22 December 2016 Americas/Canada Equity Research Double click here to select a sector. Canadian Equity Strategy Research Analysts STRATEGY Andrew M. Kuske 416 352 4561 [email protected] Balancing the Barbell; Canadian Commodities Andrew E. Buscaglia 212 325 5870 and Rates Sensitives in Focus for 2017 [email protected] Jason Frew ■ A Balancing Act: Nearly half of the S&P/TSX Composite is directly related 403 476 6022 to a variety of global commodities with a skew to energy. With the recent oil [email protected] price moves along with the current outlook, there are many impacts on the Laurent Grandet 212 538 7901 Canadian market. Another overarching area of interest is changes in trade [email protected] patterns with the new incoming US administration. In any event, we believe Brian Ho there are pockets of opportunities. Most recently, we witnessed rebounding 403 476 6009 equity values and a higher move on bond yields. These factors are shown, [email protected] in part, on Figure 1, which illustrates the relative value of Canadian Mohammad Khan, CPA, CA 416 352 4596 treasuries against the TSX, with equities looking rather attractive. [email protected] Figure 1: Bond versus Stock indices – Canada Allison M. Landry 212 325 3716 500 [email protected] 450 Robert Loebach 403 476 6021 400 [email protected] Alvise Marino 350 212 325 5911 300 [email protected] David Phung 250 403 476 6023 200 [email protected] Ralph M. Profiti, CFA 150 416 352 4563 [email protected] 100 Robert Reynolds, CPA, CA, CFA 50 416 352 4516 [email protected] 0 Dec 91 Dec 95 Dec 99 Dec 03 Dec 07 Dec 11 Dec 15 Anita Soni, P. Eng., CFA 416 352 4587 Canadian Treasuries > 1 Year Toronto Stock Exchange [email protected] Robert Spingarn Source: Credit Suisse IDC, Bloomberg 212 538 1895 [email protected] Selected stocks: With an outlook for 2017, the preferred stocks from Credit Nick Stogdill, CA, CFA Suisse's Canadian Equity Research team are: (a) Consumer: COT.N/BCB; (b) 416 352 4592 Diversified: BBU and EFN; (c) Energy: AAV, ARX, ECA, ERF, IMO, NVA, [email protected] PXT, TOU and VII; (d) Financials: RY; (e) MERC in the forest products sector; Paul Tan (f) AEM and NEM.N in the Gold sector; (g) BBDb, CP and WCN amongst the 416 352 4593 [email protected] Industrials; (h) LUN and TECKb in the Industrial Metals; and, (i) Infrastructure: Yan Truong, CFA BIP.N, EMA (utilities) and TRP (pipelines). Finally, we also note that AEM and 416 352 4584 RY are on Credit Suisse's Global Focus List. [email protected] DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 22 December 2016 Investment summary Our macro starting point is the CS Global Risk Appetite appearing in Figure 2. CS Global risk appetite roughly at a midpoint Figure 2: CS Global Risk Appetite 10 Global Risk Appetite Index Fall of Berlin Wall Oil plummets, EM euphoria 8 equities rally Nikkei Loose 1st Greek downgrade peaks liquidity US housing Asian Tech bubble Saddam Mexican financial bubble bursts Jackson Hole, 6 Continental invades crisis QE2 Illinois run Kuwait crisis Japan 4 earthquake 2 0 -2 -4 Société Générale Debt ceiling, 1981 Bear S&P downgrade Operation ERM recession Black Monday Russia 9/11, Stearns Desert Storm -6 crisis, defaults, Enron, Euroopea LTCM fails Oil Surprise n WorldCom Mexico peaks Italian downgrade -8 defaults Lehman Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jandefault Jan Jan Jan Jan Jan Jan Jan 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: Credit Suisse Source: CS Global Strategy / IDC Finally, to consider this metric on a smoothed basis, we provide a five-year moving average in Figure 3 . Figure 3: CS Global Risk Appetite Five-Year Moving Average 3.0 5yr Moving Average of Global Risk Appetite 2.5 2.0 very high 1.5 1.0 long run 0.5 average 0 -0.5 very low -1.0 -1.5 Jan 81 Jan 85 Jan 89 Jan 93 Jan 97 Jan 01 Jan 05 Jan 09 Jan 13 Source: CS Global Strategy / IDC Arguably, this risk appetite is also supported by a historical perspective on interest rates, as partially evidenced in Figure 4 and Figure 5 . Canadian Equity Strategy 2 22 December 2016 Figure 4: Yields Canada - Short and Long Rates Figure 5: Yields Canada and USA - long rates since Since 2000 2000 % 7.0 7.0 6.0 6.0 5.0 5.0 4.0 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0 0 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 10-year CAD Government Bond 10-year US Treasury Bond 3-month LIBOR CAD 10-year CAD Government Bond 30-year CAD Government Bond 30-year CAD Government Bond 30-year US Treasury Bond Source: Credit Suisse IDC, Bloomberg Source: Credit Suisse IDC, Bloomberg The interest rate environment continues to be very benign and, for non-domestic investors should also be considered in relation to recent CAD devaluation. The combination of rates differentials and oil price movements highlights potentially meaningful foreign exchange moves for the USD/CAD (Figure 6). Consider Currency Figure 6: Canadian dollar (CAD) vs. USD 1.70 1.60 1.50 1.40 1.30 1.20 1.10 1.00 0.90 0.80 1/4/1971 1/4/1974 1/4/1977 1/4/1980 1/4/1983 1/4/1986 1/4/1989 1/4/1992 1/4/1995 1/4/1998 1/4/2001 1/4/2004 1/4/2007 1/4/2010 1/4/2013 1/4/2016 Source: Datastream, Credit Suisse / IDC The dollar and trade The dollar relationship is important with roughly half of Canada's main stock indices being actions of importance directly to a variety of global commodities. The USD/CAD is also extremely important in relation to the economic activity between the two countries―a topic of notable interest in light of the new incoming US administration. Figure 7 give a perspective of the YTD performance for a variety of major equity markets in local currency terms. Canadian Equity Strategy 3 22 December 2016 Figure 7: Selected stock market performances 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% S&P/TSX… DAX INDEX MSCICHINA TOPIX INDEX… KOSPI INDEX MSCIWORLD SHANGHAI SE… CAC 40 INDEX IBEX IBEX INDEX 35 S&P 500 INDEX Euro Stoxx Pr50 FTSE 100 INDEX S&P/ASX 200 INDEX Source: Bloomberg On a USD basis, the ranking doesn't change in our sample, but the performance declines to even more disappointing levels (Figure 8). Figure 8: Developed market YTD performance (USD terms) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% S&P/TSX… DAX INDEX MSCICHINA TOPIX INDEX… KOSPI INDEX MSCIWORLD SHANGHAI SE… CAC 40 INDEX IBEX 35 INDEX S&P 500 INDEX Euro Stoxx Pr50 FTSE 100 INDEX S&P/ASX 200 INDEX Source: Bloomberg Over a longer timeframe, a lower valued CAD relative to the USD is generally positive for several export oriented industries. Figure 9 illustrates the percentage of Canadian exports to the US as a total percentage. Canadian Equity Strategy 4 22 December 2016 Declining CAD Figure 9: Canada exports to US in % of total exports potentially beneficial for exports % 88 86 84 82 80 78 76 74 72 Dec 90 Dec 94 Dec 98 Dec 02 Dec 06 Dec 10 Dec 14 Canada exports to US in % of total exports Source: Datastream, Credit Suisse / IDC 500 Somewhat450 notable in the context of Figure 9 is the growth of Canadian energy exports to the US market in both volume and dollar value. So while the US remains large and 400 important for Canada, the overall dependence is less than previous. Clearly, trade issues with the incoming350 US administration will be critical for dollar levels. 300 Finally, one of our favourite views of the relative value in the Canadian market appears in Figure 10, 250which illustrates Canadian equities against treasuries. 200 Figure 10: Bond versus Stock indices – Canada 150 100 50 0 Dec 91 Dec 95 Dec 99 Dec 03 Dec 07 Dec 11 Dec 15 Canadian Treasuries > 1 Year Toronto Stock Exchange Source: Bloomberg, Credit Suisse / IDC Figure 11 highlights our specific top picks by coverage group. Canadian Equity Strategy 5 22 December 2016 Figure 11: Top picks by sector Sector Stock Rating Target Consumer Cott Corporation OUTPERFORM US $ 14.00 Diversified Brookfield Business Partners LP OUTPERFORM US $ 29.00 Element Financial Corporation OUTPERFORM C $ 16.00 Energy Advantage Oil & Gas OUTPERFORM C $ 11.00 ARC Resources Ltd.