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

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

3. 3 3 Economic Indicators

4. 4 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. 5 5 The Worst Seems To Be Behind Us Home Sales Finding A Bottom

6. 6 6 Initial Unemployment Claims Turn The Corner

7. 7 7 Retail Inventories Still Excessive, But Getting Less So

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

9. 9 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. 10 Canadian Economy Improving ) June 2009

11. 11 Household Debt Levels Resulting in Paradox of Thrift )) Canada Personal Savings () and Household Debt () As Percent of Disposable Income Consumer credit plus mortgage debt Q2392009:2 25 20 15 10 5 0 130 120 110 100 90 80 70 60 50 40 19601965197019751980198519901995200020052010 4.5 128.6

12. 12 MFC GIM’s Forecast 2004-08 Average 20082009 Forecast 2010 Forecast Real Economic Growth (% change in GDP) World3.5%2.2%-2.2%2.6% United States2.5%1.1%-2.5%2.7% Canada2.4%0.4%-2.2%3.0% Eurozone2.0%0.6%-4.0%1.1% Japan1.7%-0.7%-5.3%1.6% China10.8%9.0%8.5%10.0% Inflation (% change in CPI) United States3.2%3.8%-0.6%2.0% Canada2.1%2.4%0.4%1.9% Eurozone2.3%3.2%0.4%1.6% Japan0.2%1.4%-1.0%0.0% China3.6%5.9%-0.3%1.1% Source: MFC Global Investment Management, as at August 24, 2009

13. 13 Canadian Equities

14. 14 Commodity Prices Recovering September 2009 20082009

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

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

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

18. 18 S&P/TSX Bear Markets – 1957 to 2009 Returns from end of bear market Period # of months Decline3 months6 months12 months24 months May 57 – Dec 577-26.9%7.0%14.2%31.2%37.3% May 69 – Jun 7013-25.4%13.2%19.1%27.5%45.5% Oct 73 – Sep 7411-35.9%2.9%22.1%23.2%35.9% Jun 81 – Jun 8212-39.2%18.7%46.8%86.9%76.3% Jul 87 – Nov 874-25.4%8.4%10.9%14.5%42.1% Dec 89 – Oct 9010-20.1%7.3%14.8%18.6%16.4% Apr 98 – Aug 984-27.5%15.2%15.1%28.1%109.4% Aug 00 – Sep 0225-43.2%7.5%3.7%22.5%45.4% Median-27.2%8.0%15.0%25.4%43.8% Jun 08 – Mar 099-50.2%39.4%45.4%?? Source: CPMS/ Bloomberg

19. 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. 20 Canadian Fixed Income

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

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

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

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

25. 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. 26 Alternative Assets: Prospects and Challenges

27. 27 Commercial Real Estate

28. 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. 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. 30 Asian Market Outlook 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. 31 Oil & Gas

32. 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. 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. 34 Timber

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

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

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

38. 38 Agriculture

39. 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. 40 Average Value per Acre of US Farmland, 1940–2008 Long-Term Upward Trend in Farmland Value US Aggregate Net Farm Income (billions), 1940–2018F Source: USDA Economic Research Service. Actual numbers through 2008, forecast through 2018

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

42. 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