2015 outlook

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This report was prepared in part by an analyst(s) employed by a Canadian affiliate, BMONesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules.

For disclosure statements, including the Analysts Certification, please refer to pages 51 to 53.

Brian G. Belski

Chief Investment Strategist

BMO Capital Markets Corp.

212-885-4151

[email protected]

Nicholas Roccanova, CFA

Sr. Investment Strategist

BMO Capital Markets Corp.

212-885-4179

[email protected]

Ryan Bohren, CFA

Associate

BMO Nesbitt Burns Inc.

416-359-4993

[email protected]

December 1, 2014

Investment Strategy

2015 Market Outlook

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December 1, 2014FinancialGroupA member ofBMO

2015 Market Outlook BMO Capital Markets

3

Table of Contents

Executive Summary ................................................................................... 5

2015 Market Outlook .................................................................................. 7

Investment Themes .................................................................................. 14

Sector Recommendations ........................................................................ 21

Implementation Strategies ....................................................................... 38

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4

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5

Executive Summary

The 2015 Market Outlook is our annual Investment Strategy publication that encapsulates

our conclusions, recommended investment processes, and implementation strategies for the

year ahead. The report includes opinions for both the US and Canadian equity markets.

2015 Market Outlook

Given the combination of improving economic conditions and rebounding earnings growth

we believe 2015 will represent another year of solid gains for US stocks. Our models sugges

a year-end S&P 500 price target of 2,250 on EPS of $126. This would represent a 9.7% gain

and earnings growth of 8.6% based on our 2014 forecasts. Both of these forecasts are largely

in line with mid-cycle secular trends. In addition, we see very little risk of a bear market

developing in the coming year, but slightly above-average valuation makes significant gains

more difficult. Furthermore, unlike the past few years we expect more frequent periods of

volatility, which, in our view, strongly favors fundamental over momentum-based strategies

By contrast, although we expect Canada to post positive returns in 2015, the S&P/TSX will

likely underperform the US for the fifth consecutive year. Indeed, we expect Canada to

become increasingly correlated to US strength; however, sentiment around EM and Europe

will continue to drive broad swings above and below our target.

Investment Themes

From our perspective, the major theme over the next several years will be all about the

redistribution of corporate and private capital as doubt and fear subside alongside a North

American economy that continues to improve. It is common knowledge that corporations

have been sitting on enormous cash piles yet have been reluctant to invest in their businesses

Instead, they have focused on share buybacks, which investors had been rewarding. However

this approach seems to be losing investors favor and the next logical step is for companies to

ramp up capex to generate growth, in our view. On the other hand, memories of the financiacrisis has steered many private investors away from the traditional investment goal of wealth

creation, to wealth preservation. Given a strong stock market and the likelihood that interest

rates will be higher in the coming years, we believe investors will look toward stocks for both

wealth preservation and generation in the coming years.

Sector Opinions

In the US, we continue to favor Financials, Industrials, and Information Technology within

portfolios. Each sector contains fundamental attributes and themes that will benefit from the

stronger-than-expected US economic recovery that we believe will occur over the next

several quarters. For Canada, we favor Financials for broad stability and dividend growth;

Industrials for direct exposure to US strength; and Telecommunications for an improvingearnings outlook and good relative value.

Implementation Strategies

In terms of portfolio construction, we believe investors should focus on four main themes:

large-cap over small cap; value over growth; quality and consistency of earnings; and

dividend growth.

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6

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7

2015 Market Outlook

Adventures of the Stealth Bull Market

Our longer-term bullish stance regarding US stocks remains firmly intact. To that end, we

believe 2015 will represent another year of moderate gains, marking the seventh consecutive

year without a loss for the S&P 500. In addition, we continue to believe that the current bullmarket is part of a longer cycle that will eventually last 15-20 years in totality. Nonetheless

this has been a bull market whose underlying trend and proposed duration remains firmly

doubted and distrusted by most of our clients, in our view. In other words, this is the largest

stealth bull market of our collective careers, one that no one believes, and everyone is looking

over their shoulder to diagnose its end.

Admittedly, seven consecutive years without an annual loss is rare for US stocks, but not

totally unheard of based on history. In addition, we continue to believe most investors have

suffered an enormous amount of psychological damage stemming from America's lost decade

during the 2000s. After all, two recessions, multiple wars, 9/11, and mushrooming distrust of

corporate America were likely to take a toll. As such, we believe fear remains a primarymotivation as most investorsespecially private clientsremain cynical and distrusting of

American companies. However, this fear has caused investors to somewhat overlook the

massive structural reforms that US companies have undertaken ever since to position

themselves as one of the best fundamental assets in the world. For instance, most of our

clients discount the fact that US companies have the strongest balance sheets since in the

1950s, are growing dividends, and have the most stable earnings growth in decades

Furthermore, the fear factor is omnipresent within Financials in particular, a sector that

admittedly had a significant part in the Great Recession, but will likely have just as big of a

role helping to re-create growth and wealth over the next decade, in our view. Therefore unti

the faith factor increases and investors begin to accept the fundamental facts surrounding US

stocks, reactions will continue to rule the roost, providing disciplined investors an opportunityto add to core positions.

Exhibit 1: Stages of Secular Bull Markets

Reaction Acceptance Euphoria

High correlations

Reliance on indexing

Swings in volatility,

earnings and multiples

Outflows from mutual

funds

Low trading volume

Apathy and doubt ofcurrent trend

Low correlations

Active investing to generate

alpha

Consistent earnings growth

Steady multiples

Improving sentiment

Increased trading volume

and return of asset inflows

2015 will represent a

transition toward this type of

environment

Outsized winners and

losers

Sharp upside moves and

corrections

The creation of new

products and strategies

Outsized asset inflows

Source: BMO Capital Markets Investment Strategy Group.

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8

S&P 500 2015 Price Target: 2,250; EPS: $126

We believe the S&P 500 Index will achieve a year-end 2015 price target of 2,250 on earning

per share of $126. While these assumptions equate to another year of positive returns for US

stocks, we continue to believe levels of equity engagement remain low (Exhibit 2), especially

compared to historical standards. Furthermore, we continue to believe US stocks remain a

beacon for the rest of the world in terms of fundamental stability and consistency. That being

said, stock prices are rarely linear for long and we anticipate a high likelihood of periods of

increased volatility akin to fall 2014, part of a normal corrective cleansing for any prolonged

bull market.

Summary of Price and EPS Target Model Internals:

Our price and EPS targets imply a 2015 year-end P/E of 17.8x, which would be

slightly higher than our expected 2014 level of 17.7x.

Given the stage of the economic cycle and persistently low interest rates, we also are

using a below-average cost of equity assumption of 780 bps.

Dividend growth expectations continue to provide positive trends for our models.

Revisions have stabilized and suggest average return potential. Economic conditions, while improved, are still somewhat of a drag.

Exhibit 2: Levels of Equity Engagement Remain Low

Source: BMO Capital Markets Investment Strategy Group, ICI.

Exhibit 3: 2015 S&P 500 TargetsPrice Target Earnings Per Share Target

Model Category 2015E Model Category 2015E

Dividend Discount Model Fundamental 2,250 Macroeconomic Regression Model Macro $128Fair Value Price-to-Earnings Model Valuation 2,200 Bottom Up Mean Consensus Expectation Fundamental $128

EPS Revision Model Mean Reversion 2,150 Normalized EPS Mean Reversion $121

Ex ected Return* 9.7% Ex ected EPS Growth* 8.6%Prior Year End S&P 500 Close* 2,050 Prior Year S&P 500 EPS* $116Price Target 2,250 EPS Target $126

Implied P/E: 17.8x

Source: BMO Investment Strategy Group. *Based on our 2014 target.

-400-200

0200400

600800

1000120014001600

2007 2008 2009 2010 2011 2012 2013

Cumulative US Stock and Bond Flowsincludes mutual funds & ETFs, $ billions

Stocks

Bonds

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9

Fundamental and Macro Data Suggest Middle-of-the-Road Returns

P/E Levels Makes Continued Double-Digit Gains More Difficult . . .

Based on our own estimates, the S&P 500 will end 2014 with a P/E of roughly 17.7x.

Although this is slightly above historical norms, valuation is by no means grossly overvalued

However, our analysis suggests it may be more difficult for the market to continue itsimpressive run given these valuation levels. We found that, following similar P/E levels

market returns have been lackluster, on average, in subsequent holding periods (Exhibit 4)

and only when EPS was growing at a double-digit rate. In fact, it took EPS growth rates of

roughly 10% or greater for the market to deliver double-digit returns during these periods

(Exhibit 5). Although earnings growth has certainly improved lately, we believe productivity

and profit margins trends will make it difficult for EPS to achieve such growth over the near

term. As a result, we believe this provides further evidence that the multiple expansion part o

this cycle has largely played out, while future gains will likely require good old fashioned

earnings growth. Fortunately, economic conditions continue to trend in the right direction

making it highly probable that better earnings growth is more achievable longer-term.

Exhibit 4: S&P 500 P/E Ratio and Subsequent Price Returns

S&P PE Ratio (actual)

% of Monthly

Observations 1-Year 3-Years 5-Years 10-Years

Less than 10x 11.3% 13.8% 10.1% 11.4% 11.3%

Between 10x and 15x 27.9% 11.9% 9.5% 8.2% 9.7%

Between 15x and 20x 41.3% 7.0% 5.3% 4.8% 4.6%

Greater than 20x 19.5% 2.3% 4.9% 5.4% 3.9%

Source: BMO Capital Markets Investment Strategy Group, Bloomberg.

Exhibit 5: Valuation Makes Big Gains More Difficult in the Absence of Robust EPS Growth


7.0%

5.3%4.8%

10.4%

9.0%

11.7%

0%

2%

4%

6%

8%

10%

12%

14%

1-year 3-years* 5-years*

S&P 500 Forward Performance Given P/E Levels and Subsequent EPS Growth

P/E levels Between 15x and 20x P/E levels Between 15x and 20x and EPS Growth 10% or better

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10

. . . but Market Breadth and Macro Trends Suggest a Bear Market Is a Remote Possibility

Certain investors are becoming convinced that market performance has been displaying many

signals of top behavior. While their arguments seem convincing at first glance, we believe

they lack the proper context from an investment strategy point of view. Although we do not

discount the possibility of periods of market weakness given the stage of the current cycle

nothing in our work suggests an imminent end to the current bull market. Therefore, we

remain confident in our secular bull market thesis and would urge investors to be

opportunistic during market pullbacks.

For the bearish crowd, much has been made of "poor market internals" as the defensive

Health Care and Utility sectors have been leading the market. However, a closer look at

market performance reveals a different storythere is still relatively broad participation

across the market. We have found through our work that bull markets are typically nearing

their end when leadership significantly narrows. As it stands, roughly half of the S&P 500 is

still outperforming (over the past year), which remains around the longer-term average

(Exhibit 6, left). By contrast, we found that prior bull markets since 1970 ended when this

indicator dropped to a significantly low reading.

More important, our work shows that the longest and most painful bear markets have been

commonly associated with recessionssomething that we believe is a very low probability

event for 2015. This is especially evident given that leading indicators continue to improve. In

fact, one of the most tried-and-tested market indicatorsthe slope of the yield curve

suggests that bear market worries are overblown. For instance, every single post-war US

recession has been preceded by a significant narrowing or inverted yield curve (Exhibit 6

right). Similarly, all non-recession bear markets have witnessed similar yield curve patterns

Yet, despite some narrowing over the past few months the slope of the yield curve remains

very steep by historical standards.

Exhibit 6: Market Leadership and Slope of the Yield Curve Suggest Bull Market Remains Intact

Source: BMO Capital Markets Investment Strategy Group, FactSet, Bloomberg, Federal Reserve.

20%

30%

40%

50%

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80%

197

1

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9

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0

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6

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8

201

0

201

2

% of S&P 500 Stocks Outperforming - Trailing 1 Year

Non-recession Bear Market Recession

% Outperfo rming Stocks Avg.

-4

-3

-2

-1

0

1

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4

5

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Yield Curve, Recessions & Bear Markets

Recession Non-recession Bear Market 3m/10y Slope

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11

Old Time HockeyPut Me in, Coach

One of the things market watchers love to do is try to define the current or forward market

environment by comparing it to a prior period or deriving a fancy new title. In terms of the

current bull market, which began in March 2009, it has been hard to diagnose an overall labe

given the schizophrenic behavior of investors. For instance, investors chased low quality

small cap, and commodities during most of 2009 and 2010, round-tripped EM from 2009 into

2011, and tried to bottom fish Europe and chase yield again in 2014. Granted, cycles and

styles come and go, but it continues to confound us that investors remain fixated on

everything but the fundamental condition of US stocks. As such, we continue to believe the

US has entered a multi-year period of outperformance, driven by fundamental investing

bottom-up stock picking (Exhibit 7) with variables such as earnings stability, EV/EBITDA

free cash flow and dividend growth driving performance. In other words, we believe we are

heading into a period akin to the 1980s and 1990swhen the US was seemingly the only

game in town because it was more fundamentally sound than other major markets. To be

clear, we do not believe stocks will end in the same spectacular fashion, but do believe there

are many more years of stock gains left. Furthermore, just because stocks go up, this does not

necessarily mean they are in a bubble. Bubbles are created by prolonged periods of excess

and emotion (e.g., credit and housing in mid-2000s; technology in the late 1990s). Rather, the

current period is more like "Old Time Hockey," and good old fashion investing, where we

skate with the puck, pass the puck, and shoot the puck.

Exhibit 7: Fundamental Factors Are Outperforming Again, Something We Expect to

Continue During 2015

Source: BMO Capital Markets Investment Strategy Group, FactSet, CompuStat, IBES.

The relative price line is derived by taking the simple average of the index levels of all fundamental factor profiles divided

by the simple average of all technical factor profiles. Fundamental factor profiles cover the valuation, actual growth,

estimated growth, and quality factor categories. Technical factor profiles also include high risk category. See latest US

Factor Profilesfor more details.

1.05

1.06

1.07

1.08

1.09

1.10

1/13

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3/13

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12/13

1/14

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3/14

4/14

5/14

6/14

7/14

8/14

9/14

10/14

Fundamental vs. Technical Factors Relative Price

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12

Diffuse Fear With Fundamentals

Fear and emotion continue to be primary drivers of stock market momentum and opinion,

judging by our interactions with clients and companies over the past several months. In fact

we believe at least three fear trades alone occurred in 2014. For instance, the dreaded "polar

vortex" during 1Q drove investors back into fixed income and yield product (especially

Utilities). Yet, the fundamental foundations of these instruments are less than desirable, with

Treasuries providing negative real rates of returns and many US utility stocks trading at or

near all-time valuation highs with anemic earnings and cash flow growth. In addition

investors flocked to index funds for much of 2014 (especially during the summer), as stock

price correlations and prices moved higher together. We believe this behavior was driven by

investor fears of missing additional upside in US stocks given their relatively poor

performance relative to benchmarks. Lastly, investors received what they asked for when US

stocks delivered a near classic correction during September-October, driven mainly by Ebola

and international growth fears. However, calmer heads and fundamentals prevailed, as

investors realized quickly that the issues stemming from EM and Europe issues were old

news and Ebola was not going to become a pandemic, no matter how hard the media punched

the fright button. The way we see it, fundamentals almost always defeat fear and we

implore our clients to stick with their disciplines and styles over the next several quarters

even as doubts remain about the resiliency of the US in the face of rising interest rates, slowe

growth in EM and Europe, and deflationary pressures stemming from the slide in

commodities. As you can see from Exhibit 8, the fundamental and macro backdrop has

continued to improve despite all the obstacles along the way.

Exhibit 8: Economic Conditions Continue to Improve and Rebounding EPS Growth Reflects This

Source: BMO Capital Markets Investment Strategy Group, Bloomberg, Conference Board, IBES.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

-60%

-40%

-20%

0%

20%

40%

60%

1985 1990 1995 2000 2005 2010

S&P 500 (Y/Y % Chg.)

Leading Indicator Index (Y/Y % Chg., rhs)

2%

3%

4%

5%

6%

7%

8%

1/13

2/13

3/13

4/13

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1/14

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7/14

8/14

9/14

10/14

S&P 500 Trailing 4 Quarter EPS Growth

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13

Three- to Five-Year US Stock Return Outlook

As we have mentioned, we believe US stocks are mired within a secular bull market

Historically, these cycles have lasted roughly 15 years. In addition, there have been clear

return and volatility patterns within each stage of the cycle. Given our view that the market is

transitioning toward the second stage of a secular bull market (acceptance), we believe US

stocks are poised to provide average returns of 8-10% for at least the next three to five yearssimilar to historical norms. Furthermore, since volatility is typically higher during this stage

we believe corrective phases are not out of the question and some years may be better or

worse than the average (or even negative). Nonetheless, the return structure of US stocks

remains positively disposed relative to other regions and asset classes, in our view.

Exhibit 9: This Bull Market Has Tracked Other Secular Cycles Reasonably Well . .

Something We Expect Will Continue in the Coming Years


Exhibit 10: US Stocks Are Entering Into a Period of Somewhat Lower and More Volatile Returns


1.0

1.5

2.0

2.5

3.0

3.5

4.0

0 1 2 3 4 5 6 7 8 9 10

Years Into Secular Cycle

Normalized S&P 500 Price Performance of Secular Bull Markets

Average of Prior Two Post War Secular Bull Markets Current

18.8%

10.6%

16.8%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

First 5 Years Next 5 Years Remaining Years

S&P 500 Compounded Annual Returns During SecularBull Market Stage

4.0%

4.5%

3.3%

3.0%

3.2%

3.4%

3.6%

3.8%4.0%

4.2%

4.4%

4.6%

First 5 Years Next 5 Years Remaining Years

S&P 500 Average Std. Dev. of Monthly Returns DuringSecular Bull Market Stage

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14

Three- to Five-Year US Stock ThemeRedistribution of Corporate and

Private Capital

Corporate Cash to Provide Engine for Growth, Benefitting Industrials and Technology

We continue to believe a burgeoning capex recovery is occurring within the US. This is due

to the defensive nature of corporate America over the past few years, driven in part by theirgeneral reluctance to invest cash into the businessaside from share buybacks, which we

viewed as an effort to boost EPS numbers. While this strategy had worked out well for a

while, it appears that investors are beginning to lose their appetite for buybacks. For instance

the performance of companies with the greatest amount of buybacks has been roughly fla

over the past year and has actually deteriorated moderately over the past few months (Exhibi

11). From our perspective, this suggests that sooner or later companies will need to invest in

their businesses to provide themselves and investors with future growth opportunities.

Exhibit 11: Share Buybacks Are Starting to Lose Their Appeal

Source: BMO Capital Markets Investment Strategy Group, FactSet, CompuStat.

Exhibit 12: Corporate Cash Remains at Historic Levels

Source: BMO Capital Markets Investment Strategy Group, BEA.

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

1/11 3/11 5/11 7/11 9/11 11/111/12 3/12 5/12 7/12 9/1211/12 1/13 3/13 5/13 7/13 9/13 11/13 1/14 3/14 5/14 7/14 9/14

Relative Total Return of Top 50 Stocks With Highest Amount of Share

Repurchases over the Past Year

0

200

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800

1000

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1400

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Nonfinancial Corporate Cash$ billions, deposits plus short-term securities

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15

Several secular trends are also providing the impetus for increased capex spending. For

instance, investment spending as a percentage of GDP, while recovering lately, remains low

from a historical perspective (Exhibit 13). Furthermore, the average age of plant and

equipment is at its highest levels in 50 and 15 years (Exhibit 14, right), respectively. The way

we see it is that there is a tremendous amount of pent-up investment spending demand and,

given the abovementioned, we believe the next logical step for companies to improve growthprospects is to invest in their businesses. Finally, the enormous pile of cash sitting on

corporate balance sheets (Exhibit 12) makes the case even stronger, particularly as economic

conditions continue to gradually improve and the fear factor is removed from corporate

management consciousness.

Exhibit 13: Investment Spending Has Rebounded, but Remains Too Low


Exhibit 14: Plant and Equipment Are Aging


12%

14%

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22%

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Average

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Average Age of Equipment & Structures

Equipment

Structures (rhs)

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16

Our overall market outlook, and more specifically our sector positioning, are based partly on

our expectation for a capex revival. As Exhibit 15 illustrates, we analyzed performance trend

for all capex cycles since 1970 and found that cyclical areas of the market tend to perform

significantly better when the overall level of capex is improving, specifically Energy

Industrials, and Technology. Not so coincidently, we recommend Overweight positions for

two out of the threeIndustrials and Technologywhich we expect to be the mainbeneficiaries when combined with solid fundamental conditions of both sectors. In Energys

case, we are less optimistic given what we view as a secular change in the supply and demand

dynamics of crude oil.

Exhibit 15: Cyclical Areas Benefit From Improved Capex


Private Investor Asset Positioning With Transition Toward Wealth Generation Benefiting Financials

The psychological damage stemming from Americas lost decade during the 2000s has

steered many investors away from the traditional investment goal of wealth creation, to

wealth preservation, in our view. As a result, investors have strongly preferred bonds over

stocks throughout this bull market despite the significant outperformance of stocks. Indeed, as

Exhibit 16 (left) shows, equity allocations within retirement plans (i.e., long-term investors)

are relatively low at roughly 50% of total assets. By comparison, equity allocations

approached 65% during prior bull markets. Again, we believe this is a reflection of the 10

years leading up to the financial crisis where stocks significantly underperformed bonds

However, while we do not expect a rapid increase of interest rates, we do believe things areslightly different this time around. Remember, interest rates were much higher then and had a

lot further to drop to propel bond gains (Exhibit 16, right). Nowadays, interest rates are stil

hovering around historic lows. Therefore, given relatively low equity allocations, significant

outperformance of stocks and the likelihood that rates will be higher rather than lower in the

next three to five years, we believe it makes sense for investors to increase stock allocations

in order to both generate and preserve wealth. And once investors come to this realization tha

0.0%

-1.2%

5.8%

0.1%

-1.1%

2.5%

5.2%

-1.5%

-8.6%

-6.3%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

COND CONS ENRS FINL HLTH INDU INFT MATR TELS UTIL

Average Relative Sector Performance During Improving Capex Cycles Since 1970

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17

bonds may become capital destructors in retirement portfolios, we expect a significan

redistribution of capital toward equities.

From our perspective, the main beneficiary of this would be Financials. Historically, the

sector has outperformed during periods of increasing equity allocations given all that this

would entail (e.g., more transactions, higher margin investment products, capital appreciationon AUM, and associated fees, etc.). Unfortunately, this relationship has broken down in

recent years, which we believe is based on the misguided views regarding regulatory

constraints. For instance, even with more stringent capital requirements, sector valuation

should be at least 20% higher based on our analysis. As such, an eventual redistribution

toward equity assets and subsiding worries regarding regulatory constraints will provide

powerful tailwinds for Financials in the coming years, in our view.

Exhibit 16: Low Equity Allocations and Interest Rates Could Propel Financials in the Coming Years

Source: BMO Capital Markets Investment Strategy Group, Bloomberg, Federal Reserve, Haver, Merrill Lynch Bond Indices.

Topics to Consider Heading into 2015

The Fed tap dance.As the economic data improve in America but disintegrates in both EM

and Europe, uncertainty surrounding the Fed will likely only increase in 2015.

BMO view:While we certainly do not expect another round of QE, we believe the Fed will

err to the side of caution before tipping its hand in terms of a change in policy. However, we

do believe investors should be patient as there will be plenty of time to adjust portfolios

accordingly. Granted, we have now reared an entire generation of investors that believe

higher rates are bad for stocks. To the contrary, a change in Fed policy will only bring

credibility to the fundamental improvement of US stocks. Therefore, any reactive moves tothe downside will be exactly thatreactionsthereby providing opportunities for more

disciplined investors. As such, we believe the US has entered a multiyear period in which

stock prices, earnings, the economy, and dollar will all be positively correlated.

20%

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55%60%

65%

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Financials vs. S&P 500 Equity Allocation in Retirement Plans

-5.1%

12.7%

-2.2%

-0.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%8%

10%

12%

14%

Prior 10 Years 2009 thru Current

Average Annual Excess Total Return: Stocks vs. Bonds

Change in 10 Yr Tsy Yield

Stocks = S&P 500Bonds = ML Domestic Bond Master Index

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18

Exhibit 17: Fed Rate Hike Should Not Be a Concern, Particularly Given the Size of the Fed Balance Sheet

Source: BMO Capital Markets Investment Strategy Group, Federal Reserve.

Common sense will increase. As the cycle matures, good news will eventually becomegoodand bad will become bad.

BMO view:With only about 10% of US fund managers outpacing the market in 2014 and

hedge funds massively underperforming, a change in investment process is likely to occur

From our lens, this means a prolonged period of active investing is upon us, thereby

overtaking the macro or index biased ways that have engulfed investing the past 15 years

Why now? The more managers underperform, the more they will be forced to change their

stripes. In addition, based on our work, fundamental stalwarts such as EV/EBITDA, price to

free cash flow, and operating metrics like ROE and ROA continue to outperform

dramatically.

Exhibit 18: Fund Managers Have Had an Awful 2014


-2.5%

6.0%

9.9%

16.8%15.4%

-10%

-5%

0%

5%

10%

15%

20%

30 DaysFollowing Rate

Hike

Subsequent 3Months

Subsequent 6Months

Subsequent 1Year

Subsequent 2Years

(annualized)

Average S&P 500 Performance Following Initial FedRate Hike Preceded By a Prolonged Period of

Accommodative Policy - All Periods Since 1970

0

500

1000

1500

2000

2500

0

500

1000

1500

2000

25003000

3500

4000

4500

5000

1/09

5/09

9/09

1/10

5/10

9/10

1/11

5/11

9/11

1/12

5/12

9/12

1/13

5/13

9/13

1/14

5/14

9/14

Federal Reserve Balance Sheet Assets ($ billions) S&P 500

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

% of Outperforming US Equity Fund Managerstop 200 US mutual funds by AUM

dotted line represents average

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

2014 Cumulative Price Returnthrough Oct. 31st

Credit SuisseHedge Fund Index

S&P 500

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19

Capex requires a change in behavior. Prospects for the manufacturing renaissance

increased on-shoring, and capex remain more myth than fact.

BMO view:Admittedly, multinational companies have been exporting capacity for decades in

hopes of increased operating efficiencies and lower costs. However, we believe those days are

coming to a screeching halt. As fundamental volatility increases around the world, especially

in EM, the cost/benefit of exporting capacity is slowly eroding as time and quality begin to

take precedent over price and quantity. Therefore we believe it is only a matter of time before

US companies will need to invest to facilitate growth. What changes the behavior? We

believe managements will be reticent to invoke change until they absolutely have to or unti

incentives in the form of cash repatriation and/or corporate tax reform takes shapean even

that is unlikely to occur for at least a few more years. In addition, we believe investors should

not discount the increased odds of a more friendly energy platform in America the next few

years, which would literally fuel on-shoring and job growth, and thereby increase the

prospects for North America to become a low-cost efficient producer of goods and services.

Exhibit 19: Emerging Market Growth Is Slowing While the US Is Becoming Cost Competitive Again

Source: BMO Capital Markets Investment Strategy Group, Bloomberg, IMF, OECD.

Demand for US equities. Prospects for higher interest rates, lower commodity costs and

increased fundamental volatility in EM and Europe likely increases the demand for US

equities.

BMO view:We continue to believe non-US investors have been reluctant buyers of US stocks

and have been in many ways "renting performance" until overall global growth, and

especially EM, recovers. Let's face it, investors have spent a lot of time learning about EM

small cap, credit, and commodities the past 10-15 and do not want that work to go to waste

In addition, a 30-year bull market in bonds has been tough to reverse. As such, anytime a

glimmer of hope shines, they seem to run back in droves. Case in point, the rally in 10-year

Treasuries in 2014 looks and feels like a blow-off top every day, while the rallying cries for a

European recovery in early 2014 fell very short. As such, we believe a multiyear period of

underperformance remains in the very early stages for those aforementioned asset classes

with US stocks the most logical and fundamentally based landing spot.

5

6

7

8

9

10

11

12

13

14

15

20

00

20

01

20

02

20

03

20

04

20

05

20

06

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07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

China, GDP Growth

estimates

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

OECD Competitiveness IndicatorNormalized as of 12/31/94

US

China

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20

Exhibit 20: Foreigners Remain Reluctant US Buyers, But Returns Have Lagged in Other Regions

Source: BMO Capital Markets Investment Strategy Group, Federal Reserve.

-100000

-50000

0

50000

100000

150000

200000

250000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Net Foreign Purchase of US Stocks$ millions

-10%

-5%

0%

5%

10%

15%

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

2014 Cumulative Price Return

S&P 500

MSCI Emerging Markets

MSCI Europe

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21

US Sector Recommendations

For some time now we have been sharing our view that US stocks will set the fundamental

and performance pace for equities around the world for at least the next several years. As

such, we continue to favor Financials, Industrials, and Information Technology within

portfolios. Each sector contains fundamental attributes and themes that will benefit from the

stronger-than-expected US economic recovery that we believe will occur over the next

several quarters. By contrast, we prefer to avoid areas of the market that are overly exposed to

emerging markets since fiscal and monetary uncertainty remains quite high while economic

growth in these nations has begun to cool. As such we recommend that investors lighten up

on Energy and Materials.

Overweight:

Financials; Recommended Weight of 21.5% vs. Index Weight of 16.3%

The most feared sector globally, despite massive fundamental structural change since

2008as most companies and investors alike continue to treat sector as if it were

indeed still 2008-2009, in our view. For instance, consensus believes that regulations will only worsen from here

debilitating the sector into utility-like fashion.

Therefore, most of our clients around the world remain underweight the sector, a

primary reason we believe so many portfolio managers are underperforming.

We continue to favor regional banks for burgeoning commercial loan business

(increasing capex, on-shoring), with money centers, select insurance, asset managers

and brokers benefitting from re-creation of the wealth theme for the next several

years.

Exhibit 21: Financials Have the Highest Correlation to the Strengthening US Economy; and Fund Managers Remain Cautious

on the Sector

Source: BMO Capital Markets Investment Strategy Group, FactSet, Lionshares, Bloomberg.

61% 57%

48%

78%

65%

76%

49%

58%

17%

51%

76%

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

COND

CONS

ENRS

FINL

HLTH

INDU

INFT

MATR

TELS

UTIL

SPX

Price Returns Explained By Business CycleR2 from linear regression between sector prices and leading indicators

beginning 1990

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

3/09 12/09 9/10 6/11 3/12 12/12 9/13 6/14

Financials Weight in Top 200 US Equity Mutual Fundsvs. S&P 500 Index Weight

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22

Industrials; Recommended Weight of 12.5% vs. Index Weight of 10.5%

Industrials remain the most eclectic and most misunderstood sector in the US.

Most investors remain fixated on those names within the sector that rely on

international growth (prior cycle leadership).

However, many of these same names have very strong North American

operations and growth, fundamentals that we believe will more than compensate

for a potential slowdown in Europe and Emerging Markets.

We continue to favor railroads, aerospace and defense, select conglomerates, tool

companies, waste management, and select machinery.

Exhibit 22: Domestically Focused Industrials Appear Most AttractiveIndustry Sector Weight 2015E PE 2015E EPS Gr. PEG 2015

Domestic Focused* 42.4% 16.9 11.3 1.5

Foreign Focused* 57.6% 16.1 9.3 1.7

Industrials NA 16.4 10.1 1.6

S&P 500 NA 19.9 13.7 1.5

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES.

*Domestic/Foreign Companies are defined as those with lower/higher 5-year average foreign sales compared to the

sector level of 38%.

Exhibit 23: Stable Relative Price Performance Suggest Industrials Requires Active Stock

Selection


0.17

0.20

0.22

0.25

0.27

1990 1993 1996 1999 2002 2005 2008 2011 2014

Industrials vs. S&P 500 - Relative Price Index

Dotted lines represent +/- 1 std. dev.

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23

Technology; Recommended Weight of 22% vs. Index Weight of 19.9%

In our view, Technology is the poster child for structural fundamental reform in

corporate America the past decade.

Increasingly stable earnings, massive balance sheets and steady cash flow, not tomention dividend growth in many of the larger legacy Technology leaders.

Granted, the sector is not the go-go grower of the 1990s. However, we believe

that is a positive thing as the sector rebuilds credibility through continued

innovation and stability of operating results.

We continue to favor bricks and mortar Tech relative to social networking stocks

After all, these are the areas that literally make the social network run. As such, we

prefer software, peripherals, and select hardware and service companies.

Exhibit 24: Technology Continues to Offer GARP Characteristics

Source: BMO Capital Markets Investment Strategy Group, IBES.

Exhibit 25: Strong Demand Is Also Providing Technology Tailwinds

Source: BMO Capital Markets Investment Strategy Group, ISM.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1994 1997 2000 2003 2006 2009 2012

Technology Valuation & Earnings Growth

Valuation Composite vs. S&P 500 Earnings Growth Composi te

10

30

50

70

-80%

-40%

0%

40%

80%

1991 1994 1997 2000 2003 2006 2009 2012

Technology Performance & ISM New Orders

Information Technology Performance (%y/y) ISM: New Orders Index

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24

Market Weight:

Consumer Discretionary; Recommended Weight of 11% vs. Index Weight of 11.8%

Weakness beginning to unwind after several months of steady underperformance.

To be clear, we are not advocating an Overweight stance given lofty sector

valuations and increasing structural headwindsspecially for traditional retail. As such, we believe the consensus belief to own the sector again due to falling

commodity costs is too simplistic.

We prefer very select high- and low-end retail, media and select restaurants

Consumer Staples; Recommended Weight of 9% vs. Index Weight of 9.8%

Staples remain a classic neutral sector, with valuations near historical norms and

earnings remaining the US markets most stable.

We favor select beverages, household products, and hypermarkets.

Exhibit 26: Analyst Pessimism Is Receding, but Consumer Discretionary Remains Relatively Expensive; Strong Non-

Discretionary Spending Continues to Support Consumer Staples

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Census Bureau.

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

1990 1993 1996 1999 2002 2005 2008 2011 2014

Consumer Discretionary Valuation Composite

-30%

-20%

-10%

0%

10%

20%

30%

40%

-2%

0%

2%

4%

6%

8%

2000 2003 2006 2009 2012

Consumer Staples Performance vs Non-DiscretionarySpending

Retail Sales: Food & Beverage/Pharma Stores (%y/y)

Consumer Staples Performance (%y/y)

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Health Care; Recommended Weight of 13% vs. Index Weight of 14.2%

Recent outperformance has been dominated by very select areasespecially within

biotech and pharma.

As such, many of these areas are extended near-term but provide stronger

longer-term fundamentals in our view.

Therefore, we would continue to be very select within both biotech and pharma

while avoiding most devices at current levels.

Overall sector valuations are no longer cheap, with 2014 outperformance likely

spelling more neutral trends for the next several months.

We also prefer select instrument and managed care companies.

Telecom Services; Recommended Weight of 2.5% vs. Index Weight of 2.4%

Upgrading from Underweight stance.

Earnings and dividend growth are much improvedespecially relative to other

higher yield brethren like Utilities.

We prefer traditional telecom service companies.

Exhibit 27: Health Care Has Strong Earnings Growth but Valuations Are at Cycle Highs; Telecommunications Has Been

Upgraded to Market Perform on Improved Dividend Growth and Earnings Outlook


(1.50)

(1.00)

(0.50)

-

0.50

1.00

1.50

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1994 1997 2000 2003 2006 2009 2012

Health Care Valuation & Earnings Growth

Valuation Composite Earnings Growth Composite

0.07

0.11

0.14

-0.1

-0.1

0.0

0.1

0.1

0.2

0.2

0.3

0.3

2003 2006 2009 2012 2015

Telecommunications Dividend Growth vs RelativePerformance

DPS Growth (adv. 4Q)

Telecommunications vs. S&P 500

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Underweight:

Energy; Recommended Weight of 6.5% vs. Index Weight of 8.7%

Downgrading to Underweight from Market Weight stance.

Perfect storm of slowing EM growth, expanding North American supply and lower

crude prices equate to a perfect storm against the sector.

A behavior change must occur with companies and analysts alike as sector

transitions operationally and psychologically from demand driven to supply.

We prefer very specific services, integrated and E&P companies.

Exhibit 28: Sharp Drop in Revisions Suggest Potential Negative EPS Growth in 2015; and Rising Domestic Oil Production Wil

Likely Keep Downward Pressure on Oil Prices

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Haver, EIA, CME.

Materials; Recommended Weight of 1% vs. Index Weight of 3.3%

Over capacity and decelerating global growth remain stumbling blocks.

Avoid precious metals; base metals improving; we prefer chemicals and specialty

companies.

Exhibit 29: Weaker Commodity Prices and Slow Global Growth Will Continue to Weigh on the Sector

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Haver, CRB, IMF.

(2.00)

(1.00)

-

1.00

2.00

-10%

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014

Energy EPS Growth & Revisions

NTM EPS Growth

Revisions Composite

0

50

100

150

2000

4000

6000

8000

10000

1999 2001 2003 2005 2007 2009 2011 2013

Domestic Oil Production vs WTI Spot Price

US Crude Oil Production (000 bbl/d)

WTI Spot (EOP, $Barrel)

-40%

-20%

0%

20%

40%

-40%

-20%

0%

20%

40%

2000 2003 2006 2009 2012 2015

Materials Sales Growth vs. Commodity Prices

Sales Growth CRB Spot (y/y, adv. 2Q)

0

2

4

6

8

10

2002 2004 2006 2008 2010 2012 2014 2016 2018

GDP Growth - Emerging Markets

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Utilities; Recommended Weight of 1% vs. Index Weight of 3.1%

Utilities remain one of the most expensive assets in the world.

Polar vortex fear trade back into high yield in 2014 was a likely head fake.

Realities of higher interest rates is not a positive.

We prefer very select traditional electric utilities with above sector dividend and

earnings growth.

Exhibit 30: Utilities Remain Very Expensive; and Will Likely Be Challenged in a Rising Rate Environment

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Bloomberg.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1990 1993 1996 1999 2002 2005 2008 2011 2014

Utilities Valuation Composite2.1

2.3

2.5

2.7

2.9

3.10.10

0.11

0.11

0.12

0.12

12/13 2/14 4/14 6/14 8/14 10/14

Utilities Relative Performance vs Rates

Utilities vs. S&P 500

10-year Treasury Yield (inverted rhs)

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28

Canada: Continued Underperformance, but Increasing Correlation to US

We believe the S&P/TSX Index will achieve a year-end 2015 price target of 15,600 on

earnings of $940. This will mark another year of positive returns for Canadian stocks

however the S&P/TSX will likely underperform the US for the fifth consecutive year, as the

US economy continues to outpace global growth. Additionally, although we believe tha

sentiment around EM and Europe will continue to drive broad swings above and below our

target, ultimately Canada will become increasingly correlated with the US. As such, despite

the potential for a year-over-year decline in resource prices in 2015, we expect Canada will

post another positive year driven by US strength.

Exhibit 31: Resurging US Manufacturing to Be an Increasing Net Positive for Canadian Equities. Operating Efficiency

Continues to Improve, Supporting a Strong Dividend Yield

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Bloomberg, Markit, ISM, S&P.

Exhibit 32: Oil Prices Remain a Key Obstacle to Any Sustained Outperformance; TSX Volatility Is Increasing Relative to US

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Haver, S&P, IEA.

-60%

-40%

-20%

0%

20%

40%

60%

35

40

45

50

55

60

65

1999 2001 2003 2005 2007 2009 2011 2013

S&P/TSX vs. Global PMI & US PMI

US ISM Global PMI S&P/TSX Price Index (%y/y)

US ISM: 76%

10y Correlation:Global PMI: 81%

-2.0

-1.0

0.0

1.0

2.0

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1999 2001 2003 2005 2007 2009 2011 2013

S&P/TSX Dividend Yield vs Operating Efficiency

Dividend Yield Efficiency Composi te

10

30

50

70

90

110

130

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

S&P/TSX vs. WTI Spot Price

S&P/TSX Price Index WTI Spot Price (AVG, $/Barrel)

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2010 2010 2011 2011 2012 2012 2013 2013 2014 2014

S&P/TSX vs S&P 500 Relative 6m Trailing Volatility

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29

Two out of Canadian Big 3 Sectors Face Fundamental and Macro Hurdles

While Financials remain our favored sector, we continue to believe most Canadian

centric investors remain apologetic about owning the sector.

Pristine balance sheets, steady earnings, and consistent dividend growth, not to

mention historically better behaved relative to their neighbors to the south willlikely reward the sector with higher ROEs and multiples for years to come.

However, the story is not as positive for Materials and Energy.

The super cycle in commodities is clearly over.

EM is now dealing with over capacity and decelerating growth, a scenario that

may take up to five years to dissipate.

While oil prices have declined, the sectors relative weight within the index has

not corrected as one would expect.

Furthermore, although both Energy and Materials stocks have suffered sharp

price corrections, longer-term earnings expectations are not reflective of thechanging global and intra-sector dynamic, in our view.

Exhibit 33: S&P/TSX Sector Weights

Industry

Average (1956-

present) Peak Trough Current

Energy 12.7% 32.8% 4.2% 22.9%Materials 25.6% 45.3% 7.3% 10.7%Industrials 8.2% 13.4% 5.0% 8.8%Consumer Discretionary 5.8% 11.4% 2.8% 6.1%Consumer Staples 6.2% 12.5% 1.4% 3.3%Health Care 0.7% 3.7% 0.0% 3.4%

Financials 20.4% 35.6% 10.3% 35.8%Information Technology 3.1% 42.2% 0.1% 2.0%Telecommunications Services 6.9% 16.8% 3.9% 4.8%Utilities 4.3% 7.0% 1.3% 2.2%

Source: BMO Capital Markets Investment Strategy Group, IHS Global Insight.

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30

Exhibit 34: Energys Index Weight Remains High

Source: BMO Capital Markets Investment Strategy Group, IHS Global Insight.

Exhibit 35: S&P/TSX EPS Sector Weights: Falling Energy Earnings Will Require Other Sectors to Pick Up the Slack


0%

5%

10%

15%

20%

25%

30%

35%

1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

S&P/TSX Energy Sector Weight

COND,13%

CONS, 6%

ENRS, 16%

FINL, 31%

HLTH, 2%

INDU, 11%

INFT, 5%

MATR,10%

TELS, 2%UTIL, 4%

S&P/TSX EPS Weight: Current

COND, 22%

CONS, 10%

ENRS, 9%

FINL, 29%

HLTH, 1%

INDU, 3%

INFT, 3%

MATR, 8%

TELS, 6% UTIL,9%

S&P/TSX EPS Weight: 1998-99 Average

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31

Exhibit 36: Current Energy Sector Earnings Revisions Are Tracking the 2008 Recession; However, Price Performance Is Not


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1 2 3 4 5 6 7 8 9 10

Energy Revision Composite Cycles (by Months)

Current Average Cycle 08 Recession

0.4

0.6

0.8

1.0

1.2

1 2 3 4 5 6 7 8 9 10

Energy Sector Performance during Revision Cycles

Current Average Cycle 08 Recession

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32

S&P/TSX Targets: 2015 Year-End Price Target of 15,600 and EPS Target of $940

Although valuations are above historical norms, consistent dividend growth and our

previously lowered risk premium assumption are supportive of continued positive

returns in 2015.

Of our models, our Macroeconomic models are flagging the weakest earnings growthand potential price performance heading into 2015, driven by weak global growth

and commodity prices.

Negative earnings revisions heading into 2015 will likely keep earnings growth

contained to the mid-single digits, more than two percentage points below US EPS

growth for the second consecutive year.

Price multiples to remain relatively flat at roughly 16.6x for 2015, a moderate

discount to the US.

Exhibit 37: 2015 S&P/TSX Composite TargetsPrice Target Earnings Per Share Target

Model Category 2015E Model Category 2015EDividend Discount Model Fundamental 15625 Macroeconomic Regression Model Macro 847.50Fair Value Price-to-Earnings Model Valuation 15900 Mean Consensus Regression Model Macro 950.75EPS Revision Model Mean Reversion 15075 Bottom Up Mean Consensus Expectation Fundamental 952.25Macroeconomic Regression Model Macro 14925 Normalized EPS Mean Reversion 989.25

Ex ected Return* 7.6% Ex ected EPS Growth* 5.6%Prior Year End S&P/TSX Comp. Close* 14500 Prior Year S&P/TSX Comp. EPS* 890Price Target 15600 EPS Target 940

Implied P/E: 16.6x

Source: BMO Investment Strategy Group. *Based on our 2014 target.

Exhibit 38: S&P/TSX Valuations Have Improved, However Earnings Expectations Remain Lofty Suggesting the Market MayStruggle as Analysts Re-rate Earnings; Additionally, Soft Commodity Prices Suggests a Discount to the TSX Multiple


8

10

12

14

16

18

20

-20%

-10%

0%

10%

20%

30%

40%

50%

1999 2001 2003 2005 2007 2009 2011 2013 2015

S&P/TSX Earnings Growth and Valuation

NTM EPS Gr. NTM Median PE

-120%

-60%

0%

60%

120%

-8

-6

-4

-2

0

2

4

6

8

12/1 12/1 12/1 12/1 12/1 12/1 12/1 12/1

S&P/TSX vs. S&P 500 Multiples & Energy Price

TSX vs SPX LTM PE TSX vs SPX NTM PE

WTI (y/y)

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33

Canadian Sector Recommendations

Overweight:

Financials; Recommended Weight of 39% vs. Index Weight of 35.8%

Financials remain among the most stable earners in Canada, while also offeringattractive yields and dividend growth. Additionally lower leverage and higher

barriers to entry will likely warrant higher multiples for Banksespecially relative to

their US counterparts.

Furthermore, we believe insurance and banks can be owned together given the

increased asset management exposure within Canadian insurance companies, which

have helped diversify their revenue growth while aiding to dilute potential risk of

higher interest rates.

Exhibit 39: Financials Have Returned to Peak Operating Efficiency, Growth Expectations Have Improved, and DividendGrowth Has Surged


(2.0)

(1.0)

-

1.0

2.0

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1999 2001 2003 2005 2007 2009 2011 2013

Financials Earnings Growth & Operating Efficiency

NTM EPS Gr. Efficiency Composite-20%

-15%-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2008 2009 2010 2011 2012 2013 2014

Financials Dividend Growth

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34

Industrials; Recommended Weight of 11% vs. Index Weight of 8.8%

Industrials have seen one of the strongest improvements in underlying fundamentals

and will likely continue to benefit the most from the strengthening US economy.

We continue to favor the railroads and select manufacturers and waste management.

Exhibit 40: Industrials Earnings Growth Continues to Be Driven by the US, and Freight Traffic Is Hitting Record Highs

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, FRB, Haver, Bloomberg, Statistics Canada, AAR.

Telecommunications; Recommended Weight of 6% vs. Index Weight of 4.8%

We are upgrading Telecom to Outperform based on a clear trough in actual earnings

growth and expectations, as the threat of new entrants has diminished and pricing

power has been restored. Additionally, it has been an underperforming sector tha

now offers good relative value in our view.

We favor the traditional integrated telecom companies.

Exhibit 41: Telecom Earnings Growth Is Expected to Rebound in 2015, and Valuations are Relatively Attractive; Additionally

Pricing Power Remains Strong

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Haver Analytics, Statistics Canada.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-20%

-10%

0%

10%

20%

30%

40%

50%

1999 2001 2003 2005 2007 2009 2011 2013

Industrials Earnings Growth vs. Industrial Production

NTM EPS Gr. US Industrial Production (%y/y)

120000

180000

240000

300000

80000

120000

160000

200000

2000 2002 2004 2006 2008 2010 2012 2014

Intermodal Freight (Seasonally Adjusted)

Canada US

-20%

-10%

0%

10%

20%

30%

40%

50%

2006 2008 2010 2012 2014

Telecommunications Earnings Growth

LTM EPS Gr. NTM EPS Gr. (adv 12M)-8%

-6%

-4%

-2%0%

2%

4%

6%

8%

10%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

CPI: Communications (%y/y)

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35

Market Weight:

Consumer Discretionary; Recommended Weight of 6% vs. Index Weight of 6.1%

We are upgrading Consumer Discretionary to Market Perform on an improved

earnings outlook; however, valuations remain extended.

We prefer select retailer and media.

Consumer Staples; Recommended Weight of 4% vs. Index Weight of 3.3%

Health Care; Recommended Weight of 3% vs. Index Weight of 3.4%

Information Technology; Recommended Weight of 2% vs. Index Weight of 2.0%

Staples and Health Care remain stable long-term holds, while Technology is growing

but lacks meaningful company representation within the index.

We prefer select food retailing in Staples and pharma within Health Care.

Exhibit 42: Consumer Discretionary Earnings Outlook has Improved, However Valuations Are at Cycle Peaks; ConsumerStaples Earnings Growth Continues to Be Supported by Good Relative Pricing Power, Despite Increased Competition Threat

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Haver Analytics, Statistics Canada, Bank of Canada.

Underweight:

Energy; Recommended Weight of 20% vs. Index Weight of 22.9%

Perfect storm of slowing EM growth, expanding North American supply and lower

crude prices equate to a perfect storm against the sector.

Even more than the US, given the importance of the sector within the Canadian

market, a behavior change must occur with companies and analysts alike as sector

transitions operationally and psychologically from demand to supply driven.

We would bottom-fish select integrated, natural gas, pipes, and very select services

once earnings expectations become more realistic.

57

9

11

13

15

17

19

21

23

-20%

-10%

0%

10%

20%

30%

40%

50%

1999 2001 2003 2005 2007 2009 2011 2013

Consumer Discretionary Earnings Growth vs. Valuation

NTM EPS Gr. NTM PE

-60%

-40%

-20%

0%

20%

40%

60%

-1.2

-0.6

0.0

0.6

1.2

2000 2002 2004 2006 2008 2010 2012 2014

Consumer Staples Earnings Growth vs. Food InflationMargins

Earnings Composite

Consumer Food Price Inflation less Argicultral Price Inflation

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36

Exhibit 43: Although the Energy Sectors Calendar Year 2015 EPS Has Come Down, WTI

Suggests More to Come

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Haver Analytics, IEA.

Materials; Recommended Weight of 8% vs. Index Weight of 10.7%

Although valuations may look attractive, we are downgrading Materials due to

increased commodity price volatility and global growth concerns. More importantly

operating and profitability metrics remain weak, suggesting solvency risk in the

sector on further commodity price weakness.

We favor forest and paper products over precious metals, with base metals showing

slow improvement.

Exhibit 44: Material Sectors Overall Fundamentals Remain Weak and Commodity Prices Wil

Likely Remain Soft

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, Haver Analytics, Bank of Canada.

70

75

80

85

90

95

100

105

110

170.0

175.0

180.0

185.0

190.0

195.0

200.0

205.0

210.0

12/13 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 12/14 1/15

Energy CY 2015 Earnings vs WTI Prices

CY 2015 EPS WTI Spot, Cushing ($/Barrel)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-1.0

-0.6

-0.2

0.2

0.6

1.0

2004 2006 2008 2010 2012 2014

Materials Fundamentals vs Commodity Prices

Fundamental Composite BoC: Metals & Minerals Commodity Price Index (CAD, y/y)

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37

Utilities; Recommended Weight of 1% vs. Index Weight of 2.2%

Valuations remain relatively high in the Utilities sector, while earnings growth and

profitability are weak.

We prefer very select traditional electric utilities with above sector dividend and

earnings growth.

Exhibit 45: Utilities Continue to Show Poor Profitability and Earnings Growth


5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

-1.0

-0.5

0.0

0.5

1.0

1.5

2003 2005 2007 2009 2011 2013

Utilities Earnings Growth & ROE

Earnings Composite ROE

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Implementation Strategies

Large-cap over small-cap. We believe large-cap has entered a multi-year period of

outperformance relative to small-capespecially in US stocks. For instance, small-cap was

part of the prior cycle leadership when credit, commodities, and low quality led the way

However, our work continues to suggest that leadership is rarely similar from cycle to cycle

Furthermore, we believe valuation, earnings stability, and especially balance sheet prowess

and dividend growth place large-cap companies at a significant advantage to small-caps,

especially when it comes to private client re-engagement, which has yet to resurface.

Exhibit 46: Small vs. Large Runs in Long Cycles

Source: BMO Capital Markets Investment Strategy Group, Haver, Russell.

Value over growth. While growth has displayed short-term periods of outperformance over

the past few years, we continue to believe value disciplines are best positioned over the next

several months. For one thing, our factor work shows that traditional fundamental and value

metrics such as valuation and operating performance continue to display steady performance

In addition, we believe value strategies provide increasingly stable returns, especially during

periods of higher volatility, which we believe will likely resurface given the strong string o

positive returns in US stocks and the likelihood of changing macro dynamics.

Exhibit 47: Value Has Been a Better and More Consistent Performer Longer-Term

Source: BMO Capital Markets Investment Strategy Group, Bloomberg, Dow Jones Indices.

0.6

0.8

1

1.2

1.4

1.6

1.8

1979

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2007

2008

2009

2010

2011

2012

2013

2014

Russell 2000 vs. Russell 1000

11.1%

11.9%

10.6%

10.8%

11.0%

11.2%

11.4%

11.6%

11.8%

12.0%

Large-cap Growth Large-cap Value

Annualized Total Return By Styledata beginning 1980

20.3%

15.1%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

Large-cap Growth Large-cap Value

Standard Deviation of Annualized Total Return By Styledata beginning 1980

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Quality over volatile growth. Akin to our preference for value, we continue to favor quality

relative to volatile growth. For instance, as investors slowly accept the notion of owning

stocks again, we believe they will seek quality and substance compared to uncertainty and

flash. In addition, our work shows the return structures of higher quality growth stocks

significantly outperform generic growth stocks.

Exhibit 48: Quality of Growth Is More Important Than Just High Growth Rates

Source: BMO Capital Markets Investment Strategy Group, FactSet, IBES, CompuStat.

Dividends still matter. Despite our concern regarding certain yield-based strategies given our

interest rate expectations, dividends remain an important part of our longer-term investmen

outlook. However, we believe investors should focus more on dividend growth rather than

yield when searching for opportunities. We have found that dividend-growth strategies

perform much better than yield strategies when interest rates are rising. In addition, valuation

and yield differentials also make a compelling case for dividend growth, in our view

Furthermore, dividend-growth strategies tend to be more cyclically exposed, which is anadded benefit should economic conditions continue to improve as we expect in the coming

months.

Exhibit 49: Dividends Deliver a Meaningful Portion of Total Returns Longer-Term

Source: BMO Capital Markets Investment Strategy Group, Haver, Russell.

-500%

0%

500%

1000%

1500%

2000%

1992

1992

1993

1994

1995

1995

1996

1997

1998

1998

1999

2000

2001

2001

2002

2003

2004

2004

2005

2006

2007

2007

2008

2009

2010

2010

2011

2012

2013

2013

2014

Cumulative Total Return of Growth Strategies

Quality Growth Theme Screen

DJ Large-cap Growth Index

11.3%

7.4%

3.9%

0%

2%

4%

6%

8%

10%

12%

Total Return Price Return Dividend Return

Distribution of S&P 500 Annualized Returns Since 1948

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40

US Large-Cap Disciplined Value

Screen Methodology

To implement our disciplined value strategy, we screen the S&P 500 each January, April

July, and October based on the following parameters:

No EPS losses in the past five years;

Debt to common equity less than 1x;

Positive expected EPS growth for the next two years; and

P/B and forward P/E values less than that of the S&P 500.

USLarge-Cap Disciplined Value Theme Screen StocksTicker Company Price BMO Rating* Months In Screen

ADM Archer Daniels Midland Co. $53.18 OP 6

AET Aetna, Inc. $86.91 OP 3

AIZ Assurant, Inc. $67.59 NR 30

BMS Bemis Co., Inc. $39.74 Mkt 3

CAM Cameron International Corp. $56.82 NR NEW

CI Cigna Corp. $102.01 OP NEW

COF Capital One Financial Corp. $82.75 NR 3CSCO Cisco Systems, Inc. $27.43 OP 3

DGX Quest Diagnostics, Inc. $64.43 NR 6

DOW The Dow Chemical Co. $51.76 NR NEW

EMC EMC Corp. $30.04 OP NEW

ETN Eaton Corp. Plc $69.21 NR 9

GLW Corning, Inc. $21.07 NR 6

HP Helmerich & Payne, Inc. $77.73 NR 3

IVZ Invesco Ltd. $40.46 NR 15

JEC Jacobs Engineering Group, Inc. $47.47 NR NEW

JNPR Juniper Networks, Inc. $22.20 Mkt 6

KSS Kohl's Corp. $58.67 Mkt 6

LRCX Lam Research Corp. $82.19 NR NEW

MPC Marathon Petroleum Corp. $95.67 NR 3NDAQ The NASDAQ OMX Group, Inc. $44.83 OP 18

NOV National Oilwell Varco, Inc. $71.29 NR 6

PCG PG&E Corp. $49.94 Mkt NEW

PFG The Principal Financial Group, Inc. $54.18 NR 18

PGR Progressive Corp. $27.24 NR 3

PVH PVH Corp. $124.49 NR 3

PWR Quanta Services, Inc. $33.51 NR NEW

SWK Stanley Black & Decker, Inc. $94.77 NR 9

T AT&T, Inc. $35.13 Mkt 15

TMO Thermo Fisher Scientific, Inc. $128.66 NR NEW

UNM Unum Group $33.65 NR 21

WDC Western Digital Corp. $103.67 OP NEW

WHR Whirlpool Corp. $183.54 NR 39

WLP WellPoint, Inc. $126.90 Mkt 3

XRX Xerox Corp. $13.89 Mkt 18

Source: BMO Capital Markets Investment Strategy. Prices as of 11/26/2014. Screened constituents as of 10/31/2014. *Rating Key,

according to BMO Capital Markets Equity Research: OP: Outperform, Mkt: Market Perform, Und: Underperform, NR: Not rated by BMO

Capital Markets. Some stocks in the table above may be covered by our Canadian affiliate BMO Nesbitt Burns Inc. Click here for

disclosures on those stocks: http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx

8/10/2019 2015 Outlook

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41

Exhibit 50: US Large-Cap Disciplined Value Total Return Snapshot


US Quality Growth

Screen Methodology

To implement our quality growth strategy, we screen the S&P 500 each January, April, July,

and October based on the following parameters:

LTM earnings accrual ratio less than that of the S&P 500 for nonfinancial stocks;

Five-year EPS stability lower than the S&P 500 for financial stocks;

FY2 expected earnings growth greater than FY1 expected earnings growth; and

FY1 and FY2 expected earnings growth greater than that of the S&P 500.

US Quality Growth Theme Screen StocksTicker Company Price BMO Rating* Months In Screen

AGN Allergan, Inc. $214.00 OP NEW

ALLE Allegion Plc $53.06 NR 6

AMG Affiliated Managers Group, Inc. $203.17 NR 3

AVY Avery Dennison Corp. $49.19 NR 6

CAH Cardinal Health, Inc. $81.50 NR NEW

CAM Cameron International Corp. $56.82 NR 6

CCL Carnival Corp. $42.12 NR 3

DG Dollar General Corp. $65.91 OP 6

DLTR Dollar Tree, Inc. $67.34 Mkt 3

DOW The Dow Chemical Co. $51.76 NR 10

EA Electronic Arts, Inc. $43.68 OP 3

ETN Eaton Corp. Plc $69.21 NR 3FFIV F5 Networks, Inc. $129.09 OP 6

FIS Fidelity National Information Services $60.76 Mkt NEW

FLIR FLIR Systems, Inc. $31.78 NR 3

JNPR Juniper Networks, Inc. $22.20 Mkt NEW

M Macy's, Inc. $63.53 OP NEW

MCO Moody's Corp. $100.17 NR NEW

MDLZ Mondelez International, Inc. $39.00 Mkt 3

MPC Marathon Petroleum Corp. $95.67 NR NEW

1.2%

2.9%

6.6%

9.5%

17.8%

13.3%

2.4%

5.0%

8.2%

11.0%

17.3%

9.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1 Month 3 Months 6 Months Year-to-Date 12 Months CAGR Since 1990

US Large-Cap Disciplined Value

S&P 500

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US Quality Growth Theme Screen StocksTicker Company Price BMO Rating* Months In Screen

NBR Nabors Industries Ltd. $15.07 NR 6

NDAQ The NASDAQ OMX Group, Inc. $44.83 OP 3

NFX Newfield Exploration Co. $32.48 OP NEW

NSC Norfolk Southern Corp. $117.20 OP NEW

NTRS Northern Trust Corp. $67.61 NR 6PNR Pentair Plc $68.03 NR 6

PPG PPG Industries, Inc. $216.95 NR 6

PXD Pioneer Natural Resources Co. $160.81 Mkt NEW

QEP QEP Resources, Inc. $24.18 OP NEW

SHW The Sherwin-Williams Co. $240.60 NR NEW

SWK Stanley Black & Decker, Inc. $94.77 NR NEW

TRIP TripAdvisor, Inc. $72.77 NR NEW

WAG Walgreen Co. $68.47 NR NEW


according to BMO Capital Markets Equity Research: OP: Outperform, Mkt: Market Perform, Und: Underperform, NR: Not rated by BMO

Capital Markets. Some stocks in the table above may be covered by our Canadian affiliate BMO Nesbitt Burns Inc. Click here for

disclosures on those stocks: http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx

Exhibit 51: US Quality Growth Total Return Snapshot


1.8%2.8%

7.3%

10.4%

17.0%

14.3%

2.4%

5.0%

8.2%

11.0%

17.3%

9.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1 Month 3 Months 6 Months Year-to-Date 12 Months CAGR Since 1990

US Quality Growth

S&P 500

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43

US Dividend Growth

Screen Methodology

To implement our dividend growth strategy, we screen the S&P 500 each January, April,

July, and October based on the following parameters:

Dividend increases in each of the prior 10 years;

Dividend yield greater than the S&P 500;

Free cash flow yield greater than the dividend yield, except for Utilities;

Incremental EPS growth in each of the prior two completed years;

Incremental expected EPS growth in each of the next two years; and

Forward P/E multiple less than 20x.

US Dividend Growth Theme Screen StocksTicker Company Price BMO Rating* Months In Screen

ADI Analog Devices, Inc. $54.56 Mkt NEWADM Archer Daniels Midland Co. $53.18 OP 6BMS Bemis Co., Inc. $39.74 Mkt 18

D Dominion Resources, Inc. $72.53 Mkt 6EMR Emerson Electric Co. $65.38 NR 42GIS General Mills, Inc. $51.85 OP 15GPC Genuine Parts Co. $101.84 NR 6IBM International Business Machines Corp. $161.95 Mkt 3JNJ Johnson & Johnson $107.21 OP NEWK Kellogg Co. $64.93 Mkt 6KMB Kimberly-Clark Corp. $114.16 Mkt 42LLTC Linear Technology Corp. $45.55 Mkt NEWLMT Lockheed Martin Corp. $189.15 NR 9MKC McCormick & Co., Inc. $72.83 NR NEWMMM 3M Co. $158.31 NR 6NEE NextEra Energy, Inc. $103.20 OP 21NOC Northrop Grumman Corp. $141.45 NR 3NSC Norfolk Southern Corp. $117.20 OP 6

NU Northeast Utilities $49.64 Mkt 6PEP PepsiCo, Inc. $99.35 OP 6PG Procter & Gamble Co. $88.88 OP 12PX Praxair, Inc. $129.88 NR NEWQCOM QUALCOMM, Inc. $72.26 OP 3RAI Reynolds American, Inc. $65.20 NR NEWSCG SCANA Corp. $56.52 NR 18SO The Southern Co. $46.82 Mkt 6SWK Stanley Black & Decker, Inc. $94.77 NR NEWT AT&T, Inc. $35.13 Mkt 9TXN Texas Instruments, Incorporated. $54.33 OP NEWUTX United Technologies Corp. $110.16 NR 3VZ Verizon Communications, Inc. $50.04 OP 9WAG Walgreen Co. $68.47 NR NEWWEC Wisconsin Energy Corp. $48.48 Mkt 66

WM Waste Management, Inc. $48.70 NR 6XEL Xcel Energy, Inc. $33.50 Mkt 18XLNX Xilinx, Inc. $45.49 Mkt 3


according to BMO Capital Markets Equity Research: OP: Outperform, Mkt: Market Perform, Und: Unde

2015 outlook

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