The Great Disconnect2016

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March 9, 2009 – The Bottom Was In

Cash Flows Out of Equities into Bonds Unabated

Source: ICI (excludes MMKT) – Net new cash flow is the dollar value of new sales minus redemptions combined with net exchanges. Note: Data for funds that invest primarily in other mutual funds were excluded from the series. Components many not add to the total because of rounding.

2008 2009 2010 2011 2012 2013 2014 2015 Total-$600

-$400

-$200

$0

$200

$400

$600

$800

$1,000

$1,200

-229

-2 -24

-129 -153

160

25

-76

428

30

371

232

118

306

-71

44

-27

1003

Equity

Bonds

$B

U.S. Industry - Net Mutual Fund Cash Flows

As They Relentlessly Focus On Macro Economic Risks

No **** Way

But Investor Confidence Continues To Decline

On A Constant Fear Of The Next Crisis

> “George Soros says U.S. Banks ‘basically insolvent’”– Reuters, April 6th, 2009> “Fed to buy $600 billion in bonds to aid economy” – Toledo Blade, March 11th, 2010> “Debt crisis unsettles European economy” – The Washington Post, February 9th, 2010> “Fears grow over length of U.S. job crisis” – Economic Times, December 3rd, 2010> “Obama: Raise debt ceiling or risk global recession” – Bloomberg, April 15 th, 2011> “United States of America [Credit] Rating Lowered to ‘AA+’ due to Political Risks, Rising

Debt Burden” – Standard & Poor’s, August 5th, 2011> “Occupy Wall Street: Civil society’s awakening” – LA Times, November 22nd, 2011> “U.S. approaches ‘fiscal cliff’ and world watches from the sidelines” – The Washington

Post, November 2nd, 2012> “Five years after Lehman, Americans still angry at Wall Street” – Reuters, September 15 th,

2013

The Great Disconnect

Total Return from March 9, 2009

*MSCI World133.4%

Source: Bloomberg, In Canadian Dollars to December 31, 2015

S&PTSX110.0%

S&P500272.2%

*MSCI Europe105.6%

(*MSCI World / Europe Price only)

The Hedge Fund Disconnect

Source: arborresearch.com

The Most Hated Bull Market in HistoryChart 1: Sell Side Consensus Indicator (as of 29 February 2016)

Source: BofA Merrill Lynch Global Research US Equity & Quant StrategyNote: Buy and Sell signals are based on rolling 15-year +/- 1 standard deviations from the rolling 15-year mean. A reading above the red line indicates a Sell signal and a reading below the green line indicates a Buy signal.

Essentially The Macro Market Flux Capacitor Failed

The Fallacy of Forecasts

-1%

How That Contributed To The Wealth Effect

So Why Have Global Markets Performed So Well

Corporate Profits Have Exploded Since 200919

29-3

2

1933

-37

1937

-38

1938

-41

1941

-46

1946

-50

1950

-52

1952

-56

1956

-58

1958

-59

1959

-61

1961

-69

1969

-70

1970

-74

1974

-75

1975

-80

1980

-83

1983

-89

1989

-91

1991

-00

2000

-02

2002

-07

2007

-09

2009

+

-100%

-50%

0%

50%

100%

150%

200%

-+75%

+198%

-+49%

+92%

-+29%

+238%

-+18%

+58%

-+22%

+19%

-+12%

+94%

-+13%

+78%

-+16%

+100%

-+19%

+103%

-+23%

+179%

-+22%

+109%

-+46%

+130%

S&P 500 EPS Cycles

Median EPS increase over 11 expansions: +100% Average EPS increase over11 expansions : +115%

Source: IGIM, UBS, NBER

Corporate Profits Ultimately Drive Equity PricesQ1-1964

Q1-1965

Q1-1966

Q1-1967

Q1-1968

Q1-1969

Q1-1970

Q1-1971

Q1-1972

Q1-1973

Q1-1974

Q1-1975

Q1-1976

Q1-1977

Q1-1978

Q1-1979

Q1-1980

Q1-1981

Q1-1982

Q1-1983

Q1-1984

Q1-1985

Q1-1986

Q1-1987

Q1-1988

Q1-1989

Q1-1990

Q1-1991

Q1-1992

Q1-1993

Q1-1994

Q1-1995

Q1-1996

Q1-1997

Q1-1998

Q1-1999

Q1-2000

Q1-2001

Q1-2002

Q1-2003

Q1-2004

Q1-2005

Q1-2006

Q1-2007

Q1-2008

Q1-2009

Q1-2010

Q1-2011

Q1-2012

Q1-2013

Q1-2014

Q1-2015

0

500

1000

1500

2000

0

20

40

60

80

100

120S&P 500EPS

Source: IGIM, UBS, Bloomberg

Today’s Headlines Revolve Around Oil

38 Years Ago – We Were Running Out of Oil

“World oil production can probably keep going up for another six or eight years. But, sometime in the 1980’s it can’t go up much more. Demand will overtake production.”

Nationally Televised Speech, April 18, 1977

And Today We Have Too Much – Drill Baby Drill!

Source: arborresearch.com

The Oil Price Collapse in Perspective

19

This Chart Could Well Determine The Future Price of Oil

If I Had A Million Dollars ... I’d Be Rich (Wouldn’t I?)

The Stock/Bond Valuation Disconnect

U.S. 10 Yr Bond – S&P 500 CDN 10 Yr Bond – S&P TSX

Source: IGIM, as at January 15, 2016

Expansion S&P500 increase % expansion

# of 15% corrections

during expansion

# of 8% corrections

during expansion

2009+ + 190% 2 10

2001 - 2007 + 105% 1 5

1990 - 2000 + 415% 1 9

1983 - 1990 + 247% 1 15

1975 - 1981 + 126% - 7

1970 - 1973 + 73% - 2

1960 - 1970 + 107% 2 6

1957 -1960 + 56% - -

1953 - 1957 + 117% - 2

1948 - 1953 + 93% 3 5

Average Cycle + 149% 1 6

Source: IGIM, NBER, Bloomberg

15%+ corrections- 2012- 2011- 2003- 1998- 1987- 1966- 1962- 1950- 1949- 1947

*1981 Double-dip

8%+ corrections in

2009 cycle- 2009 x 1- 2010 x 3- 2011 x 3- 2012 x 2- 2015 x 1

Corrections are a Normal Part of the Cycle

What You Do Here Will Largely Determine Your Success

S&P 500 Intra-year Declines vs. Calendar Year Returns

Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management

1980198

1198

2198

3198

4198

5198

6198

7198

8198

9199

0199

1199

2199

3199

4199

5199

6199

7199

8199

9200

0200

1200

2200

3200

4200

5200

6200

7200

8200

9201

0201

1201

2201

3201

4201

5-60-50-40-30-20-10010203040

26

-10

15 17

1

26

15

212

27

-7

26

4 7

-2

34

20

31 2720

-10-13-23

26

93

144

-38

2313

0

13

30

114

-17 -18 -17-7

-13-8 -9

-34

-8 -8

-20

-6 -6 -5 -9-3

-8 -11-19

-12-17

-30-34

-4 -8 -7 -8 -10

-49

-28

-16-19-10

-6 -7 -13

Probability stock fell since you last checked

If you check the value of your portfolio...

Daily Weekly Monthly Yearly Each Decade0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%47%

44%

40%

28%

20%

Source: Source S&P 500, March 4th, 1957-Present

The Seventy Per Cent Advantage

S&P500 Total Return Ranges 1926-2015‘14

'12

'10

'04

'15 '93 '09 '13

'00 '11 '88 '03 '97

'90 '07 '86 '99 '95

'81 '56 '79 '98 '91

'77 '94 '72 '96 '89

'69 '92 '71 '83 '85

'62 '87 '68 '82 '80

'53 '84 '65 '76 '75

'46 '78 '54 '67 '55

'01 '40 '70 '59 '63 '50

'73 '39 '60 '52 '61 '45

'02 '66 '34 '56 '49 '51 '38 '58

'08 '74 '57 '32 '48 '44 '43 '36 '35 '54

'31 '37 '30 '41 '29 '47 '26 '42 '27 '28 '33-40% to -

50%-30% to -

40%-20% to -

30% -10% to 20% 0% to -10% 0 % to 10% 10% to 20% 20% to 30% 30% to 40% 40% to 50% 50% to 60 %