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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