Annual Financial Forum

Head Table Guests

Margaret M. Samuel, CFA, Equity Analyst, Royal Bank Investment Management Inc. and a Director, The Empire Club of Canada; Joe Oliver, President and CEO, Investment Dealers Association; Richard S. Hallisey, Vice Chairman and Director, First Marathon Securities Ltd.; Peter Nixon, Vice-President and Director, Dundee Securities; The Hon. Thomas A. Hockin, President and CEO, Investment Funds Institute of Canada; Reverend Grant Kerr, Associate Minister, St. Paul's United Church, Brampton; Brian Imrie, Managing Director, Investment Banking, Credit Suisse First Boston; Barry Cooper, Vice Chairman, Global Institutional Equity, Nesbitt Burns Inc.; Tony Pullen, Vice Chairman, Yorkton Securities Inc.; and Blake Goldring, CFA, President and COO, AGF Management Ltd. and a Director, The Empire Club of Canada.

Introduction by George L. Cooke

Our format today includes three guest speakers. All have extensive knowledge and experience in the financial sector.

Anne-Marie Thomas is Assistant Vice-President, Fixed Income with Altamira Investment Services Inc. She is a member of the Portfolio Team for the Altamira Bond Fund and the Altamira Income Fund. We note Altamira won the Fixed Income Fund of the Year Award at the Mutual Funds Award Gala held in December. Prior to joining Altamira, Anne-Marie was Vice-President, Institutional Bond Sales with Goldman Sachs Canada and she has held various positions with CIBC Wood Gundy, including Vice-President, Private Placements, Vice-President, Institutional Fixed Income Sales, Vice-President, Government of Canada Bond Trading, and Vice-President, Money Market Sales. Anne-Marie holds a BBA in Finance from the University of Iowa, an MBA from the University of Western Ontario, and the Chartered Financial Analyst designation.

John Embry is Vice-President, Equities and Portfolio Manager with Royal Bank Investment Management Inc. John specialises in the gold sector and is Chairman of the Canadian Equity and Stock Selection Committee. He began his investment career at a major insurance company as a stock selection analyst, and spent many years as a portfolio manager, primarily in Canadian equities. He progressed to the position of Vice-President, Pension Investments for the entire firm. After 23 years with the company, he became a partner with United Bond and Share, the investment counselling firm that was eventually acquired by Royal Bank to become RBIM. Mr. Embry graduated from the University of Manitoba with a Bachelor of Commerce degree.

William Eigen is Portfolio Strategist, Asset Allocation Funds (Boston) with Fidelity Investments, Canada. He has come from Boston in this weather to be here today. As well as being involved in several levels of decision making for the funds, much of Bill's efforts are focused on setting fixed income strategy. In addition, Bill often represents Fidelity's performance, strategies, and outlook to the investment community, as well as conducting research and reviews of the U.S. and international economies, capital markets, and securities instruments. Mr. Eigen graduated cum laude from the University of Rhode Island with a BS in Finance. He received his Chartered Financial Analyst designation in 1993 and is a registered securities representative with the NASD. Bill is an active member of the Association for Investment Management and Research, the Boston Security Analysts Society, and the Bond Analysts Society of Boston.

I welcome each of these special speakers to The Empire Club of Canada.

Anne-Marie Thomas

I'm not sure what has been more of a roller coaster this week--trying to navigate the roads or navigate the markets. Just when we thought the volatility in 1998 was gone, it has returned with a vengeance in the form of Brazil. The stage has been set for the market battle of 1999: in the one corner the U.S. consumer and in the other corner global economic slowdown.

Our long-term fixed income outlook at Altamira is bullish. We think the global economic slowdown will take precedence and we'll see North American interest rates drop significantly over the course of 1999. But not withstanding our long-term view and this week's events, we think in the first quarter the U.S. consumer will carry the day. Our fixed income outlook in the first quarter as a result is defensive and in the longer term, over one year, optimistic. So I will review it in that order.

Our expectation regarding higher rates in the short- term is shaped by a few major events which took place in the fall. First, the Federal Reserve Board's Greenspan cutting interest rates by 75 basis points; second, strong U.S. consumer; and third, two international events--the Japanese repatriation and the introduction of the new euro currency. Each of these we expect will continue to have an adverse impact on North American bond markets.

First of all Alan Greenspan. He is probably as popular and as known in the financial markets as Michael Jordan is in the sports world. But when Greenspan quits the team the markets will be far more unsettled than even Chicago Bulls' fans are today. The cuts in the fall were very important and not only relieved concerns about the credit crunch but the soundness of the financial system. It also contributed however to larger corporate profits and cut the cost of capital. This resulted in equity being more attractive at the margin than debt.

Second is the U.S. consumer as Titan in the U.S. economy. At 4.3-per-cent unemployment (at 8-per-cent unemployment in Canada, we are doing quite well as well) in conjunction with a growth in wages that's led to strong retail sales, a strong residential construction market and strong auto sales the U.S. consumer is holding the U.S. economy up and shows no signs of waning. That also tends to be supportive of equity markets at the expense of debt.

On the international front. The hornet's nest of the Japanese banking system and economy still presents problems. The estimates out of Japan are that this could cost the equivalent of approximately US$750 billion and we've already heard that this will entail additional borrowing by the Japanese government of the equivalent of around US$650 billion. The implication of this is significant because this causes capital to move back to Japan from the U.S. Treasury market and as a result this not only has a negative impact on the U.S. dollar but also a negative impact on North American bond markets.

And finally, the introduction of the euro. To date, the U.S. dollar has been reserve currency to the world and currently countries are holding an excess of U.S. dollars relative to the trade balance that would be required for trade purposes. The euro will likely attract some of the interest as a reserve currency because of the size and health of the region and it represents a slow leak to the value of the U.S. dollar and U.S. assets.

All these events are still in evidence and should put upward pressure on interest rates in the first quarter and as a result we see Canadian long bonds trading at between 540 and 560 and the U.S. long bond trading at between five and a quarter and five and a half.

What of our long-term view?

The events of this week are certainly a test of those conditions that we have just outlined. Thus far, the U.S. consumer has shrugged off a profound collapse in Asia and a fragile fiscal and political situation in Latin America. But if the consumer is the strength of the U.S. economy where is the connection to something like a Brazil?

We think corporate profits represent that proxy and corporate profits are declining. Our equity friends are never an optimistic bunch. Over 400 downward profit revisions to fourth-quarter earnings seem to have gone unnoticed. We are also expecting declines in corporate profits from a slowdown in Asia which represents a third of global GDP and Latin America, including Mexico, which represents approximately 20 per cent of U.S. exports.

Merger and acquisition activity, although not necessarily impairing corporate profits, will also contribute to a contraction in the labour markets. As a result, unfortunately, corporate restructuring including M and A and corporate profit drops will result in job, wage and wealth losses to the U.S. consumer.

This in conjunction with a possibly lengthy impeachment trial we expect will impinge on consumer confidence and consumer spending and will translate at that point into lower retail sales, lower housing starts, lower auto sales and as a result we expect at that point to see a shift in the markets from equity into debt.

Despite the continued pressure on the U.S. dollar from repatriation and from the introduction of the euro, the global slowdown should result in that asset shift into bonds and move North American rates down significantly with long Canada bonds by the end of the year yielding between 4.75 and 5 per cent and long U.S. Treasury bonds yielding between four and a half and four and three-quarters.

For the moment the battle between the consumer and the global economic challenges rages on. The Canadian content of the world economy links the fortunes of our currency and markets more closely to commodities than the U.S. but our strength and weakness is linked to theirs. And so as a result by the end of the quarter we think that the opportunity will present itself to increase exposure to North American bonds but we are biding our time until the signs are in place.

Thanks for your time.

John Embry

Having to speak about the prospects for the Canadian stock market, at this juncture, is a daunting task. Our market has lagged most of the industrialised world stock markets, with the notable exception of Japan, by a considerable margin in recent years. One very stark comparison is the TSE 300 Index's total return of 11 per cent per annum over the past four years contrasted with the 28 per-cent annual return on the S and P 500 in the same time period.

In fact, the stunning returns posted by the U.S. market as well as many European markets in recent years begs the question: Are we truly in a new era where stratospheric valuations are justifiable or are we in the throes of a classic financial asset inflation driven by excess credit creation which can't find an outlet in the real economy? I tend to believe that the demarcation line for which explanation you favour is age. Most people under 40 opt for the "new era" theory while the older set tend to favour "financial asset inflation." By the colour of my hair you can easily determine which side of the argument I favour. However, it is a very critical question when attempting to ascertain the future direction of the Canadian stock market.

If one really believes that we are in a "new era" then the Canadian market is merely a laggard which is due to make up ground on the other markets when commodity prices and, concomitantly, the Canadian dollar improve. On the other hand, if we are in nothing more than a classic financial asset inflation, an event which occurred in the United States in the late 20s and Japan in the late 80s, then the prospects for the Canadian stock market are far less promising because current stock market action is an aberration which portends nothing for the future direction of the world economy. We can speculate endlessly as to which theory will prevail but only time will determine the outcome.

Enough of the esoterica, what are we currently faced with in the Canadian market? Perhaps a review of the 1998 action on the TSE will be useful on the premise that the past may well be prologue. The TSE 300 Index took us for a real roller coaster ride last year. The year began with spirits high and liquidity abundant and the Index rose by more than 15 per cent through mid-April. Then, unfortunately, reality intruded as the potential impact of the Asian contagion on the Canadian scene became more apparent.

This was soon exacerbated by innumerable things going wrong on the international front, not the least of which were the Russian default and the near implosion of a major U.S. hedge fund, LTCM, previously known as Long Term Capital Management but now known as Lets Trust Computers More--same acronym but perhaps a more apt name. By the time the smoke cleared, the Index was off by more than 30 per cent from the April high and the bears were ascendant. World markets, including the TSE, were then rescued by a round of interest-rate cuts led by the venerable U.S. Federal Reserve. Confidence was restored and the Index staged a 16-per-cent rally in the fourth quarter. After all was said and done, the TSE 300 posted a small loss for the year but breadth in the market was generally poor and the average stock and, conceivably, the average investor didn't fare as well as the Index.

As we enter 1999, confidence is once more bubbling over and with looser monetary policy, lower interest rates and a decelerating economy, liquidity is again abundant. Investors may be even more ebullient following their 1998 experience because they believe if anything goes wrong in the market, the monetary authorities will be there to bail them out.

A 6-per-cent increase in the TSE 300 in the first week of the year, capped off by a 7-per-cent gain in the metals subindex on Friday, because the nickel price rose two cents, attests to the fact that animal spirits are high and, in Canada, we don't even have many Internet-related entities to truly inflame the speculators. Can this rate of acceleration continue? Of course not. But can the Canadian market put in a credible showing for the remainder of the year? Perhaps. However, there are at least three major issues that have to be addressed.

First, and perhaps foremost, whither the U.S. market? Despite the fact that our gains in Canada in the last few years have paled in comparison to those achieved in the U.S., we remain inextricably linked to the U.S. market. If it were to decline precipitously at some point in 1999, and that prospect can't be ruled out with the S and P 500 trading in excess of 30x earnings at a time when earnings appear to be under pressure, then Canada would unfortunately be caught in the vortex and dragged down as well. I seriously doubt that the magnitude of the decline in our market would match theirs because our valuations aren't as stretched, but the direction North American markets move will most assuredly be established south of the border.

The health of the U.S. stock market is also very important from another perspective; its impact on the economy. The U.S. economy is driving the world economy and the consumer is the engine of the U.S. economy. American consumers have been on a spending spree, their confidence buoyed by stock market gains to the extent that their savings rate is virtually zero. If the stock market were to seriously retrench, so will the consumer and the odds of a recession in the U.S. would rise dramatically. That brings me to my second big issue for the Canadian market, the direction of the world economy in the next 12 to 18 months. As you are all aware, the Canadian stock market continues to have a significant cyclical and natural resource bias and, if U.S. economic weakness was to coincide with a slowing European economy and continued stagnation in Asia and much of the third world, the prospects for Canada's cyclical and natural resource companies will remain bleak. If the world economy, heaven forbid, was to slump into recession, the prospects for the Canadian economy, currency and stock market would be dire. We would again be viewed as a country with too much external debt and too little internal vitality.

The third major issue for the Canadian market is corporate profits. Even if one assumes that the North American economy grows at a moderate rate, improved profits are going to be hard to come by in the near future. The world is plagued by overcapacity in many industries, the Asians are preparing to flood the world with cheap goods and I believe the Internet is going to prove to be very deflationary for prices. Thus, with the odd exception, there is a distinct lack of pricing power in the system. In the face of muted demand and a shortage of skilled labour which will create pockets of wage pressure, profit margins could come under considerable pressure. Canada, as represented by the TSE 300, has had a corporate profit problem for some time as TSE earnings have been stagnating since 1995. The villains in the piece have been the natural resource stocks whose earnings have been decimated, a factor which has offset strength in domestically generated earnings. However, the domestic companies may have a more difficult time generating significant earnings increases in 1999, for the aforementioned reasons. The optimism of Bay Street analysts remains undaunted, however. For the fifth consecutive year, the analysts' individual earnings estimates for TSE 300 companies in 1999 aggregate to a number which appears virtually unobtainable.

This reflects analysts' natural optimism but they haven't learned much from their huge overestimations in previous years. Trailing TSE 300 earnings are currently in the $275 area against an Index price of 6700. The analysts' aggregate number for 1999 is in the $340-350 range, a mere 23-per-cent gain, although it is falling daily. The strategists who compile their TSE earnings estimates using a top-down methodology which tends to pay more attention to over-riding economic factors are clustered in the $275-300 range but their numbers are declining also. The point is the same lack of earnings momentum which has plagued Canada for several years appears to be in evidence again. As analysts are forced to reduce their individual company estimates as the year unfolds, earnings disappointment, a stock killer if there ever was one, will be felt again.

Those are what I see as the main potential negatives which the Canadian stock market may have to confront as we move towards the millennium. However, to put a more positive spin on things, let us assume that Abby Joseph Cohen of Goldman Sachs, a strategist with an excellent record of calling the U.S. market, continues to be right and the U.S. market hums along churning out yet another double-digit gain in 1999. This should ensure that the U.S. economy will continue on a positive trajectory as the wealth effect bolsters consumer spending. If the U.S. economy remains relatively healthy this will allow Canada's export business, 80 per cent of which goes to the U.S., to remain firm and keep our economy on an even keel.

I believe that one of Fed Chairman Alan Greenspan's objectives when he began aggressively cutting rates was to ensure that the U.S. economy would continue to prosper until Asia and a number of the other trouble spots repaired themselves. I think he would have preferred that we not have experienced a virtually manic stock market which has blown out to valuation levels seldom if ever seen before. However, this was the price to be paid to buy time to allow the world economy to regain its health. If he is successful, and that is a big if, Canada and its stock market will ultimately be a huge beneficiary because as the world economy strengthens, particularly Asia, it will unleash a lot of pent-up demand for commodities. When the commodity complex rights itself and demand for metals, energy, forest products and agricultural goods, etc. accelerates, Canada's stock market will finally have earnings momentum. After a number of years of stagnation, this will most certainly be a welcome development and international capital will once again seek out our market.

However, let's be realistic. If this is going to happen I think its going to take time and when I say time, I don't mean six or 12 months. The amount of damage that has been done to the Asian infrastructure and financial system and the enormous overcapacity which is in existence can't be dealt with in a matter of months. It will take years and I suspect it will continue to exert a deflationary impact on the Canadian economy and, by extension the stock market, for a considerable period of time. Canada will have its day in the sun but I don't think it is going to be in the next 12 months.

There is one other issue that I almost hesitate to mention and that is the issue of Y2K. To date, the stock market has tended to ignore the subject but as January 1, 2000 approaches, there will conceivably be enough scare stories that it will have to take notice. The market hates uncertainty and whether you are an optimist or a pessimist with respect to the Y2K problem, it most assuredly introduces uncertainty as we count down to the fateful day.

So far, I've discussed fundamental issues that should influence the Canadian stock market as we move through 1999. What I haven't discussed is sentiment or human emotion which has such a dramatic impact on stock market valuations in both directions. One of the few advantages of being old, other than it beats the alternative, is that you've seen emotion at work for a long time in the market.

I well remember the hysteria of the late 60s when market conditions somewhat resembled today's and people talked about a shortage of stocks and multiples moved ever higher in a speculative fervour. I vividly remember the early 70s when we had the "Nifty Fifty" and no one cared how high a multiple they paid for those favoured stocks whose growth would last forever. I saw the dreams fade and the stock market smashed as the inflationary 70s unfolded. By 1982, at the bottom, the pessimism was so black that despite single-digit P/E multiples, no one talked about equities as long-term investments and magazine covers trumpeted "The Death of Equities."

So as we stand here today, on the cusp of the millennium, after 16 years of rising stock markets, equities are now an article of faith even though the valuations are at levels rarely seen before. I truly hope the "new era" believers are correct because it will make all our lives very much better. But I pause because of the degree of speculation presently and how easy it is to make money in the most risky of stocks. Admittedly, the speculation is only in a few sectors but the intensity of the speculation is unnerving. Internet companies rising in value by billions per day even though their revenues are in the millions attest to the lack of fear in the market. The current complacency in the market in the face of numerous systemic problems prompted one U.S. observer to dub it "irrational complacency," a wry follow-up to Alan Greenspan's infamous "irrational exuberance" comment about the Dow 3000 points ago. We will find out whether the complacency is irrational or truly justified as 1999 unfolds.

To close on a more prosaic note, I feel obliged to make a prediction on the Canadian market for 1999. I suspect that we may have a replay of 1998 experience. I foresee a market high in the first quarter as liquidity prevails, followed by another teeth-rattling correction as investors become more concerned about some of the fundamental problems. Hopefully, perceptions of the world economy will begin to improve later in the year and this will underpin a strong year-end rally.

However, on an overall risk-reward basis I remain cautious.

Thank you very much for your attention.

Bill Eigen

My barber was nice enough to tell me the other day how to make money in this market and I really appreciated it. Basically he told me to buy Yahoo. When I asked him what he knew about the company he told me he knew the ticker symbol and that was enough for him. I think that goes along with some of the thoughts that were just presented here as to some of the speculation that is going on in this market.

However, being a portfolio strategist and being an asset allocation specialist, I have been content to ride the wave for the past couple of years actually by being overweight equities in some of our U.S. funds and actually being underweight in our Canadian asset allocation fund to the Canadian market.

Normally I would have a lengthy series of prepared remarks (and actually I did) but I decided to change them at the last minute when I saw some interesting things going on in the market over the past couple of weeks including yesterday. What happened in the market yesterday demonstrated the resiliency of the U.S. market. The uncertainty in the market yesterday morning at about 9:30 a.m. was somewhat incredible and to see the NASDAQ composite go down 115 points in about five minutes and then rebound to a flat level in about 20 minutes certainly says something about the volatility level in these markets and certainly increases the difficulty of making bold and astute predictions in a market like this.

As far as making predictions on the markets are concerned, our philosophy at Fidelity Investments is to make deliberate and subtle shifts in our asset allocation stance taking a long-term view that can be easily changed by short-term events. In reality it's great to take a long-term view on the asset classes but if you ignore what is happening short-term you can really find yourselves in a world of hurt.

On that note I listen to several different strategists some of whom have been on the money, others who have predicted exactly 15 of the last two bear markets. In situations like that I find myself weighing the evidence and in many cases disregarding what the quantitative models might say. Disregarding what theory academics might tell me and really just going with what I know and going with what I feel is right in a given market has fortunately been right more than 51 per cent of the time which is basically all you need to be a successful strategist as everyone in this room knows.

I must open with a disclaimer also. The views that I will present today are solely related to the funds that I have responsibility for. There is no such thing, contrary to what some may believe, as a Fidelity-wide view on the markets. We have many portfolio managers at Fidelity Investments both on the international side and the domestic side and nobody has the same view on the markets and that's what makes for great argument in our committee meetings.

If I told you last year at this time that in 1998 the U.S. economy would slow, Russia would absolutely crumble and its currency would go to pot and it would default on its debt obligations, the world's biggest hedge fund would absolutely fall apart and have to be baled out by the Fed, Asian contagion would reach an extreme, and we would initiate a bombing campaign on Iraq, where would you have thought the U.S. equity market would close at the end of 1998? I think I have some pretty good ideas and I certainly don't think anyone in this room would have said the NASDAQ would close up 40 per cent. The S and P 500 will close up 27 per cent. It is just unbelievable what has been happening in this market lately and again I think that it is driven by several factors.

I think one of the biggest factors you are seeing in the United States right now is the absolute return and empowerment of the retail investor. Companies like eTrade. You've got people quitting their jobs now and going home and day trading for a living. Now will that continue? Probably, but the bottom line is you are seeing a lot of liquidity in the U.S. market. You are seeing certain types of securities trade their entire outstanding float one or two times a day. A company has four million shares outstanding and guess what? It traded eight million shares today. It is unbelievable. I have never seen anything like it. But again liquidity is the name of the game in this market. If you have liquidity your market can move forward. If you don't have liquidity your market can't move forward. Just ask some of our trading partners like Indonesia that question. If you don't have liquidity, if you have capital flight, your markets are not going to go anywhere. People are going to be very disappointed and it takes a long time to earn people back once you lose them from a market like Indonesia or several South-East Asian markets, some of which are starting to recover.

As far as some themes that we cover in our funds it is really interesting because I am a pretty simple guy as you can tell. I carry a yellow pad around with me so I can remember ideas that I hear from people and think about them when I get back to Boston. I don't carry my sophisticated quantitatively driven model around with me and redo the inputs when I get an idea. I put it on my yellow pad and I bring it back to the Boston office and I think about it. And I think about what I am hearing from people. I think about what I am hearing from company officials. I think about what I am hearing from other portfolio managers and I put that through one of the most complex instruments known to man--the human brain. And I then apply that to my overall asset allocation process along with the lead manager of all our funds who has been around for 31 years. And I can honestly say he is the only person who, when the market tanked about 500 points in August, just sat back in his chair and very calmly bought because he has seen it all before and he has seen it several times before. We had younger portfolio managers at Fidelity just running around. It was a really interesting time and fortunately it was a very good call and it was actually a call on the strength not only of the U.S. but the North American environment for equity investing as well as fixed income investing.

Our current view now is, if you were to look for instance at the allocations in our international portfolio fund, neutral to slightly over-weighted in the U.S. That's a pretty major move when you consider that our index is about 50-per-cent U.S. That's a pretty bold call.

The fact of the matter is the U.S. economy continues to be on track. Inflation is very low. Certainly equity premiums for certain companies are extremely high. If you told me last year that 10 companies in the S and P 500 would drive about 50 per cent of the return I might have told you you were crazy but that's exactly what happened this year. People are really focusing on the brand names. Why does Amazon.com sell at 146 times sales? Because people are buying it. That's why it is selling at 146 times sales. It's the simple rule of supply and demand. But I will not listen to any analyst who can justify its valuation for me. They're coming up with new metrics. I've seen more new metrics that people come up with to justify evaluations than I've ever seen in my entire career this year. Now it is not the price to sales or price to book, it is price to press release ratio for some of these companies.

You can imagine how frustrating that is for someone who likes to fall back on fundamentals every now and then because the fundamental game just simply doesn't work for a lot of the companies that you see. It certainly doesn't work for AOL which is now a major component of the S and P 500. The simple fact of the matter is the managers who did not hold market-weight positions in the top five securities in the S and P under-performed by as much as five, six, seven to 10 per cent. It is a pretty simple rule really. You really have to keep an eye on what you are trying to beat at all times.

So again we continue to be over-weighted on the U.S. We are constructive on the U.S. for a few simple reasons. One: The U.S. is very flush with liquidity. It is something that not enough people really think about. Liquidity is really kind of a given but we know what a lack of liquidity can do to these markets. Yesterday was a perfect example of how liquid the U.S. market is and how it came back yesterday and yes we are going through a difficult period of time right now. Over the last couple of sessions I should say. But we have had quite an opening to the year. I do not think the U.S. market will be up as much as it was last year but I do think that the U.S. equity market will out-perform bonds this year. So we have our asset allocation funds neutrally weighted on bonds and over-weighted in equities and under-weighted in cash to reflect that view.

We do believe that Canada will undergo moderate economic growth in 1999--certainly nothing spectacular, maybe one to 2-per-cent GDP growth--and we do think perhaps later in the year that there will be an export-led rebound because export competitiveness can grow with a very competitive currency.

Continental Europe is another area that we are looking at actively and we continue to be overweight in our global funds. The simple reason we are over-weighted in continental Europe is because your average company in continental Europe is much more competitive now than they were two to three years ago. And the euro is just going to introduce more simplicity to that process. We are expecting economic conversions as a result of the introduction of the euro. You are already starting to see a little bit of that but think of how it simplifies everyone's life. Risk managers at your average corporation aren't constantly worrying about currency translations and the bottom line in profitability. It obviously simplifies the purchasing decision for goods and services in many cases. I'm not saying the euro is a cure-all but certainly it is constructive for the equity markets in the euro zone in our opinion. As a result we remain over-weighted in continental Europe and we are slightly under-weighted in the U.K. who as you know is not participating actively in the euro zone.

We expect the sterling to undergo some pressure over the next six to 12 months. We expect its economy to continue to slow down, not that it is going to stagnate or go into recession although there is a chance of recession. I have heard the "R" word uttered there. But again we just don't think the market will be quite as competitive as those in the euro zone. So again we remain overweight in continental Europe.

We remain under-weighted in South-East Asia and one of the key reasons is liquidity. You just haven't seen liquidity return to those markets in the manner it was in 1994 and 1995 for instance. The same goes for Latin America. Fortunately we had a zero weight to Latin America in our international funds. When the Brazilian market tanked yesterday and it continues to tank today we didn't have to worry about it because we had net zero exposure to that country. That's not to say that you can't make money in these markets because you certainly can and there will be an opportunity but when you are running an asset allocation fund or you are running a multi-country fund we are of the camp that says we would rather wait for the elevator on the second floor rather than go down to the basement and try to take the elevator from the basement all the way up. We will wait for some concrete signs of a turnaround and a concrete sign of liquidity returning to these markets before we will just jump right in with both feet. It's not to say we won't invest in them; it is just to say that there are some issues to contend with in smaller markets in South-East Asia and Latin America and we are not entirely comfortable in deploying our assets there at this time.

Japan's in the news a lot lately. And to tell you the truth our opinion on Japan is we are really looking for a reason to add to our assets in Japan. Currently we are slightly under-weighted relative to our composite index and again it looks like in Japan the slump is bottoming out; there has been a massive government stimulus. It looks like it is doing the right things to reform the markets. However there still is the liquidity issue and the way I like to refer to Japan is they are going slow and steady but we are not ready. We are not ready to invest there yet or at least overweight our positions there although we are looking and there are some rather extreme opportunities in the small cap arena in Japan. However again it is a matter of liquidity; it is a matter of keeping your risk profile consistent in your funds. Again there will be money to be made in Japan at some point but you have got to get the consumer going in that country before true liquidity will return to that market.

And I'm sorry to keep referring to that word liquidity but I can't tell you how important it is in determining our investment decisions because, as an ex-bond manager, one of the biggest mistakes you can make as a bond manager is buying a security strictly because it is cheap. What I mean is you buy some esoteric corporate bond that hardly trades and you think you have got a great deal on it until you go to sell it and there are no buyers. There is a great story where someone running a quantitative fund at one of our competitors went to sell a rather complex structured note that he had purchased earlier in the year to a broker. He said: "Well what will you give me for this?" And while he was figuring it out the broker said: "My computer model says it is worth 85." The broker said: "I'll give you 25 for it." The person goes back with: "But my computer model says it is worth 85." The trader said: "Then sell it to your computer. The bid is now 20." So that's what I mean when I say liquidity means everything to us.

So again my overall view is constructive on North America. It is constructive on the U.S. It's constructive on Canada, not as much now as it probably could be in about six months. I don't think you are going to make a lot of money in the Canadian equity market this year but when I look at 10-year average annual returns and see that the Scotia McLeod bond index is beating the TSE 300 over 10 years on an average annual basis that'll make an asset allocator have fits and starts about where to put assets. I think the U.S. will have a decent year. I think Canada will have a positive year in the equity markets although it could be on the light side, 3 to 7 per cent. I think continental Europe will be favourable this year and I think we will see that story pan out over the next six to 12 months. I think South-East Asia is going to continue to be a difficult place to invest although at some point and it's not right now there's going to be a nice return to be made from going into Latin American countries and going into South-East Asian countries. That would include Japan as well. We are just not quite there yet. We are waiting for some flash signals.

So again I would like to thank you all for having me here today and it was a real pleasure speaking to you. Thank you.

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