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1. March 1st, 20171
Asset Allocation Model – March Update
Global risk assets continued to move higher in February, with world stocks reaching new all-time highs and corporate spreads
continuing to tighten, thanks to the brightening economic outlook, accelerating earnings growth, expectations for lower corporate tax
rates and improving risk sentiment. We are of the view that most of the increase in risk asset prices since the second half of 2016 gets
fundamental support from the global profit recovery and acceleration in global economic data. For example, with the earnings season
almost over in the U.S., operating earnings grew by an astonishing 23% in Q4 from the same quarter a year ago, with a little more than
half of the gains attributable to the recovery in energy sector earnings. Reported earnings also came in strong in Europe and Japan so
far with both regions delivering low double-digit EPS growth on a year-over-year basis. As mentioned in previous publications, turning
points in the earnings cycle, when EPS growth transits from slowing to re-accelerating, historically tends to coincide with rising equity
prices.
Despite our quantitative asset allocation model still recommending an overweight in stocks, we remain comfortable with our decision to
adopt a neutral stance on equity vs. fixed income at the end of January as many sentiment indicators and investor surveys continue to
show historically high complacency and extreme optimism in the economic outlook, despite the lack of clarity regarding Trump’s tax
policy platform. Although President Trump may enjoy a bump in his popularity from the poised delivery of his address to Congress and
markets are reacting favourably so far, we do not expect these effects to last. Markets are still priced for perfection and many obstacles
remain before the President can enact his agenda. In addition to that, a coming moderation in economic momentum could make
equities highly vulnerable to disappointment and the current slowing pace of acceleration in market-based inflation expectations may
already point to such moderation. For example, tightening financial conditions and rising mortgage rates may already have adverse
impacts on the housing sector as the National Association of Home Builders noted a significant decrease in U.S. traffic of prospective
buyers during February with a buyer traffic index hitting a new low since last October. Moreover, some key indicators are flashing
warnings signs with transportation, capital goods and weak balance sheet stocks underperforming. We are therefore continuing to favor
a defensive investment strategy this month.
Another concern is that a coming deceleration in earnings momentum, which has not occurred yet, may lead to a price correction at
some point. This is a key element to consider for investors as past turning points in the earnings cycle historically preceded shakeouts
in reflation assets, as market participants turned too confident in their growth outlook. For instance, when the U.S. earnings cycle last
turned from an acceleration phase to a deceleration at the end of 2014, stocks sank while bonds rallied in the following months.
Equities also underperformed bonds following similar earnings cycle transitions at the end of 2010 and in mid-2004. We have studied
each periods of accelerating earnings growth seen over the last three decades in order to get a better understanding of how key macro
indicators typically behaved when the business cycle transited from an acceleration phase to decelerating earnings growth. The table
below illustrates our findings and how the current episode compares. The good news is that, if history is any guide, the ongoing
earnings acceleration could still have fuel left in the tank, which should support equities in the near-term and suggest that a coming
pullback might prove to be a good re-entry point. As shown below, growth in U.S. industrial production, the Composite index of
Coincident Indicators and the annualized six-month change in the Leading Economic Index all remain within an uptrend, which is not
typical of an imminent deceleration in earnings growth. However, we remain concerned that a tipping point in earnings momentum
might well be reached within the next three to six months, which could add significant market volatility. Indeed, S&P 500 12-month
forward profit margins are already showing tentative signs of topping and the ISM Manufacturing index could well peak at a historically
high level within the next three months.

2. Economic Research and Strategy Asset Allocation Model – March Update
March 1st, 2017
Regional Allocation
Since we last upgraded U.S. stocks to ``Overweight`` at the end of June 2016, U.S. has outperformed global and Canadian equities by
1.9% and 4.3% in Canadian dollar terms, respectively. In light of this outperformance we are turning neutral to U.S. equities and
increasing our overweight to Canadian equities. As illustrated below, Canadian stocks now appear historically cheap against U.S.
equities with the relative 12-month forward PE ratio trading close to the bottom-end of its more than 10-year range. In addition to that,
S&P/TSX earnings estimates relative to U.S. equities remain on the rise, which should support the relative performance of Canadian
stocks.

3. Economic Research and Strategy Asset Allocation Model – March Update
March 1st, 20173
Sector Rotation
As for our sector allocation in Canada, we still recommend to overweight the Energy, Materials, Telecommunication Services,
Industrials and Information Technology sectors. In the U.S., we still advise clients to overweight the Energy, Materials, Information
Technology, Telecommunication Services, Real Estate and Consumer Staples sectors.
Canadian Bond Allocation
Since we last recommended investors to overweight corporate bonds against Canadian government back in late April, credit spreads
have significantly tightened. As discussed above, if history is any guide, the ongoing earnings acceleration could still have fuel left in
the tank, which should be supportive of credit. However, without more clarity regarding Trump’s tax policy platform, we remain
concerned that a tipping point in earnings momentum might well be reached within the next three to six months, which could then lead
the current rally in credit to take a pause. Another concern is the recent slowing pace of acceleration in market-based inflation
expectations, which could point to a coming widening in credit spreads. We remain overweight credit for now as the macroeconomic
backdrop remains strong with initial jobless claims close to their lowest level since 1973 and the Philadelphia Fed index surging in
February to a new high since early 1984. Under such conditions, we still see room for further spread compression.
Luc Vallée, Ph.D | Chief Strategist
Tel: 514 350-3000 | ValleeL@vmbl.ca
Eric Corbeil, M.Sc., CFA, FRM | Senior Economist
Tel: 514 350-2925 | CorbeilE@vmbl.ca
This document is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of Laurentian Bank Securities (LBS), a wholly owned subsidiary of the
Laurentian Bank of Canada. The author has taken all usual and reasonable precautions to determine that the information contained in this document has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze it are based on accepted practices
and principles. However, the market forces underlying investment value are subject to evolve suddenly and dramatically. Consequently, neither the author nor LBS can make any warranty as to the accuracy or completeness of information, analysis or views contained in this document or their
usefulness or suitability in any particular circumstance. You should not make any investment or undertake any portfolio assessment or other transaction on the basis of this document, but should first consult your Investment Advisor, who can assess the relevant factors of any proposed investment
or transaction. LBS and the author accept no liability of whatsoever kind for any damages incurred as a result of the use of this document or of its contents in contravention of this notice. This report, the information, opinions or conclusions, in whole or in part, may not be
reproduced, distributed, published or referred to in any manner whatsoever without in each case the prior express written consent of Laurentian Bank Securities.