to production catching up with
The labour force participation rate
slid to a 23-year low in October. sales as outlined previously). The
When we combine the unemployed … BUT HAS SHOWN RECENT reading eased to 50.8 in November.
with these discouraged workers and SIGNS OF STABILIZATION
those working part-time that want We are very encouraged by these
to work full-time, we find that nearly The more recent employment early signs of stabilization in jobs
one in five working-age U.S. citizens trends are mixed. Initial claims as they signal that, again, super-
are currently directly affected by the for unemployment insurance have stimulative monetary policy is
weak job market. This is likely the key declined sharply from their March fi nally starting to kick in. Exhibit 15
reason consumer sentiment readings peak, so fewer people are losing their shows the tight historical correlation
suffered a setback in November and jobs (Exhibit 14). The manufacturing between the fed funds rate and non-

farm employment. That relationship EXHIBIT 16. U.S. ISM Employment Indices
has been missing in action as the Manufacturing and Non-Manufacturing Employment Sub-Indices
normal transmission mechanism
between official borrowing costs 70
and economic activity were
broken by the credit crisis. This 60
correlation appears poised to
50
re-assert itself in the months ahead.
40
Unfortunately, the employment
component of the non- 30
manufacturing ISM continues to Source: Institute for Supply Management
languish below 50, suggesting that 20
the far larger, non-export-related 1998 2000 2002 2004 2006 2008 2010 2012
sectors of the U.S. economy have ISM Manufacturing Employment Sub-Index ISM Non-Manufacturing Employment Sub-Index
yet to move into hiring mode
(Exhibit 16). We suspect the scar
tissue from the crisis is tilting EXHIBIT 17. United States
Real Consumer Spending and Non-Farm Employment
hiring managers toward pessimism
when they should be anticipating
8.0
an eventual recovery (though it’s
understandable that smaller fi rms 6.0
will avoid hiring until new work 4.0
YoY % Change
actually comes in the door!). 2.0

0.0
This is common in the early
stages of every cycle and is why -2.0
productivity tends to shoot up -4.0
just as recessions end. Firms need Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Citigroup
-6.0
to see work volumes pick up (as
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
they are now) before committing Non-Farm Employment Real Personal Consumption
to adding employees, and more
work done by the same number of
people pushes productivity higher. EXHIBIT 18. Senior Loan Officer Survey on Bank Lending Practices
At some point the job market will Loan Officers Reporting Tightening Standards
stop deteriorating and turn positive.
This will be a hugely important 100
signal to the 90% of workers still 80
employed, as they will then view 60
QoQ % Change
their jobs as safe and return

to more normal consumption 40
patterns. Given the strong positive 20
relationship between employment 0
and real consumer spending
(Exhibit 17), an end to job cuts and -20
Source: Federal Reserve, Haver Analytics
a return to hiring is a necessary -40
precondition for a healthy recovery. 1990 1995 2000 2005 2010 2015
Mortgage Loans to Individuals Commercial & Industrial Loans

CREDIT MARKETS HAVE EXHIBIT 19. U.S. Commercial Banks

HEALED BUT U.S. BANKING Free Reserve Balances
SECTOR IS STILL IN CRISIS 1000
800
The second major obstacle to
recovery is the still-fragile state of 600
lending. In an economy built on $US Billions
credit, lending channels are still 400
not functioning normally. The
200
latest Fed survey of senior loan
officer revealed that banks are, on 0
balance, still tightening lending Source: Federal Reserve
standards on all major types of -200
loans to businesses and households, 1990 1995 2000 2005 2010 2015
the ninth consecutive quarter that
standards have been raised (Exhibit
18). Though we are encouraged EXHIBIT 20. U.S. Bank Failures
Total Assets of Failed/Assisted Institutions
that fewer and fewer banks are
tightening standards, we need to 400
see greater credit availability in Source: FDIC, Haver Analytics
350
order for consumers and small
businesses to become major players 300
in the recovery. We are not yet at 250
$US Billions
that stage. Instead, U.S. commercial 200

banks appear to be hoarding capital
150
as free reserve balances have shot
up to an all-time high (Exhibit 19). 100
50
A huge challenge to the recovery 0
is coming from the fact that U.S. 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
regional banks continue to fail in
worrying numbers (Exhibit 20). The
Fed backstopped the money-centre REGIONAL BANKS ARE these failures don’t pose a systemic
risk to global markets, they are
banks in 2008 and, as a result, the THE LINCHPIN OF LOCAL
global fi nancial system was saved more damaging than many people
ECONOMIES… realize. The disappearance of local
from collapse. Now, the problems
have shifted to smaller regional banking partners who understand
banks. Instead of being “too big to Regional banks are important. They their local customer base makes it
fail” many are fi nding out they’re provide fi nancing for the small much more difficult for the recovery
businesses that are the backbone to gain needed momentum.
“too small to save” and are being
taken over and closed by the FDIC. of the job market, businesses about
Indeed, the FDIC has emptied its as far from Wall Street capital as Currently, many banks that still
depositor-protection fund and has you can imagine. The souring of have free capital are making a
gone cap in hand to the broader the real estate market has put many rational choice to earn risk-free
banking sector for a three-year regional banks in tough shape, money by borrowing at ultra-low
advance on their annual fees. without enough capital to earn short-term interest rates and buying
their way back to health. While longer-term U.S. government

bonds, and pocketing the spread. EXHIBIT 21. Senior Loan Officer Survey on Bank Lending Practices
This serves two crucial purposes: Loan Officers Reporting Stronger Demand for Loans
it upgrades the quality of bank
balance sheets and restores bank 80
Source: Federal Reserve, Haver Analytics
fi nances. Without this balance-sheet 60
repair, the U.S. fi nancial system 40
QoQ % Change
would remain shaky. In time, the 20
economic recovery will flatten the
0
yield curve and this risk-free trade
-20
will disappear, with the result that
banks will return to their usual -40
role as credit intermediaries. -60
-80
1990 1995 2000 2005 2010 2015
… AND A LOT IS AT STAKE IN Commercial & Industrial Loans Mortgage Loans to Individuals Consumer Loans
THEIR RETURN TO HEALTH
The peak in impaired loans always EXHIBIT 22. U.S. Corporate Balance Sheets
comes after stock-market bottoms,
as businesses and households that 100 14.0
have grimly held on through the
12.0
downturn fi nally throw in the towel. 80
Times Interest Earned

So the continuing rise in bad debts 10.0
is not surprising. Having said that, 60 8.0
at some point the trajectory should
%
40 6.0
stop rising and reverse. If this
doesn’t happen soon – and spur an 4.0
uptick in credit availability, lending 20
2.0
activity and, ultimately, hiring – we Source: U.S. Federal Reserve / Royal Bank of Canada
0 0.0
will be forced to re-evaluate our
1990 1995 2000 2005 2010 2015
assumptions for this recovery. Debt-Equity (LHS) Interest Coverage (RHS)
DEMAND FOR CREDIT

prime borrowers, testament to the profits alongside the dearth of new
REMAINS WEAK AS FIRMS nascent housing-market recovery. investment, internally generated
SELF-FINANCE funds exceed capital expenditures,
It may seem odd that the recovery reducing the need to obtain as much
So far, the lack of credit availability has taken root without support external fi nancing (Exhibit 23).
doesn’t seem to have mattered all from credit, but exhibits 22 and 23
that much to the recovery because explain how businesses have been For companies that do want to turn
loan demand is still falling. The self-fi nancing so far. As fi rms cut to capital markets for funding, the
Fed survey revealed that demand inventories, the demand for term punitive spreads of last winter have
for most major categories of loans loans and lines of credit declined. narrowed dramatically, and may
continued to weaken in the three More importantly, balance sheets of have room to narrow further if the
months to October (Exhibit 21). Corporate America were in relatively yield curve is any guide (Exhibit
The sole bright spot was demand good shape going into the credit 24). Lower corporate spreads and
for residential mortgages from crisis and remain fairly healthy receptive capital markets have
(Exhibit 22). Given the recovery in unleashed a torrent of new stock and

bond issuance, including a revival EXHIBIT 23. United States Corporate Funding Gap
in the IPO market. Exhibit 25 shows Corporate Expenditures Less Internally Generated Funds
that creditworthy corporations
have had little trouble tapping 400
markets for new funding. In fact,
300
corporate bond issuance has set a
new record high in 2009. Finally, 200
100
$US Billions
U.S. productivity growth is surging,
driving profitability higher, a 0
theme we will return to shortly. -100
-200
2010 WILL SEE THE -300
Source: Federal Reserve
BEGINNING OF THE END OF -400
HISTORIC STIMULUS 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
The third and fi nal major hurdle for

households, businesses and capital EXHIBIT 24. U.S. Yield Curve vs. Investment Grade Spreads
markets relates to monetary and
fiscal policy exit strategies. There
-2.0 7.0
is still great concern that many of Source : RBC AM
the world’s major economies and -1.0 6.0
fi nancial markets cannot stand 5.0
on their own without support. 0.0
4.0
%
%
Many investors are seeking greater
clarity on these issues before 1.0
3.0
fully committing to the recovery.
2.0 2.0
Unfortunately, they may not get it.
3.0 1.0
NAVIGATING EXIT STRATEGIES 1990 1995 2000 2005 2010 2015
U.S. 10-2 Spread (Lt, Inv, Adv 30 Months) Moody's Baa-10 year T-bond Spread (Rt)
IS WHERE WE FLY ON A WING
AND A PRAYER
EXHIBIT 25. United States Corporate Debt Issuance
Timing the removal of the massive New Debt Security Issues, Non-Financials
policy easing to minimize the risk
of inflation without pushing the 300
6-Month Cumulative Sum ($US Billions)
Source: Federal Reserve

economy into reverse is highly 250
complicated, to say the least, and
is an area where the most powerful 200
and sophisticated central banks and
150
governments have little experience.
On the fiscal side, there are fears 100
this year’s $1.6 trillion U.S. budget
deficit is but the fi rst in a long 50
string of trillion-dollar deficits that
0
threaten to push the U.S. federal
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
public debt-to-GDP ratio from its

current 41% to towards 80% within EXHIBIT 26. United States

a decade (Exhibit 26). Of course, just Debt and Deficit as % of GDP
a few months ago the main concern
was that not enough was being 80 -16
Source: CBO, OMB Government Projections after 2008 -14
done, and that perhaps a second 70
-12
stimulus package was needed. So 60 -10
if we’re waiting for fiscal policy 50 -8
signals that are unambiguously -6
40
%
pleasing to markets, we’ll be waiting -4
30 -2
a long time. Having said that, the
20 0
Obama Administration must signal 2
its willingness to slow and reverse 10 4
the fiscal trend in order to preserve 0 6
the world’s faith that America’s 1960 1970 1980 1990 2000 2010 2020
debts can be honoured without Debt/GDP (LHS) Deficit/GDP (Inverted, RHS)
a sharper drop in the dollar.
EXHIBIT 27. American Recovery & Reinvestment Act of 2009

FISCAL SPENDING A LONG U.S. Fiscal Stimulus
WAY FROM RUNNING DRY

Funds Currently Available/Paid Out ($US B)
350
Total Size of Fiscal Stimulus Package: $787 Billion
Our perspective on the fiscal issue 300 Funds Available to Date: $ 297.1 Billion (37.8% of Total)
Funds Paid Out to Date: $ 136.3 Billion (17.3% of Total)
lies more in its direct impacts on 250
the economy and capital markets. 200
While fears of higher taxes later
150
might lead to reduced spending
down the road, spreading money 100
on the ground today will produce 50
Source: Federal Recovery Accountability & Transparency Board
economic activity right now. So far, 0
less than one-fi fth of the $787 billion May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09
stimulus package has been paid Funds Available Funds Paid Out
out, according to U.S. government
figures (Exhibit 27). That leaves over
$600 billion still to hit the streets MONETARY POLICY EXIT system that were so prevalent
and fi nd its way into household STRATEGIES SHOULD BE last year have largely dissipated,
wallets. Of the total $1.9 trillion we see little systemic risk from
made available since 2008 through
OF GREATER CONCERN FOR the end of direct Fed support for
various programs (including the MARKETS sections of the credit market.
stimulus package, TARP and others),
less than 40% has actually left The Fed’s monetary policy exit We have more concern about
government hands, leaving over $1 strategy is of more immediate the timing of the fi rst Fed rate
trillion in stimulus already approved concern to capital markets. The hike. In addition to marking the
and on its way to Main Street USA. Fed has already closed a variety beginning of the end of risk-free
That will buy a lot of shovels. of programs designed to unclog bank profits, a rising fed funds
credit markets and plans to end its rate hits the burgeoning U.S.
purchases of Treasury and Agency dollar carry trade and signals the
debt early in 2010. Given that the imminent end of this period of
immediate threats to the fi nancial epic monetary easing. A change in

monetary policy regime could be

EXHIBIT 28. United States Consumer Price Index
the kind of external shock to cause Headline vs. Core CPI Inflation
equity markets to re-evaluate their
expectations for future corporate 8.0
profit growth and the multiple Source: Bureau of Labor Statistics
6.0
placed on those profits. As such,
4.0
YoY % Change
a lot hinges on this fi rst Fed hike,
both in timing and communication. 2.0
Fortunately, the Fed is well aware
of its importance and is in no rush 0.0
to change the tone of policy. -2.0
-4.0
LOW CORE INFLATION MEANS 2000 2002 2004 2006 2008 2010 2012
A LOW FED FUNDS RATE Core (Ex-Food & Energy) Headline
We expect the fed funds rate to

remain at its current level of 0.25% EXHIBIT 29. Implied Short-Term Inflation Premium
Breakeven Inflation Rate: Nominal vs. 5-year Real Return Bond
until the second half of 2010, mainly
because inflation remains low and 5.0
contained. October core CPI came in 4.0
at an annual rate of 1.7%, extending
3.0 2.64%
the string of sub-2% readings to 11
2.0
months (Exhibit 28). The spike in
% 1.0 US: 1.74%
new and used car prices that pushed
this reading up in the month will 0.0
fade along with other impacts from -1.0
the “cash for clunkers” program. -2.0
Source: Bloomberg, RBC Capital Markets, RBC AM
-3.0
Around this low and stable core 2002 2004 2006 2008 2010 2012
inflation rate, headline CPI has been U.S. 5-yr TIPS Spread Trailing 5-yr Avg U.S. CPI
quite volatile. The deflation that
has prevailed over the past eight
months has started to fade as last we will be monitoring these charts WHEN WILL THE FIRST FED
fall’s collapse in energy prices drops for signs that the trillions in global HIKE ARRIVE?
out of the equation. Meanwhile, monetary and fiscal stimulus
personal consumption expenditure are feeding into expectations for So with the low likelihood of a
(PCE), the Fed’s preferred measure future price growth. As we discuss double dip back into recession and
of price pressures, is positioned below, there are several signs that inflation not a near-term concern,
within the central bank’s range of suggest today’s benign inflation the shift in monetary policy
comfort. Both mid- and long-term environment may not last beyond looms as the primary threat to the
inflation-indexed bonds indicate 2010. Case in point: a monthly equity-market rally. A few rules of
that mild inflation (not deflation gauge of U.S. inflation pressures thumb have started circulating as
or hyper-inflation) is expected maintained by the Economic preconditions for the Fed to start
through the next decade (Exhibit Cycle Research Institute climbed increasing rates after the recession.
29). However, since the predictive to a 14-month high in November, The fi rst is that the unemployment
power of the TIPS market is low, the eighth successive increase. rate has to peak (as discussed on

page 13). The second is that the EXHIBIT 30. S&P 500 and the Fed Funds Rate Hike
manufacturing ISM index must Implications for Current Cycle, Following First Rate Hike
remain above 50 for one full year.
130
Median Index Level as a % of Level at

120 First rate hike: ?
FED HIKES NOT EXPECTED
Date of Initial Rate Hike

110
UNTIL LATER IN 2010 100
90
The ISM broke above 50 in August. 80
Provided it stays there, the window 70
for the potential fi rst rate hike moves 60
to Fall 2010. This also fits with our Source: RBC AM
50
expectations for the unemployment -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24
rate. As a lagging indicator, the Months Prior to & Following Fed Fund Rate Hike
unemployment rate will keep rising Median of All Cycles Recession Cycles No Recession Cycles Worst (1973)
into the fi rst year of a recovery, as
formerly discouraged workers are
eventually lured back into the job EXHIBIT 31. U.S. 10-Year Bond Yield and the Fed Funds Rate Hike
Implications for Current Cycle, Following First Rate Hike
search and the labour force swells
relative to the number of jobholders.
130
Median Bond Yield as a % of Level at
We expect job creation to begin First rate hike: ?

in the U.S. in the fi rst quarter of 120
Date of Initial Rate Hike
2010, but the unemployment rate

may not peak until several months 110
after that. Given the elevated risks
100
lingering from the historic size and
scale of the downturn in the U.S., 90
the Fed will want to be close to 100% Source: RBC AM
sure the recovery is self-sustaining 80
before beginning the long trek back -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24
Months Prior to & Following Fed Fund Rate Hike
to a neutral policy setting. In our
Median of All Cycles Recession Cycles No Recession Cycles Worst (1994)
view, the Fed is likely to delay as
long as possible provided inflation
expectations remain stable, but HISTORY GUIDES OUR VIEW hike will be the fi rst nail in the
coffi n of the current stock-market
once it begins hiking, 50-basis-point ON FIRST HIKE TIMING AND
increments are probably going to rally. However, Exhibit 30 shows
HOW TO REACT that, in the past, this has not been
be the preferred path as the Fed
will, by that time, want to send the case. Fed hikes are not good
As the fi rst rate hike approaches,
markets a strong message that it for equities, but the S&P 500 has
many expect the market
intends to keep a lid on inflation. tended to tread water in the three
environment to become less and
months leading up to the fi rst hike
All told, the ultra-low overnight less friendly. While considerable
and the three months after it.
rate setting is likely to persist uncertainty exists over the date of
until later in 2010, though market the first Fed rate hike, our historical
short rates will continue to creep analysis provides clear guidance we The lead-up to the fi rst Fed hike
up in the lead-up to next fall. can use to shape our expectations actually generates considerably
for market conditions in the months more volatility in the bond market.
before and after the event. It’s widely Exhibit 31 shows that U.S. 10-year
anticipated that the initial Fed rate yields begin to rise sharply three

months prior to the fi rst hike, and EXHIBIT 32. Global (ex-Japan) Short-Term Interest Rate Composite
in most cases continue to climb Short-Term Interest Rates Relative to Equilibrium
thereafter. This tells us two things.
One, even though we don’t know 100
the timing of the fi rst hike, we 80
60
% Above/Below Equilibrium
know where to look for signals and
it’s in yields, not stocks. Two, if 40
history is any guide we will have 20
a short window following the fi rst 0
hike to assess the landscape. If -20
it turns out the Fed has moved -40
prematurely and the economy -60
cannot withstand higher rates, -80 Source: RBC AM Last Plot: -62.1%
we can make a decision to reduce -100
our allocation to equities. We do 1980 1984 1988 1992 1996 2000 2004 2008 2012
not have to make that decision
in advance of the Fed’s move.
EXHIBIT 33. U.S. Fed Funds
Equilibrium Range
GLOBAL SHORT RATES
24
REMAIN HIGHLY STIMULATIVE
20
Our composite global short-term 16
interest rate showing global rates 12
relative to equilibrium (Exhibit 32)
%
8
indicates just how stimulative the
current monetary policy setting is, 4
while our valuation models (exhibits 0
33-37) indicate that policy rates lie Source: Federal Reserve, RBC AM
-4
well below equilibrium in every
1980 1984 1988 1992 1996 2000 2004 2008 2012
major economic region except Japan.
Last Plot: 0.25% Current Range: 0.12% - 2.32% (Mid: 1.22%)
Given the fragility of the recovery,
central banks are widely expected
to hold short-term interest rates at EXHIBIT 34. Canada Overnight Rate
rock-bottom levels for at least the Equilibrium Range
next six months in North America,
25
Europe and Japan. The Bank of
Canada reiterated its intention to 20
refrain from adjusting the overnight
rate higher until after June 2010, 15
and recent Fed announcements
%
indicate the fed funds target will 10

remain at current levels for “an
extended period.” Eventually, with 5
the return of sustained growth Source: RBC AM
and confidence in the recovery, 0
pressure will build for central banks 1980 1984 1988 1992 1996 2000 2004 2008 2012
to send a message about vigilance

regarding future inflation. We look EXHIBIT 35. Eurozone Repo Rate

for the fi rst, minor hikes in rates to Equilibrium Range
begin in mid-2010, but the bulk of
the move in global short rates above 20
current levels remains a 2011 story.
16
LONG-TERM BOND YIELDS 12

MOST LIKELY TO MARCH
%
8
HIGHER
4
In contrast to short-term yields Source: Bloomberg, Consensus Economics, RBC AM
that stand well below their 0
equilibrium setting, global 10-year 1980 1984 1988 1992 1996 2000 2004 2008 2012
government bond yields have Last Plot: 0.47% Current Range: 0.82% - 2.50% (Mid: 1.66%)
recently moved near or above
their equilibrium levels (exhibits
38-42). In more “normal” times EXHIBIT 36. Japan Overnight Call Rate
Equilibrium Range
that might be a signal that bonds
will appreciate in the quarters 14
ahead. Our outlook, however, is
12
significantly more cautious.
10
8
Exhibit 43 shows our global 10-year
6
%
bond market composite for the

major developed markets. It does 4
not signal the buying opportunity 2
that it might if all were right with 0
Source: Bloomberg, Consensus Economics, RBC AM
the investing world. Instead, the -2
reading has more to do with abrupt 1980 1984 1988 1992 1996 2000 2004 2008 2012
changes in how our models estimate Last Plot: 0.16% Current Range: -0.54% - 0.44% (Mid: -0.05%)
equilibrium. Last year’s sharp
drop in real interest rates pulled
the estimated equilibrium level EXHIBIT 37. United Kingdom Base Rate
(and associated standard deviation Equilibrium Range
bands) lower, as did the drop in
18
CPI. This made 10-year bond yields
16
seem as if they were breaking out
14
to the top of their predicted bands,
12
while in fact yields have been
10
relatively steady and it has been
%
8
the band that has been moving.
6
4
This situation will reverse in the
2
months ahead. Even if 10-year Source: RBC AM
0
yields remain static, they will
1980 1984 1988 1992 1996 2000 2004 2008 2012
move back away from the top
of their equilibrium bands. The

recovery has pushed real interest EXHIBIT 38. U.S. 10-Year T-Bond Yield
rates up from recent historic lows. Equilibrium Range
Moreover, as last year’s sharp
drop in energy prices falls out of 16
the yearly inflation figures and 14
headline CPI rebounds into positive 12
territory, the equilibrium bands are 10
expected to move sharply higher.
8
%
6
TREASURY YIELDS REMAIN 4
REMARKABLY LOW GIVEN 2
Source: Bloomberg, Bureau of Labour Statistics, RBC AM
DEFICIT PROJECTIONS 0
1980 1984 1988 1992 1996 2000 2004 2008 2012
This normalization in inflation and Last Plot: 3.20% Current Range: 1.74% - 3.56% (Mid: 2.65%)
demands for “real” returns present
a risk to fi xed-income markets and
set the stage for very limited total- EXHIBIT 39. Canada 10-Year Bond Yield
Equilibrium Range
return prospects for government
bonds in the quarters ahead. There 18
are a variety of scenarios that, if they 16
occur, will put upward pressure on
14
yields. The rebound in commodity
12
prices alone is expected to push
10
%
inflation upward. However, there is

the added dimension from a falling 8
dollar raising the cost of imports, 6
which also pushes up expected 4
Source: Bloomberg, RBC AM
future inflation. Finally, there are 2
the longer-term implications of the 1980 1984 1988 1992 1996 2000 2004 2008 2012
epic fiscal and monetary stimulus on Last Plot: 3.22% Current Range: 2.56% - 4.25% (Mid: 3.40%)
future price pressures to consider.
The dollar is weakening largely
because markets are unconvinced EXHIBIT 40. Eurozone 10-Year Bond Yield
that the U.S. administration will Equilibrium Range
ever succeed in getting its fiscal
house in order. Recent weeks have 18
seen record government bond 16
auctions, and markets rightly fear 14
that this is the new reality. For now, 12
the increased supply of bonds is 10
%
being soaked up, but it is not hard to 8

conjure up scenarios where the U.S.
6
government will have to offer higher
4
interest rates to induce global buyers Source: Bloomberg, Consensus Economics, RBC AM
to take on ever-increasing exposure 2
to U.S. Treasuries. Accordingly, we 1980 1984 1988 1992 1996 2000 2004 2008 2012
expect U.S. 10-year Treasuries to Last Plot: 3.48% Current Range: 2.53% - 3.77% (Mid: 3.15%)

yield 4.25% in a year’s time, about EXHIBIT 41. Japan 10-Year Bond Yield
100 basis points more than today. Equilibrium Range
We expect a slightly larger move in
the U.K., but in Canada we expect 14
a smaller 75-basis-point increase, Source: Bloomberg, Consensus Economics, RBC AM
12
to 4.00%. Japanese 10-year yields
are expected to climb by about 50 10
basis points to 1.75%, and we expect 8
%
to see a 25-basis-point increase in 6
Eurozone 10-year yields to 3.75%.
4
2
EQUITY MARKETS HAVE
REBOUNDED FROM CRISIS 0
1980 1984 1988 1992 1996 2000 2004 2008 2012
LOWS Last Plot: 1.27% Current Range: 0.73% - 1.60% (Mid: 1.16%)
Equity markets have spent the past

six months in one of the strongest EXHIBIT 42. United Kingdom 10-Year Gilt
Equilibrium Range
and most impressive rallies since the
1930s. The S&P 500 is now 18% above
18
its 200-day moving average and
16
91% of individual stocks within the
14
index are in a similar “overbought”
12
condition (exhibits 44 and 45).
10
%
8
Almost by definition, stock markets
6
cannot remain this far above their
4
moving averages without entering
2
exponential territory. This means Source: RBC AM
0
something has to give – either the
1980 1984 1988 1992 1996 2000 2004 2008 2012
pace of increase slows and the
200-day average catches up, or a
correction pulls the index level back
down to its average. We don’t deny EXHIBIT 43. Global Bond Market Composite
that there is a risk of a correction, 10-Year Government Bond Yields Relative to Equilibrium
but our work shows that trying to
tactically shift in and out of a market 60
Last Plot: 12.8%
in the early stages of a recovery is
a losing proposition. In the 13 bull 40

markets since 1957, there were
corrections during the initial phase, 20
but the median drop was only 4.4%.
We’ve already seen two corrections 0
in this rally that have exceeded
that amount – in June and early -20
November. In each case, the market Source: RBC AM
subsequently moved higher in a -40
matter of weeks. While it’s easy to 1980 1984 1988 1992 1996 2000 2004 2008 2012

say markets don’t go straight up all EXHIBIT 44. S&P 500

the time and that investors should Percent Difference Between S&P 500 & 200-Day Moving Average
wait for a pullback before buying
in, there are two problems with 30.0
Highest Plot: 22.7% (Nov.1982)
that kind of thinking. One, had we 20.0
followed that advice after the initial 10.0
April rebound, we would have sat
% Difference
0.0
out the bulk of this rally. Two, what
-10.0
constitutes a correction? History
-20.0
shows that the initial correction
exceeded 10% in only three of the 13 -30.0
possible instances. Many investors -40.0 Lowest Plot: -39.7% (Nov. 2008)
Source: RBC AM, Bloomberg
have kept to the sidelines, waiting -50.0
for an appropriately sized correction 1980 1985 1990 1995 2000 2005 2010 2015
as an entry point, only to watch Current: 17.6%
markets climb inexorably higher.
In prior quarters we have shown EXHIBIT 45. S&P 500

Percentage of Companies Above 200 Day Moving Average
that the first 10% correction in prior
bull markets did not arrive until a
100
median of nearly nine months after
the start of the new cycle. If July’s
80 Last Plot: 91.3
8% correction wasn’t it, based on
past bull-market cycles, we should
60
expect a larger correction early next
%
year. But what if July’s move was

40 Trough Average: 32.9
the correction? The median return
from the start of the correction to
20
the end of the bull market was 32%,
so even if you failed to anticipate Source: RBC AM
0
the downdraft, markets eventually
1995 2000 2005 2010 2015
recovered and moved much higher.
Clearly, in trying to pick up a few
percentage points in extra return EXHIBIT 46. S&P 500 Recurring Earnings
through market timing, we risk (All Earnings Peaks Associated With Periods of Recession)
missing out on the even greater
Earnings Level as % of Cycle Peak
returns of a full bull-market cycle. 160

Median Months: Earnings Peak to Earnings Trough: 19 months
Investors also risk being spectators 140
(Current Period since July '07 Earnings Peak: 28 months)
as the billions still parked in money- 120
Earnings Level
market mutual funds re-enter the 100

market and push stocks higher. 80
60
Two key facts make exiting the market
40
especially risky at this juncture. First, Source: RBC AM
earnings have already rebounded 20
sharply on aggressive cost-cutting -6 0 6 12 18 24 30 36 42 48 54 60
alone, even before sales volumes pick Months Prior to & Following Peak in Earnings
Current Cycle Best (1973-1975) Worst (2001) Median of All Cycles

up in an improving economy. Second, EXHIBIT 47. S&P 500

valuations remain compelling. Normalized and Recurring Earnings
When we chart S&P 500 earnings this 100

cycle compared to prior downturns 68
(Exhibit 46), the savageness of the 46
recent crisis becomes clear. This has 31
been the worst earnings recession 21
EPS
in a half-century, not to mention 14
nearly 50% longer than the median 10
time horizon from earnings peak 7
to trough. However, Exhibit 47 4 Source: RBC AM, RBC CM
highlights the secular uptrend in 3
earnings per share over the past 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
Normalized Earnings Predicted by Model Actual Recurring Earnings
50 years. Trend earnings have Geometric Trendline Earnings (6.7%)
compounded at a rate of 6.7% per
year. If we are forming a through-
the-cycle view of how profits should EXHIBIT 48. S&P 500
Net Margin
behave over the coming years,
this trend growth rate is a good
10
starting point. To do otherwise
would be to stake our chips on a
view that “it’s different this time.” 8
Exhibit 48 shows the steep dive 6

%
in S&P 500 net profit margins,

which have returned to cycle lows.
However, the chart also shows that 4
profit margins are highly cyclical
and tend to accelerate sharply Source : RBC Capital Markets, RBC AM
2
once the recession ends. With the 1980 1985 1990 1995 2000 2005 2010 2015
recession all but officially over and
a double dip unlikely, we are now
approaching the key upward-sloping EXHIBIT 49. S&P 500 S, G and A Expense
region apparent in previous cycles. Selling, General and Administrative Expenses per Share
With the majority of companies
now beating earnings expectations, 15
reporting a stabilizing sales
10
environment, and cautiously raising
estimates for the coming year, an 5
Y/Y % Change
upturn in profitability is at hand.

0
One of the most compelling reasons
-5
for optimism on the earnings front
is that companies have already -10
slashed expenses dramatically. Source: RBC CM
Selling, general and administrative -15
(SG&A) expenses have been 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

falling steadily throughout 2009 EXHIBIT 50. S&P500 Forward P/E Ratio
(Exhibit 49). Viewed more broadly,
economywide productivity growth
shot up sharply in the third quarter. 25
Firms have already slashed payrolls 23
and other operating expenses to 21
the bone, and have, therefore, 19
P/E Ratio 17
created an environment in which
15
profits can grow strongly as top-
13
line revenue growth returns. We
11
can afford to be patient here. 9
7
This looming profit upturn would Source: ThomsonReuters
5
be less compelling if investors 1988 1992 1996 2000 2004 2008 2012
had already incorporated it into 12-Month Forward P/E 5-year average
expectations and had pushed
market valuations up sharply in
anticipation. But, they haven’t, EXHIBIT 51. S&P 500 Index
Normalized (Equilibrium) Price/Earnings Ratio
and this is another reason to be
overweight equities. The S&P 500
35
trailing P/E ratio has indeed moved Nov '09 Range: 1 Std. Dev.: 15.3x - 24.7x (Mid: 20.0x)
30 Nov '09 Range: 2 Std. Dev.: 10.6x - 29.4x (Mid: 20.0x)
up as prices have climbed faster
25 Current: 28.1x
than earnings. However, trailing
earnings reflect an economy in 20
X
recession, a condition that has come 15

to an end. Using the trailing P/E to
10
assert that the market is overvalued
5
is equivalent to expecting the Source: RBC AM
earnings recession to continue 0
indefi nitely. We have already shown 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
P/E on Trailing 12 Months Earnings +/- 1 Standard Deviation from Equilibrium P/E
that this has never happened, nor
+/- 2 Standard Deviations from Equilibrium P/E
should it be expected to, given tight
cost control and the improving
economic trends already underway. EXHIBIT 52. S&P 500 Index
Index Level Relative to Equilibrium
What about the forward P/E ratio?
It, too, has climbed off its lows, but 100
Last Plot: -21.1%
remains in line with its 2005-2007 80
levels, suggesting markets are not 60

overvalued (Exhibit 50). However,
40
just as we prefer to use an estimate
of normalized, or equilibrium, 20
earnings in our valuation work, 0
here too we prefer to compare
-20
actual to normalized P/E ratios to
assess valuation. Exhibit 51 shows -40
the trailing 12-month P/E ratio and -60
calculates a band one standard 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

deviation above and below our EXHIBIT 53. Global Stock Market Composite
estimate of normalized P/E – that Equity Market Indices Relative to Equilibrium
is, what investors would pay in a
vacuum given the current interest 100
rate and inflation backdrop. From 80
% Above/Below Fair Value

this work, we can calculate the
60
level of earnings that would put
the current trailing P/E right in the 40
middle of this normalized band. At 20 Last Plot: -30.7%
time of writing, this level of earnings 0
was about $54. If one thought
-20
valuations should sit one standard
deviation below equilibrium (given -40
Source: Datastream, Bloomberg, RBC AM
the current risks to the outlook), -60
the level of earnings required to 1980 1985 1990 1995 2000 2005 2010 2015
justify the market at today’s level
is about $71. Based on current full-
year S&P earnings estimates of $62 EXHIBIT 54. S&P 500 Equilibrium
Normalized Earnings & Valuations
a share these earnings levels do not
appear particularly aggressive.
3311
Nov '09 Range: 1054 - 1724 (Mid: 1389)
2026
This work tells us that at current Nov '10 Range: 1328 - 2172 (Mid: 1750)
1240 Current (30-Nov-09): 1096
levels, markets are not overvalued.
In fact, the S&P 500 sits about 21% 759
below its predicted equilibrium 464
level, given current levels of 284
borrowing costs and inflation 174
(Exhibit 52). U.S. stocks remain 106
close to their greatest discount 65
in a half-century relative to fair Source: Bloomberg, RBC AM
40
value. Global equity markets
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
appear to be even more deeply
undervalued (Exhibit 53).
EXHIBIT 55. S&P/TSX Composite Equilibrium
Exhibits 54-58 show our equilibrium Normalized Earnings & Valuations
models for the major equity market
indices. They show actual market 22387
14307 Nov '09 Range: 10275 - 15323 (Mid: 12799)
levels relative to a band plus and Nov '10 Range: 10777 - 16072 (Mid: 13425)
minus one standard deviation from 9143 Current (30-Nov-09): 11447
our estimate of fair value, given 5843
normalized earnings, valuations, 3734
interest rates and inflation. While 2387
markets are clearly volatile around 1525
the midpoint of this band, the
975
current environment stands
623
out. In most markets, the main Source: Bloomberg, RBC AM
398
indices sit either at or below the
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
lower bound of their expected

equilibrium range (the exception EXHIBIT 56. Eurozone Datastream Index

is the TSX, which sits in the lower Normalized Earnings & Valuations
half of its expected range).
4467
Though the current economic 2899 Nov '09 Range: 1523 - 2546 (Mid: 2034)
environment is characterized Nov '10 Range: 1744 - 2914 (Mid: 2329)
1881
Current (30-Nov-09): 1064
by a higher-than-usual level of 1221
uncertainty, we are confident 792
markets will eventually value
514
companies based not on the profits
334
generated at the low for the business
217
cycle, but on their expected earnings
power throughout the cycle. 141
Source: Datastream, Consensus Economics, RBC AM
1980 1985 1990 1995 2000 2005 2010 2015

QUALITY COMPANIES
POISED TO ASSUME MARKET
LEADERSHIP EXHIBIT 57. Japan Datastream Index
Normalized Earnings & Valuations
In fact, if there is one basic thesis

1000
that has characterized all our work
717
over the years, it is that markets
514
will ultimately reward companies
that have superior business models, 368
competent management, market 264
leadership and sustainable earnings 189
Nov '09 Range: 309 - 743 (Mid: 526)
power over an entire market cycle 136 Nov '10 Range: 357 - 859 (Mid: 608)
with stock prices that rise faster 97 Current (30-Nov-09): 260
than the market as a whole. There 70
are, however, times when markets Source: Datastream, Consensus Economics, RBC AM
50
are focused on other things, such 1980 1985 1990 1995 2000 2005 2010 2015
as reacting to abrupt economic
shocks like the credit crisis.
EXHIBIT 58. United Kingdom Datastream Index
The equity-market environment Normalized Earnings & Valuations
since the March lows has been
typical of the early months of a 14791
9190 Nov '09 Range: 4640 - 7738 (Mid: 6189)
new bull market. As the threat
Nov '10 Range: 5824 - 9712 (Mid: 7768)
of imminent bankruptcy passes, 5710
stocks with the weakest balance 3548
sheets – those hardest hit during 2205
the crisis and most dependent on a 1370
quick economic recovery – bounce 851
back the fastest as the market
529
removes the discount applied to
329
recognize the prior acute threat to Source: Bloomberg, Datastream, Consensus Economics, RBC AM
204
corporate survival (Exhibit 59). In
1980 1985 1990 1995 2000 2005 2010 2015
the past, that recovery period has

lasted about four months, but this EXHIBIT 59. S&P 500 Returns by Credit Rating
time given the depth of the sell-
off, the rebound has been longer SEP. 1 – NOV. 30 JUN. 1 – AUG. 31 MAR. 1 – MAY. 31 #
and more dramatic. Eventually,
AAA+ TO AAA- 11.3% 6.7% 13.3% 4
stocks with the “DNA” of successful
AA+ TO AA- 7.5% 4.4% 26.2% 23
investments move to the fore.
A+ TO A- 6.0% 1.2% 35.5% 128
These stocks may lag in the initial
BBB+ TO BBB- 7.0% 0.1% 36.8% 193
stages of the recovery but tend to
BB+ TO BB- 3.7% 1.8% 52.7% 64
have the staying power to provide
gains throughout a bull cycle. B+ TO B- 6.5% 1.6% 102.4% 13
CCC+ TO C- -6.8% -1.8% 80.0% 1
Our proprietary 3D stock-rating NOT RATED (ALL) 6.0% 6.1% 37.7% 74
system has a 25-year track record NOT RATED (TECH) 7.2% 3.4% 39.9% 38
of highlighting stocks with NOT RATED (OTHER-EX TECH) 4.9% 8.5% 35.7% 36
superior long-term prospects. In a *Using current credit rating 500
maturing bull market, we expect Source: RBC AM
to see a rotation into stocks that
will most likely lead the market EXHIBIT 60. 3D Score Monthly Performance – U.S.
Top 80 Minus Bottom 20
through the remainder of the cycle.
This rotation now appears to be 10%
taking place. Exhibit 60 shows
that stocks with the highest 3D 5% 3.39%
scores (those that screen highest
0%
across fundamental, technical and
quantitative parameters) are once -5%
again beginning to lead in the U.S.
Consistent with this turn of events, -10%
a Bank of America/Merrill Lynch
-15%
analysis of the Russell 2000 shows
Source: RBC AM
that large-cap stocks outperformed -20%
small-cap stocks for the second Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09
month in a row in November
and for three of the past four
months. According to this analysis, bond markets in isolation, given remains an unattractive option
S&P high-quality companies the macro environment and from a return standpoint. Treasury
outperformed low-quality outlook. But as we know, the bonds have the advantage of a bit
companies for the second month. attractiveness of stocks depends higher yields than cash along with
Finally, the anticipated preference partially on their expected offering safety of principal if held
for high-quality stocks has yet to absolute returns and partially on to maturity, and therefore have
show up in the Canadian market, their expected relative returns a place in a balanced portfolio.
but the trend continues to improve. versus other investment options However, holding government bonds
such as cash and fi xed income. still exposes investors to the risk
of capital loss if bond prices fail to
ASSET MIX STILL With short-term interest rates reflect an increasingly inflationary
FAVOURS EQUITIES holding at their effective lower environment, or if higher yields
bound until well into next year, are required to entice buyers for
The discussion above highlights our equities clearly offer superior bonds of developed countries
views on equity and government upside potential and holding cash with swelling fiscal debt levels.

In addition to these factors there EXHIBIT 61. United States

is also a compelling valuation Fed Model
argument for overweighting equities
relative to bonds. As noted above, 45
the 12-month forward P/E ratio on 40 * Based on expected EPS for the S&P 500
the S&P 500 is 14.7, near its five-year ** Based on the interest income of a 10-year U.S. Treasury Bond
35
average. In contrast, an estimated
30
forward P/E ratio for 10-year
P/E
Treasuries, using the inverse of the 25

current yield, is 30.4. As shown in 20
Exhibit 61, the valuation on long- 15
term government bonds remain 10
rich compared to U.S. equities. Source: ThomsonReuters, Federal Reserve
5
1988 1992 1996 2000 2004 2008 2012
To further tilt the argument in S&P500* US Treasury Bond**
favour of equities, Exhibit 62 shows
that even if the next bull market
simply moves stock prices back to EXHIBIT 62. 10-Year U.S. Stock and Bond Performance
Stock Market 10-Year Total Return Minus Long Bond Total Return
equilibrium, equity returns will beat
bonds by a significant margin over
Stock Market 10-Year Outperformance %
700
the full market cycle. Two severe
600 Source: Ned Davis Research
bear markets in the past 10 years
500
forced trailing 10-year returns for
400
equities to their lowest level relative +1 Std Dev
300
to bonds since the Great Depression.
200 Mean: 125.6%
In the past, movement to an
100
extreme has always been followed -1 Std Dev
0
by a sustained drift in the opposite -2 Std Dev
-100
direction. But we’re not counting -200
on mean reversion just because 1935 1945 1955 1965 1975 1985 1995 2005 2015
it has always happened. Properly S&P 500 10-Year Total Return minus Barclays Capital Long Term T-Bond 10-Year Total Return
functioning capital markets require
that extra risk be rewarded with
extra return. Finally, bonds have bonds, as they have done over higher, and hence remain relatively
benefited tremendously from nearly most periods of history. light, nimble and selective in
three decades of steadily declining our fi xed-income exposures.
interest rates, which produced a As such, shifts in asset mix with
capital gain to accompany income, respect to fi xed income should be In conclusion, market and
or yield. Now that rates are at or especially price-sensitive. This economic signals are still pointing
near historic lows, the generation means that we will be opportunistic to greater rewards from equities
of further capital gains is much if yields appear poised to fall. For over the coming quarters than
less likely. If stocks produce the example, if markets come to expect from other asset classes. The
long-term normalized earnings a setback in the economic recovery current investing environment
growth rates we expect, alongside or if equities become overvalued is more challenging than usual,
regular dividend payments and relative to earnings potential. and several threats – surging
a normalization in valuations, All the while, we will continue to fiscal deficits, extreme levels of
stocks will once again outperform acknowledge that the most likely government debt, global imbalances
longer-term direction for yields is in savings and borrowing, and

aging populations – will require Most importantly, we have yet to than today, as the memory of the
Herculean efforts to resolve. These see a systemic threat to fi nancial sharpest market decline since the
efforts will certainly have an impact markets that the Fed has not been Great Depression remains fresh
on capital markets and we will, able to address and, at least partly, in our minds. History, at least as
therefore, monitor them closely. defuse (albeit at a potentially it has played out so far, suggests
great cost to future taxpayers). investment opportunities like this
That said, investors, officials do not come around very often.
and markets alike have become Given this complicated backdrop,
familiar with these problems and we try to keep in mind an old Given this backdrop, we boosted
policymakers have been working investing chestnut: there are really our target equity weighting from
overtime to devise ways to lessen very few times when all market 60.0% to 62.5%, toward the upper
their impact. Provided the recovery signals appear to be flashing end of our allowable 40%-70% range,
is still underway, there is no reason green, and these tend to come to sourcing the funds from cash and
for markets to expect another be known as market peaks. Until reducing the cash allocation from
near-term recession due to any then, there will always be potential 5.0% to 2.5%. We left the fixed-income
of these longer-term challenges. obstacles, perhaps never more so allocation unchanged at 35.0%.

ROBIN GULLASON, CFA
V.P., Fixed Income Portfolio Advisory Group –
GLOBAL FIXED INCOME MARKETS RBC Dominion Securities Inc.
Global bond markets have traded EXHIBIT 1. United States

in a range over the past few 10-Year Treasury Bond Yields
months as the outlook for the
global economy has stabilized. 4.5
The growth outlook remains
benign for fi xed-income investors, 4.0
but markets remain unsettled
as the debate over inflation 3.5
Yield (%)
versus deflation rages on. The
strengthening economic recovery 3.0
should drive bond yields higher in
the year ahead, and policymakers 2.5
will probably begin raising short- Source: Bloomberg
term interest rates in late 2010. 2.0
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
UNITED STATES
Since peaking around mid-year, U.S. EXHIBIT 2. United States
12-Month Yield Forecasts
Treasury yields have traded in a broad
range (Exhibit 1), despite a continued 30-NOV-09 BASE WORST BEST
rally in prices for risky assets. Though
our fair-value bands indicate that 3mo 0.06% 0.75% 2.00% 0.25%
current yields are attractive, one
year out the bands shift upward and 2yr 0.67% 2.00% 3.15% 0.50%
we see yields modestly higher over
the forecast horizon. Short-term 5yr 2.00% 3.25% 4.25% 1.50%
yields have recently dropped sharply,
taking the 2-year benchmark to
10yr 3.20% 4.25% 5.00% 2.50%
levels not seen since the depths of
the crisis nearly one year ago, while
30yr 4.19% 5.00% 5.60% 3.50%
negative yields have re-emerged
in the T-bill market. In our view, Source: RBC AM
this is not indicative of impending
panic, but a market convinced that EXHIBIT 3. United States
rate hikes will not emerge any time Yield Curves: Current and 12-Month Forecast Levels
soon – recently Fed speakers from
the hawkish end of the spectrum 6.0%
Source: RBC AM, Consensus Economics
have been striking a dovish tone.
5.0%
Short-term interest rates have 4.0%

been pegged between zero and
0.25% for a year, and our forecast 3.0%
is for the Federal Reserve to stay 30-Nov-09
2.0% Consensus
on hold for most of 2010. We see Base
a series of hikes beginning in the 1.0% Worst
third quarter, culminating in a fed Best
funds rate of 0.75% by year-end, 0.0%
unchanged from our previous 3m 2y 5y 10y 30y

GLOBAL FIXED INCOME MARKETS • ROBIN GULLASON, CFA
forecast (exhibits 2 and 3). While (the headline reading is likely to rise central banks have kept policy on
the Fed will be on the lookout for due to the extremely low oil price of hold and the ECB is no different, with
any troublesome rise in inflation early 2009) or any renewed demand a 1.00% repo rate prevailing. Though
(and inflation expectations) and the for risk-free assets could pin down the ECB rate is substantially higher
emergence of new asset bubbles, longer-term yields at the bottom than many other central banks, it
early indications are that short-term end of their range. While upside appears the current setting will be
rates will rise at a moderate pace. risks are unlikely in our forecast the low for the cycle, barring another
period due to high unemployment, crisis. We see a modest hiking
Further out the curve, we see a anemic wage growth and soft campaign getting underway towards
continuation of the range-bound capacity utilization, any indication end of our forecast period, taking
trading that has dominated the that core inflation is on the rise the repo rate to 1.25%, up 25 basis
past six months. Longer-term would likely push yields higher. points from last quarter’s forecast.
bond yields have lingered near The slower pace of hikes in the
the bottom of the range due to EUROZONE Eurozone reflects both the relatively
benign inflation and uncertainty higher current level of rates and the
over the strength of the economic The European economy has begun to weakest outlook for real growth in
recovery. This has been bolstered crawl out of its deepest recession in our forecast universe, combined with
by continued strong fund flows into modern times, with 1.5% annualized inflation that will be weaker than in
bond mutual funds and purchases growth in the third quarter. The all regions except Japan in 2010. Our
by commercial banks, which invest broader Eurozone has lagged its two 10-year bond forecast is unchanged
in government debt as an almost largest economies, Germany and at 3.75%, and continues to be 50
risk-free alternative to lending. France, which also posted growth in basis points lower than the U.S.
These two trends bear watching, the second quarter. While a return to (exhibits 4 and 5). The expectation
however. Any reversal could break growth is good news and sentiment of European outperformance can be
the current equilibrium in the market surveys continue to improve, the explained by inflation differentials
as supply continues unabated and Eurozone economy still faces and slower growth. Less fiscal
the Treasury plans to extend the pressure from a soaring euro and stimulus will lead to a lower level of
average maturity of its debt. This lighter fiscal stimulus than in the U.S. Eurozone growth and bond supply.
will lead to less issuance of short-
term bonds, which typically meet Though there have been a few The risk to our base-rate forecast
with heavy demand from foreign notable exceptions, the world’s major is to the upside as the inflation-
central banks, and more 10-year
and 30-year issues, which are more
likely to be taken up by domestic EXHIBIT 4. Europe
buyers. Our target for 10-year bond 12-Month Yield Forecasts
yields is unchanged at 4.25%, which
30-NOV-09 BASE WORST BEST
is the upper boundary of the level
of interest rates that we think the
3mo 0.39% 1.25% 2.00% 0.50%
U.S. economy is able to withstand
given the amount of debt still carried
by businesses and consumers. 2yr 1.26% 2.25% 3.00% 1.00%
Risks to our yield forecasts reside 5yr 2.24% 3.25% 3.75% 2.00%
primarily to the downside, with
the idea of the Fed staying on hold 10yr 3.16% 3.75% 4.25% 2.50%
beyond our forecast horizon not
outside the realm of possibility. 30yr 3.89% 4.25% 4.50% 3.25%
Benign readings on core inflation
Source: RBC AM
phobic ECB could turn hawkish EXHIBIT 5. Europe

at a moment’s notice if it deems Yield Curves: Current and 12-Month Forecast Levels
inflation to be a risk. Longer-term
rates could under-shoot our forecast 5.0%
if the economic recovery stalls or 4.5% Source: RBC AM, Consensus Economics
inflation surprises to the downside. 4.0%
3.5%
3.0%
JAPAN
2.5%
Recent data from Japan continues 2.0% 30-Nov-09
to be encouraging, but it appears 1.5% Consensus
the good news may be short-lived. 1.0% Base
Worst
A strong yen and the return of 0.5% Best
deflation will weigh on the economy 0.0%
in the quarters to come, and we still 3m 2y 5y 10y 30y
see Japan having the lowest nominal
growth in our forecast universe.
EXHIBIT 6. Japan
Japanese officials have expressed
concerns over fourth-quarter growth
and the Cabinet Office announced 30-NOV-09 BASE WORST BEST
on November 20 that the economy
is “in a mild deflationary phase,” 3mo 0.17% 0.10% 0.75% 0.00%
which should all but guarantee
that the Bank of Japan keeps rates 2yr 0.23% 0.40% 1.00% 0.05%
on hold at our forecast rate of
0.1% for the foreseeable future. 5yr 0.55% 1.00% 1.50% 0.25%
We see Japanese 10-year yields

10yr 1.27% 1.75% 2.40% 0.75%
rising modestly in the next year.
Our target is 1.75%, which is in the
30yr 2.17% 2.60% 3.00% 1.75%
upper half of the 1.2%-2.0% range
that has prevailed for the past five Source: RBC AM
years. Our forecast is 250 basis
points less than the comparable EXHIBIT 7. Japan
U.S. Treasury security due to Yield Curves: Current and 12-Month Forecast Levels
Japan’s lower growth and inflation
potential, though both markets will 3.5%
Source: RBC AM, Consensus Economics
face supply concerns. Japan’s gross 3.0%
debt-to-GDP ratio is forecast to hit
2.5%
nearly 250% by 2014 (up from 218%
this year) according to the IMF. As 2.0%
a result, there will be no shortage of 1.5%
Japanese government bonds (JGBs), 30-Nov-09
1.0% Consensus
while the ability of Japan’s new Base
government to successfully steer 0.5% Worst
the economy is still in question. Best
0.0%
Investors are starting to take
3m 2y 30y
notice of these risks, with Japan’s

credit-default swap spreads (the EXHIBIT 8. Canada

market’s perception of credit risk) 12-Month Yield Forecasts
increasing versus the U.S. over the
past few months (exhibits 6 and 7). 30-NOV-09 BASE WORST BEST
We see two-sided risk to Japanese 3mo 0.21% 1.00% 2.00% 0.25%

bond yields – sustained deflation
would push yields to the bottom 2yr 1.10% 2.25% 3.25% 1.00%
of the range, while concerns over
a building fiscal crisis could lead 5yr 2.38% 3.50% 4.00% 1.75%
yields higher as investors lose faith
in Japan’s ability to service its 10yr 3.23% 4.00% 4.50% 2.50%
debts in a sustained deflationary
environment. Given how close 30yr 3.84% 4.50% 4.90% 3.25%
short rates are to zero, the greater
risk is that yields will exceed our Source: RBC AM
forecast. The Bank of Japan has
been reluctant to enact further EXHIBIT 9. Canada
Yield Curves: Current and 12-Month Forecast Levels
monetary stimulus, and the
government appears ambivalent 6.0%
toward the yen’s strength. Source: RBC AM, Consensus Economics
5.0%
CANADA 4.0%
Like the U.S., Canadian bond 3.0%

yields continued to trace a broad
30-Nov-09
range over the past quarter, as the 2.0%
Consensus
strong correlation between the Base
1.0% Worst
two countries’ bond yields persists
Best
despite differing fiscal dynamics. 0.0%
Though we anticipate that Canada 3m 2y 5y 10y 30y
will have the strongest GDP growth
in our forecast universe, it will not
be enough to ignite significant that is where the similarities end. strike a balance between keeping
inflation pressures. Add in the drag Australia’s largest export market asset prices in check (ultra-low
provided by a strong Canadian is China, which is booming, while mortgage rates have driven Canada’s
dollar, and it appears that Bank of Canada still sends the majority housing market to new highs) and
Canada Governor Carney will be of its exports to its struggling encouraging a sustainable recovery.
able to keep his promise to keep neighbour to the south. Australian The 25-basis-point premium to
rates on hold until at least mid-2010. policymakers also appear to be the U.S. fed funds rate suggests
much more laid-back regarding that Canada’s resource-driven
Market expectations that Canada currency appreciation. We have economy will grow faster in 2010.
would follow Australia in hiking stayed the course on our Bank
short-term rates have been fully of Canada call, with a 1.00% We have modestly increased our
unwound, with Canadian 2-year rate expected in one year’s time. forecast on the Canadian 10-year
yields pulling back after jumping Policy rates should begin rising yield to 4.00% from 3.75% last
in October. While both countries in the second half of 2010, with quarter as recovery takes hold
are big commodity exporters, the central bank attempting to (exhibits 8 and 9). This forecast

change brings the differential from EXHIBIT 10. Foreign Exchange Rates
U.S. Treasuries down to 25 basis GBP/EUR
points from 50 points previously,
but is still indicative of Canadian 1.8
outperformance as yields drift 1.7
higher. Though the Canadian
1.6
economy has stronger growth
potential than the U.S., at least for GBP/EUR 1.5
now, and a slightly more aggressive 1.4

central bank, the continued deluge 1.3
of U.S. Treasury supply will keep 1.2
U.S. rates at a slight premium.
1.1
Source: Bloomberg
The risks to our short-term rate 1.0
forecast are two-sided. A stronger- 1999 2001 2003 2005 2007 2009 2011
than-expected recovery, spike
in core inflation or irrational
EXHIBIT 11. United Kingdom
exuberance in the housing market
could all cause the Bank of Canada
to hike more aggressively, while 30-NOV-09 BASE WORST BEST
fears of a double dip in the economy
could put things on hold. Upside 3mo 0.30% 1.25% 2.50% 0.50%
and downside risks persist further
out the curve. A renewed fl ight to 2yr 1.16% 2.25% 3.35% 0.50%
safety could drive bond yields back
to cyclical lows, but the Canadian 5yr 2.59% 4.00% 5.00% 1.75%
bond market would not be immune
to a sharp sell-off in U.S. Treasuries.
10yr 3.52% 4.75% 5.50% 2.50%
UNITED KINGDOM 30yr 4.09% 4.50% 5.00% 3.00%
The U.K. economy continues to Source: RBC AM

disappoint, reporting a third-quarter
GDP decline in sharp contrast to the EXHIBIT 12. United Kingdom
resumption of growth in the U.S., Yield Curves: Current and 12-Month Forecast Levels
Japan and the Eurozone. Officials
6.0%
are predicting a return to growth, Source: RBC AM, Consensus Economics
but Bank of England Governor 5.0%
Mervyn King has been cautious in
recent commentary. The pound 4.0%
has stabilized off its worst levels,
3.0%
but is still up only marginally from
its all-time low versus the euro 2.0% 30-Nov-09
Consensus
(Exhibit 10). This situation is making Base
U.K. exports more competitive 1.0% Worst
Best
but increases inflation risks.
0.0%
3m 2y 5y 10y 30y

Our U.K. base rate forecast has risen prevails. Administered rates could EXHIBIT 13. Expected Return
25 basis points to 1.25% despite the stay low if growth and inflation are 12 Months
economy’s poor prospects (exhibits subdued, but we can also envision LOCAL U.S.
11 and 12). The U.K. still has the a more aggressive Bank of England CURRENCY HEDGED
highest inflation forecast of the should inflation accelerate past U.S.
regions we cover, and the Bank of target. The risk to our gilt yield 3MO 0.4% 0.4%
England will be keen to keep prices forecast is to the downside given 2YR 0.0% 0.0%
in check given its strict inflation that recent ranges are well below 5YR -0.9% -0.9%
mandate. The Bank may end up our target. A longer-than-expected 10YR -2.3% -2.3%
hiking more than it would like if commitment to quantitative easing 30YR -5.8% -5.8%
inflation pressures persist. Due or a prolonged recession could both ALL -1.5% -1.5%
to the Bank of England’s massive result in rates below our forecast. EUROPE
quantitative easing program, 3MO 0.8% 0.6%
rate hikes are only part of the 2YR 0.9% 0.7%
equation and Governor King has RETURNS AND 5YR 0.0% -0.2%
10YR 0.1% -0.1%
made it clear that any sustained RECOMMENDATIONS
30YR -0.2% -0.4%
hike in short-term rates will be a
ALL 0.2% 0.0%
slow process as bond purchases Our expected country returns are
JAPAN
continue. The most recent vote on listed in Exhibit 13. We maintain our
3MO 0.2% 0.5%
the size of the quantitative easing neutral duration call this quarter,
2YR 0.2% 0.5%
program resulted in a £25 billion as uninspiring total returns are
5YR -0.4% -0.1%
increase in a bid to further support balanced with fair valuations.
10YR -1.2% -0.9%
the economy, but this process will With risks generally running both
30YR -4.7% -4.4%
end at some point to the detriment ways in bond markets, we don’t
ALL -1.3% -1.0%
of the gilt market. The eventual see sufficient reward in making an
CANADA
completion of the government’s outright duration call. Our forecasts
3MO 0.6% 0.3%
bond purchases, heavy supply and indicate that the Eurozone will
2YR 0.7% 0.3%
higher inflation pressures will lead outperform. We recommend an
5YR 0.1% -0.3%
gilts to underperform, and we have Eurozone overweight and equal 10YR -1.0% -1.3%
boosted our forecast by 50 basis underweights in the U.S. and 30YR -4.7% -5.1%
points to 4.75% to reflect this. Japan. A summary of our analysis ALL -1.0% -1.3%
is presented in Exhibit 14. U.K.
Risks to our base rate run both 3MO 0.8% 0.7%
ways given the uncertainty that 2YR 0.7% 0.5%
5YR -0.1% -0.2%
10YR -3.2% -3.3%
30YR -0.7% -0.8%
ALL -0.5% -0.6%
Source: RBC AM

EXHIBIT 14. Scenario Analysis – 12 Months
Barbell vs. Bullet (Duration Weighted)
2/10-Year vs. 5-Year
EXPECTED BASE WORST BEST
LOCAL CCY USD HEDGED LOCAL CCY USD HEDGED LOCAL CCY USD HEDGED LOCAL CCY USD HEDGED
U.S.
2yr – 10yr -1.08% -1.08% -1.44% -1.44% -4.68% -4.68% 5.44% 5.44%
5yr -0.86% -0.86% -1.12% -1.12% -4.90% -4.90% 5.26% 5.26%
EUROPE
2yr – 10yr 0.50% 0.32% 0.20% 0.03% -1.85% -2.02% 5.22% 5.04%
5yr -0.04% -0.22% -0.30% -0.48% -2.41% -2.58% 4.42% 4.23%
JAPAN
2yr – 10yr -0.42% -0.11% -0.53% -0.23% -3.05% -2.76% 3.16% 3.48%
5yr -0.42% -0.11% -0.46% -0.15% -2.52% -2.22% 1.99% 2.30%
CANADA
2yr – 10yr -0.07% -0.43% -0.45% -0.81% -2.59% -2.94% 5.50% 5.12%
5yr 0.10% -0.25% -0.26% -0.61% -2.67% -3.02% 5.77% 5.40%
U.K.
2yr – 10yr -1.12% -1.23% -1.66% -1.78% -4.76% -4.87% 6.91% 6.79%
5yr -0.06% -0.18% -0.49% -0.60% -4.17% -4.28% 7.46% 7.33%
2/30-Year vs. 10-Year

EXPECTED BASE WORST BEST
LOCAL CCY USD HEDGED LOCAL CCY USD HEDGED LOCAL CCY USD HEDGED LOCAL CCY USD HEDGED
U.S.
2yr – 30yr -2.94% -2.94% -3.81% -3.81% -8.42% -8.42% 9.49% 9.49%
10yr -2.34% -2.34% -3.15% -3.15% -8.71% -8.71% 10.49% 10.49%
EUROPE
2yr – 30yr 0.32% 0.14% -0.39% -0.57% -2.77% -2.94% 9.13% 8.93%
10yr 0.07% -0.11% -0.55% -0.73% -4.16% -4.33% 9.24% 9.04%
JAPAN
2yr – 30yr -2.08% -1.78% -2.56% -2.27% -6.39% -6.11% 6.13% 6.46%
10yr -1.20% -0.90% -1.52% -1.22% -6.48% -6.19% 6.64% 6.97%
CANADA
2yr – 30yr -1.98% -2.33% -2.78% -3.12% -6.11% -6.45% 8.51% 8.12%
10yr -0.98% -1.34% -1.84% -2.19% -5.41% -5.75% 10.30% 9.91%
U.K.
2yr – 30yr 0.11% -0.01% -0.76% -0.88% -4.51% -4.62% 11.68% 11.54%
10yr -3.20% -3.32% -4.40% -4.51% -9.77% -9.88% 12.92% 12.79%
Source: RBC AM

DAGMARA FIJALKOWSKI, MBA, CFA
Head, Global Fixed Income & Currencies (Toronto & London) –
CURRENCY MARKETS RBC Asset Management Inc.
The U.S. dollar has continued EXHIBIT 1. Currency Performance

to grind lower since our last Spot Returns to November 20, 2009
publication, and the headlines
would have you believe a full-
NZD 5.9% 46.9%
blown dollar crisis is upon us
AUD 8.8% 44.8%
(Exhibit 1). While the low reached
SEK 2.6%
32.8%
by the dollar in March 2008
NOK 6.7%
26.4%
still holds, comparisons to two
CAD 2.2%
21.5%
previous dollar bear markets do
GBP 1.4%
19.8%
not allow us to answer conclusively
DKK 3.9%
18.0%
whether the bear market that
EUR 3.9%
17.8%
began in 2002 ended last year
CHF 3.9%
13.8%
(Exhibit 2). Forecasting currencies Source: Bloomberg
JPY 5.3%
11.2%
is much more complicated
than the headlines suggest. Since Last Global Investment Oulook Since March '09 USD highs
The most watched trade-weighted

dollar indices, which measure the EXHIBIT 2. Comparison of USD Bear Markets
dollar against major developed-
market currencies, show that the
105
greenback declined 35% from its 100
peak in 2001/20021 (Exhibit 3). 95
However, these indices paint an 90
incomplete picture because these 85
80 March 08
currencies, which float against the
75
greenback, account for only about 70
half of U.S. trade. The other half 65
takes place with emerging markets 60 Source: Bloomberg
including China, India, South Korea, 55
1 51 101 151 201 251 301 351 401 451 501
Taiwan, Mexico, Brazil, Russia Weeks into bear market
and Saudi Arabia. Unlike the euro,
2002-Present 1985-1995 1971-1981
pound and yen, these currencies
do not circulate widely outside
their country of issue and many EXHIBIT 3. USD Weakness Since Beginning of Bear Market
are fi xed to the dollar. Collectively, January 2002 = 100
the dollar declined only 3% against
these currencies during the entire 110
105
dollar bear market. So here is
100
the crux of the issue regarding -3.6%
95
global imbalances: while many big 90
emerging markets don’t allow their 85
currencies to appreciate against 80 -21.8%
the dollar (China being the most 75
70 -34.7%
65 Source: Bloomberg
1TW$ index (weights updated annually, includes 60
7 major trading partners: EUR, CAD, GBP, AUD,
2002 2003 2004 2005 2006 2007 2008 2009 2010
JPY, CHF, SEK ), or DXY (weights from 1972, 6
currencies: EUR, JPY, GBP, CAD, SEK and CHF). Majors Broad Index Other Important Trading Partners

CURRENCY MARKETS • DAGMARA FIJALKOWSKI, MBA, CFA
important example), the bulk of EXHIBIT 4. Gold Strength Not Limited to USD
global imbalances stems from trade Normalized Scale, June 2007 = 100
with these partners. One could
argue that as long as foreign-reserve 220
growth continues in export-oriented 200
emerging markets, there will be
180
more pressure on the dollar. Recent
estimates put global reserves at 160
US$7.4 trillion, of which only about 140
US$4 trillion is reported to the IMF 120
(China is one of those non-reporting
100
countries). It is mostly the growth Source: Bloomberg
in reserves that is responsible for 80
the pressure on the dollar. While Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09
the share of the dollar in IMF- USD EUR GBP CAD AUD
reported foreign-exchange reserves
fell to 63% from 72% between
2001 and 2008, undermining the EXHIBIT 5. PPP Valuation
October 2009
dollar is not in the best interest of
reserve managers since they remain 40
such large dollar holders. In fact, 27.8
30 26.5
Barclays estimates that the real 22.9 20.7 (% Over/Undervalued)
19.7
(adjusted for valuation) decline 20 16.4
of U.S. dollar holdings in foreign 7.8
10 6.0
reserves during that time was only
2.5%. The question is: how long 0
will developed countries tolerate -10 -2.7
their currencies absorbing the lion’s
share of the “adjustment” burden? -20 -16.1
Source: Deutsche Bank
-30
As an aside, the price of gold is NZD AUD EUR CHF NOK CAD GBP JPY SEK USD
not necessarily the unequivocal
signal of lack of faith in the dollar.
Looking at the change in the gold The extent to which major currencies strength, the upside potential for
price since the beginning of the absorbed the adjustment of the Australian dollar, the euro, and
credit crisis in June 2007 (Exhibit imbalances is reflected in their the Swiss franc is limited. The U.S.
4), we observe that gold appreciated valuations against purchasing dollar on the other hand, is 16.1%
in most currencies, not just in power parity (PPP). For several undervalued on a trade-weighted
U.S. dollar terms. Gold’s meteoric currencies, the PPP elastic bands basis, which is butting up against
rise appears to reflect a global have now stretched to, or beyond, its “line in the sand.” Historically,
desire to diversify away from fiat the “lines in the sand,”2 as these 90% of observations lie within 17%
money, as well as to hedge against currencies are more than 20% of the dollar's PPP valuation, which
the unexpected. In a world of low overvalued relative to the U.S. dollar means that sustainable downside
interest rates, even central banks (Exhibit 5). That means that despite should be limited for the dollar
are pursuing gold acquisitions to very convincing reasons for their (Exhibit 6). While we don’t know
diversify their foreign reserves.
2 Reference to extreme PPP under/overvaluation - from DB research publication “Fair Value Lines in the Sand”,
March 2006. We discussed it in detail in the Fall 2007 issue of the Global Investment Outlook .

what exactly will trigger a reversal EXHIBIT 6. USD vs. Purchasing Power Parity
in the euro or Australian dollar, DXY Index
we can expect with reasonable
certainty that one will occur. 160
150
In the past year, equities have been 140
driving currency markets. The 130
correlation between movements in 120
the dollar relative to the S&P 500 110
remains the most negative in the 100
past 10 years. However, as Exhibit 90
7 illustrates, the correlation has 80 Source: Deutsche Bank, Bloomberg
70
been far from stable and we monitor
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
this relationship for signs that it
is coming to an end. Interest rates PPP Average DXY 20% bands
would be the most natural trigger
for the equity/dollar relationship to
change course. But at the moment, EXHIBIT 7. DXY Beta to S&P 500
50-Day Rolling Beta
monetary policy as represented
by the level of 2-year yields, is just 3.0
starting to matter (Exhibit 8). We 2.5
believe that interest rates will not 2.0
be a main driver of currencies 1.5
until a change in monetary policy 1.0
is imminent, which is likely no 0.5
sooner than the second half of 0.0
2010. Once it happens, however, the -0.5
change in monetary policy should -1.0
support the dollar. Looking at the -1.5
relationship between the fed funds Source: RBC AM, Bloomberg
-2.0
target rate, 2-year yields and the 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
spread between 2-year and 10-year
bond yields (Exhibit 9), we see
that there are usually a few false EXHIBIT 8. USD Correlation With Equities and Short-Term Interest Rates
dawns before real policy change 25-Period Correlation of Daily Changes
occurs. However, the change, when
100%
confi rmed, triggers a massive
80%
flattening in the 2-10 yield curve,
60%
and this is historically a very bullish 40%
dollar scenario (Exhibit 10). Only 20%
when the Fed starts hiking rates will 0%
the major obstacle to the dollar’s -20%
rise be removed. Until then, the U.S. -40%
dollar remains a funding currency -60%
– fuel for the carry trade. With this -80% Source: RBC AM, Bloomberg
setup, we expect that currencies -100%
will be very sensitive to shifting Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09
rate expectations through 2010. Monetary Policy (2-year yields) Equities

One of the most frequent arguments EXHIBIT 9. U.S. Fed Funds Rate, 2-Year Yield and Yield Curve
against a recovery in the U.S. dollar
is the size of the country’s budget
deficit and the expectation of much 6.0 2.75%
higher debt levels down the road. 5.0 2.25%
According to JPMorgan,3 each 10%
1.75%
rise in the debt-to-GDP ratio of 4.0
a G-10 country equates to a 2.5% 1.25%
3.0
decline in the real exchange rate 0.75%
for that country. Taking the IMF 2.0
0.25%
forecasts for debt-to-GDP through
1.0 -0.25%
2014 4 (markets are forward-looking)
and comparing them to the level 0.0 -0.75%
of debt in 2008 for each country Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
relative to the debt of the U.S., one Fed Target Rate (lhs) Generic US 2-Yr Yield (lhs) US 2s-10s Spread (rhs)
can come up with expected changes
in the exchange rate (making the
assumption that spot changes EXHIBIT 10. Dollar Returns in Different Curve Scenarios
Average Returns for Trade-Weighted Dollar, 1995-2009
reflect real exchange rate changes).
The expected changes versus the 15%
actual changes (current spot versus
10%
Annualized weekly returns
the average spot price of 2008) are

illustrated in Exhibit 11. While the 5%
calculation is admittedly back-of-
the-envelope, our confidence is 0%
boosted by the fact that the actual -5%
changes have been in the same
direction as the expected ones. -10%
As for magnitude, actual changes Source: Deutsche Bank
-15%
in the euro and the pound, have Bear Flattener Bull Flattener Bear Steepener Bull Steepener
been very close to expected, while (25% of weeks) (29% of weeks) (21% of weeks) (25% of weeks)
the yen seems to have appreciated
too much and the Canadian
dollar too little. The bottom line EXHIBIT 11. Spot Adjustment to Expected Trends in Debt/GDP
is that the market seems to have Over Next Five Years
already priced in a good deal of
20%
the gloomy U.S. fiscal outlook.
15%
EURO 10%
Spot adjustment
5%
The euro, as the alternative reserve
currency to the dollar, benefits 0%
whenever risk appetite increases. -5%
-10%
3John Normand, J.P. Morgan, “Position For Cyclical Source: IMF, RBC AM
Strength and Structural Weakness”, October 2009 -15%
4IMF World Economic Outlook, October 2009 Euro area Japan UK Canada
IMF Global Financial Stability Report, October 2009 Expected Actual

This will continue as long as the EXHIBIT 12. Long-Term Relationship Between Euro and Interest Rates
dollar and S&P 500 are negatively DB Model Suggests Euro Should Be Trading at 1.21
correlated. However, as we showed
earlier, one thing that we can be sure 1.2
1.2
Ln USDDEM = 0.496 + 0.0945*(US-German) 10yr interest
of with regards to that correlation
Sample Period: Jan. 1978 - Nov. 2009 1.0
is that it’s not stable. Certainly, one 1.0
would be less likely to accumulate Adjusted R-Squared: 53%
0.8 0.8
the euro if one considered only
the economic fundamentals of the 0.6
0.6
Eurozone. Whether we use PPP as a
yardstick, or the euro’s relationship 0.4 0.4
with interest rates (Exhibit 12), the Source: Deutsche Bank
euro should be trading much lower. 0.2 0.2
There is also the issue of Europe’s Jan-77 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09
banking system, where, according ln USD/DEM Fitted ln USD/DEM
to the IMF,5 expected additional
losses exceed those realized so far.
While trend-following investors may EXHIBIT 13. Comparison of Trade Partners for Canada and Australia
push the euro beyond US$1.50 in
the short term, we would expect an August 2009 Canadian Exports, % share August 2009 Australian Exports, % share
aggressive reflationary action from
Europe once it happens and the
Other 14% Other 55%
rubber band-like behaviour versus
Mexico 1% Japan 21%
PPP to pull the euro back down.
Japan 2% Hong Kong 1%
UK 3% China 23%
CANADIAN DOLLAR China 3%
U.S. 77%
October was a volatile month for
the Canadian dollar. The currency
strengthened 6% in the fi rst half
of the month, only to weaken and
Source: Scotia Capital Economics, Industry Canada, Australian Bureau of Statistics
close slightly weaker for the month.
It appears that there is a clear
divide between how foreigners and to China, while Canadian GDP driving the Canadian dollar, we
the Bank of Canada perceive the relies heavily on U.S. demand. The would not be buying the loonie
currency. Foreigners focus on “the Bank of Canada is keenly aware below parity for the longer term.
loonie” being a highly leveraged play of the strains that an overvalued In our view, a perfect recovery has
on global growth and commodity currency puts on the economy and already been priced in (Exhibit 14).
consumption, and their minds downplays scenarios that could
often link the Australian and propel the currency even higher. JAPANESE YEN
Canadian dollars. Looking at the Interestingly, the Bank of Canada,
composition of the trade flows in which hasn’t intervened in currency While it is difficult to predict
both countries, it’s rather obvious markets, had more success arresting whether the Fed or the ECB would
why they shouldn’t (Exhibit 13), as its currency appreciation than the be the fi rst to raise rates, it’s easy to
Australian trade is closely linked Swiss National Bank, which has foresee that the Bank of Japan will
sold billions of francs against the be last among the three. On the day
5 IMF Global Financial Stability Report, U.S dollar and euro in the past year. that a move to wind down credit-
October 2009 While fully acknowledging trends easing programs was announced,

Governor Shirakawa cautioned that EXHIBIT 14. Global Business Surveys vs. USD/CAD
this move should not be construed
as an indication that the BOJ plans to
alter its near-zero policy rate anytime 30% -3.0
soon. Deflationary CPI readings 25% Source: ISM, IFO Institute, Bloomberg -2.5
Standardized
(a 2.4% year-over-year decline in 20% -2.0
inverted
15% -1.5
August) give the BOJ sufficient reason
10%
to delay hikes. Without interest -1.0
5%
rate support, the yen, as a counter- -0.5
0%
cyclical currency, should weaken -5% 0.0
as the global economy improves -10% 0.5
(Exhibit 15 illustrates the relationship -15% 1.0
with LEI). As for PPP, estimates are -20% 1.5
all over the map and therefore this Jun-93 Feb-95 Oct-96 Jun-98 Feb-00 Oct-01 Jun-03 Feb-05 Oct-06 Jun-08 Feb-10
valuation indicator is not as useful as USD/CAD (lhs, YoY) ISM & IFO (rhs)
it is for other currencies. According
to Deutsche Bank, the yen is 6%
overvalued based on CPI, and has lots EXHIBIT 15. USD/JPY vs. U.S Leading Indicators
of room to appreciate. Yet the OECD
calculates that the Japanese currency 145 125
is 23% overvalued based on a 140 120
customized basket of products. In the
135 115
shorter term, the yen may strengthen
130 110
due to temporary flare-ups in risk
125 105
aversion or foreign covering of
short positions in Nikkei equities. 120 100
115 95
110 90
BRITISH POUND Source: ECRI, Bloomberg
105 85
Sterling has been little changed in Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09
the past three months. The Bank of ECRI Weekly Leading Indicator (lhs) USD/JPY (rhs)
England continues to be the most
aggressively accommodative central
bank, expanding its quantitative companies have announced or to keep declining. While sterling can
easing program as recently as completed U.K. company takeovers continue to appreciate against the
November 5. These measures, that, so far in 2009, have brought a dollar in the short term, we expect it
combined with the weak currency, net US$4.1 billion into the country. to weaken again once the Fed starts
are starting to spur the economy. There are still many negatives fueling tightening monetary policy in the
House prices and retail sales have skepticism, primary among them second half of 2010, assuming that
improved, and manufacturing and being projections that the increase the BOE keeps its monetary policy
services indices are both signalling in U.K. public debt over the next five unchanged until at least 2011.
strength. Sterling is extremely cheap years will be larger than in any other
on a PPP basis against the euro, developed country on a debt-to-GDP POSITIONING
although it’s nowhere near such basis. These negatives help keep
extremes against the U.S. dollar. IMM6 positions short – indicating With the dollar now a funding
Cheap pound-denominated assets that speculators expect the pound currency of choice along with
are attracting foreign interest and,
6 International Money Market, a division of the Chicago Mercantile Exchange (CME)
according to Bloomberg, overseas

the yen and Swiss franc, negative EXHIBIT 16. U.S. Trade-Weighted Dollar vs. Market Positioning
sentiment toward the greenback Net Non-Commercial Futures Positions, November 20, 2009
is overwhelming. The fact that the
dollar must go down is broadly 20 95
accepted and rarely disputed. 10 Long Dollars 90
Positioning and sentiment
indicators that we follow confi rm - 85
this consensus (Exhibit 16). A (10) 80
stronger-than-expected economic
recovery, earlier-than-expected (20) 75
tightening by the Fed, or steps to (30) 70
control fiscal largesse, could force Source: CFTC, Bloomberg Short Dollars
unwinding of dollar short positions (40) 65
and contribute to a change in the Oct-05 Jun-06 Feb-07 Oct-07 Jun-08 Feb-09 Oct-09
relationship between stocks and USD IMM Positions vs all currencies (lhs, Billions) USTW$ (rhs)
the dollar’s trade-weighted value.
To summarize: • Reserve growth will slow once • A Fed hike will confi rm
emerging-market currencies yield-curve flattening and
• Dollar weakness may continue are allowed to appreciate, both will support the dollar
in the short term; dollar bears in the medium term,
are still in control and the • The longer emerging-market
bulls will have to be patient, currencies are sheltered, the • Positioning is still dollar-negative
bigger the adjustment will be, and at risk of unwind.
• Many developed-market
currencies are getting extremely • Currencies will be sensitive to Our 12-month forecasts are: euro
overvalued versus the greenback shifting rate expectations in 2010, to 1.35, sterling to 1.58, yen to 105
– the rubber band is stretched, and less so to equity movements, and Canadian dollar to 1.12.

This page intentionally left blank.

THE CURRENCY OUTLOOK: KEY FACTORS
EURO
SUPPORTIVE
>> NEGATIVE
• The only alternative to the dollar as a reserve currency • Significantly overvalued based on purchasing power
at a time when the market believes that the U.S. parity.
government is trying to drive the dollar lower. • Verbal intervention intensifies as export-driven growth
• Strong momentum/trend. in emerging markets hurts European competitiveness.
• Positive correlation with equity rally/risk appetite. • Market expectations of Fed hikes and withdrawal of
• Higher commodity prices add to diversification demand monetary accommodation before any tightening by the
for euro from reserve managers. ECB.
• Additional regulation and taxes in the U.S. may shift • Curve-flattening is historically dollar-positive.
some new foreign direct investment to Europe. • Renewed worries about fiscal situation of Greece, Italy
• Flows into equities have heavily favoured Europe over and other peripheral European economies.
U.S. and Japan. • Positioning and sentiment are overly long the euro.
• Weak dollar is prompting favourable adjustment in U.S.
current-account balance.
12-MONTH FORECAST: short term strength beyond 1.50 not expected to last, lower over our forecast horizon to 1.35.
YEN
SUPPORTIVE
>> NEGATIVE
• The yen benefits during flare-ups of risk aversion. • Worst gross public debt/GDP of any major economy
• Tax breaks for Japanese corporations to repatriate (218% estimate from the IMF for 2009).
overseas retained earnings. • Threat of intervention if yen strengthens below 85 per
• Interest rate disadvantage versus other major US$1.
currencies now at historic low. • Positioning is long the JPY.
• Recent economic statistics exceeding low • Aging population leads to fewer profitable business
expectations. opportunities in domestic marketplace – Japanese
• Stronger growth in China and other emerging markets corporations forced to invest abroad.
likely to buoy Japanese exports. • Labour market still in doldrums and winter bonuses
expected to decline causing households to cut
spending.
• Corporate sector weakness weighing on rebound in
business fixed investment.
• Expectations of negative carry as Bank of Japan will
be left behind once the global rate tightening cycle
begins.
12-MONTH FORECAST: short term strength below 85 not expected to last, over our forecast horizon yen expected to weaken to 105.

CANADIAN DOLLAR
SUPPORTIVE
>> NEGATIVE
• Sensitive to global recovery, LEI improvement. • Priced for perfection - vulnerable to renewed
• Oil rebounded to 2009 highs, other commodities weakness in energy prices and weaker recovery
trading even better. scenario.
• Healthy fiscal situation. • Oil price closer to “fair value” according to OPEC
and break-even on oil-sands projects may bring out
• Commitment to keeping rates low should help hedging of future sales ($75-$85), removing a major
promote growth and prevent deflation. support for CAD.
• Housing market and financial sector are in better • BoC firmly on hold, seeing strong currency “more
shape than their U.S. counterparts. than offsetting” economic improvement since July.
• Businesses are optimistic about future sales. • Risk of U.S. trade protectionism in 2009 and “clean
• Aggressive foreign demand for Canadian assets. energy” initiatives targeting oil sands.
• Medium-term bullish trend still intact. • Sentiment and positioning positive and extended
• Bank lending stronger than in U.S. and overseas already.
markets. • Trade is in deficit and at weakest since at least 1971.
• 16.4% overvaluation on PPP basis means limited
sustainable upside from current levels.
12-MONTH FORECAST: short term strength below parity not expected to last, our 12-month forecast is 1.12.
POUND STERLING
SUPPORTIVE
>> NEGATIVE
• Increased competitiveness of exports to Europe and • BOE expected to revise growth forecast lower,
revenues from tourism. leave rates lower for longer and possibly increase
• Gross debt/GDP at 52% is lower than EU or Japan. quantitative easing.
• Current-account deficit narrowing. • Most vulnerable of majors to global financial-system

stress.
• Housing market improving.
• Budget deficit over 11% in 2009 and expected to be
• PMI services has been improving since November 13.2% in 2010.
2008 (usually a good indicator of real GDP growth).
• Higher taxes risk driving business and wealth away.
• Doubt about the political will to reduce fiscal deficits;
risk of hung parliament (next election to be held by
June 2010).
• Private sector debt levels are highest in G8.
12-MONTH FORECAST: short term strength to 1.70 will be difficult to sustain, expected to weaken over 12 months to 1.58.

RAY MAWHINNEY – Senior V.P., U.S. & Global Equities
BRAD WILLOCK, CFA – V.P. & Senior Portfolio Manager

REGIONAL OUTLOOK – U.S. RBC Asset Management Inc.
ECONOMIC BACKDROP
UNITED STATES RECOMMENDED SECTOR WEIGHTS
The worst recession in the postwar RBC INVESTMENT BENCHMARK
era appears to be ending, as the STRATEGY COMMITTEE S&P 500
NOV. 2009 NOV. 2009
U.S. economy returned to growth in
the third quarter for the fi rst time ENERGY 13.3% 12.3%
in a year. The late spring trough in MATERIALS 4.0% 3.6%
economic activity has given way to INDUSTRIALS 10.8% 10.5%
rising vehicle and steel production, UTILITIES 2.8% 3.6%
oil and gas drilling, railcar loadings, CONSUMER DISCRETIONARY 9.4% 9.4%
home-appliance shipments and
CONSUMER STAPLES 11.6% 11.6%
exports. In response to improving
economic prospects and historically HEALTH CARE 11.8% 12.7%
low valuations, the stock market FINANCIALS 14.3% 14.4%
has rallied over 60% from the low. INFORMATION TECHNOLOGY 20.0% 19.0%
TELECOMMUNICATION SERVICES 2.3% 3.0%
Although the economic Source: RBC AM
environment has brightened, several
powerful forces are acting to mute S&P 500 EQUILIBRIUM
the strength of the recovery. In Normalized Earnings & Valuations
the household sector, consumer
spending has stopped falling, but a 3311
rising unemployment rate, too much 2026 Nov '09 Range: 1054 - 1724 (Mid: 1389)
debt and reduced availability of 1240 Nov '10 Range: 1328 - 2172 (Mid: 1750)
credit are preventing spending from 759
increasing. In the corporate sector, 464
management teams are focused 284
on hoarding cash and cutting
174
costs. While these actions have
106
boosted profitability, manufacturing
65
inventories and capital investments Source: Bloomberg, RBC AM
have posted record declines and 40
are a drag on the recovery. 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
The link between the corporate growth, a decline in initial will likely still move higher but
and household sectors, and the unemployment claims, and the be driven more by company- and
key to a sustainable recovery, is PMI employment survey all industry-specific factors. We expect
job creation. Once companies see point to improvement in the job the economic recovery to be uneven
improvement in fi nal demand, more market sometime in early 2010. as central banks around the world
jobs will be created and consumer seek to boost benchmark interest
spending will turn up, resulting Meanwhile, the equity market is rates, and investors should expect
in additional jobs and further transitioning to a more challenging more modest returns and a likely
spending. While recent employment phase. In the fi rst phase, dating increase in market volatility.
data is sending mixed messages, from the March low, the market
forward-looking indicators of moved dramatically higher as SECTOR ANALYSIS
employment are showing signs of investor fears of a depression ceded
promise. For example, a positive to relief that this would not be the The ENERGY sector underperformed
turn in temporary employment outcome. In this next phase, stocks the broader market for most of this

REGIONAL OUTLOOK – U.S. • RAY MAWHINNEY • BRAD WILLOCK, CFA
year, but since early September that consumer spending remains stocks have languished. However,
has started to show some much subdued over the intermediate term, provisions for loan losses should
anticipated leadership. Energy we are downgrading our position peak sometime in the next few
stocks typically outperform as an to market weight from overweight. months and this typically has led
economic recovery takes shape. The to better relative performance. As
strength of the economic rebound The performance of the HEALTH such, we upgrade our position
in emerging economies, combined CARE sector has been hampered by to neutral from underweight.
with a favourable outlook for a uncertainty regarding health-care
moderate recovery in developing reform as investors consider which The MATERIALS sector has
economies in 2010, has boosted areas of the group will be hurt most outperformed so far this year as
investor sentiment toward the once a fi nal bill is passed. In our the global economic recovery
group. Within the sector, our opinion, given the political process, gathers pace. Demand for raw
preference is for oil producers, oil it is likely that the fi nal bill will do materials in China and other
service and drilling companies less damage to the profitability of emerging markets continues to be
and selective international the sector than is currently priced robust, and the destocking process
integrated oil companies. We into the stocks. Still, although the that characterized much of the
maintain our overweight position. sector is attractive, we expect the past year in the developing world
reform process to drag on well into appears to be giving way to small
The CONSUMER STAPLES sector the fi rst quarter of 2010 and so we production increases and inventory
lagged the broader market rally maintain our underweight position. accumulation. Shares of mining
during its initial stages, but recently and chemicals companies, as well
began outperforming despite Over the past three months, as producers of industrial gases,
a relative lack of leverage to an the INDUSTRIALS sector has have done well, while steel and
economic recovery. We continue outperformed the market as agriculture-related names have
to focus on food retailers, which confidence in the recovery has faired poorly. We expect demand for
should benefit from an end to grown. The group’s profitability commodities to remain solid while
price deflation in the coming has shown amazing resilience supply struggles to keep up and a
months, and selective household as management teams cut costs weak U.S. dollar to be supportive.
and personal product companies rapidly to better match supply We remain overweight the sector.
with global businesses. Given our with demand. The sector stands
outlook for an uneven recovery, to benefit disproportionately The INFORMATION TECHNOLOGY
it seems prudent to maintain as spending on infrastructure, sector has outperformed since
our market-weight position. machines and equipment recovers late November 2008. However,
from an unsustainably low base. As during recent months, relative
The CONSUMER DISCRETIONARY a result, we are moving to a slight performance appears to be slowing
sector continues to be one of the overweight stance on the sector. as investors become concerned
leaders in the market as investors the stocks may reflect near-peak
become more comfortable with The FINANCIALS sector has been earnings. It seems far too early in
prospects for sustainable economic the worst performing over the past the recovery to believe the sector
growth in 2010. Both specialty three months. Uncertainty around has reached this level when the
retailers and department stores potential regulatory changes, global economy has just barely
have performed well as strict mixed data from the housing climbed out of the worst recession
inventory management enabled market and rising unemployment in decades. We believe higher
them to generate more sales at full have combined to pressure the earnings lie ahead for the group
price even though traffic remains stocks. In addition, with valuations and that stock prices will follow. We
anemic. However, given the more in line with the economic maintain our overweight position.
significant outperformance of the backdrop that is widely expected to
group this year and the likelihood unfold in the coming quarters, the

STUART KEDWELL, CFA – Senior V.P. & Senior Portfolio Manager
REGIONAL OUTLOOK – CANADA RBC Asset Management Inc.
ECONOMIC BACKDROP
CANADA RECOMMENDED SECTOR WEIGHTS
The S&P/TSX Composite continued RBC INVESTMENT BENCHMARK
to progress during the fall quarter STRATEGY COMMITTEE S&P/TSX COMPOSITE
with most other global equity NOV. 2009 NOV. 2009
markets and, despite five swings ENERGY 28.0% 27.3%

of between 7% and 10%, delivered MATERIALS 20.5% 19.7%
reasonable relative performance. INDUSTRIALS 6.5% 5.6%
Materials stocks did the heavy UTILITIES 1.5% 1.5%
lifting in the most recent period,
CONSUMER DISCRETIONARY 4.5% 4.3%
with shares of gold and energy
companies registering strong
performances and reaching their HEALTH CARE 0.0% 0.5%
highest prices in a year. Financials FINANCIALS 29.5% 30.7%
moved sideways as regulatory INFORMATION TECHNOLOGY 3.5% 3.3%
commentary surrounding the sector TELECOMMUNICATION SERVICES 3.5% 4.3%
picked up globally. Banks noticeably Source: RBC AM
outperformed insurance companies.
S&P/TSX COMPOSITE EQUILIBRIUM
The Canadian dollar was Normalized Earnings & Valuations
characterized by volatility,
22387
traversing a wide range of $0.90
14307 Nov '09 Range: 10275 - 15323 (Mid: 12799)
to $0.98 and fi nishing near the Nov '10 Range: 10777 - 16072 (Mid: 13425)
midpoint. Bank of Canada Governor 9143
Current (30-Nov-09): 11447
Mark Carney, in an assertive speech, 5843
managed to deflate some of the 3734
Canadian dollar’s momentum 2387
near the middle of the quarter and 1525
has been consistent in reflecting
975
his concern about the negative
623
impact of a surging Canadian Source: Bloomberg, RBC AM
dollar on the economic recovery. 398
While Canadian economic growth 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
is expected to modestly outstrip
the U.S. next year and short-term price level that we believe to be SECTOR ANALYSIS
interest rates are expected to be consistent with mild inflation and
modestly higher, we believe the low interest rates in an environment We have lowered the weighting on
strength of the Canadian dollar of economic growth. While the Canadian FINANCIALS to a modest
has largely run its course given the S&P/TSX Composite remains the underweight, putting the sector in
currency’s extreme overvaluation developed world’s most expensive line with our global outlook. The
based on purchasing power parity. equity market and is nearing the stock performance of banks off the
midpoint of our 2009 estimate of March lows has been impressive,
As the credit crunch diminishes fair value, it is still attractively but as we move forward, regulatory
and the economy begins to stabilize, valued. As we roll forward to considerations and discussions
attention has returned to equity- our 2010 estimate of fair value, are likely to result in a period of
market valuations. Fair value is the reasonable returns are expected. uncertainty. Canadian banks

REGIONAL OUTLOOK – CANADA • STUART KEDWELL, CFA
enter this period well capitalized While weakness in the U.S. dollar growth and increased competition,
on traditional measures, but risk has accelerated gains for oil, futures on the one hand, while still
weightings are likely to rise and contracts indicate optimism that considering the reasonable
the quality of capital is likely to be a global economic recovery will valuations and high levels of
in focus. While investors have so tighten the supply-demand picture free cash flow, on the other.
far been focused on normalized for ENERGY through next year. Stocks
earnings for the 2011 to 2012 in the sector are currently fairly INFORMATION TECHNOLOGY remains
time frame, the regulatory issues valued given the environment and overweight. This sector provides
may cause investors to question offer attractively priced options investors with reasonable valuations,
whether the environment for which on higher prices. Natural gas cyclical recovery benefits and
they have modeled earnings is offers the potential for recovery some powerful secular forces,
appropriate. Insurers face similar, from current prices, which have which benefit sector heavyweight
if not heightened, risks on these been depressed by a slow start to Research In Motion, in particular.
fronts. Given the underperformance winter and an increased supply
of insurers’ shares, these risks backlog from newly drilled wells The CONSUMER STAPLES and
already appear reflected more not yet connected to pipeline CONSUMER DISCRETIONARY sectors
than elsewhere in the sector. systems. We remain overweight. stay near market weight. Well run
businesses at reasonable valuations
We are recommending an The INDUSTRIALS sector remains characterize these sectors. Tim
overweight in MATERIALS and, overweight. With economic Hortons’ valuation looks attractive,
within the sector, a slight emphasis activity picking up, a number and particularly so if one considers
on basic metals and chemicals at the of well managed Canadian that the company’s U.S. business
expense of gold. Continued concern bellwethers are well positioned is approaching profitability. We
over the U.S. dollar, coupled with for improved earnings. Further, are also focused on a potential
Barrick Gold’s decision to remove its as government stimulus triggers recovery in profit margins at Loblaw,
hedges and India’s large purchase infrastructure spending, there which could provide shareholders
of gold, contributed to a breakout in are a number of companies in with above-average returns over
the Gold sub-sector. Copper led the this sector that stand to benefit. the coming years. In addition, the
commodity surge. Many Materials controlling Loblaw stake held
companies can expect significant We remain underweight in by George Weston provides an
improvements in free cash flow on TELECOMMUNICATION SERVICES, attractive discount to net asset
the back of higher commodity prices. reflecting the sector’s slowing value for the parent company.

DOMINIC WALLINGTON – Chief Investment Officer,
REGIONAL OUTLOOK – EUROPE RBC Asset Management UK Limited
ECONOMIC BACKDROP
EUROPE RECOMMENDED SECTOR WEIGHTS
We remain positive on prospects RBC INVESTMENT BENCHMARK
for European equity markets. While STRATEGY COMMITTEE MSCI EUROPE
NOV. 2009 NOV. 2009
it appears that economies in the
region are either bottoming or ENERGY 12.8% 11.5%
improving, we believe the eight- MATERIALS 10.5% 8.8%
month rally from the lows in March INDUSTRIALS 9.7% 9.4%
has been driven more by the receding UTILITIES 4.9% 6.3%
financial crisis than by any great CONSUMER DISCRETIONARY 7.5% 7.4%
hope for an uptick in European GDP.
Equities valuations remain well
below long-term averages and look HEALTH CARE 8.2% 9.9%
cheap in comparison to other asset FINANCIALS 24.5% 24.8%
classes such as cash and bonds. INFORMATION TECHNOLOGY 3.7% 2.8%
TELECOMMUNICATION SERVICES 6.4% 7.2%
We believe that stock markets could Source: RBC AM
be driven higher by sustained levels of
profitability, and third-quarter results EUROZONE DATASTREAM INDEX EQUILIBRIUM
are again demonstrating that. Despite Normalized Earnings & Valuations
the scale and nature of the economic
downturn, profitability remains 4467
stable. There is skepticism in many 2899 Nov '09 Range: 1523 - 2546 (Mid: 2034)
quarters that this can continue in 1881 Nov '10 Range: 1744 - 2914 (Mid: 2329)
Continental Europe given the region’s 1221
less flexible, laissez-faire-resistant 792
political structure. This view is based 514
more on opinion than evidence and
334
we believe that equity markets will
217
begin to price in higher levels of
141
profitability in the coming quarters. Source: Datastream, Consensus Economics, RBC AM
The U.K. is still in the grip of the worst 1980 1985 1990 1995 2000 2005 2010 2015
recession since the Second World War,
and output could fall by 6% over the may act as a drag on recovery. We consumption, and this created an
course of the downturn. However, believe that management teams early and extreme reaction. We
several things suggest that the worst have tackled problems associated expect growth in the second half
is over. Low interest rates, continued with the downturn well. of 2009 due to Germany’s rapid
quantitative easing, a weaker rebound as it rides the global
exchange rate and a recovering Continental Europe entered a manufacturing cycle. The strength
global economy will all help. Sterling severe recession in 2008 as a rapid of the euro will be a headwind,
has fallen approximately 20% since contraction in the export- and but we believe that Germany and
mid-2007, a plus for exporters. investment-oriented economies France, with their lack of consumer
The largest part of the economy, of Central Europe led to a record debt and renewed competitiveness,
consumer spending, may take some contraction in GDP in early 2009. will lead growth in the region.
time to recover and the relatively high
burden of household debt, while not Business investment and trade We have found trend P/E – the
as severe a problem as some suggest, balances are more volatile than aggregate price of the stock market

REGIONAL OUTLOOK – EUROPE • DOMINIC WALLINGTON
divided by its long-term level of that mining companies are now They are the continued recipients
earnings – to be a good indicator fairly valued. Steel producers remain of free reserves from Central
of valuations, and, on this basis, a relatively inexpensive part of Banks and, as access to wholesale
stocks look inexpensive. At the point the sector, but their outlook is still funding is restricted, they are able
in the cycle where the economy is somewhat unclear. Construction to charge their customers more.
perceived to have started improving stocks have also performed well
or stopped worsening, share prices and while we expect infrastructure Reductions in European interest
rise more quickly than profits spending to provide some revenue rates have set the stage for a
because investors look through the growth, valuations are quite full in recovery in household spending, as
low point in earnings to levels more the sector. However, our positive consumers feel more encouraged
in line with long-term performance. view on the economy as a whole by the economic backdrop and
For this reason, forward-looking P/ keeps the rating at overweight. more secure in their jobs. Share
Es are less of a guide to the direction performance has been robust in
of the stock market than trend P/Es, The UTILITIES sector remains the CONSUMER DISCRETIONARY
and we believe this has led to undue one of the less attractive areas sector and valuations have begun
pessimism among some investors. of the market from a dividend- to catch up with the improving
yield perspective and we remain macroeconomic outlook, but
In summary, we believe we concerned that power prices in we remain convinced that
are still in the early stages of a Europe – a key determinant of further progress is possible. Our
cyclical recovery. Investors tend the profitability of much of the exposure is now predominantly
to focus on the cyclical areas of sector – will be forced lower. auto- and media-related.
the stock market at such times, These companies may have We remain overweight.
but the performance of these moved too aggressively to cut debt
economically sensitive sectors following the fi nancial crisis. The Much of the INDUSTRIALS sector
has been so robust that, while we rating stays at underweight. has performed extremely well,
want to retain a cyclical bias in our and it now looks fully valued. Our
portfolios, we expect a degree of HEALTH CARE has been a laggard this exposure is focused on business
catch-up from other areas of the year, as investors shifted investments services and capital-goods
market that have been left behind to more cyclical sectors. We believe companies that garner substantial
from a valuation perspective. Our the sector offers the potential revenues from selling services.
strategy is, therefore, stock-specific for big relative gains, but such a The continued recovery in global
without large sector variances. scenario is difficult to forecast. growth remains a backdrop for
Within the sector, we have switched continued high profitability in
SECTOR ANALYSIS our exposure somewhat to medical these areas and we remain largely
technology companies, which offer neutral on the overall sector.
Europe’s INFORMATION TECHNOLOGY greater visibility relative to makers
sector has exhibited much greater of pharmaceuticals. We remain We believe the ENERGY sector
levels of capital discipline in the underweight the sector overall. will gain as valuations catch up
decade since the bursting of the to the overall market. Investors
Tech Bubble, and we expect that We remain neutral on the FINANCIALS have been concerned about the
this will enable companies to sector as valuations remain sustainability of dividends, but
perform better than expected. reasonable even after a strong recent results point to robust cash
Valuations remain attractive in the rally. Longer term, we can see a flows that can be directed to debt
sector and balance sheets are also much more stringent regulatory reduction after dividends are paid.
robust. We remain overweight. environment developing and we We have raised our rating on the
expect Bank sector leverage to fall. sector to overweight from neutral.
The MATERIALS sector has performed In the short term, however the
strongly this year, and we believe banks have several advantages.

YOJI TAKEDA – Director & V.P., Asian Equities
REGIONAL OUTLOOK – ASIA RBC Investment Management (Asia) Limited
ECONOMIC BACKDROP
ASIA RECOMMENDED SECTOR WEIGHTS
Our view remains somewhat RBC INVESTMENT BENCHMARK
positive on equities in Asia, where STRATEGY COMMITTEE MSCI PACIFIC
markets are benefiting from an NOV. 2009 NOV. 2009
attractive combination of excess ENERGY 3.6% 2.6%
liquidity, still-low inflation and MATERIALS 13.4% 11.6%
strong demand from China, which INDUSTRIALS 15.0% 14.7%
continues to vacuum up imports UTILITIES 3.0% 4.9%
from neighbouring countries. This
CONSUMER DISCRETIONARY 15.0% 14.4%
helps export industries around the
region, and makers of information
technology, consumer electronics HEALTH CARE 3.0% 4.6%
and automotive products, in FINANCIALS 28.8% 28.7%
particular. Japan’s economy is the INFORMATION TECHNOLOGY 10.4% 8.8%
exception and will require a catalyst TELECOMMUNICATION SERVICES 1.5% 3.5%
to catch up with other Asian markets.
Source: RBC AM
China’s unprecedented fiscal JAPAN DATASTREAM INDEX EQUILIBRIUM

and monetary stimulus should Normalized Earnings & Valuations
continue to support annualized
1000
growth levels, which are currently
running between 8% and 9%. There 717
is, at this point, little incentive to 514
restrain the expansion, which is 368
pushing up real estate prices and 264
equity markets, since domestic 189
employment remains subdued Nov '09 Range: 309 - 743 (Mid: 526)
136
Nov '10 Range: 357 - 859 (Mid: 608)
and inflation muted. However, 97 Current (30-Nov-09): 260
renewed weakness in the U.S. dollar
70 Source: Datastream, Consensus Economics, RBC AM
is boosting liquidity and forcing
50
some Asian countries to intervene
1980 1985 1990 1995 2000 2005 2010 2015
in foreign-exchange markets.
The pace of economic recovery in of Asia’s export-led recovery. In the enacted some mild tightening
Asia may be moderating after a sharp meantime, China will likely maintain measures, while Australia’s central
rebound from the early-2009 low. a high level of domestic demand bank has hiked short-term interest
This is evident in the 2.4% increase in through massive government fiscal rates twice since September, and
China’s third-quarter GDP versus the stimulus. The Shanghai World the Bank of Korea also hinted that
2008 period, down from 4.0% in the Expo, which begins in May 2010, monetary tightening is on the way.
previous quarter, while Japan’s GDP will provide an additional push to
rose just 1.3% in the third quarter. the expansion. Another factor in While Japanese industrial production
Growth in Japan has been driven by China’s growth is excess liquidity. is recovering in a V-shaped fashion,
strong Chinese demand and renewed Bank lending grew 34% in the nine production levels are still 20% below
factory production after cutbacks months ended September 30, 2009, their 2008 peak and there remains
following the financial crisis. We raising expectations of a gradual plenty of slack in the economy.
expect rising U.S. and European tightening in monetary policy. This scenario is deflationary, and
demand to generate the second leg China’s government has already the Bank of Japan recently forecast

REGIONAL OUTLOOK – ASIA • YOJI TAKEDA
that consumer prices will decline are improving, thanks to strong Taiwanese and Korean manufacturers
until 2011. In addition, a new left- money growth. One concern is are the major beneficiaries. Chinese
leaning government has shifted Japan, where financial companies consumer demand for flat-panel
the country’s budget priorities need to keep raising equity in order TVs has absorbed the excess
resulting in temporary halts to many to beef up their capital ratios. inventory that existed in early 2009.
infrastructure projects. The yen’s
persistent strength is burdening We are more positive on the Prospects for the ENERGY sector
exporters and economic growth may INDUSTRIALS sector and are, therefore, have improved as global growth
well stagnate in coming quarters. moving to a slight overweight from has recovered, and our rating
neutral. Transportation company remains overweight. Chinese oil
Exporters in Taiwan and South shipment volumes are rising and and coal companies are reporting
Korea are benefiting more than capital investment in utility and strong domestic demand, and
most from strong Chinese demand. infrastructure-related areas is prospects for Australian oil and
Electronics factories are operating strong. Construction is robust gas producers remain healthy.
near capacity for products such in real estate and infrastructure,
as TV liquid crystal displays, PCs, thanks to fiscal stimulus. Our Our rating for CONSUMER STAPLES
smart phones and memory chips. enthusiasm for the sector is tempered rises to neutral from underweight.
For these products, OECD demand by manufacturers’ reluctance to Japanese food and beverage
seems to be recovering more than invest in plant and equipment. companies are recovering with the
expected as the Christmas season help of restructurings and, in some
approaches, and inventories are Our rating on the CONSUMER cases, mergers. Lower crop costs
not excessive. Hong Kong assets are DISCRETIONARY sector remains are also a positive. The trend is less
benefiting from liquidity due to the overweight. Automobile sales are promising for convenience stores,
currency’s peg to the U.S. dollar, gradually recovering in OECD which are reporting weak sales.
which is pushing up real estate and markets as consumer confidence
stock prices. Taiwan continues to improves. Chinese auto sales remain We remain underweight the HEALTH
reap dividends from its improving extremely strong and the country is CARE sector, as many Japanese
relationship with mainland now the world’s largest car market. pharmaceutical companies face
China. Down south, Australia’s Some specialty-retail businesses patent expiries on major drugs
domestic economy is showing a in Japan are showing steady and insufficient pipelines to
solid recovery. The country was the growth because of new products, pick up the slack. Companies
fi rst to start raising interest rates although conventional retailers that sell medical equipment and
toward more normal levels and are having a more difficult time. services offer better prospects.
continues to benefit from strong
demand from China for its iron The MATERIALS sector is buoyant We remain underweight both
ore and other natural resources. and we remain overweight. Strong UTILITIES and TELECOMMUNICATION
Chinese demand and a global SERVICES. Neither sector offers
SECTOR ANALYSIS economic recovery are raising much growth. Even in China,
prices for metals and minerals, the telecom business appears
We remain neutral on the FINANCIALS as well as for steel and chemicals. to be maturing and utilities are
sector. Investor confidence has Demand for materials used in hampered by tight rate controls.
returned to the global financial electronics is also improving.
system, backed by a recovery in
economic activity. Asian financial The INFORMATION TECHNOLOGY sector
companies, particularly outside remains overweight. Demand for PCs
Japan, have forecast better asset and mobile phones has been stronger
quality and lower loan-loss than expected, and semiconductor
provisions and real estate markets production is operating near capacity.

RBC INVESTMENT STRATEGY COMMITTEE
MEMBERS

CHIEF INVESTMENT OFFICER,
RBC GLOBAL ASSET MANAGEMENT
CHAIR, RBC INVESTMENT STRATEGY COMMITTEE
Dan Chornous is Chief Investment Officer of RBC Global Asset Management, Canada’s largest single mutual fund family,
with over $81 billion in domestic and global equity and fixed income mandates, including the Royal Mutual Funds group
of products. Effective May 1, 2008, Dan was also named Chief Investment Officer, Phillips, Hager & North following its
merger with RBC AM, a combination that boosted total assets under management to $141 billion. Dan is responsible
for the overall direction of investment policy and fund management. In addition, he chairs the RBC Investment Strategy
Committee, the group responsible for global asset mix recommendations and global fixed income and equity portfolio
construction for use in RBC Wealth Management’s key client groups including RBC Funds, International Wealth
Management, RBC Dominion Securities and RBC Phillips, Hager & North Investment Counsel Inc. Dan serves on the
Board of Directors of the Canadian Coalition for Good Governance and is also chair of its Public Policy Committee.
JIM ALLWORTH PATRICIA CROFT

PORTFOLIO MANAGER, CHIEF ECONOMIST,
RBC ASSET MANAGEMENT INC. RBC GLOBAL ASSET MANAGEMENT
Jim has been in the investment business for 38 years, as both a Patti’s experience in the investment-management industry spans
research analyst and portfolio strategist. He is currently a director almost three decades. She spent 16 years on the sell side, and was a top-
of RBC Investments and also Vice-Chair of the RBC Capital Markets ranked sell-side economist before joining Canada Trust in 1996 as Chief
Investment Strategy Committee. Through his 33 years at RBC Economist and member of the firm’s asset-allocation strategy committee.
Dominion Securities (and predecessors), Jim has played a key role in In 1998, Patti joined Sceptre Investment Counsel as Chief Economist. In
developing investment policy for the firm and translating that into this role, she managed portfolios for private and institutional clients, and
solutions for individual clients. He presents extensively on the topic. later became head of the firm’s asset-mix committee. In 2004, Patti joined
PH&N as Chief Economist. She is responsible for global macroeconomic
research and outlook and is part of the asset-mix team overseeing $15
billion in balanced mandates. She also manages institutional portfolios.
Patti is a frequent public speaker and commentator on economic issues,
and is quoted regularly in print and electronic media.
JANET L. ENGELS DAGMARA FIJALKOWSKI, MBA, CFA

SENIOR V. P. AND DIRECTOR, HEAD, GLOBAL FIXED INCOME & CURRENCIES
PRIVATE CLIENT RESEARCH GROUP (TORONTO AND LONDON),
RBC WEALTH MANAGEMENT RBC ASSET MANAGEMENT INC.
Janet has more than 26 years of experience in the securities industry. As Head of Global Fixed Income & Currencies at RBC Asset
She joined Tucker Anthony, later RBC Dain Rauscher, in 1982. Over the Management, Dagmara oversees 15 investment professionals in
course of her career, she has held the positions of Director of Equity Toronto and London, with more than $40 billion in assets under
Research for Sutro & Co. and Director of Equity Strategies for Tucker management. In her duties as a portfolio manager, Dagmara looks
Anthony. In 2002 she was named Director of the Private Client Group after foreign-exchange hedging and active currency-management
at RBC Dain Rauscher, now RBC Wealth Management, where she is programs for fixed-income and equity funds, and co-manages
also a member of the Director’s Circle. several of the firm's bond portfolios. Dagmara is a member of the
RBC Fixed Income & Currencies Committee; the RBC Investment
Policy Committee, which determines the asset mix for RBC balanced
products; and the RBC Investment Strategy Committee, which
establishes global strategy for the firm.

MEMBERS
STUART KEDWELL, CFA ANDREW MITCHELL, CFA

SENIOR V. P. & V.P. & INSTITUTIONAL PORTFOLIO MANAGER,
SENIOR PORTFOLIO MANAGER, PHILLIPS, HAGER & NORTH INVESTMENT MGMT LTD. AND
RBC ASSET MANAGEMENT INC. PORTFOLIO MANAGER, RBC ASSET MANAGEMENT INC.
Stu Kedwell began his career with RBC Dominion Securities in the Andrew began his career at RBC Dominion Securities and has over
firm’s Generalist program and completed rotations in the Fixed Income, 15 years of experience in the investment industry. He is currently
Equity Research, Corporate Finance and Private Client divisions. an institutional portfolio manager at Phillips, Hager & North, and a
Following this program, he joined the RBC Investments Portfolio member of the firm's Canadian Equity team. He is also a portfolio
Advisory Group and was a member of the RBC DS Strategy and Stock manager at RBC Asset Management. Prior to joining PH&N, Andrew
Selection committees. He later joined RBC Asset Management as was a top-ranked sell-side equity analyst and Managing Director
a senior portfolio manager and now manages the RBC Canadian at Scotia Capital. Andrew holds an MSc from the London School
Dividend Fund, RBC North American Value Fund and a number of of Economics. He was appointed to the RBC Investment Strategy
other mandates. He is co-head of RBC Asset Management’s Canadian Committee in 2009.
Equity Team.
MARTIN PALECZNY, CFA GEORGE RILEY, FSI

V. P. & SENIOR PORTFOLIO MANAGER, HEAD GLOBAL INVESTMENT SOLUTIONS,
RBC ASSET MANAGEMENT INC. RBC INTERNATIONAL WEALTH MANAGEMENT
Martin Paleczny, with 15 years of experience in the investing field, George has more than 30 years experience in the Financial sector, with
began his career at Royal Bank Investment Management, where he over 18 years of investment experience. He is a Fellow of the Securities
developed an expertise in derivatives management and created a policy and Investment Institute. Prior to joining RBC, he worked with Lloyds
and process for the products. He also specializes in technical analysis Bank International in their trust businesses in the British Isles and
and uses this background to implement derivatives and hedging Monaco. George joined Royal Bank of Canada in 1985 and moved to
strategies for equity, fixed income, currency and commodity-related Guernsey where he was appointed Director of Royal Bank of Canada
funds. Since becoming a portfolio manager, Martin has focused on Investment Management (Guernsey) Limited in 1993. In March 2000,
global allocation strategies for the full range of assets, with an emphasis he moved to Geneva, Switzerland, where he was appointed Chief
on using futures, forwards and options. He serves as advisor to the RBC Investment Officer of Royal Bank of Canada (Suisse) in June 2002.
Investment Strategy Committee for technical analysis. In January 2006 George was appointed Head, Global Investment
Solutions and relocated to Guernsey.
JASON STORSLEY, CFA GORDON TELFER

PRESIDENT & CEO, DIRECTOR OF EQUITIES, U.S.
RBC DIRECT INVESTING RBC GLOBAL ASSET MANAGEMENT
Jason joined RBC Direct Investing on Feb. 1, 2009, and is responsible for Gordon joined the firm in 2003 from Alliance Capital Management, where he
developing strategy, growing assets under administration, and expanding was a senior portfolio manager and member of the investment policy group.
revenue and market share. He was previously head of RBC AM's Before that, he was a senior vice president and global strategist at Scudder
institutional investment-management business and Director of Global Kemper Investments, where he served on the firm’s investment management
Equity Research. Jason's career at RBC Financial Group dates from 1998, committee. Gordon began his career in 1986 at Murray Johnstone
when he joined RBC DS. In 2001, he moved to the Fixed Income Portfolio International. As a member of the RBC Investment Strategy Committee
Advisory Group, where he was in charge of structuring portfolios for high- (RISC), Gordon helps to formulate macro investment strategy and ensure
net-worth clients and formulating trade recommendations. Jason was investment best practices. Gordon has spoken at numerous regional and
elevated to Vice President in 2003, when he assumed leadership of the national conferences on portfolio management and been a guest on CNBC.
portfolio advisory group, and the retail bond sales and trading desks. A native of Glasgow, Scotland, he earned a Stock Exchange Diploma from
Heriot-Watt University, Edinburgh, Scotland.

RBC INVESTMENT STRATEGY COMMITTEE
GLOBAL EQUITY HEADS

Ray Mawhinney Senior V.P., U.S. & Global Equities
Yoji Takeda Director & V.P., Asian Equities
RBC Investment Management (Asia) Limited
Dominic Wallington Chief Investment Officer & Chief Executive Officer
RBC Asset Management UK Limited
Paul Johnson V.P. & Senior Portfolio Manager, Global Equities
GLOBAL EQUITY ADVISORY COMMITTEE

Chris Beer, CFA V.P. & Senior Portfolio Manager, Canadian & Global Equities
Cameron Hurst Associate Portfolio Manager, U.S. Equities (Financials)
Henry Kwok Senior Analyst, Global Equities (Health Care & Consumer Staples)
Stuart Morrow, CFA Manager, Global Equities Research
Martin Paleczny, CFA V.P. & Senior Portfolio Manager, Asset Allocation & Derivatives
Cameron Scrivens V.P. & Senior Portfolio Manager, U.S. Equities (Health Care & Technology)
Robert Silgardo, CFA Senior Analyst, Global Equities (Telecommunications & Technology)
Janice Wong, CA, CFA Senior Analyst, Global Equities (Industrials & Utilities)
GLOBAL FIXED INCOME & CURRENCIES ADVISORY COMMITTEE

Soo Boo Cheah, MBA, CFA Portfolio Manager, Global Fixed Income & Currencies
Patricia Croft Chief Economist
RBC Global Asset Management
Dagmara Fijalkowski, MBA, CFA V.P. & Senior Portfolio Manager, Global Fixed Income & Currencies
Suzanne Gaynor V.P. & Senior Portfolio Manager, Global Fixed Income & Currencies
Robin Gullason, CFA V.P., Fixed Income Portfolio Advisory Group
RBC Dominion Securities Inc.

This information has been provided by RBC Asset Management Inc. and is for informational purposes only. It is not
intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be
relied upon for providing such advice. RBC Asset Management takes reasonable steps to provide up-to-date, accurate and
reliable information, and believes the information to be so when printed.
Due to the possibility of human and mechanical error as well as other factors, including but not limited to technical or
other inaccuracies or typographical errors or omissions, RBC Asset Management is not responsible for any errors or
omissions contained herein. RBC Asset Management reserves the right at any time and without notice to change, amend
or cease publication of the information.
Any investment and economic outlook information contained in this report has been compiled by RBC Asset Management
Inc. from various sources. Information obtained from third parties is believed to be reliable, but no representation or
warranty, express or implied, is made by RBC Asset Management Inc., its affiliates or any other person as to its accuracy,
completeness or correctness. RBC Asset Management Inc and its affiliates assume no responsibility for any errors or
omissions.
©Copyright 2009. This report may not be reproduced, distributed or published without the written consent of RBC Asset
Management Inc. RBC Asset Management provides wealth management services and is a Member Company under RBC.
RBC Asset Management Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. ® Registered
trademark of Royal Bank of Canada. Used under license.
A NOTE ON FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements about the Fund, its future performance, strategies or prospects,
and possible future Fund action. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,”
“anticipate,” “estimate,” “expect,” “intend,” “forecast,” “objective” and similar expressions are intended to identify
forward-looking statements.
Forward-looking statements are not guarantees of future performance. Forward-looking statements involve inherent
risks and uncertainties, both about the Fund and general economic factors, so it is possible that predictions, forecasts,
projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on
these statements as a number of important factors could cause actual events or results to differ materially from those
expressed or implied in any forward-looking statement made in relation to the Fund. These factors include, but are not
limited to, general economic, political and market factors in Canada, the United States and internationally, interest and
foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws
and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events.
The above list of important factors that may affect future results is not exhaustive. Before making any investment
decisions, we encourage you to consider these and other factors carefully. All opinions contained in forward-looking
statements are subject to change without notice and are provided in good faith but without legal responsibility.

® Registered trademark of Royal Bank of Canada. RBC Global Asset Management is a trademark of Royal Bank of Canada. Used under license.
© RBC Global Asset Management 2009. All rights reserved.

Global Investment Outlook The Year Ahead RBC Global Asset Management

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T HE G LOBAL I NVESTMENT O UTLOOK

RBC Investment Strategy Committee

NEW YEAR 2010

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 1

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

Sarah Riopelle, CFA – Portfolio Manager,

ECONOMIC & CAPITAL MARKETS FORECASTS 4

RECOMMENDED ASSET MIX 5

CAPITAL MARKETS PERFORMANCE 8

GLOBAL ECONOMIC OUTLOOK 10

GLOBAL INVESTMENT OUTLOOK 16

GLOBAL FIXED INCOME MARKETS 43

REGIONAL EQUITY MARKET OUTLOOK

RBC INVESTMENT STRATEGY COMMITTEE 68

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

SARAH RIOPELLE, CFA

2 THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 3

ECONOMIC FORECAST (RBC INVESTMENT STRATEGY COMMITTEE)

UNITED STATES CANADA EUROPE UNITED KINGDOM JAPAN CHINA

TARGETS (RBC INVESTMENT STRATEGY COMMITTEE)

FORECAST CHANGE FROM 1-YEAR TOTAL RETURN

4 THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 5

...Continued from previous page

35-YEAR AVERAGE 9.8% 6.4%

LAST 12 MONTHS AVERAGE 11.7% 5.2%

LAST 12 MONTHS AVERAGE 12.8% 7.3%

6 THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

35-YEAR AVERAGE 10.4% 9.2%

LAST 12 MONTHS AVERAGE 13.8% 10.4%

35-YEAR AVERAGE 10.6% 11.4%

LAST 12 MONTHS AVERAGE 14.9% 13.0%

35-YEAR AVERAGE 10.8% 14.1%

LAST 12 MONTHS AVERAGE 17.1% 17.5%

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 7

The U.S. dollar declined against EXCHANGE RATES (USD RETURNS)

Over the latest 12-month period, CANADA (CAD $ BASIS)

local currency. During this period,

8 THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

a gain of 19.2%, compared with a CANADA (CAD $ BASIS)

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 9

powered by emerging markets, firmer

10 THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

Key to the recovery is the outlook EXHIBIT 3. China

Cumulative % Change/QoQ Ann.

recent softening of the government’s Boom

While China’s recovery appears Time

THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 11

BASE CASE: EXHIBIT 5. U.S. Recessions

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THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE 13

BOND YIELDS ARE EXHIBIT 7. Real Short-Term Interest Rates

Bank Credit Analyst report points 1.0

the real estate bubble burst when

debt burden and the sensitivity of 0.5

largely behind us, a funding crisis Real Estate

U.S. and U.K. (Exhibit 10). Much of 6.0

14 THE GLOBAL INVESTMENT OUTLOOK RBC INVESTMENT STRATEGY COMMITTEE

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ALLAN SEYCHUK, CFA

GLOBAL ECONOMY ON THE PATH TO NORMALCY