BNS - Portfolio Perspectives - September 2009

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Scotia Private Client Group consists of private client services from The Bank of Nova Scotia, The Bank of Nova Scotia Trust Company,Scotia Cassels Investment Counsel Limited, Scotia Cassels U.S. Investment Counsel Inc., and ScotiaMcLeod, a division of Scotia CapitalInc., all members of the Scotiabank Group. Scotia Capital Inc. is a member of CIPF.

September review

Portfolio Perspectives

The big picture

Canada’s GDP growth stalls

The latest reports on the Canadian economy unexpectedly showed no GDP growth in July, throwing intoquestion the strength of the country’s recovery. Wednesday’s report from Statistics Canada dashedeconomists’ expectations of a 0.5% increase, blaming shutdowns at mines, lower oil-and-gas extraction,civic strikes and poor weather. On the bright side, employers added 27,000 jobs in August, and newapplications for employment insurance fell. Prime Minister Stephen Harper reported that 90% of theeconomic stimulus funding has been allocated and that the money will create or support 200,000 jobs overtwo years by funding 7,500 infrastructure projects, training for 44,000 Canadians, $5.8 billion in added EIbenefits and $131 billion in business financing.Bank of Canada Governor Mark Carney said, “A powerful and sustained restructuring of the global economyhas begun, but the efforts required of us will be historic,” as he called on consumers and businesses tospend and hire. Consumer confidence in Canada rose for the seventh month in September, but fellunexpectedly in the U.S. on job security worries. U.S. home prices rose for the third month in July, but stillare down 32.6% from their 2006 peak. In Germany, stocks surged as Chancellor Angela Merkel was re-elected and pledged to form a centre-right coalition.

The markets

A bumpy road to recovery

Early gains in the week were erased on Thursday as weak U.S. manufacturing and jobless data sent stockslower. It was one year ago that the Dow Jones Industrial Average suffered its biggest point drop ever – butalso its largest gain soon after. In the fourth quarter of 2008, the S&P 500 moved 3% in one day a stunning29 times. The extreme market volatility seen last year has abated, but stocks are expected to remain in avolatile environment as the recovery picks up.Bombardier shares surged when its joint venture in China won a US$4-billion contract to build 80 high-speedtrains. Apple’s iPhone will go on sale in China in October for about US$700. The iPhone App Store hit 2billion downloads, with users buying 6 million apps per day. Mergers and acquisitions continued with Xeroxbuying Affiliated Computer Services, while Abbott Laboratories will acquire a division of Solvay. Meanwhile,British regulators gave Kraft a November 9th deadline to make a formal bid for Cadbury. In the lead-up tothe holiday season, Wal-Mart unveiled a list of 100 toys for $10 each, and Toys “R” Us is hiring 35,000seasonal employees.

Scotia Cassels Portfolio Perspectives

Fixed Income

: Our outlook for fixed income investments is less compelling. At the short end of the curve,we see very little potential for upside as rates are already low and the next yield changes will likely beupwards. At the longer end of the curve, however, yields are substantially higher and we expect to see lesspressure on prices there.

Equities:

Equity markets have in fact performed quite well over the summer months, but still remain wellbelow the pre-Lehman “normalized” levels which coincidentally occurred just over one year ago. In Canada,another relatively strong quarter for the banks helped propel the market forward. If the price of oil can alsomaintain its price at or above $70 per barrel, we expect to see elevated profits for the oil companies in futureearnings seasons. The U.S. market has also experienced a pretty good run, and given the amount of costcutting that has occurred, any future revenue gains that companies achieve should flow straight to thebottom line.

Portfolio Strategy:

We have concluded that the time seems right to move to an overweight position inequity. With return prospects for cash-like investments still near zero, and the potential of bond returnslimited, we believe that equities offer the most attractive risk-adjusted returns going forward. We are raisingour equity weight by 2.5% to 57.5%, and this will be balanced by a reduction in our fixed income weight by2.5%, to 40.0%. Our cash allocation remains unchanged at 2.5%.

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