Global Market Outlook - CIFPs › Public › Media › PDF › Conference2010...Global Market Outlook – 2010 - 8 Median U.S. Home Prices-20-15-10-5 0 5 10 15 20 90 92 94 96 98 00

Global Market OutlookWith an Eye on Resources

2Global Market Outlook – 2010 -

Current Market Backdrop

› Recovery started in the spring / summer of 2009 marking end of longest and deepest recession since Great Depression

› Unprecedented Central Bank actions (race to 0%) is supportive of future growth / albeit somewhat slower (1/2 speed) in 2011 as global deficit reduction plans become the focus

› Fed Reserve will likely hold rates until early 2011 / Canada already raising rates

› Housing correction maturing as home prices return to equilibrium

› Despite recent recovery, stock valuations indicate mid to long term opportunity still lies ahead – short term pause within bull market

› Urbanization of developing world still driving demand for commodities / BRIC Economies remain strong led by China – good for Canada

› Volcanic Ash / Oil spills / Electronic Trading Error / Terrorism / Korea


The CrisisHow it all got started

After two decades of steady gains averaging 4.7% annually, U.S. housing prices soared in 2004-

2006...

...fueled by the surge in subprime and other non-conventional

lending...

U.S. Mortgage OriginationsType of Loan by Date of Issuance

0102030405060708090

2001-2005 2006 2007

% of

Orig

inatio

ns by

Yea

rPrime Subprime/Alt-A

Source: Inside Mortgage Finance, Deutsche Bank

U.S. Housing - Median Sales Price Existing Single Family Home

0

50,000

100,000

150,000

200,000

250,000

1980 1985 1990 1995 2000 2005 2010

$ Projected Home Price Depreciation: -3.5%

Source: National Association of Realtors, Existing Home Sales, Bank of America Securities LLC


The “Players” Have Changed

› U.S. financial landscape significantly altered

Bear Stearns bought by JP Morgan

Lehman Brothers bankrupt

AIG effectively nationalized

Merrill Lynch sold to Bank of America, Wachovia gone

Goldman Sachs and Morgan Stanley converted to deposit-taking institutions

Washington Mutual - largest bank failure in U.S. history

› Greatest government intervention since the 1930s


The Credit SqueezeSignificant destruction of capital


The CrisisHousing, at the epicentre of the bust

Case-Shiller Index fell 33.6% from peak,now up 5% in four months

United States30-Year Conventional Mortgage Rate

4

5

6

7

8

9

10

11

12

1990 1995 2000 2005 2010 2015

%

Source: Federal Reserve

S&P/Case-Shiller Home Price Index10 and 20 City Composite Indices

-25.0-20.0

-15.0-10.0

-5.00.0

5.010.0

15.020.0

25.0

1988 1992 1996 2000 2004 2008 2012

YoY

% C

hang

e10 City Composite 20 City Composite

Source: Standard & Poors


Long Period of Calm Came to an EndVolatility likely to remain, although at lower levels

S&P 500 Composite Index Monthly VolatilityDaily Observations Within Month Above/Below 2.0%

-10

-5

0

5

10

2000 2002 2004 2006 2008 2010 2012

Days

Source: RBC AM


Median U.S. Home Prices

-20

-15

-10

-5

0

5

10

15

20

90 92 94 96 98 00 02 04 06 08 10

Annu

al %

cha

nge,

3m

ma

New homesExisting homes

Source: U.S. Census Bureau, National Assoc. of Realtors

US Home Sales

3500

4000

4500

5000

5500

6000

6500

2002 2003 2004 2005 2006 2007 2008 2009 2010

Thou

sand

uni

ts

0

200

400

600

800

1000

1200

1400

Thou

sand

uni

ts

New homes (right)Existing homes (left)

Source: U.S. National Assoc. of Realtors, U.S. Dept. of Commerce

U.S. Mortgage Applications: Home Purchase

150200250300350400450500550

Jan-

04

Sep-

04

May

-05

Jan-

06

Oct

-06

Jun-

07

Feb-

08

Nov

-08

Jul-0

9

Mar

-10

Inde

x

Source: Mortgage Bankers Association of America

U.S. Housing Starts

400600800

10001200140016001800200022002400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

'000

uni

ts

Source: US Dept. of Commerce

U.S. Housing Sector Recovery Is Faltering


The EconomyLending standards beginning to loosen

TED Spread and LIBOR Spread3-Month TED and 3-Month LIBOR Minus the $US OIS Rate

050

100150200250300350400450500

Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

Basis

Poin

ts

U.S. 3-Month LIBOR minus 3-month T-Bill U.S. 3-Month LIBOR minus Overnight Indexed Swap Rate

Source: RBC AM, Haver Analytics


Greece, Latest Threat to Confidence

Global CDS 5-Year Spreads

0

50

100

150

200

250

300

350

400

450

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10

Bas

is P

oint

s

Greece United States United Kingdom Japan Germany

Source: Bloomberg


European Stabilization Fund - now what?

› Lessons learned post credit crisis – shock and awe required

•750 billion Euro program

•SWAP programs reactivated

•ECB to buy secondary debt in public/private markets

› In return for funding – deficit reduction required

•Grow your way out

•Inflate your way out

•Cut spending/raise taxes

› For many countries we will see tighter fiscal policy before tighter monetary policy

› Implications: weaker growth and lower inflation


Can the U.S. Experience Offer Lessons for Europe?

U.S. Credit Crisis in Perspective

190

600

480

356

89

0

100

200

300

400

500

600

700

Savings & Loans1986 - 1995

Japan Banks 1990 -1999

Asia Banking 1998 -1999

TARP (CBO est.,Apr. 2009)

TARP (CBO est.,Apr. 2010)

$US

Billi

ons

0

2

4

6

8

10

12

14

16

% o

f GD

P

Dollar Cost

% of GDP

Source: IMF, UBS Investment Research, RBC GAM


Bank Free Reserve BalancesFunds available for lending or investments at all time highs

U.S. Commercial BanksFree Reserve Balances

-200-100

0100200300400500600700800

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

$US

Billio

ns

Source: Federal Reserve


United States Gross Federal Debt as % of GDP, with Projections

2030405060708090

100110120

1980 1990 2000 2010 2020%

Source: Office of Management and Budget

United StatesFederal On-Budget Surplus or Deficit % of GDP, with OMB Projections

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

1980 1985 1990 1995 2000 2005 2010 2015 2020

% o

f GDP

Source: Office of Management and Budget

THE CRISIS: In the Developed World

The crisis of 2008/2009 will dominate fiscal policy/handcuff governments for many years to come…

...as deficits in excess of 10% of GDP push debt/GDP toward levels...

...have in the past reduced growth in developed nations, including the U.S. by about 1.0%

(median) to 1.7% (average).

...that have been identified as critical to growth. Debt/GDP levels above 90%...


Canadian Deficits of the 90’s

CanadaNet Federal Government Debt and Deficit % of Nominal GDP

0

10

20

30

40

50

60

70

80

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

%

-7-6-5-4-3-2-10123

Debt/GDP (LHS) Deficit/GDP (Inverted, RHS)

Source: Cansim

.

Canada’s relatively strong fiscal position should remain

intact despite recent appearance of large deficits.


Government Finances Are Extremely StressedThe importance of the 90% threshold to growth

United States 1790-2009 3.6 -1.8 104.3

Canada 1925-2009 3.2 2.2 71.9

France 1880-2009 3.5 2.3 91.5

Germany 1880-2009 2.3 n/a 90.1

Italy 1880-2009 4.1 0.7 127.9

Japan 1885-2009 4.2 0.7 241.8

United Kingdom 1830-2009 2.7 1.8 96.9

20 Country Average 3.4 1.7

Gross Debt/GDP Country Period Up to 90% 90% and above 2013

Source: Reinhart, Carmen M., and Kenneth S. Rogoff. “Growth in a Time of Debt,” IMF, OECD, World Bank

Federal Govt Debt/GDPReal GDP Growth

Memo: Greece, 2010: 123.3

After 25 years an economy will be 50% larger at 3.4% v. 1.7%


Fixed Income Markets Short-term interest rates at massively stimulative levels

U.S. fed funds rate likely to stay low with modest hikes in early 2011. Central Banks remain focused on threats to

the self-sustained recovery.

U.S. Fed FundsEquilibrium Range

0

4

8

12

16

20

24

1980 1985 1990 1995 2000 2005 2010 2015

%

Last Plot: 0.25% Current Range: 0.06% - 2.27% (Mid: 1.16%)

Source: Federal Reserve, RBC AM


Fed Hikes & The US Unemployment Rate

0

2

4

6

8

10

12

14

16

18

20

55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09

%

Fed Funds RateUnemployment Rate

Un peaks in Dec '70 , Fed starts hiking by August '71

Un peaks in May '75, Fed starts hiking by May '76

Un peaks Dec '82, Fed starts hiking by Mar '84

Un peaks Jun '92, Fed starts hiking by Mar '94

Un peaks Jun '03, Fed starts hiking by Jul '04

Source: Federal Reserve, BLS, PH&N

If Un peakedOct '09, Fed

starts hiking by Q4 2010

Fed Waits Until Unemployment Rate Peaks…before Raising Rates


Policy tightening underway outside the G7

China Canada

India U.K.

Australia U.S.

Israel ECB

Norway Japan

Malaysia

Rates Rising…

Next central bank to hike

First rate hike in early 2

ECB and BoJ will lag

Already tightening

Worried about inflation

Raising rates

Raising rates

Raising rates

Raising rates

Brazil Raising rates


Corporate Bond Spreads Narrowing…But still attractive with spreads close to past level peaks

Corporate Bond Spread Moody's BAA Corporate vs. U.S. 10-Year Treasury

0

100

200

300

400

500

600

700

1980 1985 1990 1995 2000 2005 2010 2015

Basis

Poin

ts

Source: RBC AM

Average: 223 bps

+1 SD: 298 bps

+2 SD: 373 bps

+3 SD: 448 bps

+4 SD: 523 bps

+5 SD: 598 bpsPeak: Nov 2008 @ 611bps

5.17 SD above mean

Most Recent: 242 bps


Chicago Fed National Activity IndexSignificant improvement, still no inflationary concerns

Chicago Fed National Activity IndexThree Month Moving Average

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

1980 1985 1990 1995 2000 2005 2010 2015

Inde

x Le

vel

Source: Federal Reserve Bank of Chicago

+0.7

-0.7

Risk of Inflation

Risk of Recession


The EconomyAs credit crunch eases, the economy responds to rock bottom rates

Massive policy response had been overwhelmed by clogged credit channel. Stimulus working as ISM rebound sharply

U.S. ISM Manufacturing Index and the Fed Funds Rate Fed Funds Inverted and Advanced Six Months

30

35

40

45

50

55

60

65

70

1998 2000 2002 2004 2006 2008 2010 2012

0

1

2

3

4

5

6

7

8

%

ISM Diffusion Index (LHS) Fed Funds Rate (Inverted, Adv 6 Months) (RHS)

Source: Institute for Supply Management


EmploymentKey to restoring spending

United StatesReal Consumer Spending and Non-Farm Employment

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

YoY

% C

hang

e

Non-Farm Employment Real Personal Consumption

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Citigroup


“Low Levels Of Resource Utilization” =Abundant Spare Capacity

Spare Capacity in US Labor and Product Markets 68

70

72

74

76

78

80

82

84

86

881975 1980 1985 1990 1995 2000 2005 2010

%, i

nver

se s

cale

3

4

5

6

7

8

9

10

11

12

%

Capacity utilization rate, all industries (left)

Unemployment rate (right)

Cap Utilization LR avg = 81.1%

Unemployment rate at natural rate of 6%

Source: US BLS, BEA, PH&N


Canada’s Core CPI Stands Out Amid Disinflation Elsewhere

Canada

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2003 2004 2005 2006 2007 2008 2009 2010

% c

hang

e ye

ar a

go

Headline CPICore

Source: Statistics Canada

United States

-2.0

-1.00.01.0

2.03.04.0

5.06.0

2003 2004 2005 2006 2007 2008 2009 2010

% c

hang

e ye

ar a

go

Headline CPICore

Source: BLS

Eurozone

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2003 2004 2005 2006 2007 2008 2009 2010

% c

hang

e ye

ar a

go

Headline CPICore

Source: Eurostat

China

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2003 2004 2005 2006 2007 2008 2009 2010

% c

hang

e ye

ar a

go

Headline CPI

Excluding food

Source: National Bureau of Statistics of China


Very Strong Global Industrial Sector Recovery

German IFO Index of Industrial Sector Optimism

80

85

90

95

100

105

110

98 99 00 01 02 03 04 05 06 07 08 09 10

Inde

x

Source: Ifo Institute

UK CBI Business Optimism Index

-80

-60

-40

-20

0

20

40

98 99 00 01 02 03 04 05 06 07 08 09 10

Diff

usio

n in

dex

Optimism balance Volume of expected output

Source: Confederation of British Industry

Purchasing Managers Index: China

35

40

45

50

55

60

2006 2007 2008 2009

Inde

x

Source: NTC Research

Japanese Manufacturing & ExportsAnnual percent change

-60

-40

-20

0

20

40

60

2006 2007 2008 2009 2010

%

-20-15-10-505101520253035

%, i

nver

se s

cale

Manufacturing output (left)Merchandise exports (left)Real effective exchange rate (right)


Key Indicators Surpass Pre-Crisis Peaks

BRIC Industrial Production

95

100

105

110

115

120

125

05 06 07 08 09 10

Inde

x

Simple average of industrial production indexes,Brazil, Russia, India & China

Source: OECD, China National Bureau of Statistics, PH&N

Chinese Exports

405060708090

100110120130140

2005 2006 2007 2008 2009 2010

US$

Billi

ons

Merchandise exports, seasonally adjusted

Source: Chinese National Bureau of Statistics, Haver Analytics

U.S. Consumer Discretionary SpendingTotal spending less spending on housing services, gasoline and other fuels, groceries and health care

5400

5500

5600

5700

5800

5900

6000

2006 2007 2008 2009 2010

US$

Billi

ons

Source: Bureau of Economic Analysis, NBF

Canadian Retail Sales

30

31

32

33

34

35

36

37

2006 2007 2008 2009 2010

C$

Billio

ns

Nominal

Real



Equity Market ModelsMajor equity markets still show good total return prospects / S&P as cheap as ’82 low

S&P 500 now 32% below 1-year forward fair value and also

beneath lower limitof fair value channel.

TSX remains developed world’s most expensive market, but is still attractively valued relative

to its own history.

S&P/TSX Composite EquilibriumNormalized Earnings & Valuations

398

623

975

1525

2387

3734

5843

9143

14307

22387

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: Bloomberg, RBC AM

Aug '09 Range: 8908 - 13285 (Mid: 11096)Aug '10 Range: 10667 - 15909 (Mid: 13288)Current (31-Aug-09): 10868

S&P 500 EquilibriumNormalized Earnings & Valuations

40

65

106

174

284

464

759

1240

2026

3311

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: Bloomberg, RBC AM

Nov '09 Range: 1054 - 1724 (Mid: 1389)Nov '10 Range: 1328 - 2172 (Mid: 1750)Current (30-Nov-09): 1096


Swedish Model(My favourite)

Sweden - Datastream IndexNormalized Earnings & Valuations

145

236

383

623

1013

1647

2678

4354

7079

1980 1985 1990 1995 2000 2005 2010 2015

Source: RBC AM

Jan '10 Range: 2605 - 5436 (Mid: 4021)Jan '11 Range: 3365 - 7022 (Mid: 5194)Current (13-Jan-10): 2499

Oct 1991: Major Swedish bank on verge of bankruptcy

Sep 1992: Swedish government guarantees banking system

Dec 1996: Bank guarantee terminated and replaced with a deposit guarantee financed by the banks


EQUITY MARKETS: BEGINNING WITH CHINA, A PROGRESSION OF LESS COMPELLING STOCK MARKET RALLIES

SHANGHAI SE A SHARE INDX SHANGA.ZZ.I

345 DAYS 2JAN09 - 30APR10

2000

2200

2400

2600

2800

3000

3200

3400

JAN09 FEB09 MAR09 APR09 MAY09 JUN09 JUL09 AUG09 SEP09 OCT09 NOV09 DEC09 JAN10 FEB10 MAR10 APR1015 29 12 26 12 26 9 23 7 21 4 18 2 16 30 13 27 10 24 8 22 5 19 3 17 31 15 29 12 26 12 26 9 23

FTSE 100 SHARE IDX FT100.ZZ.I


4000

4500

5000

5500

JAN09 FEB09 MAR09 APR09 MAY09 JUN09 JUL09 AUG09 SEP09 OCT09 NOV09 DEC09 JAN10 FEB10 MAR10 APR1015 29 12 26 12 26 9 23 7 21 4 18 2 16 30 13 27 10 24 8 22 5 19 3 17 31 15 29 12 26 12 26 9 23

S&P 500 COMPOSITE SPC.ZZ.U


700

800

900

1000

1100

JAN09 FEB09 MAR09 APR09 MAY09 JUN09 JUL09 AUG09 SEP09 OCT09 NOV09 DEC09 JAN10 FEB10 MAR10 APR1015 30 13 2 16 30 14 28 12 27 10 24 9 23 6 20 3 18 2 16 30 13 30 14 29 13 28 11 26 12 26 12 26

DJ EURO STOXX 50 DJE50.ZZ.U


2000

2200

2400

2600

2800


TOKYO NIKKEI STK AVG NIK.ZZ.I


7500

8000

8500

9000

9500

10000

10500

11000

JAN09 FEB09 MAR09 APR09 MAY09 JUN09 JUL09 AUG09 SEP09 OCT09 NOV09 DEC09 JAN10 FEB10 MAR10 APR1019 2 17 3 17 1 15 30 18 1 15 29 13 28 11 25 8 25 9 26 10 25 9 23 8 25 8 23 9 24 7 21

S&P/TSX COMP IDX TSX.ZZ.T


8000

9000

10000

11000

12000


China, the first to bottom and move ahead from its fall/08 low, appears to have been the first to set a primary peak for the bull’s first major leg way back in August ’09. In a show of flagging momentum, the Eurozone market did not take out its January high in the

April global stock market rally, but Japan, the U.S. and Canada did. This bears watching as the stock market, especially the Chinese stock market, was early in signaling economic recovery. Its loss of momentum may be indicating a slowdown lies ahead

China Peak: Aug. ‘09 No New

Highs New High: Apr. ‘10

New High: Apr. ‘10



Euro Stoxx Peak: Jan. ‘10

No New Highs


Expect mean reversion in relative performance

10-Year U.S. Stock and Bond PerformanceStock Market 10-Year Total Return minus Long Bond Total Return

-200

-100

0

100

200

300

400

500

600

700

1935 1945 1955 1965 1975 1985 1995 2005 2015

Sto

ck M

arke

t 10-

Year

Out

perfo

rman

ce % S&P 500 10-Year Total Return minus Barclays

Capital Long Term T-Bond 10-Year Total Return

Source: Ned Davis Research

Mean: 125.6%

+1 Std Dev

-1 Std Dev

-2 Std Dev


› Job creation well underway; 134,000 new jobs created since June 2009

› Housing market booming, prices up 18% yoy, starts at pre-recession high

› Jan. manufacturing sales +2.4%, wholesale sales +3%

› Q4 GDP +5%, limited contribution from inventories so far

› Upward pressure on core CPI

› Very strong net foreign buying of Canadian securities in January

› Increasing likelihood of summer interest rate hike, possibly even in June

Canada’s Recovery Outpacing that of U.S.

› Employment stabilizing; 8.4 million jobs eliminated this recession

› Housing fragile, prices still below year ago, starts remain near multi-decade lows

› Feb. industrial production +0.1%, 8th month of growth

› Q4 GDP +5.9%, large contribution from inventories underway

› Feb. core CPI at 6-year low of 1.3%

› Jan. net foreign buying of U.S. long-term securities lowest since July

› Fed appears to be on hold until 2011

CANADA U.S.A.


Divergent Status of Government Finances

Gross General Government Public Debt % of GDP

20

30

40

50

60

70

80

90

100

110

120

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

%

Advanced economies

Emerging economies

World

Canada

Source: IMF World Economic Outlook, October 2009


Canada’s Housing Market a Picture of Strength

Existing House Prices

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Pric

es

United StatesCanada

Source: CREA, NAR

Existing Home Sales

-40-32-24-16-808

1624324048566472

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Year

-ove

r-ye

ar %

cha

nge

United StatesCanada

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

Canadian Mortgage Rates*

3

4

5

6

7

8

9

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

1 year5 year

*Commercial bank posted rates


Canadian Housing Starts

50

100

150

200

250

300

1994 1996 1998 2000 2002 2004 2006 2008 2010

thou

sand

s, s

aar

Source: CMHC


Source: BLS, PH&N

United States

92

94

96

98

100

102

1 4 7 10 13 16 19 22 25 28 31Months

Inde

x, 1

st m

onth

of U

.S. r

eces

sion

= 1

00

1973-75: 16 mths,1.26 mln. jobs1981-82: 15 mths, 2.7 mln. jobs1990-91: 8 mths, 1.24 mln. jobs2000-01: 20 mths, 473K jobsCurrent: 26 mths, 8.3 mln. jobs

Canada

92

94

96

98

100

102

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49Months

Inde

x, 1

st m

onth

of U

.S. r

eces

sion

= 1

001981-82

1990-91

2000-01*Current *Recession in US only.

Stark Difference in Labour MarketsCanada has largely recovered, U.S. employment still very weak


Canadian Dollar vs US Dollar

Canadian Dollar & Purchasing Power Parity

0.6

0.7

0.8

0.9

1.0

1.1

1980 1985 1990 1995 2000 2005 2010 2015

CAD/

USD

Exchange Rate PPP 20% Band

Source: DB FX Research, RBC AM

PPP Last Plot: 0.85

Last Plot: 0.95


Canadian Dollar on the Way to ParityBut may not be justified by fundamentals.

Labour productivityCanada & U.S.

-2

0

2

4

6

1998 2001 2005 2009

% Year-over-year

Source: Statistics Canada, US BLS

Canadian dollar and WTIMonthly since 1995

0.60

0.70

0.80

0.90

1.00

1997 2001 2005 2009

US$ per C$

0

20

40

60

80

100

120

140

US$/barrel

USD per CAD (left)

Crude Oil - WTI Spot (right)

Correlation since 1995 = 0.89

Source: Bank of Canada, Datastream


Theme for a DecadeThe rise of the Asian consumer

U.S. China

Population (mm) 307 1,338

Life Expectancy (Yrs) 78 73

GDP per Capita $46,678 $3,155

Savings Rate (%) 4.6% 49.9%

Internet Users (% of population) 73% 13%

Car ownership (% of households) 87% 6%

Source: CIA World Factbook, BEA, National Statistics Bureau of China, People’s Bank of China, Euromonitor.


Time

Index Values (CAD)

R St k

60

20,000

100

200300400600

1,000

2,0003,0004,0006,000

10,000

Jan1956

Aug2009

Dec1960

Dec1965

Dec1970

Dec1975

Dec1980

Dec1985

Dec1990

Dec1995

Dec2000

Dec2005

Canadian Resource Stocks

Source: RBC Asset Management, Morningstar EnCorr. Based on 65% S&P/TSX Energy & 35% S&P/TSX Materials.

Resource Stock - Previous CyclesNot the first cyclical correction in a secular uptrend

Jul 1960 – June 1981+1746% (+15.0% ann.)

251 months

Jun 1981 – Feb 1999+29% (+1.5% ann.)

212 months

Feb 1999 – Aug 2009+433% (+17.3% ann.)

126 months

-41.5% -50.0%

-50.1%

-42.7%

-47.3%


Classic Demand / Supply Imbalance

BRIC Accounts for 40 % of Population/ 25% of Land / $15 trillion GDP

Brazil RussiaIndiaChina

DEMANDStrong Growth Prospects

• Access to resources –growing government presence

• Underinvestment in exploration & development for past two decades

• Restrained capital spending due to high costs relative to commodity prices

SUPPLY

Lagging for awhile

Natural Resources ThemeGrowth factors

Strong upside in Natural Resources for a prolonged

period!

+ The “Next” Billion


Higher for Longer Commodity PricesSupply / demand imbalance driven by BRIC & next billion

Demand› Strong demand for

resources supports commodity prices & stocks despite U.S. slowdown & Chinese weather related weakness

Supply› Difficult access to

resources globally continues to constrain supply


U.S.

S. KoreaJapan

China

Oil Consumption and Industrialization, 1900 to present

Lower U.S. labor costs versus Europe and the U.K. drive American industrialization, enrichment and energy consumption

Lower Japanese labor costs do the same to the U.S.

Lower Korean labor costs do the same to Japan

Oil per capita rises rapidly during early industrialization, then levels to rapid real income growth. Rising world trade actually stimulates the industrialization phase.

Source: U.S. Global Investors, Dr. Marc Faber

Natural Resources ThemeGrowth factors - demand

http://www.flags.net/country.php?country=JAPA&section=CURR�


Current Future? Additional BOE/d

U.S.A 25.2

Mexico 7.0 7.0

China 2.0 7.0 17.9 million

India 0.8 7.0 18.8 million

If China and India per capita consumption grows to levels similar to Mexico’s current consumption, global demand would increase by over 36 million barrels per day. You would need the equivalent of 3 more Saudi

Arabia’s to meet this demand!!

Source: Sprott Asset Management

Oil Consumption Per Capita (Per Year)

Natural Resources ThemeGrowth factors – demand


Cost of New Supply Steadily Rising

Source: CIBC World Markets, Total SA

Natural Resources ThemeSupply constrained


$18.68 $12.28 $17.48 $27.60 $23.12 $24.36 $28.10 $36.05 $50.64 $61.08 $69.08

Average Annual OPEC Reference Basket PriceSource: OPEC, Production data compiled by

Energy Watch Group

Natural Resources ThemeSupply constrained


› Cyclical recovery is well underway;

› Financial crisis has left legacies that will mute the expansion

› Sharp U.S. recovery to slow to “half-speed” by 2011 › Tighter monetary and fiscal policy will impact markets, but

bonds more so than stocks and not until 2011› Stocks continue to look attractive over the long term

› Fiscal crisis to be a key theme for next few years and lead to slower growth in the developed world

› Leverage to emerging economies will be important › Long term implications of credit/economic crisis

• Deficit concerns• Change in world economic order

Summary

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