Est. 1964Est. 1964

Winter 2009 Economic Outlook: Winter 2009 Economic Outlook: Recession and Recovery Recession and Recovery

Winter 2009 Economic Outlook: Winter 2009 Economic Outlook: Recession and Recovery Recession and Recovery

Presented by:

Allan Seychuk, EconomistPhillips, Hager & North Investment Management Limited

Estate Planning Council of Abbotsford

January 2009

Estate Planning Council of Abbotsford

January 2009

40

50

60

70

80

90

100

110

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jul-08 Aug-08 Sep-08 Oct-08

Ind

ex, J

an. 1

, 200

8 =

100

Major Markets Since January 2008 (local currency terms)

Source: Datastream

S&P 500 S&P/TSX

MSCI EAFE MSCI Emerging

Lehman Bros Fails

Global Equity Markets Struggle to Find BottomGlobal Equity Markets Struggle to Find Bottom

2009 to be extremely challenging for the US economy

Canada’s buffers against US spillovers will diminish

Risk of deflation and market disappointment remains elevated

Why we’re optimistic about 2010, and beyond

Signs we’re looking for the recovery is underway

What obstacles still stand in the way of true recovery?

Have we indeed entered a new era, with new behaviour?

How much should today’s bailouts / stimulus worry us?

Recession

Recovery

Obstacles

Challenging Times Slowly Setting the Stage for Next Bull MarketChallenging Times Slowly Setting the Stage for Next Bull Market

CDX Credit Default Swap Index

0255075

100125150175200225250275300

Sep-0

6Nov

-06

Jan-

07M

ar-0

7M

ay-0

7Ju

l-07

Sep-0

7Nov

-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep-0

8Nov

-08

Ind

ex

Source: Bloomberg

U.S. Dollar LIBOR

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Nov-07Jan-08

Mar-08

May-08Jul-0

8

Sep-08Nov-08

Jan-09

%

Source: U.S. Federal Reserve, Bank of England

CBOE Volatility Index (VIX)

0

10

20

30

40

50

60

70

80

Jan-06May-06

Sep-06Jan-07

May-07Sep-07

Jan-08May-08

Sep-08Jan-09

Ind

ex

Source: Chicago Board Options Exchange

U.S. Financial Commercial Paper Outstanding

450

500

550

600

650

700

750

800

850

900

Dec-0

3M

ar-0

4Ju

n-04

Sep-0

4Dec

-04

Mar

-05

Jun-

05Sep

-05

Dec-0

5M

ar-0

6Ju

n-06

Sep-0

6Dec

-06

Mar

-07

Jun-

07Sep

-07

Dec-0

7M

ar-0

8Ju

n-08

Sep-0

8Dec

-08

US

$ bi

llion

s

Source: Federal Reserve

Financial Market Stress is EasingFinancial Market Stress is Easing

U.S. Median Resale House Prices

-15

-10

-5

0

5

10

15

20

64 67 70 73 76 79 82 85 88 91 94 97 00 03 06

Yea

r-o

ver-

year

% c

han

ge

Single-family homes

Source: National Association of Realtors

U.S. Household Net Worth Year-over-year Change

-8,000

-6,000

-4,000

-2,000

-

2,000

4,000

6,000

8,000

1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008

$ b

illi

on

s

Source: U.S. Federal Reserve, Merrill Lynch

Not Your Garden Variety RecessionNot Your Garden Variety Recession

U.S. Light Vehicle Sales

7.5

10.0

12.5

15.0

17.5

20.0

81 83 85 87 89 91 93 95 97 99 01 03 05 07

Mill

ion

un

its,

an

nu

aliz

ed

0.05

0.10

0.15

0.20

Sal

es p

er w

ork

er

Total new vehicle sales

New vehicle sales per worker

Source: Autodata, US Census Bureau, PH&N

U.S. Light Vehicle Sales

7.5

10.0

12.5

15.0

17.5

20.0

81 83 85 87 89 91 93 95 97 99 01 03 05 07

Mill

ion

un

its,

an

nu

aliz

ed

0.05

0.10

0.15

0.20

Sal

es p

er w

ork

er

Total new vehicle sales

New vehicle sales per worker

Source: Autodata, US Census Bureau, PH&N

US Household Net New Borrowing (% of GDP)

-2

0

2

4

6

8

10

1955 1960 19651970 1975 19801985 1990 19952000 2005 2010

% o

f G

DP

Borrowing, % of GDP4 per. Mov. Avg. (Borrowing, % of GDP)

Source: U.S. Flow of Funds, TD Newcrest

US Household Net New Borrowing (% of GDP)

-2

0

2

4

6

8

10

1955 1960 19651970 1975 19801985 1990 19952000 2005 2010

% o

f G

DP

Borrowing, % of GDP4 per. Mov. Avg. (Borrowing, % of GDP)

Source: U.S. Flow of Funds, TD Newcrest

U.S. Real Consumer Spending

-6

-4

-2

0

2

4

6

8

10

70 73 76 79 82 85 88 91 94 97 00 03 06 09

%

Source: U.S. BEA

Job Losses Accelerating

-600

-500

-400

-300

-200

-100

0

First 8 monthsof recession

Latest 3 monthsof recession

Th

ou

san

d

-82,000/month

-484,000/month

Source: BLS, Economic Policy Institute

Current Conditions Continue To DeteriorateCurrent Conditions Continue To Deteriorate

Leading Economic Indicators: OECD & Selected Non-OECD

OECD

Non-OECD*

Source: Organization for Economic Cooperation & Development, PH&N

* Trade-weighted average of China, India, Brazil, Russia, Indonesia & South Africa

-10

-5

0

5

10

15

20

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

6-m

on

th r

ate

of

% c

han

ge

Leading Indicators Signal Deep DownturnLeading Indicators Signal Deep DownturnLeading Indicators Signal Deep DownturnLeading Indicators Signal Deep Downturn

Japanese Exports

-40

-30

-20

-10

0

10

20

30

Jan-07Apr-07

Jul-07Oct-07

Jan-08Apr-08

Jul-08Oct-08

Jan-09

%

To the USTo Western EuropeTo China

Source: Ministry of Finance

Industrial Production & Machinery Orders

-20

-15

-10

-5

0

5

10

15

20

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

% Y

ear-

ove

r-ye

ar

Industrial production

Domestic machinery orders

Source: Ministry of Industry & Commerce

Japan’s Recession Expected To DeepenJapan’s Recession Expected To Deepen

China Merchandise Trade

Yea

r-o

ver-

year

% c

han

ge,

3 m

th a

vg.

ExportsImports

-20

-10

0

10

20

30

40

50

60

97 98 99 00 01 02 03 04 05 06 07 08

Source: National Bureau of Statistics of China

Industrial Production

Jan

-07

Ap

r-07

Jul-

07

Oct

-07

Jan

-08

Ap

r-08

Jul-

08

Oct

-08

Jan

-09

-35

-25

-15

-5

5

15

25

% y

ear-

ove

r-ye

ar

TaiwanKoreaThailandSingapore

Source: National Statistical Agencies

Remarkable Deterioration in China, AsiaRemarkable Deterioration in China, AsiaRemarkable Deterioration in China, AsiaRemarkable Deterioration in China, Asia

U.S. in the worst shape of any major economy and Canada is the country the most exposed to the U.S.

Canada also exposed to global economic conditions via global demand for commodities (which has crumbled)

Why should we expect Canada to hold up well in this environment?

Expect: job losses, lower national income, falling nominal GDP, more weakness in factories, housing and retail sales

Monetary stimulus to be joined by further fiscal stimulus

Positives: lower fuel prices, room for more government spending, somewhat better household fundamentals, less reliance on home equity for spending money

Canada’s Recession Just Getting StartedCanada’s Recession Just Getting Started

New Light Vehicle Sales

50

60

70

80

90

100

110

120

Jan

-06

Ap

r-06

Jul-

06O

ct-0

6Ja

n-0

7A

pr-

07Ju

l-07

Oct

-07

Jan

-08

Ap

r-08

Jul-

08O

ct-0

8

Ind

ex, J

an 2

006

= 1

00

U.S.Canada

Source: Merrill Lynch, StatsCan, US Dept. of Commerce

Existing House Prices

-15

-10

-5

0

5

10

15

20

2003

2004

2005

2006

2007

2008

An

nu

al %

ch

ang

e, 3

mth

avg

U.S.Canada

Source: Can. Real Estate Assoc., National Assoc. of Realtors

Canada Playing Catch-Up in Key SectorsCanada Playing Catch-Up in Key SectorsCanada Playing Catch-Up in Key SectorsCanada Playing Catch-Up in Key Sectors

Growth in Household Net Worth

-15

-10

-5

0

5

10

15

20

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Yea

r-o

ver-

year

% c

han

ge

CanadaU.S.

Household Debt, % of Personal Disp. Income

%

50

60

70

80

90

100

110

120

130

140

150

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

U.S.

Canada

Source: Federal Reserve, Statistics Canada, PH&N

Canadian Consumer Not Really So DifferentCanadian Consumer Not Really So DifferentCanadian Consumer Not Really So DifferentCanadian Consumer Not Really So Different

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009 2010

%

Bank of Canada

U.S. Federal Reserve

Central Bank Policy Interest Rates

Projection

Extended Period of Low Interest Rates AheadExtended Period of Low Interest Rates Ahead

Resolution of auto sector’s troubles still uncertain, confusion regarding bailout, TARP, etc.

More housing trouble ahead in Alt-A, Option ARMs

Need for looser credit conditions and strong financial sector: conflict

U.S. household financial conditions still a long way from good

Deleveraging: how much is enough? How fast can global GDP grow?

Can China generate sufficient growth internally?

“Frugal future”, or a temporary setback? Has behaviour really changed?

How much to worry about the long term implications of bailout, deficits?

Issues, Obstacles and Risks:Issues, Obstacles and Risks:

Source: Finance Canada, OECD Economic Outlook No. 83, June 2008. Data is general government, national accounts basis.

United States: Deficit and Debt

-10

-5

0

5

10

15

20

25

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

-32

-16

0

16

32

48

64

80

Financial balance (left)

Net debt (right)

Debt to GDP Ratio will

rise sharply

No strong correlation

between deficits and bond

yields

Higher private sector

savings will offset public

sector dissaving

Business cycle will

dominate issuance cycle

US Deficit Set To SoarUS Deficit Set To SoarUS Deficit Set To SoarUS Deficit Set To Soar

U.S. Dollar Trade-Weighted Index

Source: U.S. Federal Reserve

Major currency index

60

70

80

90

100

110

120

130

140

150

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Ind

ex

U.S. Dollar Has Bottomed – For NowU.S. Dollar Has Bottomed – For NowU.S. Dollar Has Bottomed – For NowU.S. Dollar Has Bottomed – For Now

US Household Debt Relative to Disposable Income

30

50

70

90

110

130

150

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

%

Source: U.S. Federal Reserve Flow of Funds

Household deleveraging will be a drawn-out process

From Conspicuous Consumption to Thrift?From Conspicuous Consumption to Thrift?From Conspicuous Consumption to Thrift?From Conspicuous Consumption to Thrift?

U.S. Real Per Capita Personal Consumption

-10

-5

0

5

10

15

1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009

%

Source: Robert Shiller, www.econ.yale.edu/~shiller/data.htm

For How Many Years Will Spending Shrink?For How Many Years Will Spending Shrink?For How Many Years Will Spending Shrink?For How Many Years Will Spending Shrink?

Economic indicators still deteriorating and will not bottom until much later in 2009 – true recovery is a 2010 story

Credit will remain tight until house prices stop falling and more people are finding jobs than losing them

Economic and market outlook must be reconciled with magnitude of loss of wealth, jobs, income and confidence

Canada is very negatively positioned in this environment

Eventually, tremendous monetary and fiscal stimulus will have an impact

Markets are forward-looking and have now priced in a sharp recession

Eventually, central banks will have to mop up today’s flood of liquidity

Summary: Near-term gloom, hope for the futureSummary: Near-term gloom, hope for the future

Early Cyclical Stocks Rallying While Bond Yields PlummetEarly Cyclical Stocks Rallying While Bond Yields Plummet

TSX Sectors Since January 2007

Source: Datastream

50

75

100

125

150

175

Jan

-07

Mar

-07

Ma

y-07

Jul-

07

Sep

-07

No

v-07

Jan

-08

Mar

-08

Ma

y-08

Jul-

08

Sep

-08

No

v-08

Jan

-09

Ind

ex,

Jan

.1 =

100

Energy

MaterialsFinancials

TSX Sectors Since January 2007

Source: Datastream

50

75

100

125

150

175

Jan

-07

Mar

-07

Ma

y-07

Jul-

07

Sep

-07

No

v-07

Jan

-08

Mar

-08

Ma

y-08

Jul-

08

Sep

-08

No

v-08

Jan

-09

Ind

ex,

Jan

.1 =

100

Energy

MaterialsFinancials

Energy

MaterialsFinancials

Canadian Treasury Bond Yields Since Jan. 2007

Source: Bank of Canada

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan

-07

Mar

-07

Ma

y-07

Jul-

07

Sep

-07

No

v-07

Jan

-08

Mar

-08

Ma

y-08

Jul-

08

Sep

-08

No

v-08

Jan

-09

%

2-year10-year

Canadian Treasury Bond Yields Since Jan. 2007

Source: Bank of Canada

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan

-07

Mar

-07

Ma

y-07

Jul-

07

Sep

-07

No

v-07

Jan

-08

Mar

-08

Ma

y-08

Jul-

08

Sep

-08

No

v-08

Jan

-09

%

2-year10-year2-year10-year

2008 – Optimal Asset Allocation Strategy2008 – Optimal Asset Allocation Strategy

60% Ghana Stocks (+66%)

40% US Long Bonds (+30%)

Total Return: 52% plus currency!

Cash levels close to minimums as short-term yields plunge. Overweight bonds – at maximum corporate bond focused on high quality as credit cycle plays out

No rush to further add to stocks as bottoming process could be prolonged – epic credit cycle continues as consumers and financial system deleverage while the contours of the global downturn remain unknown

Asset Mix Strategy – Patiently AwaitOpportunity to Add to StocksAsset Mix Strategy – Patiently AwaitOpportunity to Add to Stocks

Stocks Bottom In Advance of Earnings/EconomyStocks Bottom In Advance of Earnings/Economy

Equity Markets, Earnings and Recessions

70

75

80

85

90

95

100

105

110

115

120

-12-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34

Ind

ex, 4

wee

k av

erag

e

DJIA bottoms ~ 5 months before end of

recession

Reported earnings bottom ~ 2 years after end of recession

ISM bottoms ~ 4 months before end of

recession

Recession

Equity Performance (DJIA)

DJIA Reported EarningsISM Index

Extended period with no more nasty surprises!! (ie financial system continues to regain normal functionality, systemic stress eases)

US housing market stabilization: housing starts bottom, defaults/foreclosures peak, ARM resets peak, monthly house price declines slow, inventories stabilize

Other leading economic indicators stabilize: sentiment, orders, retail sales, Chinese & Japanese exports

Commodity prices and oil prices stop falling and stabilize

Low interest rates begin to spur demand for loans and banks actually lend

Technicals: stocks climb on rising volume, mountain of cash begins to move from sidelines

Markets rise on bad news

Searching for Signs of a Market BottomSearching for Signs of a Market Bottom

3-Month T-Bill Eurodollar Spread (TED Spread)

0

50

100

150

200

250

300

350

400

450

500

1994 1996 1998 2000 2002 2004 2006 2008

Bas

is p

oin

ts

The TED spread is a leading indicator of liquidity conditions and credit risk. T-bills are risk free while eurodollar deposits reflect borrowing conditions in the short-term corporate credit market. A widening spread indicates rising risk aversion.

Eurodollars are US dollar deposits in banks outside the USA. The eurodollar rate reflectsthe cost of US dollar funds for large non-US financial institutions. Source: Datastream

Credit MarketsTED Spread Signals Increasing Risk AppetiteCredit MarketsTED Spread Signals Increasing Risk Appetite

Source: Federal Reserve Bank of St. Louis

U.S. Money Market Mutual Fund Assets

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1983 1986 1989 1992 1995 1998 2001 2004 2007

$ B

illio

ns

Dec 2008 = $3.36 trillion

SentimentCash A Safe Haven Amidst Credit CrisisSentimentCash A Safe Haven Amidst Credit Crisis

ValuationA 45 P/E on Bonds – Model Says Buy StocksValuationA 45 P/E on Bonds – Model Says Buy Stocks

Fed Model - United States

5

10

15

20

25

30

35

40

45

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

P/E

S&P500*

US Treasury Bond**

* Based on expected EPS for the S&P 500.** Based on the interest income of a 10-year U.S. Treasury Bond.

Fed Model - United States

5

10

15

20

25

30

35

40

45

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

P/E

S&P500*

US Treasury Bond**

* Based on expected EPS for the S&P 500.** Based on the interest income of a 10-year U.S. Treasury Bond.

Canadian Equity – OutlookMean Reversion Works Both WaysCanadian Equity – OutlookMean Reversion Works Both Ways

-25% -24%-65%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

Dec

-29

Dec

-34

Dec

-39

Dec

-44

Dec

-49

Dec

-54

Dec

-59

Dec

-64

Dec

-69

Dec

-74

Dec

-79

Dec

-84

Dec

-89

Dec

-94

Dec

-99

Dec

-04

Dec

-09

Average: 103%

S&P 500 10-Yr Rolling Return (1929-2008)

Source: Scotia Capital

-1%

36%

-65%-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

Dec

-29

Dec

-34

Dec

-39

Dec

-44

Dec

-49

Dec

-54

Dec

-59

Dec

-64

Dec

-69

Dec

-74

Dec

-79

Dec

-84

Dec

-89

Dec

-94

Dec

-99

Dec

-04

Dec

-09

Average: 86%

S&P/TSX 10-Yr Rolling Return (1929-2008)

ISM* <0% 0-10% 10-20% +20% Gain Positive return Return > 10%

12M fwd S&P 500 performance Average Probability of

# o

f o

ccu

rre

nce

s

S&P 500 Performance 12-Month after ISM-survey (since 1950)

Source: Scotia Capital, Bloomberg

<40 5 6 26 27% 100% 86%

40-50 40 32 42 59 11% 77% 58%

50-60 109 85 102 73 8% 71% 47%

60+ 42 42 21 9 2% 63% 26%

* The Institute for Supply Management (ISM) publishes a monthly purchasing managers survey

Canadian Equity – OutlookThe Worse the Headlines…The Better the ReturnCanadian Equity – OutlookThe Worse the Headlines…The Better the Return

Phase 2: Markets Normalize

2009-2010?

Markets bottoming as credit begins to thaw

Short/sharp bear rallies

Markets bottoming as credit begins to thaw

Short/sharp bear rallies

Gradually improving confidence in fundamentals

Earnings finally reflect trough & begin to stabilize

Gradually improving confidence in fundamentals

Earnings finally reflect trough & begin to stabilize

Market leaders take share and drive out efficiencies

Weak competitors forced to exit/get acquired

Market leaders take share and drive out efficiencies

Weak competitors forced to exit/get acquired

Phase 3: Recovery

Strong rally in anticipation of earnings recovery

Volatility normalizes

Strong rally in anticipation of earnings recovery

Volatility normalizes

Fundamentals matter again!

Cost cuts magnify margin expansion

Sharp earnings recovery

Fundamentals matter again!

Cost cuts magnify margin expansion

Sharp earnings recovery

Pricing power/margin expansion

Operating leverage magnifies EPS growth for survivors

Pricing power/margin expansion

Operating leverage magnifies EPS growth for survivors

Phase 1: De-leveraging

Equity markets in freefall

Good & bad stocks fall sharply

Equity markets in freefall

Good & bad stocks fall sharply

Equity Index

Valuation metrics don’t apply!

Earnings estimates in freefall

Macro events drive markets

Valuation metrics don’t apply!

Earnings estimates in freefall

Macro events drive markets

Survival of the fittest Weak companies

become distressed (GM)

Survival of the fittest Weak companies

become distressed (GM)

Fundamentals

Companies

Canadian Equity – OutlookLooking Across the ValleyCanadian Equity – OutlookLooking Across the Valley

Source: BMO Capital Markets

12.5%

25.0%

37.5%

37.5%

37.5%

62.5%

87.5%

87.5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Telecom Services

Materials

Energy

Utilities

Consumer Staples

Industrials

Financials

Consumer Disc.

Key Overweights

Key Underweights

Consumer Staples is a likely funding source to re-position for early cycle leverage

Consumer Staples is a likely funding source to re-position for early cycle leverage

First Year of New Bull Market 1957 – 2008

Canadian Equity - StrategyFinancials & Consumer Discretionary Lead in S&P/TSX Recoveries

Canadian Equity - StrategyFinancials & Consumer Discretionary Lead in S&P/TSX Recoveries

Canadian Equity – StrategyCanadian Banks Capital, Profitability, Valuation DashboardCanadian Equity – StrategyCanadian Banks Capital, Profitability, Valuation Dashboard

Bank Capital Strength – Nearly Double 1990s Crisis

10.4%9.3%

10.5%9.8% 10.1%

9.2%9.8%

5.5%4.7%

5.3% 5.0% 5.0%

6.5%5.3%

BMO BNS CM NA RY TD BNK

Overweight - Current Tier 1Underweight - Current Tier 11990 Tier 1 Ratios

Canadian Banks ROEs – Q4/08

16%

20%21%

17%20%

14%

18%

13%

6%

15%

5%

16%15%

13%

0%

5%

10%

15%

20%

25%

30%

BMO BNS CM NA RY TD BNK

Operating ROEReported ROE

19%

31%

55%50%

0%

20%

40%

60%

80%

1980 1990 2000 Q4-2008

Non-Interest Income % of Total Revenue

Less Cyclical & Higher Recurring Revenue Streams Price to Book Multiple for Canadian Banks

1.0

1.5

2.0

2.5

3.0

3.5

De

c-9

1D

ec

-92

De

c-9

3D

ec

-94

De

c-9

5D

ec

-96

De

c-9

7D

ec

-98

De

c-9

9D

ec

-00

De

c-0

1D

ec

-02

De

c-0

3D

ec

-04

De

c-0

5D

ec

-06

De

c-0

7D

ec

-08

10-year Average P/B: 1.9xCurrent P/B: 1.5x10-year Average P/B: 1.9xCurrent P/B: 1.5x

Source: Bloomberg, company reports and Scotia Capital

Canadian Equity – StrategyCommodity Stocks are Late Cycle Performers!Canadian Equity – StrategyCommodity Stocks are Late Cycle Performers!

CRB Index

Shaded areas highlight U.S. recession Source: Bloomberg

75

125

175

225

275

325

375

425

475

525D

ec-7

0

Dec

-72

Dec

-74

Dec

-76

Dec

-78

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Investment Implications of Global Economic TrendsInvestment Implications of Global Economic Trends

Infrastructure Governments will support infrastructure investments Developed world infrastructure is crumbling Developing world needs to build infrastructure

Outsourcing Companies will look for ways to turn fixed costs into variable costs.

Look for beneficiaries

Organic Growth Most businesses have no pricing power. Look for those that have

organic or unit volume growth: driven by demographics, life cycle of industry, changes in consumer behavior, long-term secular trends.

Market Leadership Leaders will become stronger weaker companies fail

Fixed Income Opportunities: CorporatesCorporate Bond Yields Less Gov’t of Canada Bond Yields*Fixed Income Opportunities: CorporatesCorporate Bond Yields Less Gov’t of Canada Bond Yields*

Source: DEX Mid Term Bond Index

4.4%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Dec

-90

Dec

-91

Dec

-92

Dec

-93

Dec

-94

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Yie

ld S

pre

ad (

%)

These bonds are guaranteed by the Government of Canada. The wider spreads represent the nervousness of investors and the “price of liquidity”.

These bonds are guaranteed by the Government of Canada. The wider spreads represent the nervousness of investors and the “price of liquidity”.

+0.54%

Source: credit\CHT spreads (5 yr chart) 1/2//09

CHT Five Year Term

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Dec

-03

Jun

-04

Dec

-04

Jun

-05

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Sp

read

(%

)

Fixed Income Opportunities: Liquidity SpreadsCanada Housing Trust (CHT) Yield Spreads vs Similar Term Canadas

Fixed Income Opportunities: Liquidity SpreadsCanada Housing Trust (CHT) Yield Spreads vs Similar Term Canadas

Benchmark Sep/07 Dec/07 Mar/07 Jun/08 Sep/08 Dec/08% % % % % % %

Cash 5.0 10.1 10.9 7.1 7.1 3.0 1.2

Bonds 35.0 32.1 33.7 35.2 35.0 36.9 38.3

Canadian 35.0 30.5 29.7 31.5 33.5 32.4 31.9

U.S. 12.5 14.7 13.3 12.7 12.4 16.7 17.6

International 12.5 12.6 12.4 13.5 12.0 11.0 11.0

Equities 60.0 57.8 55.4 57.7 57.9 60.1 60.5

Evolution of Asset Mix Strategy:Evolution of Asset Mix Strategy:

Greed

Businesses will continue to try to sell more

Investors will continue to look for gains

Fear will recede over time

Capitalism is not dead

Globalization

Well underway and irreversible

Increased trade has led to rising living standards globally

Rise of Asian consumer is inevitable

Governments

Extremely low interest rates, innovative monetary policy actions, banking system recapitalization

Tremendous fiscal stimulus and more to come; Fed printing money

Eases recession and lays groundwork for recovery

Why Be Optimistic?Why Be Optimistic?Why Be Optimistic?Why Be Optimistic?

Key PointsKey Points

The equity market decline has been unprecedented in severity and speed, and has been accompanied by extreme strains in credit markets

We are positioned for an eventual narrowing of credit spreads and are benefiting from higher yields of corporate bonds

Economic recoveries in the U.S. and beyond will be determined by bottoming in housing and wringing out of credit crunch fears, likely not until later in 2009

Equity markets tend to bounce before the economy

Thank YouThank You

U.S. CPI Projection

-5

-3

-1

1

3

5

7

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

%

Monthly CPI % change, headline

Year-over-year % change, headline

Year-over-year % change, core CPI

July 2008

July 2009

U.S. Deflation To Be Short-LivedU.S. Deflation To Be Short-Lived

U.S. Price-Earnings Ratio Since 1881

0

5

10

15

20

25

30

35

40

45

50

1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001

Rat

io

Shiller P/E RatioOne std deviation aboveMeanOne std deviation below

Source: Robert Shiller, www.econ.yale.edu/~shiller/data.htm

U.S. Price-Earnings Ratio Since 1881

0

5

10

15

20

25

30

35

40

45

50

1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001

Rat

io

Shiller P/E RatioOne std deviation aboveMeanOne std deviation below

Source: Robert Shiller, www.econ.yale.edu/~shiller/data.htm

ValuationReasonable Based on Long-Term MetricsValuationReasonable Based on Long-Term Metrics