Slides from the Nicola Wealth Toronto Strategic Outlook Event on May 9, 2019

1. 2019 Strategic Outlook
David Sung, President

4. Pop Culture

5. 1994-2019

6. Nicola Wealth, 25 years

7. The Path Less Traveled

8. On The Contrary, Real Estate

9. Contrarian Investment
Cottonwood Mall, Chilliwack, BC
 Acquired – February 2019
 Partnership with PCI Developments
 248,000 sf enclosed mall
 Vacant 92,000 sf former Target store
 Remainder of Mall was 94% leased
 Tenants include London Drugs, Dollarama, Earl’s
Restaurant, TD Canada Trust, Burger King & Starbucks.
 New lease with Save-On Foods to backfill former Target
 New free-standing Pad/Store to be constructed
 Strong store performance despite retail landscape
 Projected IRR: >20%

10. Empire
 Analysts despised the name and rightly so as the
company had had a difficult time integrating the
Safeway acquisition and the investment
community lost further faith in management’s
ability to turn Safeway around after they wrote
down half the purchase price.
 On December 14, 2016 the company announced
their quarterly results and they were much worse
than analysts had anticipated.

11. Empire
• Dec 14, 2016 - Same-Store-Sales declined 5.1% in Western Canada.
• The stock dropped over 20% over the next 2 days and that is when we
started to invest.
From: Sean Oye
Sent: Thursday,
December 15, 2016 12:11 PM
To: PM Team Email
Subject: Re: EMP/A
“Quarterly results worse than
expected. SSS declined 5.1% in
the West and 2.6% overall. The
stock is down over 16% this
morning.
Overall, this could be an ideal
name to write Put options on.
THI CDN could write the April Puts;
which would provide ~17.74%
annualized premium….”

12. Empire
ANALYSTS IN 2016
 No one was “shopping” for Empire stock at the end of
2016
 End of 2016 – Stock Market Analysts negative on the stock
 Public investors negative on the stock
 We found the valuation of the company was very
compelling—it was trading well below our very
conservative estimate of its Net Asset Value
 Overall, we felt that the short-term issues were transient,
the introduction of a new CEO would be positive and that
Safeway would get fixed
 In essence, we update our Empire sum-of-the-parts model
and decided the current share price didn’t make sense
from a Net Asset Value perspective
 So what has Empires performance been since that fateful
reporting period?

13. Empire
ANALYSTS TODAY
 What a difference 1 year makes ... Everyone loves it now!
Analysts and investors over the past year have been back
“shopping” the stock.
 For us, being contrarian and timing this investment against
market sentiment has made a significant difference to the
returns in our Nicola Tactical Cdn High Income Fund.
 Since Dec 16, 2016, Empire’s returns have crushed both the
S&P/TSX return and the two other major Grocers since!

14. Looking at Things Differently

16. Up Next…

17. 2019 Strategic Outlook
Ron Haik, Chief Investment Officer

18. Our
Agenda
An Inconvenient Truth
2018 in Review Four Season Investing
The Perfect Storm

19. 2018 in Review S&P 500
2018 S&P 500 -4.4%First Correction
in 2 Years
-10.2%
Dec 24, 2018
-19.8%
Bloomberg – Feb 22, 2019

20. 2018 in Review S&P/TSX
Bloomberg – Feb 22, 2019
July 12, 2018July 12, 2018 2018
S&P/TSX
-8.9%
Dec 24, 2018
-16.8%
-8.0%

21. 2018 in Review BEAR-o-meter – Global Equity Markets
Bond Yields & S&P 500 Both Move up
Bonds Prices and Stock Prices Negatively Correlated
S&P 500
-19.8%
-18.8%
-27.2%
-23.6%
-16.8%
-22.8%
-34.0%
-22.3%
-18.2%
-16.4%
-23.4%
-18.5%
-26.4%
-21.1%
-25.8%
-30.8%
-23.3%
-16.2%
20.6%
19.0%
21.5%
24.8%
16.8%
9.8%
29.6%
36.7%
15.0%
10.5%
11.0%
16.4%
17.8%
10.7%
18.2%
25.4%
7.4%
18.6%
-40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
S&P 500
Dow Industrials
Russell 2000
Nasdaq Composite
S&P/TSX
Mexico IPC
Argentina Merval
Brazil Bovespa
Stoxx Europe 600
FTSE 1000
Germany DAX
France CAC 40
Italy FTSE MIB
Nikkei
Hang Seng
Shanghai Composite
Kospi
Bombay Sensex
Max Drawdown
Recovery

22. 2018 in Review Canadian and U.S. Yield Curves
Jan 1, 2018
Yield Curve
Dec 31, 2018
+60 bps
+69 bps
Yield Curve
Jan 1, 2018
Dec 31, 2018
+28 bps
+18 bps
-8 bps

23. 2018 in Review BEAR-ometer – Fixed Income & Real Assets
-3.2%
-5.1%
-17.7%
-9.5%
-5.5%
-5.9%
-17.3%
-12.3%
-15.1%
-12.7%
-41.5%
-44.3%
-76.8%
-13.6%
-16.2%
-23.6%
-53.3%
-81.2%
-46.1%
-46.5%
6.4%
4.4%
21.6%
8.6%
5.4%
6.6%
4.6%
20.1%
20.8%
20.1%
33.9%
41.4%
277.9%
10.1%
5.7%
14.3%
18.4%
29.0%
53.7%
62.1%
-100.0% -50.0% 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0%
US Agg Bond
US TIPS
US Leverered Loans
US HY
Global Agg Bond
Global HY
Cdn Preferred Shares
Cdn REIT's
US REIT's
Global REIT's
Brent Oil
WTI Oil
WCS Oil
Gold
Commodities
Copper
Lumber
Bitcoin
Horizons Marijuana ETF
N.A. Marijuana Index
Max Drawdown
Recovery

24. Four Season Investing
S&P 500
Winter
Recession
Rate cut
Min Risk
Summer
Expansion
Rate hikes,
Max Risk
Fall
Slowing Growth
High Inflation
Reduce Risk
Spring
Recovery
Low inflation,
Add Risk

25. 2009-Current
1990 – 2000
1949 - 1956
1957 - 1961
1982 - 1987
2002 - 2007
1974 - 1980
1962 - 1966
1970 - 1973
1987 - 1990
1966 - 1968
1946 - 1948
10%
15%
20%
25%
30%
35%
0 2 4 6 8 10 12
Return(CAGR)
Years
S&P 500 Historical Bull Markets
Barron’s – July 2, 2018
Fortune – August 2018
The Economist – October 11, 2018
Bloomberg Businessweek Aug 2018
Four Season Investing – Investor Sentiment
Sir John Templeton:
Bull markets are born on pessimism
Grow on skepticism
Mature on Optimism
Die on euphoria

26. S&P 500
Four Season Investing – Consumer Sentiment (temperature)
Mar 2000 – 11 mo.
13 Month Average
Apr 1978 - 22 mo
Nov 1980 – 9 mo.
Feb 1989 – 18 mo.
Aug 2007 – 5 mo.

27. Feb 1989 - Aug 1990
18 months
Mar 1997 - Apr 2001
49 months
June 2006 – Jan 2008
19 months
Average
29 months
Four Season Investing – Wage Growth (pressure)

28. December Spike
Four Season Investing – Credit Spreads (speed)

29. Four Season Investing – Historical Patterns
2018
4.5 Point PE Decline
S&P 500 -4.4%
S&P 500 EPS +24%
2018 GDP +3.1%
S&P 500 Forward P/E Multiple

30. Four Season Investing - Historical Patterns – 1984 & 1994
Bernstein US Economics – Jan 8, 2019
1984
GDP +7.3%
Earnings +21%
P/E – 2 pts
1994
GDP +4.0%
Earnings +19%
P/E – 3 pts
S&P 500 + 6.3%
1985
S&P 500 + 33.0%
1995
S&P 500 + 37.1%
S&P 500 + 0.3%

31. The Perfect Storm – Donald & Jerome
S&P 500

32. The Perfect Storm – Hurricane Donald
New York Times Op Ed – September 2018
I am part of the resistance inside the Trump Administration
“Americans should know that there are adults in the room.
We fully recognize what is happening. And we are trying to
do what’s right even when Donald Trump won’t.”
Betting Odds Trump will be Impeached
In his first Term
(PredicitIt – Mar 25, 2019)
Business Insider – Dec 31, 2018
• March 25 Close – 22%
• Pelosi – “He’s not worth it”
• Mueller Investigation
• No collusion

33. The Perfect Storm – Hurricane Donald
S&P 500
South China Morning Post WSJ – Feb 19, 2019
USA: 25% tariff on $50 billion, 10% Tariffs on
$200 billion (increasing to 25% by end of
2018)
China: Proposed or imposed tariffs on $110
billion by December 2018
The Deal (we think)
• Easy
• China buys more US goods
• Harder
• Protection of Intellectual property
• Reduce government subsidies to
Chinese SOE’s
• End technology transfer from U.S.
companies
• Hardest
• Enforcement Mechanism – Unilateral?
• Existing Tariffs
WSJ – Feb 19, 2019

34. The Perfect Storm – Donald & Jerome
S&P 500
Goldman Sachs Financial Conditions Index
&
Federal Funds Rate
Fed
2018 - Four increases in Federal Funds Rate

35. The Perfect Storm – Hurricane Powell
S&P 500
Double Line Raising Rates Webcast – Feb 26, 2019
Hedgeye Cartoon of the Day – Feb 21, 2019

36. The Perfect Storm – Hurricane Powell
December 2018

37. The Perfect Storm – Hurricane Powell
S&P 500
Hedgeye Cartoon of the Day – Jan 14, 2019
Barron’s – Mar 23, 2019
Three Times in 2019
Once in 2020
Twice in 2019
Once in 2020
No increase in 2019
Once in 2020
One Decrease in 2019

38. S&P 500
The Perfect Storm – Hurricane Jerome
Unemployment recently touched it’s lowest level in 49 years (Dec 1969)
WSJ: Current census estimates only 50,000 jobs/month needed to keep
employment stable
Current Gap
-1.0%

39. The Perfect Storm S&P 500 – 2001 Recession (dotcom bubble)
Apr 2000 3.8%
Apr 2000 5.2%
Natural Rate of Unemployment
-1.4%
2001
Recession
8 months
GDP
-0.3%
S&P 500
-47.4%

40. The Perfect Storm S&P 500 – 1973 – 1975 Recession
Unemployment Rate
Mar 1969 3.4%
-2.4%
Natural Rate of Unemployment
1973-75
Recession
16 months
GDP -3.6%
CPI +12.3%
S&P 500
-45%
Mar 1969 5.2%

41. S&P 500
WSJ – Jan 10, 2019
Fed looking at letting inflation run above 2%
The Perfect Storm – Hurricane Powell

42. The Perfect Storm Bear Markets & Recessions
S&P 500

43. An Inconvenient Truth Debt
S&P 500
U.S. Unemployment vs. US Budget Deficit as % of GDP
WSJ – Mar 21, 2019
CBO
US Budget deficit to exceed $1T every year
2022-29
Social Security & Medicare = 40% of all
federal spending (excl. interest).
By 2029 will be 50%.

44. An Inconvenient Truth Debt
U.S. Unemployment vs. US Budget Deficit as % of GDP
Deficit increasing while
unemployment
decreasing
Last time we saw this:
Late 60s
Jeffrey Gundlach –
Doubleline
• Last seven recessions
budget deficit
increase average 4%
of GDP
• Last two recessions
5.8% (2001) and 8.8%
(2007)
• Could hit 13% next
recession

45. Bond Yields & S&P 500 Both Move up
Bonds Prices and Stock Prices Negatively Correlated
S&P 500
An Inconvenient Truth US Debt/GDP
Bipartisan lack of interest in reducing debt:
• Republicans – deficit talk a ploy to roll
back tax cuts
• Democrats – deficit talk ploy to cut
Medicare, Medicaid & social security
Washington Post article:
A conversation last year between the President
and senior advisors took place in which a
“hockey stick” spike in national debt was
presented. Trump’s reaction: “Yeah, but I
won’t be here.”

46. IN SUMMARY

47. Summary - Farmers Almanac
(Old) NWM Forecast
It’s Fall – Getting closer to Winter
No Recession 2019
Economy and earnings to continue growing
Fed to continue tightening 2020
• Create recession in 2020 – 2021
Equities (Dividend Paying) over Bonds
• Remember 1985 & 1995
• Look to reduce risk
• Diversification
• Roots are strong
(New) Nicola Wealth Forecast
Fed keeps rates low – for too long
Result: More severe recession down the road
• Asset Bubble – 2001
• Stagflation - 1973-5
All asset classes under pressure
Longer term – Inconvenient truth
• More debt
• Higher Interest rates
• Less room for fiscal stimulus
• Roots might get severed

48. 2019 Strategic Outlook
John Nicola, Chairman & CEO

49. Where Are We Going?

50. Us vs. Them
Demographics
Populism
The 1%

51. Baby Bust
3.8
5.7
2.4
3.7
2.5
5.9
6.4
5
1.6 1.6 1.5 1.8 1.8
2.3
5.5
2.4
0
1
2
3
4
5
6
7
Canada China Germany US Russia India Nigeria The
World
1960 2016
2.1 = Break Even

52. Memory Lane – Mary Poppins circa 1964

53. Mary Poppins Returns 2018
Is 90 the new 60?

58. Humble Tweets

62. 90% higher
40% lower
The 1%

63. Anywheres vs. Somewheres

64. Older = Richer ?
29.5
28.1
30
32.9
35.3
37.2
38
0 10 20 30 40
1960
1970
1980
1990
2000
2010
2018
Median Age

65. Older= Richer
Older = Richer
https://wallethacks.com/average-net-worth-by-age-americans/

66. Top 10% Income Share
31.4%
30.6%
29.8%
26.6%
25.7% 25.4% 25.3%
22.3%
20.0%
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
China US India France Italy UK Canada Norway

67. Gini Co-efficient
62.5
48.3 47 46.5
37.9 36.2
32.4 32.1
28.7
24.9
20
25
30
35
40
45
50
55
60
65
South Africa Mexico US China Japan New
Zealand
UK Canada Switzerland Sweden

68. Hey Big Spender
Questions
What is lowest cost form of debt?
How much of mortgage debt has been used to acquire assets
or start businesses vs. for personal consumption ?
85%-176% since 1990

69. It’s About the Cash Flow
Debt Service - P and I increase from 12-14.9% since 1990
Debt Service - Interest only decrease from 10-6.5% since 1990

70. Spendthrift Canadians?
11
11.55
12.42
13.05 12.98
1.85 1.95 2.05 2.16 2.24
9.1
9.6
10.36
10.89 10.74
0
2
4
6
8
10
12
14
2014 2015 2016 2017 2018
Total Assets Total Liabilities Net Worth

71. By the numbers
Over 4 years assets have risen by $2
Trillion. Liabilities by $400 Billion.
LTV rate now at 18% vs. 17% in 2014.
Declining home prices and equity
markets impacted 2018 numbers.

72. Asset Allocation for HNW Investors Globally
Source: Capgemini

73. Multi Family
20%
Commercial
11%
Farm/Timber
11%
Public Equities
23%
Securitised Debt
33%
Gold
2%
42%
Global Investable Assets
Why would this
be 60-75% of an
Investment Portfolio?

74. Our Asset Allocation
CDN/US
CDN /
Foreign
(Private &
Public)
Bonds
Mortgages
Private Debt
Hedge Funds
Precious Metals
Real Estate
24%
Equity
36%
Fixed
Income
35%
Alternative
5%
Nicola Wealth Client Composite Model March 2019

75. Issues
o Illiquid asset class
o Hard to diversify
o Significant minimum investment
o Higher fees on committed capital
o Due diligence on managers
o Fund of funds likely best option

76. Northleaf PE Returns vs. MSCI World
Returns to June 30, 2014. Northleaf returns gross of Northleaf fees.

77. Where has the low
hanging fruit gone?
Getting harder
all the time2%< historical
Still expensive
How low can they go?
Source: Statscan
https://www.quandl.com/data/MULTPL/SHILLER_PE_RATIO_MONTH-
Shiller-PE-Ratio-by-Month
Source: NAREIT

78. Private debt
(mortgages and
corporate lending)
2%< historical
Still expensive
How low can they go?
Asset allocation
Value investing
Dividend growth
Private Equity
Build to own
Value add
Modest leverage
Where has the low
hanging fruit gone?
Source: Statscan
Source: NAREIT
https://www.quandl.com/data/MULTPL/SHILLER_PE_RATIO_MONT
H-Shiller-PE-Ratio-by-Month

79. Market Cycles
Markets more expensive
Lower probability for above
average future returns
Markets less expensive

80. Seven Habits of
Highly Ineffective Investors

81. What if Everyone is Above Average?
2006 Survey of 300 Fund Managers
76% said they were above average
The other 24% said they were average
100% were average or better?

82. The Deadly Trio
Cognitive Dissonance
(I agree with every fact
That agrees with me)
Over Confidence
(a Bridge - or apple -
too far)
Confirmation Bias

83. Gambling with House Money
Investors increase their
aggressiveness when they win first.
Can we up the
minimum bet?

84. Loss Aversion
$2 Gain = $1 Loss

85. The Emotional Investor

86. Behavioural Finance
Can you sell when you are
winning and buy when you are
losing ?

87. 3-5% annual loss of return
The Impact of Emotion in Investing
5% worse
In 12 monthswww.investmentexecutive.com

88. Managing Assets More Efficiently
Alternative Strategies,
15.0%
High Yield Bonds, 7.3%
Preferred Shares, 4.5%
Canadian equitries ,
17.0%
Real Estate, 20.0%
Mortgages, 11.0%
Bonds, 9.0%
Foreign Bonds, 5.4%
Private Equity, 4.0%
Foreign Equities, 12.1%
4.6%
Re-Balance
-2.3%
2.3% for 2018
(Morningstar Neutral
Balanced =-4.7%)

89. Spock or Homer?

90. Vulcan Investing
an Investor!

91. Know Thyself (avoid overconfidence)
Embrace Uncertainty (Minsky Moments)
Play the Odds (Avoid Loss Aversion)
Diversification in asset classes but focus within them
Accept Pain (necessary path for growth)
Behaving Well

93. The 4% Rule
50% success
https://www.onefpa.org/journal/Pages/The%204%20Percent%20Rule%20Is%20Not%20Safe%20in%20a%20Low-Yield%20World.aspx

94. Price is 3 to 4 times as volatile as cash flow
for both real estate and equities

95. A Couple’s Tale
Bob and Linda are both age 60 . In good health and
considering retirement . Here are the other facts:
• Bob is a lawyer and Linda a dentist.
• They are both incorporated and have personal, registered,
and corporate portfolios of $2M each
• Bob’s portfolio is best represented by Morningstar’s
Balanced Index.
• Linda’s portfolio is invested with us in a Core Model
• They want to know the likely impact of withdrawing 4% of
their capital annually and adjusting that to inflation.
• We recreate that model for them going from January 2000
to December 2018.

96. How Well Does It End?
$2.0M $2.0M$1.8M $1.8M$1.7M
$3.7M
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
$4,000,000
Bob 60/40 Linda
Start Income End

97. A Couple’s Tale
What Happened?
• Bob’s indexed income greater than his overall return.
• 85% of Linda’s return from cash flow so less volatility
and no need to sell assets during negative years such
as 2008.
• SWP have greater negative impact in losing years.
• Bob has 6 losing years out of 19 with a combined
loss of 28% . Linda has two losing years with a
combined loss of 7%.

98. What Is Next?
Real and Secular Road Bumps Ahead
Behave Well We’ve Been Here Before

99. THANK YOU
This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for
informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Please speak to your Nicola Wealth Advisor
regarding your unique situation. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be
considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or
lose value. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’
commissions.