Our Weekly Report

Weekly report | July 8 2016

Our weekly report

In This Issue: < Bank of Canada – upbeat tone despite lower GDP forecasts < Global fertilizers update < Energy update < Portfolio updates and recommendations < Investor’s corner

Bank of Canada – upbeat tone despite lower GDP forecasts

Although the Bank of Canada lowered its GDP growth estimates for 2016 (from 1.7% to 1.3%) and 2017 (from 2.3% to 2.2%), Governor Poloz kept a relatively upbeat tone. The GDP contraction expected in the second quarter of 2016 (due to Alberta wildfires) should be short lived with the pace of growth bouncing strongly in the third quarter (+3.5%). The Bank also counts on Federal infrastructure spending and the U.S. economy to support activity in the back half of 2016, with non-energy exports expected to be a driver of growth. Canadian non-energy exports should benefit from a recovery in the U.S. manufacturing sector as well as a weaker Canadian dollar. With global monetary easing likely to continue in the second half of 2016 forcing rates lower, coupled with the Bank of Canada’s upbeat tone, Canadian equity markets followed their global counterparts higher. A combination of improved risk sentiment and an increasingly attractive dividend yield, when compared to the alternative of lower rates has led investors to rush back into the stock market. Global markets will remain in a state of alternating phases of optimism and pessimism driven by cross currents created by uncertainties related to Brexit as well as fluid central bank policy. We remain generally constructive on markets given stable U.S. economic dynamics and the outlook for the Canadian economy. However, the overall magnitude of upside potential is an open question given cycle-high valuation levels. We advocate investors continue to hold a moderate cash level with an eye to deploying on any meaningful pullback in quality-yield investments with sustainable dividend payers.

Global fertilizers – better late than never: Chinese contract should set a floor for 2016 Potash prices - positive

For the third year in a row, Brazil Potash Corporation has settled the Chinese potash contract at a better than expected price of $219 per metric ton versus an anticipated $200. As a result, we expect to see other big producers settle at a similar price which will be a positive in the short-term for this industry. Confidence in a near-

® Registered trademark of The Bank of Nova Scotia, used under licence. ™Trademark of The Bank of Nova Scotia, used under licence. Scotia Wealth Management™ consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod ®, a division of Scotia Capital Inc. Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of Scotia Capital Inc. Scotia Capital Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. term potash floor should now increase and volume is ready to move to China, India, and other regions that were waiting for the China contract price to be set. We will be watching keenly for total Chinese contract volumes, as well as domestic Chinese production, in order to assess how likely China is to hold out on its contract next year. With the uncertainty out of the way, Potash Corporation of Saskatchewan and Agrium could see further near-term share price gains. Both Potash Corporation of Saskatchewan and Agrium shares have enjoyed some price appreciation, likely because the Street had become overly negative on the fertilizer space. As a result, we may see analysts increase their estimates and targets modestly for both companies. Even with this contract price and in our opinion, it doesn’t appear that Potash Corporation of Saskatchewan’s dividend is sustainable. We continue to prefer Agrium for its large retail segment, strong balance sheet, and sustainable dividend.

Energy update – Positive view on natural gas despite likely-near term setbacks

While such catalysts as hot weather and short covering in the sector have lent some support to natural gas prices recently, we think the pronounced rebound heightens chances of a correction in the short-term. Using data from SNL Energy Research Company and forward looking estimates from Bentek, we honed in on some current trends. While we think the short-term sentiment remains uncertain, our long-term outlook for natural gas remains positive. We think properly positioned companies could benefit from materially higher prices in 2017 and beyond.

Portfolio updates and recommendations

APPLE – Have you found your Pokémon?

Apple Inc. is scheduled to report its quarterly results on July 26. Credit Suisse's analyst Kulbinder Garcha announced that he maintains an Outperform rating on the company, with a price target of $150, saying that Apple should be able to sustain "elevated levels" of earnings and free cash flow in the long term. The Credit Suisse revenue and earnings per share estimates for the quarter came in at $41.2bn and $1.39, which is in line with the consensus expectations. Given high retention rates, a superior ecosystem, and multi product compute advantage, we believe such elevated levels of earnings and free cash flow should be sustainable long term. One interesting recent development that Apple stands to benefit from is the release of the new Pokémon game. It goes without saying that both Corinne and I are far too busy with our families during our private time to go and chase fantasy Pokémon’s around Edmonton, but I am sure you have seen or heard of the global phenomenon that is the new Nintendo Pokémon game. Well, it turns out that Apple earns 30% in revenue from each download and in game purchase from the game developers. Some early calculations suggest that Apple could earn up to $3 billion over the next year, courtesy of this craze. So don’t worry if you have not found your Pokémon, as owning Apple stock can turn out to be equally as satisfying.

Microsoft – Reaching for that cloud-based business

Microsoft reported adjusted earnings of 69 cents per share for its latest quarter, 11 cents a share above estimates. Revenue also beat forecasts. Of particular note to investors was a seven percent jump in cloud-based business, a key focus for the software giant. Microsoft reported a nice strong quarter to end its fiscal 2016. The fourth quarter results showed the continued progress that Microsoft is making to move away from the slowing legacy businesses and to the fast growing cloud businesses. Intelligent Cloud business segment revenues were up 7% to $6.71b helped by its Azure (cloud computing business competing with Amazon’s AWS) which doubled in the quarter. Weekly report | July 21 2016

Personal Computing revenues declined down 4% to $8.90b which was higher than street expectations. Productivity and Business Processes revenues were up 5% to $6.97b. Office 365, a subscription version of the old Office software, rose 54%from commercial customers and 19% from retail consumers. In the long run Microsoft investment thesis is improving as it shifts towards delivering software/services over the internet, transforms into cloud businesses, exits the phone business and leverages LinkedIn for cross-selling products & services. The transformation to cloud is margin dilutive (as renting software in the cloud is not as profitable as selling licenses) however, we believe the cloud business model is more stable and has significant growth potential. We reiterate our Buy recommendation on Microsoft.

Shaw Communications Inc. – mixed results does not change our medium term thesis

Shaw Communications reported third quarter results that were in line on revenue and better than expected on earnings after expenses. Revenue was $1.28B up 3.2% year over year and earnings of $555M (up +3.1%) vs. our $551.9M estimate. Subscriber results were in line with our expectations, with a beat on cable and home phone with slightly weaker internet net additions. WIND Mobile, Shaw’s wireless division, contributed $29M of earnings after expenses, which was better than the Scotiabank analyst’s $26M estimate. Shaw provided a preliminary Capital expenditure forecast of $1.3B which was slightly higher than the consensus estimate of $1.18B, with further details to be provided with Q4 2016 results. We would take advantage of any share price weakness should it weaken due to the slightly higher than expected capital expenditure plans. In our opinion, it’s reasonable to expect that it will take a few quarters for the company to invest in and see results from the recent Wind acquisition. We are also encouraged to see that across the street, consensus for 2017 target price estimates have actually increased modestly in recent days. As highlighted in previous weeks, we believe Shaw offers investors an attractive and sustainable 4.7% dividend yield, an enviable growth profile supported by WIND, and potentially hidden value in the ViaWest data centre business. Shaw should also benefit from what we expect will be a lower for longer interest rate environment post-Brexit referendum.

Canadian Western Bank – equity raise from CWB continues the 'Cloak and Dagger' around bank capital levels

Following the completion of the recent $150m common equity raise by CWB earlier this month, we have reduced our earnings per share estimates for the bank for 2017. The main reason for doing so relates to the 7% increase in shares outstanding and in circulation resulting from the 6.125m shares issued. The equity raise will increase the banks’ capital ratio by 0.70%, which alongside the closing of the GE Franchise Financing acquisition we estimate that the bank will end the 3rd quarter of 2016 with a Tier 1 Capital ratio of 8.77%. We’ve had a positive view on CWB since Sept 2015, not as a bank but as a conservative energy proxy. Over this period, CWB’s total return has been mostly in line with the bank sector and 300 bps shy of the energy sector. In looking at CWB, and its exposure to Alberta, we think the cyclicality of the region should encourage investors to look at valuation as they would a resource-oriented cyclical. CWB’s earnings have been affected by the Alberta economy, but when examined on This publication has been prepared by an advisor of ScotiaMcLeod, a division of Scotia Capital Inc. (SCI). This publication is intended as a general source of information and should not be considered as personal investment or tax advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication. Opinions, estimates, and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither SCI nor its affiliates accepts liability whatsoever for any loss arising from any use of this publication or its contents. This publication is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any securities and/or commodity futures contracts. SCI, its affiliates and/or their respective officers, directors, or employees may from time to time acquire, hold, or sell securities and/or commodities and/or commodity futures contracts mentioned herein as principal or agent. All performance data represents past performance and is not indicative of future performance. SCI and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. All insurance products are sold through Scotia Wealth Insurance Services Inc., the insurance subsidiary of Scotia Capital Inc., a member of the Scotiabank group of companies. When discussing life insurance products, ScotiaMcLeod advisors are acting as Insurance Advisors (Financial Security Advisors in Quebec) representing Scotia Wealth Insurance Services Inc. This publication and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent of SCI. price to book, which mostly factors out cyclicality of earnings, CWB is currently trading at 1.13x vs. a bank sector average of 1.71x which is a 34% discount. We expect further bumps ahead, but continue to like CWB for its valuation, sustainable dividend, and upside should oil prices continue to recover over the next 12-18 months.

Hudson’s Bay (HBC) - current price $16.03, current yield 1.24% HBC is one of the most dynamic department stores on the globe. It has a robust new store opening program that is almost unprecedented, a differentiated business with 10 banners across six countries leveraging a shared services model, all underpinned by extensive real estate ownership. Trading near an all-time low, HBC has been under significant pressure due to the weakness in the luxury retail segment. While operations are unlikely to rebound immediately, the owned real estate portfolio should provide support near current levels. HBC is doing the right things in each market to drive a better business & value. Patient investors with a long term view could be well rewarded. Bloomberg: 10 buys, 0 holds, 1 sells; $25.23 average target price.

Investor’s corner

A managed account can set you free from dealing with some, or all of the day-to-day investment management decisions to have more time and freedom to focus on your family, career or other important pursuits. We can tailor one of our Managed Portfolio Programs to meet your investment goals. Our premier managed portfolio, The Summit Program, is designed for higher net worth clients looking for a truly professional approach to managing their wealth. Assets are managed on a discretionary basis, featuring highly skilled external money managers managing a wide variety of investment mandates. Each money manager is selected and monitored by Northern Trust Global Advisors, a leading investment management consultant. A single account management fee covers investment management, ongoing due diligence and monitoring of the money managers and the investment mandates, custody, trading costs and detailed reporting.

If you would like more information on our Managed Portfolio Program, or if you are feeling concerned or have questions about recent market volatility or your portfolio, please do not hesitate to contact Corinne and René at 780.413.7454 or 1.888.814.4223.

Please follow the link to our website for your "Market Watch"- http://thefuhrhughesteam.ca/latest-news/

*All dividend yields as of July 20, 2016*

Best Regards,

Corinne Fuhr-Hughes René Welz Senior Wealth Advisor Wealth Advisor Director, Wealth Management