Economic and Investment Outlook CIA Conference, Toronto September 2009 Warren A. Thomson

1. Economic and Investment Outlook CIA Conference, Toronto September 2009 Warren A. Thomson SEVP & Chief Investment Officer

2. Overview • Economic Indicators • Canadian Equities • Canadian Fixed Income • Alternative Assets • Commercial Real Estate • Oil & Gas • Timber • Agriculture

3. Economic Indicators

4. Is The Recession Over? • Signs of growth in China, Europe and Japan in Q2 2009 • The US: • Growth may be resuming as we speak (Q3 2009) • Worst downturn since WWII – even a partial rebound could deliver startling % growth rates • GDP: 2.5% loss vs. 3% trend growth implies at least 5.5% below potential now

5. The Worst Seems To Be Behind UsHome Sales Finding A Bottom

6. Initial Unemployment Claims Turn The Corner

7. Retail Inventories Still Excessive, But Getting Less So

8. ISM Indexes Still Below 50, But Past The Worst

9. Canada: Basically Sound, But Tied To The US • Negatives: in a bad neighborhood • Too integrated with the US to avoid tracking US cycle • Spillovers from the demise of Detroit, particularly in Ontario • Positives: living within one’s means • Commodities will bounce back with global growth • Closer than other countries to sustainable budget and trade balances • Systemically important financial institutions are sound • Bottom line: less trauma than elsewhere • Slightly healthier GDP growth than the US • Employment probably not rebounding until 2010 • Strengthening CAD may limit manufacturing competitiveness

10. Canadian Economy Improving ) June 2009

11. Household Debt Levels Resulting in Paradox of Thrift Canada Personal Savings ( ) and Household Debt ( ) ) ) As Percent of Disposable Income 25 130 128.6 120 20 110 100 15 90 80 10 70 60 5 4.5 50 0 40 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Consumer credit plus mortgage debt Q239 2009:2

12. MFC GIM’s Forecast Source: MFC Global Investment Management, as at August 24, 2009

13. Canadian Equities

14. Commodity Prices Recovering September 2009 2008 2009

15. Equity Valuations are Reasonable September 2009 50-yr Average

16. S&P/TSX Earnings Near Trough August 2009

17. Earnings Yield Still Above Government Bond Yields ) ) September 2009

18. S&P/TSX Bear Markets – 1957 to 2009 Source: CPMS/ Bloomberg

19. Summary • The worst is likely behind us from an equity market perspective • Markets are supported by: • A resumption of global growth • Commodity price recovery • Earnings recovery • Attractive valuations

20. Canadian Fixed Income

21. Short Term Rates at Record Lows Canadian Government Yield Curves Pre-Crisis (June 30, 2007) Post-Crisis (September 9, 2009) Source: Bloomberg

22. Spread Between LIBOR and T-Bills has Returned to More Normal Levels US Interest Rates – September 17, 2004 to September 9, 2009 Lehman failure Beginning of crisis 3 month US LIBOR 3 month US T-Bill Source: Bloomberg

23. Strong Corporate Bond Returns as of August 31, 2009 Canadian Bond Total Rates of Return Mid Crisis December 31, 2008 (0.3%) Post Crisis August 31, 2009 Source: PC Bond Analytics, TSX

24. Corporate Spread Compression Continues Canadian Investment Grade Corporate Spreads US High Yield Spreads Source: PC-Bond Analytics, Merrill Lynch, June 30, 2009

25. Canadian Bonds Are Expected to Perform Well Going Forward • Interest rates should increase modestly over time • Corporate spreads may tighten further • Modest improvement over time in line with economic conditions • Corporate bond class should continue to outperform, but relative performance will moderate

26. Alternative Assets:Prospects and Challenges

27. Commercial Real Estate

28. US Market Is Stressed • Most property types and regions experiencing difficulty from increased vacancy and tight credit markets • Office market has settled into a stable but soft cycle • Duration tied to the start of job creation • Erosion of operating income and valuations is increasing pressure on owners struggling to refinance their loans • Upcoming loan maturities and lower values necessitate new equity • Excessive use of leverage (debt) is the core problem

29. Canadian Market A Relatively Strong Performer • Market remains relatively healthy compared to rest of the world • Foreign buyers showing interest in acquiring institutional-grade commercial real estate • Concentrated institutional ownership of large properties reduces the likelihood of trades and value declines (due in part to reduced use of leverage) • Pockets of weakness remain contained

30. Asian MarketOutlook Uncertain • Asia has benefited from financial easing during the first half of 2009 • Lower rental rates have resulted from weak space demand and threat of rising vacancy rates • Continued high acquisition activity expected • Property fundamentals remain uncertain into 2010 • Risks are lower due to decreased use of leverage relative to rest of world

31. Oil & Gas

32. Oil Price Stability Expected to Resume in 2010 • Short term oil prices likely to remain volatile • Bloated inventory levels • Tighter oil supply than at start of the year • Some signs of global economic improvement • Oil price stability should replace volatility in 2010 • Global economic recovery signs begin to take hold • No suitable substitute for transportation fuel Source: FirstEnergy Capital, World Crude Oil Markets, August 27, 2009

33. Natural Gas Price Outlook Remains Weak • Short Term – Natural gas currently challenged by: • High inventories • Weak industrial demand • Growing US domestic production • Long Term – Few catalysts for a rebound in prices • Inventory continues to build • Increasing unconventional supply may insulate price spikes • Weak natural gas prices are a stimulus to the broader economy Source: BMO Capital Markets, Monthly Commodity Watch, August 2009; IHS CERA – Monthly Briefing “North American Natural Gas”, August 2009

34. Timber

35. Timber Markets in a Deep Cyclical Trough US Housing Starts and US Lumber Consumption Source: Resource Information Systems, Inc. (RISI)

36. Demand For Pulp Has Also Declined GlobalPulpwood Demand and Pricing Source: Wood Resources International and Hawkins Wright Ltd.

37. Timberland Values Are Stressed Operating Cash and Value for Prototypical All Age US Timberland Property (nominal $ per acre) Sources: NCRIEF and HTRG Research. Methodology detailed in “Explaining Timberland Values in the United States,” Journal of Forestry, December 2004.

38. Agriculture

39. Farmland Market Fundamentals • US farmland values are expected to moderate in near-term and grow in long-term driven by: • Strong US net farm income • Healthy balance sheet fundamentals • Continued strength in the agricultural export markets

40. Long-Term Upward Trend in Farmland Value Average Value per Acre of US Farmland, 1940–2008 US Aggregate Net Farm Income (billions), 1940–2018F Source: USDA Economic Research Service. Actual numbers through 2008, forecast through 2018

41. Strong Financials and Balance Sheets For the US Farm Sector US Farm Sector Balance Sheet, 1970-2008 US Farm Sector Debt Ratios 1970-2008 Source: USDA Economic Research Service 1970-2008

42. Summary • Canada remains sound, but tied to the US • Commodity prices are recovering and equity valuations are reasonable • Short term rates at record lows, with interest rates expected to rise modestly over time • The worst may be behind us, but it is still too soon to declare that the recession is over

43. Questions & Answers