Annual Financial Forum

January 13, 2000 A. Scott Penman President and Managing Partner, Investors Group Investment Management Limited Clive Coombs Executive Vice-President, AGF Management Limited Moira McLachlan Portfolio Manager and Equity Analyst, Mackenzie Investment Management Incorporated ANNUAL FINANCIAL FORUM Chairman: Robert J. Dechert President, The Empire Club of Canada

Head Table Guests

Margaret M. Samuel, CFA, Equity Analyst, Royal Bank Investment Management Inc. and a Director, The Empire Club of Canada; Lawrie Lewis, Managing Director and Co-Head of Institutional Equities, Scotia Capital Inc.; Joe Oliver, President and CEO, Investment Dealers Association; Andrea Rosen, Deputy Chairman, TD Securities Inc.; Eric Tripp, Senior Vice-President and Director, Institutional

Equity Sales, Nesbitt Burns Inc.; The Hon. Thomas Hockin, President and CEO, Investment Funds Institute of Canada and a Director, The Empire Club of Canada; Reverend Grant Kerr, Associate Minister, St. Paul's United Church, Brampton; Blake C. Goldring, CFA, President and COO, AGF Management Limited and a Director, The Empire Club of Canada; David Brown, Chair, Ontario Securities Commission; Francois Du Plessis, CEO, HSBC Securities Canada Inc.; and Gerald C. Throop, Executive Vice-President and Managing Director, Equity Markets Group, Merrill Lynch Canada Inc.

Introduction by Robert J. Dechert

As you know, each year at this time the Empire Club does something a little different and brings you a selection of advice from three leading investment gurus.

This year's market is barely eight days old and already we have had a wild ride; the post-Y2K volatility continues to be the major news story each day. We have already experienced record one-day decreases followed by record one-day increases in several major indexes. One wonders what the balance of 2000 has in store for us?

Our expert guest speakers today have agreed to share with us their insights with respect to the near and medium terms in Canadian and global fixed income and equity markets.

The batting order for our experts today will be Clive Coombs, who will provide us with his insight into the market for fixed income securities, Scott Penman who will provide us with his forecast for Canadian equity markets and finally, Moira McLachlan, who will share with us some of her projections with respect to global equity markets.

Our first speaker today, Mr. Clive Coombs, currently leads the fixed income team at AGF, managing approximately $3 billion of domestic and international bond funds.

Clive was educated at Trinity College of the University of Toronto and continued graduate studies at the London School of Economics.

He was appointed Executive Vice-President in 1998 with overall responsibility for investment management and currently manages a diversified range of top-performing funds with assets of over $20 billion. Mr. Coombs was appointed a Director of U.K. based NCL investments in 1998.

Ladies and gentlemen please welcome Mr. Clive Coombs.

Clive Coombs

Mr. President, honoured head table guests, ladies and gentlemen: good afternoon.

It is a pleasure to be here with you today to give you my outlook on the bond market for the year ahead. In this time of extraordinary gains in the stock market, rebounding property prices and the general "feel good" atmosphere in the economy, I am going to try to convince you to give the bond market another look. In my attempt I will be examining four areas that affect the bond market over the longer run: first, economic growth versus inflation; second, the supply of bonds; third, central bank alertness; and fourth, real yields.

The bond markets in 1999 turned in their second-worst performance since the Second World War. U.S. Treasury bond yields rose 2 per cent and long-term Canada bonds saw rates rise by almost as much. The only bond markets to perform well were those in the emerging economies. Their markets were of course rebounding from the decimation of the previous year, that swept that part of the world in the wake of the Russian debt crisis.

So why was 1999 such a bad year for Canadian and U.S. bonds? Well, we started 1999 feeling our way out of the Asian meltdown. Almost immediately, the strength of the rebound in Asia, stability in Latin America and Russia and the continuing strength of the North America economy gave bond investors much to contemplate. They anticipated a strong rebound in inflation and the bonds began a steady sell-off. This reaction is understandable given that most of us in the market or in this room for that matter were either in the markets during high inflation times or were educated during those times.

This brings me to the first area of examination-economic growth versus inflation. I think it is important to put inflation into historical perspective. It is hard to believe, but the level of wholesale prices in the U.S. was the same in 1950 as it was in 1776. Sure there were bouts of inflation in between, generally around wars, but there were also long periods of deflation. It was only from the early 1960s to the early 1980s that rampant uncontrolled price level increases took hold. The main reason behind this was a serious misinterpretation of Keynesian economic theory which created a level of government spending in peacetime historically reserved for wars.

High growth rates have in recent times been equated with high inflation. However, it is once again important to look at what happened in the U.S. from 1865-1905, a period similar in many ways to today. There were rampant technological changes at that time; the invention of the telegraph, the transcontinental railroad was built, and the first national market was created. During this time industrial production increased 700 per cent or 5 per cent per year, but the general level of prices dropped 50 per cent or 1.7 per cent per year. Lots of growth, technological innovation and absolutely no inflation. The railroad bond yields dropped from 8 per cent to 4 per cent in response to declining prices. Isn't this exactly what the Internet is doing today? Over the last few years, estimates for economic growth have been largely understated. In fact, consensus estimates have been wrong by 2 per cent per year since 1996. Maybe, just maybe, the uniformly strong predictions for GDP growth this year will be overstated and harried bond investors will be given a small reprieve as the threat of a wage and price spiral once again remains unfulfilled.

The second area to look at is supply and demand. Basic economics and common sense tells us that excess supply drives down prices. The same is true for bonds. For 30 years of increasing government debt levels, of up to $300 billion per year in the U.S., bond yields rose and bond prices dropped. Over the last few years there has been a tremendous turnaround in profligate government spending. Deficits have been eliminated and yields for the past five years are much lower than they were in the 10 years before that. In Canada, net bond supply by both government and corporates to the market last year was $16 billion. Corporates issued $19 billion of bonds which means that the government was responsible for the difference of -$3 billion i.e. a net reduction of government debt of $3 billion. To look at it another way, in 1993 bond issuances in Canada amounted to $65 billion of which the government issued $54 billion. Since then not only has bond issuance declined, but more importantly the mix has changed and companies are able to get at the table rather than being crowded out by big government. The story is similar south of the border. While government supply has become largely negative, corporate and mortgage debt has grown to fill the void. In the short run, the total supply is not good for the market, but the change in mix is extraordinary and very encouraging. Companies generally make better use of capital than governments. There is also a check and balance inbuilt when it is companies rather than governments who borrow. Corporations who over-extend go bankrupt-quite Darwinian but very deflationary. This is good for holders of quality debt. If governments issue huge amounts of debt, and if they have a problem it is very easy for them to monetise it, i.e. print money to get themselves out of trouble, which of course creates the inflation we experienced in the 1970s.

The third area is the role and alertness of central banks around the world. In the 15 years I've been an investor in the bond market, technological tools available to traders and investors have improved tremendously. We have realtime access to information and prices from every corner of the globe. This means that we investors and traders can buy or sell a bond traded anywhere in the world very quickly. What this does is create a healthy discipline on fiscal authorities and central bankers who realise slight slippage in policy will cause an immediate sell-off in their bond market. Central banks are alert today, they're vigilant and are very cognizant of letting the fear of inflation get out of hand. Remember 1994, the Federal Reserve raised rates six times, although inflation was well contained. On the contrary, the recent moves by the new government of New Zealand to abandon successful economic policies in favour of loose policy, indicating a rift between government and the central bank, caused an immediate drop of 5 per cent in their currency and commensurate rise in interest rates. Obviously the government was forced to back-pedal very fast.

These examples are tangible proof of the efficiency of the markets and of central bank vigilance.

The final area I'd like to cover is real interest rates. With the issuance a few years back of real return or indexed linked bonds, it has become very easy to judge the level of real yields. Currently, the yield on these bonds is 4.5 per cent which is the highest they've been since they were issued and almost as high as implied real yields have been in 30 years. This level is very high when one considers that the real return from U.S. bonds since the war has been a paltry 1.3 per cent. Even the S & P 500 has only returned just under 7 per cent on a real basis over this time. A 4.5-per-cent real yield now looks awfully attractive. There is great value in bonds.

What I have outlined for you today are four of the many influences affecting the bond market. Let's recap. Growth does not in itself lead to inflation, the drop in supply of government bonds is very good for the market, central banks are watched very carefully by the market and real yields on an historical basis look very high right now.

Now markets are as much about risk as reward. We have examined the potential to drive bond prices higher so where's the risk?

What is 'causing problems right now is that the unemployment rate is very low in the U.S. at 4.1 per cent and

Canada at 6.9 per cent. These historically low rates of unemployment, although good for the country, are causing, investors to worry about a pick-up in wage inflation. However more recently average hourly earnings have actually been declining. Additionally, the U.S. has become a much more open economy, very efficient and able to import cheap foreign goods and in so doing the U.S. gets access to cheaper labour. Quite simply if you haven't got the people to make it yourself, buy it from someone else. There are many countries willing to sell their output to the U.S. and Canada. China for example is facing a different problem. This year it expects to lay off 12 million people.

I trust you see the point. In the short run, it is distinctly possible to see an up-tick in short-term interest rates in the U.S. and Canada, which may cause a ripple effect in the bond market with yields approaching 7 per cent. A time will come however, when the economy will show signs of slower growth. God-forbid we could also see a small retrenchment in the equity markets. Should either of these events occur I believe the bond market is poised for a powerful rally with yields in North America back in the 5.5-per-cent range.

So if you're a patient, contrarian investor, and like buying last year's losers, I strongly encourage you to give the bond market a second look. Good luck with your RRSP investing.

Introduction by Robert J. Dechert

As President and Managing Partner of Investors Group Investment Management Ltd., Scott Penman leads a team of portfolio managers, analysts and traders who are responsible for 50 funds and over $36 billion of assets under management.

In addition, Scott is Portfolio Manager of the Investors Canadian Equity Fund, a $2.9-billion fund that he has managed since 1983.

He first joined Investors Group in 1981 as an investment analyst and during his tenure has held positions as Portfolio Manager of the Investors Mutual Fund of Canada and the Investors Retirement

Mutual Fund as well as being a key consultant on the Investors Canadian Small Cap Funds and the Investors Canadian Enterprise Fund.

Today, he is one of Canada's most respected investment professionals.

Ladies and gentlemen, please welcome Mr. Scott Penman to the podium of The Empire Club of Canada.

Scott Penman

Good afternoon ladies and gentlemen.

I want to start by thanking President Dechert for his kind introduction, and Blake Goldring for the invitation to speak to you this afternoon. It is also my pleasure to share the podium with Clive Coombs and Moira McLachlan, two very respected names in the investment world today.

I am especially pleased to be here to talk about what I see as an exciting road ahead for investors in the Canadian marketplace.

This is a rare occasion, especially since Groundhog Day is still a few weeks away, to have three senior investment managers who are brave enough to poke their heads out of their burrows long enough to predict whether we are in for an early spring, or can expect six more weeks of dreaded winter. And as I will point out in just a few minutes, for those who make their living making market predictions, such as the doomsayers who said the world would spiral into recession as a result of the Y2K bug, many of them should envy the track record of the groundhog, who is right at least 50 per cent of the time.

Now, it is true that the past 18 months have seen a bit of a rollercoaster ride for those who follow the equity markets. We have seen the dizzying highs of what will perhaps be the longest bull market in history interrupted by a few market corrections, the most recent one occurring last summer. The turbulent markets, together with fears about Y2K, created endless months of uncertainty forcing some investors to watch nervously from the sidelines. Unfortunately, those on the sidelines have been missing out on some great opportunities.

This has also not been an easy time for those of us who manage mutual funds, especially Canadian equity mutual funds.

I am reminded of the story of two Canadian mutual fund managers who, on a trip to Mexico, decided to try their hand at bungee jumping. After a bit of liquid courage in the form of a few tequilas, the first manager makes up his mind to take the plunge. He bounces at the end of the cord, but when he comes back up the second manager notices that he has a few cuts and scratches. Unfortunately he isn't able to catch him, so the first manager falls again, bounces and comes back up. This time he is bruised and bleeding. Again, the second manager misses him. So he falls another time and bounces back up. This time, he comes back pretty messed up; he's got a couple of broken bones and is almost unconscious. Luckily, the second manager finally catches him, and asks: "What happened? Was the cord too long?" The first manager says: "No, the cord was fine but what the heck is a pinata?"

Those of us who manage Canadian equity funds may feel that way sometimes. Despite all our efforts to pick wisely, manage risk and buy for the long term, when the markets go through volatile periods, you often find yourself at the other end of the stick. That, for better or worse, comes with the job.

But today, we have before us not only a new year, but a new decade, and a new millennium. It comes naturally that we tend to look to where markets may be headed over the next 10 years.

It wasn't that long ago, when we were faced with days of rampant inflation, high interest rates and pronouncements that the stock markets were all but dead. Over the years that transpired, we shifted into a prolonged period of low inflation, low rates of borrowing and a booming economy. To illustrate how dramatically the world has shifted over the past two decades, I went back to some of the predictions the experts were making 10 and 20 years ago to see how they stand up today.

Look at what the analysts were saying back in 1979. They predicted that during the 1980s oil would reach $100 barrel; double-digit inflation would continue through the decade; and your best investments would be gold and the family home. In fact, in August of 1979, Newsweek had a cover story showing a picture of a dinosaur proclaiming "The Death of Equities." As you can see, they were wrong on all counts.

Skip ahead to 1989, and what were the experts saying? Japan's industrial machine would be so formidable that the U.S. simply could not compete. In fact, Japan would own most of the rest of the world by the end of the 90s and North American stocks could never match their performance of the 1980s. Do you see a trend developing here?

To show you how far we have come, just listen to some of the current wisdom for the decade ahead:

Stocks always provide the best returns;

The remarkable returns of the 1990s can be expected for the future;

Always buy during the dips, and hold on because stocks will always go higher over time;

Dividends, once a key element in measuring the health of a stock, simply don't matter anymore; Bear markets are a thing of the past. The Federal Reserve and the Bank of Canada simply will not allow it. There will be no recession in the next decade; new information technology, a growing service-based industry and just-in-time inventory has made recession obsolete;

o Internet-related advances in commerce and communication will be the industrial revolution of the 21st century; technology will improve investment returns as it improves productivity;

o Inflation is dead, and interest rates will remain low.

When I reflect on this list of popular predictions the one thing that strikes me is how fearless the next decade's predictions are in comparison to the past. I believe this optimism is due, in part, to a broader recognition that the underpinnings of today's economy have never been stronger. With inflation and interest rates under control, and employment and economic growth on the rise, the confidence of our market analysts has gone up considerably. But as time has taught us all, predictions are often notorious for missing the mark. It is my view that a little more respect for risk is required.

Although the conditions appear to be ripe for widespread market expansion, we have seen only small pockets of companies surging ahead. I'm referring to that narrow group of technology-related stocks that has been largely responsible for the TSE's gain over the past 12 months. The problem is an issue of breadth, where many are concerned that the drive forward cannot be sustained without broader participation. And when you consider that one-third of stocks in Canada and the U.S. are still more than 30 per cent off their 52-week highs, while market averages are at, or near, all-time highs, you quickly see where those concerns have arisen.

The mystery then remains. Why has the rest of the Canadian market failed to generate the same level of enthusiasm as that small group of very dynamic stocks?

The federal and provincial governments, for their part, have set the right tone for growth in our economy by getting, our country's fiscal situation under control. True, the debt is still there. But we all can agree that the fiscal situation is much more encouraging in this new framework.

Still one element remains missing-tax relief. For decades we had governments who felt they knew how to spend our money better than we did. The reality check of the 1990s helped bring that philosophy to an end, but while taxes have held steady over the past few years, the federal government has stopped short of putting some of that money back in the hands of the consumer.

Recently, I came across an interview with John Roth, the CEO of Nortel Networks. Mr. Roth noted that with the advent of globalisation, Canada is losing its brightest and best to other countries, specifically the United States, which is much more competitive in terms of wages and taxation. Only 7 per cent of Nortel's top executives are actually located in Canada, and Mr. Roth indicates the most common reason is "they want more take-home pay."

A big part of the problem is the difference in the U.S. and Canadian dollars, which although great for exports has also created a 47-per-cent wage differential between Canadian executives and their U.S. counterparts. Tax treatment is the other side of the coin. The U.S. has just moved its top marginal tax rate to $285,000, while in Canada, the top rate starts at $65,000 Canadian or $42,000 in U.S. dollars. That means in the U.S. you are considered wealthy at $285,000, while if you look across to Canada, you are wealthy at $42,000.

In terms of Nortel, only 28 of the company's top-400 executives remain in Canada, and Mr. Roth notes those executives who have left took their entire departments with them. An incredible loss of brain-power, tax revenue for governments and discretionary spending in the Canadian economy.

Now what Mr. Roth is talking about is two-fold. Companies need to recognise and address the wage-gap issue. But at the same time, governments need to look at the tax system in Canada, and determine if we are driving people out of this country because they can keep more of what they earn in countries like the U.S.

I am encouraged by the words of our finance minister that tax cuts are on the way in the upcoming budget. My hope is that these cuts will be meaningful, so Canadian workers have an incentive to stay in Canada and contribute to our economy.

So aside from tax relief, what else is holding us back?

A recent study by RBC Dominion Securities shows that over the past 20 years the TSE has consistently been lower, less predictable and less profitable than the S & P 500. Part of the challenge is that the TSE is subject to a resource-sensitive market that sways with the cycles of the commodities.

We also seem to be lacking a core group of price-setters-a strong collection of large-cap stocks that we can count on to perform in any environment. The U.S. has a much larger proportion of mega-stocks compared to Canada, and their proven performance has continued to drive the marketplace. As a footnote, although we have a smaller group of price-setters, Canadian markets are on the verge of a cyclical upswing. Canadian price-setters tend to perform well in an environment where there is tight capacity and strong demand, so you can expect to see domestic economic sensitive stocks, especially resource-related companies, gain ground in the months ahead.

A big part of Canada's recent under-performance relative to the U.S. can be credited to the technology craze that has been driving the NASDAQ to record levels. And maybe that's not such a bad thing because the question everyone seems to be asking is: "Are these gains in technology stocks real, and will they last?"

Well, there was an interesting article recently comparing the latest rush for Internet IPOs to the Pokemon craze among our youngsters. I'm sure by now you are all familiar with Pokemon-the "pocket monsters" from Japan that are featured in video games, television shows, collector cards and a recent movie. I know my three children have been caught up with this phenomenon, and I am amazed at the level of knowledge they have about the characters, their powers and their value in the Pokemon marketplace. Finally after watching, my kids for hours engrossed in the videogame, I was confused by it all and asked them how to play. My son, obviously not interested in spending the long hours teaching his old dad the intricate workings of the game said: "Sorry dad, only kids can understand."

That's pretty much the point related to today's mania around Internet IPOs. You get the feeling that there are only a few people who really understand the game, or say that they do. But Pokemon cards have no real value. They only hold value to those playing the game.

The same might be said about the many Internet IPOs that have rocketed in price, only to come crashing down when cooler heads prevail. When you take a look at these IPOs from a value perspective, you find some seriously overpriced stocks with no underlying value to support it. That's why many of us believe today's hot Internet prospect may be tomorrow's "Tickle me Elmo." Simply an emotional mania.

There is no doubt that the Internet and the proliferation of e-commerce will be the next big things. If you look at Fortune Magazine's greatest inventions of the 20th-century, you find many examples of products that revolutionised the way we live our lives and do business. From the simple paper clip and post-it note to the photocopier, fax machine and microprocessor, these innovations have left an indelible mark on how we all operate. The difference is none of these products generated the outrageous level of hype and bloated expectations that we have seen with Internet IPOs.

As a value investor, how do I deal with these issues? What I still look for are companies that are trading below their true values that will be strong performers over time.

And when you look across the board, there are many of them out there.

The key is to search for companies that contain some of the same influences that are driving these technology stocks, but where the valuations are still reasonable. For example, I don't own Nortel, one of the highest-flying stocks on the TSE, because from a value perspective it has become too expensive. I do however own Bell Canada, which has some of the same influences at play, but still trades at acceptable valuations.

I also own CMAC, a lesser known company, which designs and makes components for Nortel products. CMAC's future is influenced by many of the same drivers that influence Nortel, and yet CMAC trades at valuation levels near one-half those of Nortel.

In this environment, it is also wise to not only look at developers of technology, but at adopters of technology. It is these companies that have the greater potential to enjoy improvements in productivity. TD Bank, for example, has adopted technology in both its traditional banking and discount brokerage businesses to improve internal processes and efficiencies.

Still, when you look at the Canadian marketplace, you will find value in many more places than simply developers and adopters of technology.

This is no secret to foreign investors, who have been buying into the Canadian market at a growing rate. According to Goldman Sachs, foreign investment in Canadian shares has jumped 83 per cent in the last six years. To the end of October, foreign investors had purchased $13 billion in Canadian equities. Many of these foreign investors are seeing what we have known for quite some time-the fundamentals in Canada are very positive.

So while Canadian markets are becoming more and more attractive to foreign investors, it is somewhat puzzling to see Canadian investors doing just the opposit, and going abroad with their investments.

Fully one-quarter of deposits in Canadian investmen funds today are outside Canada. In 1999 alone, Canadian; invested more than $5 billion in foreign RSP "clone" fund and purchased over $25 billion in foreign stocks, a stag gering outflow of capital.

The reason that Canadian investors may be looking elsewhere is a natural tendency to lose sight of their long term investment plans because of the immediacy of short-term results. And that's too bad, because it means you are falling into the trap of buying high, and selling low. For myself, I tend to fill up my tank whenever there is a price war at the gas pump. In fact, I will run home to get my wife's car to fill it as well. Too many Canadians forget that the principles you use as a wise consumer also apply to the wise investor.

The Canadian companies I see flourishing over the next several years will be the ones with a clear international strategy.

Nortel, no doubt, fits the bill as a global leader in communication and Internet technology, yet it has become an expensive stock that may be out of reach for many.

Companies like Alcan, which will be the world's second-largest producer of aluminum might lead you to believe it is part of the old economy. I say, don't be fooled. The automobile industry is moving increasingly into lighter vehicles, and aluminum engine blocks are becoming more and more commonplace. At the same time, Alcan is also a great adopter of new technology, meaning productivity is likely to soar.

I mentioned Toronto Dominion as strong on technology, but I also see a very pronounced international strategy, with moves into the discount brokerage area with TD Waterhouse, and expansions into the United States, India, Japan and Australia.

Bombardier, meanwhile has become a global leader in mass transit and the production of aircraft.

CN Rail is growing to become North America's largest railroad.

Despite all my personal efforts to boost Seagrams' stock over the years, they have expanded to become much more than just a producer of fine Canadian spirits. Today, they are one of the world's largest entertainment conglomerates, with a great strategy that combines their music production and distribution arm with growing Internet capabilities. Although some people see the Internet as a threat to the music industry, I view it as an opportunity. Now, "baby boomer" audio lovers like myself can purchase music on-line, rather than from the spikyhaired kid at the record store who has never heard of The Eagles.

Thomson Corp. has found ways to use Internet technology to leverage its traditional publishing business. This means that you can still get your legal reference material but you can also register a patent on-line through one of the Thomson-affiliated web sites. With more than 100 sites under its wing, Thomson is one of the few companies generating real revenue from the Internet.

Magna International Inc. has had its share of controversy, but it has also developed into one of the world's largest suppliers of auto parts. Magna continues to gain more share of the components that go into an automobile, while General Motors and Ford are concentrating more on marketing and distribution.

Many of these names are out of favour, and have yet to be recognised by the global market. Although some might view them as "old economy" stocks, I see them as important companies to hold because of the big role they will play in the new economy. In fact, I don't care much if a company is old economy or new economy, but more if the stock is cheap and has a good potential for growth.

The biggest selling point for Canadian stocks is that today, 80 per cent are considered cheap on a global basis, as compared to only 20 per cent of American stocks that are financially attractive.

Another positive factor is the resurgence of the global economy, and much the same as we saw in the early 1990s, we are entering another period of synchronised global economic growth.

We have seen very promising employment numbers over the past few months that are a good sign of a stronger Canadian economy. And while inflation and interest rates have been on a slight rise, these increases are not expected to stifle growth.

And although we lag the U.S. economy in terms of productivity, capital spending is also on the rise in Canada, as domestic companies embrace new technologies that will help make us more competitive.

So if you're asking the question: "Why should I invest in Canadian equity funds when they are down?" the answer lies in the question.

Just as Japanese funds and Natural Resource funds roared back in 1999 after hitting their lows in 1998, it is clear that 1998 would have been the best time to buy into those funds.

The message to you is don't miss out on what could potentially be a beneficial growth opportunity. the economy is stronger, and companies will participate in that growth. Take advantage of Canadian equities now while they're undervalued, because they certainly will go up in the longer term.

I want to close with a word of wisdom from my friends on Bay Street. It seems that two stockbrokers were having a conversation at the end of a particularly hard day. The first stockbroker says to the other: "I don't think this line of work is for you. You just keep losing money all the time."

"You're right," he replied. "My whole life all I've done is lose money."

The next day he comes to work and resigns.

His co-worker asks: "What are you going to do with your life?"

"I finally figured out how I can make some money from losing money all the time."

"How?" asks the co-worker.

"I am going to build a web page and take it public."

I want to again take this opportunity to thank President Dechert and the Board of Directors of the Empire Club for hosting this wonderful event, and to Blake Goldring for the invitation to speak to you this afternoon. It has been,a great pleasure to share some of the enthusiasm I have for the future of the Canadian markets.

Thank you!

Introduction by Robert J. Dechert

Moira McLachlan is a portfolio manager and equity analyst with Mackenzie Investment Management Inc. based in Fort Lauderdale, Florida.

Moira is a key member of the Mackenzie international investment team that directs the Universal World Growth RRSP Fund, the Universal World Value Fund and the Universal World Balanced RRSP Fund.

Moira joined Mackenzie in 1995. She is a graduate of the University of South Carolina with an MBA degree. And she also earned a B.Sc. in Multinational Business Operations from Florida State University.

Ladies and gentlemen, please welcome Ms. Moira McLachlan.

Moira McLachlan

Thank you Mr. President.

Good afternoon, ladies and gentlemen. It's a pleasure to be here.

I'm going to be talking first about a number of factors we believe point to outsized returns from international markets this year. Then I'll be discussing where we see

the most attractive opportunities in markets around the world for 2000.

Usually when we talk to investors in the U.S. we have to spend quite a bit of time trying to convince them to venture outside the domestic market. I'm not sure that's such an issue here in Canada. However, after a number of years in which the U.S. market has generated the highest returns with the lowest risk of any of the world's major markets, 1 suspect that when many investors think "International," they think "United States." With that in mind, I think it's worth addressing the reasons we are expecting the change in market leadership away from the U.S. that started in 1999 to continue this year.

There are a number of factors that highlight the attractiveness of overseas markets going into 2000.

The global economic cycle is supportive. We are looking for global growth to accelerate to around 3.9 per cent this year from an estimated 3.0 per cent in 1999. That is a big improvement from 1998, when global growth was essentially cut in half by the Asian crisis and turmoil elsewhere in the developing world.

Perhaps more importantly than the acceleration is where we expect the source of that growth to be. In almost every region of the world outside the U.S., we're looking for accelerating growth. And, we think there is the potential for upgrades to estimates for Asia, including Japan, Continental Europe and Latin America (these regions alone account for 65 per cent of world economic output).

This rebalancing of global growth away from the United States should be very healthy. The U.S. will no longer be the sole driver of the world economy. And it should also be positive for equity markets in other parts of the world as economies at an earlier stage in the profit cycle have higher operational gearing and the potential for higher profit growth.

There are also a number of structural changes taking place in markets around the world that present good opportunities. In nearly every part of the world there is a trend toward more market-oriented policies. Increased economic integration and lower government involvement are having a dramatic impact on the way business is being done around the world. As more companies are accessing global capital markets, many are placing increasing emphasis on shareholder value.

And last, but certainly not least, valuations are attractive particularly in relation to the U.S. market. Some investors might say that other markets deserve to trade at a discount to the U.S., but it hasn't always been so. European markets enjoyed a premium to the United States from 1976 to 1979, through most of the 1980s and again from 1994 to 1996. And in the early 90s, the high growth nations of Asia, namely Singapore and Hong Kong, traded at substantial premiums.

Now, for our outlook on different parts of the world, starting with Europe. After much fanfare at the beginning of last year when the Euro was introduced, the new currency depreciated quite substantially in 1999 (around 16 per cent versus the U.S. dollar). This resulted in the most competitive exchange rate European countries have had in around 25 years. As you can imagine, this provided a boost to exporters, especially toward the end of the year. For example, French exports in the third quarter were the highest they have been in 10 years.

This year we expect to see the up-tick in exports from the Eurozone that we saw at the end of last year continue with exports contributing to rising GDP and top-line growth for many industries for the first time since 1997. Exports have actually been a drag on European growth for the last two years.

In addition to a more robust export sector, we expect domestic activity to continue to show strength. A steady improvement in consumer confidence in Europe over the

last couple of years has contributed to increases in retail sales, which we expect to continue.

Business confidence is more mixed. I think we need to see continued strength in consumer spending and the up. tick in exports continue before businesses get more bullish.

One factor that has been contributing to caution on the part of corporations in Europe is the increased competition and other challenges presented by European Monetary Union. The new larger European marketplace is forcing companies to take a good hard look at what it will take to thrive in the new environment. Incentives such as stock option programmes are being used with increasing frequency to align management interests with shareholders interests, which is relatively new in Europe. Managers are looking at individual business units and selling off non-core assets.

Corporations are also entering into aggressive merger and acquisition activity. Consolidation activity is taking place in virtually every industry throughout Continental Europe and the U.K. including telecoms, pharmaceuticals autos, energy, utilities, banks and insurance companies. So far the majority of the activity has been within national borders. (I'm sure many of you followed the saga of the French banks last year.) But we are starting to see crossborder deals. Vodafone's aggressive bid for Mannesmaan is just one example.

We believe that we have only just begun to see the impact of EMU (Economic and Monetary Union) on European corporate profitability. We think that cost-cutting activities in Europe will make a significant contribution to earnings growth over the next couple of years-much as it did in the U.S. during the 1990s.

We expect inflation will remain low in Europe, although there were signs of a slight up-tick in the second half of 1999. This caused jitters in the financial markets as investors began to worry about an interest rate hike from the European Central Bank in 2000. We do think it is likely that there will be an increase in rates this year; we're looking for a 50-basis-point hike between now and year-end 2000. This will increase rates from the current 3.5 per cent up to 4.0 per cent. So even after an increase, real interest rates will remain below 2.5 per cent. This should continue to provide a positive backdrop for financial markets.

Finally, in Europe we expect strong demand for equities to be driven. by growth in pension fund assets. Governments and individuals are starting to focus on inability of the "Pay As You Go" pension systems to provide retirement. We expect to see rising equity ownership among individuals in Europe similar to what we've seen over, the last 15 years here and in the U.S. with the growth of 401 K -type programmes.

In Asia, what a difference a year makes! The recovery in Asia has been much faster and stronger than anyone expected. We saw a strong snap back in economic activity in 1999 from very depressed levels in 1998. In less than two years, industrial production in the crisis economies in Asia are back to their pre-crisis levels.

The first leg of the recovery has been led by looser monetary conditions combined with a strong recovery in exports. We expect that the second leg of the recovery will be driven by domestic demand. Recent economic statistics indicate that domestic conditions are improving across the region. Initial reports from Hong Kong point to 10-to-30-per-cent year-on-year increases in department store sales since mid-November. A rebound in consumer confidence is absolutely critical to driving the regional recovery further.

Credit to the private sector still remains at depressed levels in the region. Banks remain wary of lending and there is still a lot of slack or excess capacity in these economies. I think many businesses are waiting for consumption to pick up before they borrow additional funds for investment.

That said, however, toward the end of 1999 we did start to see a pick-up in lending growth after sharp declines over the previous 15 months or so. This growth contributed to an annual rate of lending growth of around 6 per cent, with nearly all of the increase coming in the last quarter.

We remain cautious on Japan. There are signs that a cyclical recovery is beginning to take place, but we remain concerned about deep-rooted structural problems in the Japanese economy that could choke the recovery.

Optimism on corporate restructuring in Japan was the major impetus behind the market rise that we saw last year. There were a lot of announcements coming out about plans for restructuring and cutbacks. We haven't seen much evidence that these programmes are actually being implemented. Now, even assuming that the announced cutbacks do take place, it is difficult to ignore the impact this restructuring would have at the macroeconomic level. Mass layoffs could have a devastating impact on already fragile consumer confidence.

Unemployment for Japan is currently at 4.5 per cent; not an alarming number in and of itself, certainly, but it's the highest in the post-World War 11 period. Within this context it is extremely difficult to see how large cutbacks could be achieved without damaging Japan's economic outlook.

The other concern we have about Japan has to do with the yen, which strengthened substantially last year. From a Japanese perspective, continued strength in the yen really hurts the prospects for recovery. So you see the picture for Japan is quite mixed.

Now, on emerging markets. The turn in global economic cycle is positive for emerging markets. Commodity price increases are quite positive, as many emerging economies are net exporters of basic materials. And, of course, valuations are quite compelling. We particularly like South Africa, which was left behind in last year's emerging market rally.

We are also quite positive on prospects for Latin America. The region's cyclical recovery in 2000 should be relatively healthy with regional growth averaging over 3 per cent. We expect this to translate into a rebound in top-line earnings growth in the region. Bottom-line earnings growth should receive an additional boost from restructuring related gains from recently privatised companies such as the telecoms in Brazil. In addition to improving growth prospects, declining interest rates in the region should be supportive of equity markets.

To conclude, I'd just like to reiterate our view that while we think the U.S. market is likely to continue to perform reasonably well in 2000, there is mounting evidence that the U.S. bull market cannot last forever. An improving outlook for global growth, positive secular trends in many overseas markets and effective valuations lead us to believe we could be in for a period of outsized returns from foreign markets, and investors with international exposure should benefit.

The appreciation of the meeting was expressed by Blake C. Goldring, CFA, President and COO, AGF Management Limited and a Director, The Empire Club of Canada.