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

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

3 3 Economic Indicators

4 4 Is The Recession Over?  Signs of growth in China, Europe and Japan in Q  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 The Worst Seems To Be Behind Us Home Sales Finding A Bottom

6 6 Initial Unemployment Claims Turn The Corner

7 7 Retail Inventories Still Excessive, But Getting Less So

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

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 Canadian Economy Improving ) June 2009

11 Household Debt Levels Resulting in Paradox of Thrift )) Canada Personal Savings () and Household Debt () As Percent of Disposable Income Consumer credit plus mortgage debt Q :

12 MFC GIM’s Forecast Average 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 Canadian Equities

14 Commodity Prices Recovering September

15 Equity Valuations are Reasonable 50-yr Average September 2009

16 S&P/TSX Earnings Near Trough August 2009

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

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

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

20 Canadian Fixed Income

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

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

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

26 Alternative Assets: Prospects and Challenges

27 Commercial Real Estate

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

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

30 Asian 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 Oil & Gas

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

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

34 Timber

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

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

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

38 Agriculture

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

40 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 Strong Financials and Balance Sheets For the US Farm Sector Source: USDA Economic Research Service US Farm Sector Debt Ratios US Farm Sector Balance Sheet,

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

Questions & Answers