Sun Life Financial Inc T.SLF.PR.H

TD Large Cap Model Portfolio

[retiredcf]

Canadian Large Cap Model Portfolio Portfolio Changes

• Raising Sunlife (SLF-T, portfolio weight 3%) to 4%

• Raising Manulife (MFC-T, portfolio weight 2.1%) to 3%

• Reducing BCE Inc. (BCE-T, portfolio weight 4.2%) to 2%

  We are raising our exposure to the life insurance sector and reiterating our preference for the life insurance sector over the banks and most other income sectors (see Telecom below). We see both positive macro and relative quantitative trends for the life insurance sector.

  Steepening Yield Curve

  Historically, the relative performance of the Canadian and U.S. lifecos has shown a more positive correlation to a steeper yield curve than the banks. Over the past several weeks, we have seen the U.S. yield curve extending its steepening trend. We believe that the steeper curve may be a function of higher inflation expectations resulting from higher U.S. fiscal stimulus expectations and in turn a potentially weaker U.S. dollar. However, it could also, in part, be reflecting concerns over higher U.S. bond supply.

  Economic Uncertainty

  Following a rapid monetary- and fiscal-induced recovery off an exceptionally low base, we believe that economic momentum in both Canada and the U.S. is likely to slow. We do not yet know the extent of the slowdown. Our concern, particularly for the Canadian economy, is our view that the recovery could be very slow against the backdrop of high debt levels and a potentially weak credit cycle. In a longer, slower recovery with some inflation, we believe that the lifecos will outperform the more economically sensitive banks.

  Relative Earnings Momentum and Relative Value

  When we compare the relative trends in 12-month and 24-month forward earnings and the relative price, we believe that SLF and MFC have more potential upside to the banks. If relative earnings trends hold and the yield curve continues to steepen, the potential relative upside, particularly in MFC, given its wide multiple discount to the banks, could be significant, in our view.

  Telecom

  Reducing BCE (BCE-T, portfolio weight 4.2%) to 2%

  With the increased weight in lifecos, we are further reducing our telecom exposure, with a reduction in BCE. The relative value spread between BCE and other telecom stocks versus the lifecos suggests further relative upside in the lifecos, in our view. This potential relative performance will likely also be a function of a steeper yield curve. Without positive earnings momentum, the telecom and other interest-sensitive stocks could be at risk to even a modestly higher long bond yield