Oil Slide Adds to Global Growth Outlook

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1 Oil Slide Adds to Global Growth Outlook 2015 is only a couple of weeks old and is already proving eventful. Oil has continued a surprising and sharp drop; market volatility has increased markedly; Switzerland has all but abandoned the Euro ahead of an epic round of quantitative easing and the Canadian central bank surprised the market with a rate cut, driving the Canadian dollar down to its lowest level since It s shaping up to be an interesting year. Looking back to the fourth quarter of 2014, the sudden sharp drop in oil caused the Canadian S&P/TSX Index to decline 2.2% during the quarter. Despite the setback, the TSX managed to end 2014 with a nominal increase of 7.2% for the entire year. 3-Year Chart of S&P/TSX Source: Thompson One, 3Macs 16,000 15,500 15,000 14,500 14,000 Year-End ,500 13,000 12,500 12,000 11,500 11,000 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Fortunately, we have been more focused on the U.S. markets that have fared much better. During the quarter, the Dow Jones Industrial Average advanced 4.2% while the S&P500 gained 4.8%. Adding to these gains, the drop in the Canadian dollar provided an additional tailwind for our U.S. investments. In the following pages, we briefly discuss some of our key assumptions and their impact on our portfolio decisions as we begin 2015.

2 2015 Key Assumption U.S. Economic Recovery Continues JP Morgan recently published that global GDP appears to have expanded at 3.1% annual rate during 2H14, rivaling the fastest pace in four years. This growth rate was driven by a large bounce in consumer spending. Global auto sales are at record highs, retail sales are tracking near 6% annual growth for the quarter and global factory output appears to have expanded 4% in the last quarter of 2014 (source: JP Morgan). We anticipate 10%+ returns on stocks next year, and just below zero on [Government Bonds]... We are in our 6th year of overweighting equities. JP Morgan 2015 Outlook If our outlook is correct and this carries into 2015, we should experience a material lift in global growth in 2015, sparked by the increase in household purchasing power. For now, we prefer to remain focused on the US market. Recent data releases from the U.S. continue to support our view of an acceleration in U.S. GDP, supported by low interest rates, rising housing prices, improving employment landscape and low energy costs. Also, as we discuss later, we expect currency will provide an additional lift and enhance returns. Impact on portfolio: With the U.S. economy appearing to be on more solid footing than other markets, we prefer to maintain our emphasis on U.S. equities to start out 2015.

3 2015 Key Assumption Composition of U.S. GDP Growth Favors Consumer U.S. GDP Results and Forecast Source: JP Morgan, 3Macs As a result of lower energy costs, a better housing market and overall more positive sentiment, we expect consumer spending will see a boost in With the U.S. government expected to spend more this year, Government spending finally adds to U.S. GDP rather than acting as a drag on growth. Breaking down the economic data into more granular components, our expectation is that the acceleration in GDP growth for 2015 will be achieved through: 1) Strong consumer spending. Among other factors, we expect the strong housing market and continued progress on the employment front to be positive contributors to consumer sentiment. One interesting shift we expect to see is an income shift away from corporate profits towards household purchasing power due to the drop in the price of oil, as lower profits in the U.S. energy sector are offset by higher household discretionary income.

4 2) A modest increase in government spending. Since the last two years experienced a drag on GDP due to reductions in government spending, a modest increase would be a strong positive contributor to the headline number in 2015 With both the consumer spending and the government spending, headline growth in GDP should be well ahead of recent years. We expect this will be supportive of both the U.S. stock market and the U.S. dollar in Impact on portfolio: We are emphasizing the Consumer-related sectors, select Industrials and Healthcare Key Assumption Oil Recovery Will Be Slow and U -shaped As we write this, oil stocks continue to struggle. Estimates from the major houses continue to move lower but remain generally ahead of where the futures market is currently trading, since natural decline rates and decreased capital spending will eventually bring supply and demand back in line. There will likely be a shakeup among producers as oil settles at the right price where supply and demand are balanced based on marginal costs of production. As a result, equities will likely be volatile as companies adjust. $115 $105 Impact on portfolio: Emphasize pipelines (less $55 sensitivity to commodity), refiners (lower input cost) and strongest producers (lowest of cost production $45 and/or strongest balance sheets). $95 $85 $75 $65 3-Year Chart of 1Mo Oil Futures Source: Thompson One, 3Macs Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

5 2015 Key Assumption Canadian Dollar Slips Further vs. USD Unfortunately, the current outlook for a prolonged period of low oil prices implies a material shift in wealth away from countries whose major export is energy, such as Canada. From a global perspective, this makes investment in Canada less attractive and is an additional factor in our recommendation to invest outside of Canada. The Canadian dollar has slid from parity to nearly 80 cents over the past 2 years and we have little confidence this slide will end until the outlook for oil and other commodities begins to firm. $1.04 $1.02 $1.00 $0.98 $0.96 $0.94 $0.92 $0.90 $0.88 $0.86 $0.84 $ Year Chart of CAD vs. USD Source: Thompson One, 3Macs $0.80 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14

6 We are concerned this currency divergence could be a multi-year event and that the Canadian dollar will continue to weaken relative to the U.S. dollar. As a result, we continue to see U.S. denominated investments as attractive currency exposure. Impact on portfolio: Maintain currency exposure in U.S. dollars, especially for Canadian investors. Conclusion Our recommended strategy for 2015 continues to be a focus on U.S. Equities. We expect the U.S. economy to perform better than the Canadian economy overall and we also expect further weakness in the Canadian dollar. Both these should be positive contibutors to portfolio return for the year. We wish you a healthy, happy and prosperous 2015! Brian P Weber, CFA Portfolio Manager This letter has been prepared and circulated for general information only. It does not account for the specific investment objectives and financial situation of any person receiving this report. Investors should seek professional advice regarding the appropriateness of investing in any securities discussed or recommended in this letter and should recognize that statements regarding future prospects may not be realized. The information presented in this letter has been compiled from sources believed to be reliable but no guarantee is made as to it accuracy, completeness or correctness. All opinions and estimates contained herein are provided in good faith and are subject to change without notice. MacDougall, MacDougall & MacTier Inc., its directors or employees including the author(s) of this letter may own, purchase or sell the securities mentioned before and/or during the period when this letter is in circulation