Market commentary from RBC Global Asset Management Chief Economist Eric Lascelles.

1. Close Calls
April 2013
Presented by:
Eric Lascelles, Chief Economist

2. 2
Report Card
Positive Developments:
Risk appetite revives; equity markets touch record high
Global economic data moving forward, but ebbing slightly
U.S. continuing resolution keeps budget funded until Sep 2013
Resilient U.S. data in employment, housing and manufacturing
Cyprus received bailout
Negative Developments:
Serious negative consequences from Cyprus bailout
Italy still working on forming government
U.S. debt ceiling looms in summer
Canadian housing cools further
Interesting Developments:
China’s leadership transition completed; government to tighten property
control policy to curb housing activities
Japanese inflation expectations revive
U.S. Fed to continue QE until labour market improves substantially

3. 3
Equity Surge
Despite modest economic growth and earnings growth, equities have managed decent gains
Why? Because risk appetite has rebounded
S&P 500 On Upward Trend Since 2009
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
2000 2002 2004 2006 2008 2010 2012
S&P500Index
Source: Haver Analytics, RBC GAM
Flirting with all-time high
Latest
surge
Long
recovery

4. 4
Source of Stock Market Gains

5. 5
Risk Appetite Renaissance
Risk appetite has risen back to its historical average, and may be capable of improving
further in the coming years
This constitutes an important support for the economy and equity markets
Reviving Risk Appetite
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
1991 1994 1997 2000 2003 2006 2009 2012
RiskAppetiteIndex(Average=0)
Note: Measures risk appetite based on 46 normalized inputs.
Source: Bloomberg, BofA ML, Consensus Economics, Credit Suisse, Federal
Reserve Bank of Philadelphia, Haver Analytics, NedDavis, RBC GAM
Seeking
Loving
Neutral
Reluctant
Averse

6. 6
Global Economy Wavering Amid Renewed Uncertainties
Global Economy Improving But Growth Has Slowed
50
51
52
53
54
55
56
57
58
Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13
GlobalPurchasingManagers'Index
Source: JP Morgan, Markit, RBC GAM

7. 7
Economic Indicators Inconsistent With Recession
Note: Historical data since 1948. Bottom and top of box represent the 16th and 84th percentile.
Source: DOL, ISM, University of Michigan, Haver Analytics, RBC GAM
U.S. Recession Threholds
86.6
71.8
73.0
Consumer
Confidence
52.7
54.2
42.6
Manufacturing
PMI
335
336
413
Initial Jobless
Claims ('000)
Current Level ▬ Average ▬ Recession Average

8. 8
U.S. Housing Market Continues to Improve
20
22
24
26
28
30
32
Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12
Single-FamilyHomeswithaMortgage
inNegativeEquity(%)
Note: Measure as % of total single-family homes with a mortgage.
Source: Zillow, Haver Analytics, RBC GAM
U.S. Homeowners Emerging from Underwater Mortgages

9. 9
U.S. Fiscal Update
Fiscal cliff – mostly resolved
Sequester – unresolved, but manageable (just ~0.5% of GDP) and likely to be revisited
Continuing resolution – resolved
Debt ceiling – pending
Thesis: American politicians are capable of action when the alternative is unacceptable
Economic consequences: Economic growth 1.75 percentage points slower in 2013
Market consequences: another debt rating downgrade remains likely

10. 10
Bank Loss Hierarchy

11. 11
Setting A Precedent: Cyprus Depositors
Is Cyprus really setting a precedent by reducing the value of uninsured deposits?
Yes, within the context of this Eurozone financial crisis
• Future bank bailouts are much more likely to bail in depositors
But possibly NO within a broader context
• Cyprus is “special” in that most deposits come from abroad, and are of potentially
dubious origin
• Italian banks cut 0.6% from bank deposits in early 1990s
• Icelandic banks declined to honour >€7B in British and Dutch deposits in 2008
• Many small U.S. banks have defaulted both pre- and post-financial crisis, resulting in
losses to unsecured depositors
What is the risk of a major bank run?
The risk is not trivial
HOWEVER,
• This outcome was not a shock – it was cited as a possibility for several months
• Cyprus has instituted capital controls to limit outflow
• Most “fast money” has already left remainder of peripheral Europe

12. 12
Do Europeans Want Europe?
General Public in Eurozone Is Pro-European
0 25 50 75 100
Better off inside EU?
Need reforms to face future?
Cannot delay fiscal austerity?
EU states need to cooperate more?
Like the single currency/ECB?
Strengthen EU into federation?
Positive impression of EU?
Trust national government?
Trust political parties?
% of Survey Respondents Who Agreed
Italy
Note: Shaded area represents the range of responses from Cyprus, France, Germany, Greece,
Ireland, Italy, Portugal, Spain. Source: EC Standard Eurobarometer 78, RBC GAM

13. 13
Japan Could Emerge From Deflation
Inflation Expectations Have Started to Rise
-5
-4
-3
-2
-1
0
1
2
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
JapanBreakevenInflation(%)
Note: 10-year breakeven inflation up to 6/15/2009, 5-year breakeven inflation thereafter.
Source: Bloomberg, RBC GAM

14. 14
Canadian Inflation Is Quite Tame
Canadian Headline CPI and Core CPI
-1
0
1
2
3
4
5
2001 2003 2005 2007 2009 2011 2013
YoY%Change
CPI Core CPI
Source: Statistics Canada, RBC GAM

15. 15
Less Economic Slack Than Policymakers Think

16. 16
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