1. Eurozone crisis intensifies, but economy muddling through December 2010

2. - 2 - Economic Outlook – December 2010 Europe  Crisis stage is back, but to date, contagion has not spread beyond Eurozone  German economy powering ahead as weak Euro boosts exports  UK outlook improving: mixed growth and high inflation Asia  Japan stimulus measures cool Yen, light a fire under equities  China policy looks to slow economy, growth remains strong  Exchange rates matter a lot in this region Canada  Economic growth slowed substantially in Q2  Bank of Canada expected to hit the pause button over next 6 months  C$ fortunes tied to global outlook, most specifically China Headwinds remain, but global expansion still underway Emerging Markets  India’s economy still strong  Brazil to grow 7.5%-8% this year, strongest in 25 years  EM will continue to be a powerful growth engine  Currencies undervalued

3. - 3 - Economic Outlook – December 2010 Economic Headwinds European Banking Crisis

4. - 4 - Economic Outlook – December 2010 Economic Headwinds European Banking Crisis RBC Capital Markets Piggybank Index tracks the share prices of major banks in Spain, Portugal and Greece. It shows markets consider banks of peripheral European economies to be at least as vulnerable today as at the peak of the financial crisis of 2008/09. Will it stop with Ireland, or is Portugal next, and then Spain? Aggregate GDP for the economies already in crisis (Greece & Ireland) is only 2.9% of Eurozone total, but Portugal would add another 1.3% and Spain a further 7.3%. Cost of insuring near-sovereign debt shows fear of serial correlation as the failure of Irish banks lifts CDS spreads for Portuguese banks (with a lag). Is Spain next?

5. - 5 - Economic Outlook – December 2010 So far, the Eurozone banking crisis, itself largely the product of a U.S. banking crisis (but with the necessary precondition of a locally funded real estate bubble/bust), has had a limited impact elsewhere. Stock market volatility has increased as the European banking crisis has intensified, but not by much. VIX levels remain consistent with their normal relationship with the U.S. yield curve. Swap spreads – an indicator that became prominent in the days surrounding the Lehman bust – suggest an orderly interbank lending market, where faith in counterparties is reasonably solid. Economic Headwinds Despite Europe’s issues reactions remain muted

6. - 6 - Economic Outlook – December 2010 Professors Rogoff & Reinhart have shown that sovereign debt levels are largely ignored until they cross the 90% threshold – a level now surpassed by 6 of the G7 nations. Drawing on over a century of history, the professors show that growth has subsequently slowed by 1.0-1.7% below its long-term norm. Economic Headwinds Sovereign debt remains a drag

7. - 7 - Economic Outlook – December 2010 The U.S. Economy Housing: Renewed weakness after a period of repair Housing starts still near trough levels, may be headed for a new low… …and, with the end of home buyers’ tax credit, sales of existing homes have plunged.

8. - 8 - Economic Outlook – December 2010 With the stabilizing effect of special incentives removed inventory overhang moved to a new high. This is an important setback on the way to recovery. Nevertheless, in those areas with the most dramatic price declines, the volume of transactions remains encouraging through Q3 2010. The U.S. Economy Housing: Renewed weakness after a period of repair

9. - 9 - Economic Outlook – December 2010 Lending standards for mortgages are tightening again following a brief period of easing. A steeply positive slope to the yield curve indicates the growing ability/desire by banks to make loans. Ongoing improvement in U.S. and global lending conditions is essential to our view that a double-dip for North American growth will be avoided. The U.S. Economy Credit supply

10. - 10 - Economic Outlook – December 2010 Following a period of improvement, demand for commercial & industrial loans is once again softening… …but, importantly, the demand for consumer loans is close to turning positive. A key element of a sustainable recovery – credit expansion – has been missing as both the supply of funds and borrowing demand moved in reverse. After several quarters of gradual improvement, recent data shows a loss of forward momentum in both business loans and residential mortgages. This may be transitory – especially if consumers regain confidence – but it must be closely monitored. The U.S. Economy Credit demand

11. - 11 - Economic Outlook – December 2010 Some early analysis forecasts that this $600 billion commitment from the Fed will have a positive and meaningful impact on key areas of the economy over the next few years. Economic stimulus Despite criticism, Fed looks to QE2 to quicken recovery

12. - 12 - Economic Outlook – December 2010 This month’s unexpected uptick in the ISM and similar gains offshore are welcome signs that the recovery, although half speed, is durable. Economic recovery Manufacturing indices continue to respond to low rates

13. - 13 - Economic Outlook – December 2010 Employment remains a problem although it is on trend for a positive year/year plot. Improvements closely track manufacturing pick-up and higher consumer spending. Economic recovery Employment may be gaining traction

14. - 14 - Economic Outlook – December 2010 The impact of “QE2” is already considerable, with inflation expectations moving back to the long-term average, and close to optimal levels. By this measure, the program is already a success. Inflation Outlook

15. - 15 - Economic Outlook – December 2010 Current conditions in Germany, Europe’s largest economy, are surprisingly strong despite Eurozone budget pressures and threats to its banking system. Although below its peak, global PMI rose in its latest plot. Global Economies Offshore economies are performing well

16. - 16 - Economic Outlook – December 2010 The quality of China’s growth will be a big factor in the sustainability of the world’s recovery. Recent peak in PMI and tightening of monetary policy has already had an impact on commodity and stock prices. Rising domestic inflation has caused a tightening of monetary policy, threatening the pace of growth in this critical emerging market…. …still, confidence remains unbroken. Global Economies Chinese inflation a challenge for the world’s growth engine

17. - 17 - Economic Outlook – December 2010 Implications for the economy Headwinds to the recovery remain strong: Eurozone banking, sovereign debt levels, housing, access to credit, employment, exiting the stimulus are all unusual and still important threats. Two years after the fall of Lehman, the world remains an uncertain place. Employment, critical to the development of a self-sustaining business cycle expansion, is struggling. Reinforces view that recovery from the bust will be protracted and difficult. Sovereign debt has also emerged as a key challenge to achieving normal rates of GDP growth. Even major economies, including the U.S. and U.K. are approaching debt/GDP levels which have in the past limited growth. Despite severe headwinds economic data since the summer indicates the economy is moving ahead at a modest but unbroken pace. Unacceptably high levels of unemployment causes Fed to begin QE2, providing additional and unconventional stimulus. Deflation has so far proved transitory and should remain so as long as a double dip is avoided. Threat of reflation pushed beyond forecast horizon but cannot be ignored. Uptick in inflation expectations associated with QE2 is an early success for the program. Modest recovery/mild inflation remains our base case. Threat of a double-dip is valid, but unlikely. The prospect for a protracted period of sub-par growth has become a comfortable consensus.

18. - 18 - Economic Outlook – December 2010 Disclosure This information has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Due to the possibility of human and mechanical error as well as other factors, including but not limited to technical or other inaccuracies or typographical errors or omissions, RBC GAM is not responsible for any errors or omissions contained herein. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information. Any investment and economic outlook information contained in this report has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions. This report may contain forward-looking statements about the Fund, its future performance, strategies or prospects, and possible future Fund action. The words “may,” “could,” “should,” “would,” “suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “forecast,” “objective” and similar expressions are intended to identify forward-looking statements. Forward- looking statements are not guarantees of future performance. Forward-looking statements involve inherent risks and uncertainties, both about the Fund and general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made in relation to the Fund. These factors include, but are not limited to, general economic, political and market factors in Canada, the United States and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological changes, changes in laws and regulations, judicial or regulatory judgments, legal proceedings and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors. ® Registered trademark of Royal Bank of Canada. RBC Global Asset Management is a registered trademark of Royal Bank of Canada. Used under licence. © RBC Global Asset Management Inc. 2010.