Stepping back to take in the big picture helps us bring things into clear focus. It allows you to reassess and reconfirm what’s important to you — your family’s health and security, your plans for retirement, your children’s education, your home, or maybe all of these.

I can help to ensure your priorities are being addressed within a sound plan. Adjusting your RRSP contributions, investing wisely to build your wealth, assisting with your estate plan, and helping to preserve your assets are just a few ways I can assist to keep your financial plan on track.

Call me — I’m always available to provide you with my professional advice and my services.

Over the past year, low interest rates have helped to stimulate economic growth by making it easier for people and businesses to borrow money. In Canada, consumers took advantage of low mortgage rates, leading to a rebound in the housing market. Lower mortgage and car payments left consumers with more disposable income to buy other goods and services. With cheap, available financing and resilient domestic demand, corporate Canada began investing again in machinery, equipment, and buildings.

But a rapid rise in interest rates could derail business growth and prove costly for consumers, especially new homeowners who have not evaluated their ability to carry their debt at a higher interest rate.

Furthermore, rising rates tend to dampen stock market growth, as corporate profits are squeezed by higher interest costs. Inflationary concerns could intensify hikes if domestic or global demand rises too quickly; however, economists expect a slow recovery with a strong Canadian dollar putting a damper on exports and inflation.

The good news is that even with rising rates, Canadians should still be enjoying a low-interest-rate environment, relative to historic averages.
And on the investment front, there will continue to be asset classes, market sectors, and geographic regions that should perform well, regardless of prevailing rates.

Here is a look at the factors behind oil prices, and what the future may hold.

A bullish viewpoint

While oil prices may be volatile in the short term, the Scotia Capital equity team sees many factors that support oil prices going forward.

As developing economies like China and India expand at a rapid pace, countries that don’t belong to the Organisation for Economic Co-operation and Development (OECD) are expected to begin consuming almost as much oil as developed OECD nations.

Supply slowdown. Underexploration over the past few years, as a result of the financial crisis, has lowered production to the point where inventories will be depleting when the economy recovers. The International Energy Agency estimates that $100 billion of oil production expansion projects were cancelled or postponed. “Bullish longer-term fundamentals are extremely supportive of the underlying commodity price going forward,” notes Geoff Ho, Director and Canadian Equities Specialist for the ScotiaMcLeod Portfolio Advisory Group.

Rising cost of production. There is an increasing need to produce oil in ever-challenging regions and the need for expensive technology. Scotia Capital equity analysts believe the minimum price required for deepwater and oil-sands projects is in the US$75-100 per barrel range. U.S.-dollar weakness. Most commodities, including oil, are priced in U.S. dollars. In recent years, the U.S. currency has fallen dramatically and that weakness is expected to continue as America contends with soaring budget deficits. A weak U.S. dollar means that oil rises in price, which benefits Canadian producers.

Recovery of demand. Crude oil has seen lower demand during the economic downturn, leading to higher inventories, which tends to put a damper on prices. Demand could bounce back more strongly than expected, with production playing catch-up.

Demand shifting away from North America. Ninety per cent of future demand growth for oil will be in Asia, South America, and the Middle East. Consumption in China is expected to rise by 4% in 2010 as car sales surge; currently, just 2% of the population owns a car.

Inflation hedging. Investors flock to commodities when there is a risk of inflation, since the price of raw materials tends to keep pace with inflation. As the global recovery heats up and inflation begins to rise, investors may increasingly turn to oil as an investment,
pushing up prices.

Speculative activity. Over the past two years, we have seen price swings caused by speculation over oil prices, with many investors hoping to cash in on rising oil stocks. Investment funds in commodity markets have risen from an estimated $15 billion to $260 billion since 2003.

Geopolitical risk. Continued and rising tensions in the Middle East may cause prices to rise, since Saudi Arabia is the second-largest supplier of crude oil in the world.

A long-term outlook

The Scotia Capital equity team sees oil as an excellent long-term buying opportunity with price increases supported by strong demand, particularly from Asia. We can help you to determine appropriate exposure to the energy sector for your personal situation and risk tolerance.

You count on your investment nest egg to supplement the income you receive from government sources. But in a low-interest-rate environment, your money needs to work harder.

Consider these four investment strategies that may allow you to achieve higher after-tax income.

1. Choose a T-SWP for a taxefficient income stream. A tax-efficient systematic withdrawal plan (T-SWP) works with special “T-series” mutual funds, which are set up to include tax-free return of capital (ROC) in your payouts. Once all of your original capital has been returned to you, withdrawals are taken by redeeming units.

   Note, however, that as you deplete ROC, the adjusted cost base of the units decreases as well. This means a higher taxable capital gain when you sell or transfer the units. T-SWPs are best suited to non-registered plans.

2. Consider high-income-generating asset classes, such as real estate and infrastructure. Both commercial real estate and infrastructure investments have the potential to provide a regular and reliable income flow at a level that’s potentially higher than that available from current guaranteed investment rates. And while there is greater short-term risk associated with these sectors than with guaranteed investments — as investment prices can rise and fall with market conditions — they are generally less volatile than other types of equity investments.

   In addition, these sectors offer diversification, with lower correlation to traditional asset classes.

3. Invest in dividend-paying Canadian companies. To encourage Canadians to invest in their own backyard, the government offers a tax credit when you invest in dividendpaying Canadian companies.

   The tax payable on dividend income is lower than on interest income and can, depending on the provincial and federal tax brackets, in certain circumstances, be as favourable as capital gains tax treatment. Keep in mind that successful companies often increase the dividends to their investors year after year. Many dividend-paying shares also have solid growth potential over the long term.

4. Climb a bond ladder as interest rates rise. With interest rates in Canada expected to begin rising as early as mid-2010, you may want to consider making bond investments using a ladder strategy. This strategy allows you to take advantage of higher rates as they become available.

   Here’s how it works: You start by buying roughly equal dollar amounts of bonds with a variety of maturities, each maturity date representing a different rung on the ladder. When the shortest-term security matures, reinvest the proceeds in the best-returning rung on your ladder, which usually is the top rung, with the longest maturity.

   In time, the shorter-maturity, lowerpaying rungs will be gradually replaced by higher-paying, longer-maturity securities. You will have securities maturing every few months or every year, depending on how you construct your ladder. Given that longer-term yields are normally higher than short-term yields, you are reinvesting funds at higher rates, on average, over the long run. This enables you to reinvest matured securities at the highest available rate.

   We can help you get your retirement savings working hard to generate the income you need in retirement.

Here’s how they work.

Like mutual funds, ETFs are baskets of stocks. Most of them mimic stock indexes, providing exposure similar to that of index mutual funds.

However, unlike mutual funds, ETFs trade like stocks. While mutual funds are priced at the end of the day, ETF prices change throughout the day and trades may be made any time the stock market is open. With no minimum holding period or redemption fees and real-time trades, flexibility is a key advantage.

The other key advantage is a very low expense ratio. However, be aware that there is a brokerage commission each time you make a trade.

Like stocks, the price of an ETF is determined by the market. That means, depending on demand, you could pay more or less than the net asset value of the ETF.

While ETFs are not for everyone, these popular investment vehicles may be worth investigating. Contact us to discuss whether investing in ETFs is a
suitable investment strategy given your needs and goals

Getting started

Before you can begin to consider collecting, you first need to develop an area of interest. Consider not only paintings, but also decorative art, such as sculpture, glass, metalware, antique furniture, jewellery, carpets, and clocks. You may find that your passion lies with Latin American abstract impressionism, Chinese ceramics, or Art Deco glass.

Educate yourself and train your eye by visiting public and commercial galleries and art fairs. Speak with gallery owners, artists, and people who have bought art before. Learn about art: read books and art magazines.

A reputable dealer who has been in the business for many years can be an enormous help; he or she will have the necessary knowledge and experience regarding quality, market trends, and pricing practices.

Tips for collecting art

If you want to improve the chances that your art collection will hold its value, and perhaps even increase in value over the years, follow these tips from experienced art buyers:

• Buy top quality. Top-quality items tend to appreciate even in poorer market times. Choose a field in which top quality is within your budget.
• Obtain a written appraisal or certificate attesting to the item’s authenticity.
• Buy items in perfect condition.
• Keep items in perfect condition. Maintain the item properly with appropriate environmental conditions and regular maintenance.
• Insure items adequately for theft, fire, or breakage.
• Make a detailed plan for disposition.

Your attorney or estate manager may not be sensitive to the value or importance of your collection.

Assess trends with an index

The price of art is affected by such an array of factors that valuing it can’t be an exact science. Nonetheless, art indexes do exist and can be useful for assessing trends before taking professional advice. The best-known index is the Mei Moses® index, which tracks auction prices of more than 15,000 art pieces sold by Sotheby’s and Christie’s.

Keep in mind that indexes are based on auction prices, which represent just a quarter of the market. Plus, dealers tend to increase the price when selling at a public auction.

While art can be a lucrative investment, it is first and foremost a tangible asset that is a source of enjoyment, pride, and personal expression. If you
buy only pieces that you love, your investment will never disappoint.

The stock market rally began in March and by the end of September — exactly one year after Lehman Brothers announced bankruptcy and triggered what some called the worst financial crisis since the Great Depression — the S&P/TSX and S&P 500 indices had almost returned to what their values had been 12 months earlier.

By mid-summer 2009, economic indicators in Canada showed rising consumer and business confidence and a revived housing sector. Unemployment bottomed at 8.7% in July and, from that point, jobs began to increase. But in the U.S., recovery was slower and more tentative as job losses were deeper, with unemployment hitting a 26-year high of 9.8% in September.

In July, the Bank of Canada announced that the recession in our country was over, upgrading its forecast for the third quarter to 1.3% growth from a 1% decline, and projecting GDP growth of 3% in 2010 and 3.5% in 2011. The International Monetary Fund predicted that Canada would lead the developed world in the global economic recovery.

While global economies gain strength, challenges still remain. Will economies function once government stimulus is removed? Will consumer spending bounce back as the employment picture brightens? Will Canada’s manufacturing sector be able to recover while a strong dollar dampens exports?

As the investment landscape evolves in 2010, we can help you position your portfolio to take advantage of new opportunities arising from the recovery.

Financials

Because banks are extremely sensitive to changes in the economy, they’re looking at high growth potential at this stage of the recovery.

Canadian banks are well regarded internationally, and have been significantly better positioned than their peers in other countries, most notably throughout this tough economic time.

Commodities

As various economies recover, demand for Canadian commodities such as oil, base metals, materials, and potash will increase.

China, India, Brazil, and other develop- ing countries are expected to grow faster than industrialized nations, making these countries the biggest drivers of demand. Note, however, that the U.S. remains Canada’s largest customer for oil.

Gold

The U.S. dollar is likely to continue its depreciation further into 2010, which is good news for gold. Traditionally, commodity buyers turn to gold as a hedge against rising commodity prices, since commodities are typically denominated in U.S. dollars.

Also, if the threat of inflation surfaces as a result of government stimulus in so many countries worldwide, investors who fear inflation will flock to gold as a safe haven.

Defensives

Defensive stocks such as utilities, telecommunications, and consumer staples are not particularly sensitive to fluctuations in economic health. This also means, of course, that they’re going to be slow to respond to a recovery. Nonetheless, thinking longer-term, this sector should form a solid foun- dation in a well-diversified portfolio because of its lower volatility.

Consumer goods

Consumer spending has begun to revive in Canada, but in the U.S., which is the biggest market for Canadian goods, spending is sluggish due to high unemployment. In addition, the strong loonie is making Canadian products more expensive for Americans to buy.

Multinational companies that serve the growing middle class in emerging economies will benefit as China, India, and Brazil are expected to lead economic growth.

Technology

Demand for new, innovative consumer technologies — such as the smart phone, for example — is exploding, with sales estimated to rise by 29% in 2009. In addition, Canada’s RIM was named the fastest-growing company in the world by Fortune magazine and U.S. company Apple set sales records with its new iPhone.

Industrial goods

This sector includes machinery and components to manufacture goods as well as transportation and shipping, all
industries that will benefit from economic recovery as businesses and consumers begin to increase spending.
We can help ensure that your portfolio is positioned to benefit from an improving economy, with investment recommendations that are tailored to your personal situation and risk tolerance.

What it is

A Power of Attorney is a document that legally empowers another person to manage your affairs during your lifetime, should you become incapacitated. Note that in British Columbia these are known as Representation Agreements, and in Quebec they are called Mandates. There are two types: Power of Attorney for Property and Power of Attorney for Personal Care.

The person appointing a Power of Attorney (POA) is referred to as a “grantor,” and the POA is referred to as an
“attorney” (the term “attorney” should not be confused with “lawyer,” commonly referred to as an “attorney” as well).

Power of attorney for Property

A Power of Attorney for Property gives a designated individual the power to do anything with the grantor’s property, with the exception of making a Will.

An attorney must exercise his or her duties diligently, honestly, and in the best interests of the grantor. Some of the required duties are the following:

• Making expenditures for the support, education, and care of the grantor or the grantor’s dependants.
• Keeping accounts of all transactions.
• Filing income tax returns.
• Maintaining an inventory of all the grantor’s assets, which includes recording all assets that are bought or sold, complete with dates, amounts, reasons, and other relevant details.
• Preserving any property specifi- cally bequeathed in the Will.

To the extent possible, the attorney should consult the grantor on decisions. In addition, it’s a good idea for the attorney to consult with relatives, friends, and other attorneys on behalf of the grantor and facilitate contact between the grantor and supportive relatives and friends.

An attorney must not disclose information contained in the grantor’s accounts and records, except to the grantor, the grantor’s attorney for personal care, or the public guardian and trustee. An attorney for property is entitled to charge a fee for services, which is set out by law.

Challenges and risks

Managing someone’s property can be complex and time-consuming, especially if the grantor owns a business or has minor children. When agreeing to be an attorney for property, a person should recognize that he or she will assume a legal liability for any breach of an attorney’s duties and be personally liable for mistakes. An attorney is also open to criticism from family members and friends who may not agree with what is being done and how.

An attorney should ensure that if there is a conflict of interest, such as being a beneficiary in the Will, he or she takes actions that are clearly in the best interest of the grantor.

Power of attorney for Personal Care

An attorney for personal care is someone who makes decisions about a wide range of issues — the grantor’s health care and medical treatment, where the grantor will live, his or her food, clothing, hygiene, and safety — when the grantor becomes unable to make those decisions.

The document may also spell out the grantor’s wishes regarding the use of medical measures to prolong his or her life if there is no reasonable prospect of recovery. Therefore, naming an attorney for personal care is an extremely important decision that deserves much consideration. Including as many specifics as possible is crucial to one’s wishes being carried out properly.

To view a video presentation on Powers of Attorney, visit the ScotiaMcLeod public website at www.scotiamcleod.com and access the webcast feature within the Financial Insights section of the site.

For assistance with your estate planning, including Wills and Powers of Attorney, contact us anytime.

The wildly popular and award- winning series The Metropolitan Opera: Live in HD is in its fourth season, with world-class performances transmitted by satellite from New York City’s Metropolitan Opera in high definition and digital surround sound. Performances are simulcast to more than 1,000 theatres in 42 countries.

Don’t miss this magnificent experience, which is the closest thing to a front-row seat at one of the world’s best opera houses. If you do miss a live performance or want to see it again, an encore showing will play a few weeks later. Performances start at 1 p.m. EST.

Experience The Met: Live in HD

Der Rosenkavalier – Strauss’s comic masterpiece of love and intrigue in 18th- century Vienna, starring Renée Fleming. Live: Saturday, January 9, 2010
Encore: Saturday, March 6, 2010

Carmen – Elina Garanca plays the seductive title role in this Bizet classic, one of the most popular operas.
Live: Saturday, January 16, 2010 Encore: Saturday, March 13, 2010

Simon Boccanegra – The legendary Plácido Domingo stars in Verdi’s grip- ping political thriller. Live: Saturday, February 6, 2010 Encore: Saturday, March 20, 2010

Hamlet – A new production of compos- er Ambroise Thomas’s Hamlet, featuring Simon Keenlyside and Natalie Dessay. Live: Saturday, March 27, 2010
Encore: Saturday, April 24, 2010

Armida – This mythical story of a sor- ceress who enthralls men in her prison stars Renée Fleming opposite six tenors. Live: Saturday May 1, 2010
Encore: Saturday, May 22, 2010

You can buy tickets online at www.cineplex.com/events or at your local theatre. Save 10% when you buy tickets to five performances; save 5% on three performances. For group rates, call 1-800-313-4461 or email corporate sales@cineplex.com.

If you love the big screen, get a Scotiabank SCENE card and start earn- ing free movie rewards. To learn more, visit www.scene.ca.

For more information on The Met: Live in HD, visit www.metopera.org/hdlive.

But which sectors will lead the way as conditions improve? A look at market fundamentals can help identify areas that could be in the forefront.

For instance, global trends point to a leading role for commodities stocks, such as oil, base metals, and materials, as global economies recover.

An economic rebound in China and even a slow recovery in the U.S. could increase demand and boost commodity prices, which fell steeply in 2008.

Consider that car sales in China rose by 48% year-over-year in June 2009, spurred by government tax incentives. This is boosting the already rapidly expanding demand for gasoline.

With much global growth expected to come from emerging market economies, multinationals that export to the rising middle classes of the world may do well.

In all sectors, a prudent strategy is to concentrate on industry leaders, as these large-capitalization stocks are often the first to hold onto their gains as the markets recover. Averaging into new positions with a regular investing program can minimize volatility.

We can help you identify longer-term value opportunities in the context of your investment objectives and tolerance for risk.

Whatever direction the gold price takes, having some exposure to this precious metal can provide important diversification benefits for your portfolio.

What’s behind the recent strength

Gold’s rise has been supported by a number of factors. One of the main factors has to do with supply and demand.

On the supply side, gold production on a global basis is slowing or declining, with older mines becoming depleted. While new mine projects are planned, these can take years to bring into production. And obstacles such as growing concerns over the environmental effects of gold operations may slow development further.

On the demand side, there is constant and potentially growing demand from the jewelry industry. The main drivers are China and India, which generate a demand surge each year for their wedding seasons. Increasing affluence in China and India should help keep demand for gold buoyant in the coming years.

Gold and the greenback

Another support for gold has been recent weakness in the U.S. dollar.

Investors are concerned that huge U.S. government deficits could last for many years and help bring down the value of the greenback. Indeed, Scotia Economics sees the U.S. dollar falling to par with the Canadian dollar by late 2010.

Gold is denominated in U.S. dollars and traditionally rises when the dollar falls, so further weakness in the currency could help support the price of gold.

What this means for your portfolio

For investors, having some exposure to gold can provide important diversification benefits. For instance, gold’s role as a store of value can help offset the risks of holding U.S.-dollar-based assets in your portfolio, and can provide protection in the event of further market volatility. While economic conditions may continue to improve in the coming months, any significant disappointments going forward could lend support to the gold price.

With a wealth of Canadian-based gold companies on the S&P/TSX index, gold mining shares and gold funds provide ready exposure to the sector.

A number of gold Exchange-Traded Funds (ETFs) on the Canadian and U.S. markets also provide a convenient and cost-effective way to hold gold bullion and gold equities.

Finally, it’s important to note the downside risks of gold. Some predict that a steady improvement in the global economy and the financial markets, helped by timely actions by the U.S. Federal Reserve, could remove gold’s “safe haven” appeal. A rebound in the U.S. dollar could also weaken gold prices.

Remember, as well, that gold has been volatile recently, and may not be suitable for conservative investors.

Most experts suggest limiting gold to 5% to 10% of your overall portfolio.

What’s right for you will depend on your investment objectives and risk tolerance. We can help you decide on the role that gold can play in your diversified portfolio and the best way to invest in the sector.

An alternative you may want to explore is the Insured Annuity strategy.

This strategy will assure you income for life, with no chance that your money can run out before you have planned, while providing a taxeffective legacy for your heirs.

If you are between the ages of 60 and 85, in good health, have a low risk tolerance and want to leave an estate, the Insured Annuity strategy may be an effective solution for you.

How the strategy works

The Insured Annuity strategy uses two products to produce its benefits: a Life Annuity, which provides guaranteed income for your life and for the life of your spouse, if you choose; and a permanent life insurance policy with a death benefit equal to the amount originally invested in the annuity.

The annuity component. The annuity pays a regular stream of income, part of which is a return of capital and therefore not subject to taxation.  (Note that the annuity must be purchased with nonregistered assets in order for the tax benefits to apply.) You can use a portion of each payment to cover the premiums on the life insurance policy.

The life insurance policy. On your death (or the death of your spouse, with a joint-and-last-to-die insurance policy), the death benefit is paid directly to the named beneficiaries. The money is tax free and does not pass through your estate, avoiding probate fees and possible complications and delays.

The example below illustrates how the Insured Annuity strategy can provide a 65-year-old couple an equivalent pre-tax return of approximately 7.47%.

GIC versus Insured Annuity

The example below shows how a 65-year-old couple with $500,000 in non-registered assets can use the Insured Annuity strategy to increase their cash flow while preserving their estate for their children and grandchildren.

GIC at 4.5%	Monthly income	Insured Annuity strategy
$500,000	Total investment	$500,000
$1,875	Gross income	$2,683
$1,875	Taxable income (interest component)	$919
$870	Taxes payable at 46.4% rate	$427
N/A	Insurance cost (premiums)	$589*
$1,005	Net income	$1,668

* Annuity payments will not cover initial premium requirements. Assumes 65-year-old couple, non-smoking. Rates will vary.
Source: Insurance Policy – Empire Life; Annuity (joint and last to die) – Standard Life, July 2009.

Is the Insured Annuity the right choice for you?

Before choosing this strategy, it’s important to understand all of the considerations. First, an annuity investment is locked in for life and should not represent your entire fixed-income allocation. As well, the return is fixed and will not rise if interest rates increase in future.

If you are concerned about getting sufficient income from your assets and wish to leave a secure legacy for your heirs, the Insured Annuity strategy may be an effective long-term solution. Contact us for more information and an analysis of the potential benefits based on your circumstances.

Estate benefits

The charitable Insured Annuity strategy offers a creative way for retirement-aged donors to make a significant charitable gift, while still continuing to receive the guaranteed income they need.

This strategy uses the tax efficiency of annuity payments and the charitable donation tax credit to enhance the contributor’s returns.

Gift plus income

The charitable Insured Annuity strategy preserves your gift for the charity upon your death. You purchase a life annuity and a permanent life insurance policy, naming your charity as the irrevocable beneficiary.

You get tax-efficient annuity income, plus a charitable tax deduction for the insurance premiums; the charity receives the insurance death benefit. We can help you decide if the Insured Annuity strategy can facilitate your charitable giving.

Le Clos Jordanne is located on the Niagara Peninsula, a region whose winemaking reputation has attracted investments from celebrities such as Dan Aykroyd and Mike Weir to create their own labels. Distinctive Ontario wines are also emerging out of other regions on the Lake Erie North Shore and Pelee Island, as well as Prince Edward County.

For a taste of Ontario’s best, try Cabernet Franc reds, crisp Rieslings and iconic icewines.

Production is on the rise in B.C.

Wine is booming in British Columbia as well. The Okanagan and Similkameen Valleys continue to produce some of Canada’s top vintages, with unique climates and soils creating fine whites and Bordeaux-style reds.

Supple Merlots have become a B.C. staple, along with whites from the Pinot Gris, Chardonnay, and Pinot Blanc grapes, as well as icewines.

Eastern Canada’s distinct wines

In Nova Scotia, wineries are scattered through the Annapolis, LaHave River and Bear River Valleys, and the Malagash Peninsula. Look for French hybrids such as Marechal Foch and Seyval Blanc, and specialties such as the red Leon Millot and the white L’Acadie Blanc, a good match for Nova Scotia seafood. Best vintages: 2005, 2007. And wine enthusiasts should take any opportunity to sample offerings from Quebec’s young wine industry, centred in the Eastern Townships and Monteregie regions, southeast of Montreal. These include little-seen varieties such as Vandal Cliche, Frontenac, and Geisenheim, as well as award-winning icewines. The only letdown: most are only sold within the province. Best vintage: 2005.

Learning about wine can be as pleasurable as tasting it. Your provincial liquor control board may offer wine appreciation courses. And this time of year is ideal for touring wineries during harvest — plan to make a day of it.

Returning to investing fundamentals is especially important in uncertain times like these.

In this climate, resisting emotion-based investing and maintaining a long-term view are fundamental strategies that will help you stay the course. Emotions tend to run high when markets are struggling.

Taking the time to plan and regroup will result in decisions based on information rather than intuition.

We are here to work closely with you to make sure your portfolio is positioned in a way to move you towards your financial goals.

Let’s get together soon to discuss how best to do that.

This kind of emotion-based investing can be harmful to your long-term goals, since it ignores fundamental valuation in favour of following market momentum. Stocks tend to be overvalued when the markets make new highs, and undervalued when they reach their lows.

Here are some sound investment principles to keep in mind in today’s fast-changing markets.

Don’t try to pick tops and bottoms. Market movements are too unpredictable to catch the highest or lowest price. It’s far better to invest in solid value opportunities.

Average your costs. Dollar-cost averaging through regular investing helps to minimize the effects of market volatility on your portfolio over time. Market lows are the best times to lower your average cost.

Don’t check your portfolio daily. It’s tempting to want to over-manage your portfolio in turbulent markets; this can cause you to overreact to short-term price movements and make impulsive decisions.

Invest with a long time horizon. This helps avoid focusing on shortterm market movements. Identifying sustainable trends is a better strategy for reliable gains.

Being disciplined in volatile times is key. We can help ensure that your portfolio stays on track by focusing on value and long-term opportunities in the context of your investment objectives and risk tolerance.

But it is not enough to simply add more income investments to your portfolio.

In fact, making significant changes to your asset mix without integrating them into a strategic investment plan can result in imbalances and affect long-term returns.

It’s key to have a plan for the income portion of your portfolio that takes into account your investment objectives, timelines, and risk tolerance, while balancing immediate needs for income with your longer-term need for growth.

The good news is that today’s market offers a number of ways to structure your portfolio with investments that offer both high-yielding income opportunities and good longerterm growth prospects.

Opportunities in today’s market

If you are looking for growth opportunties that will pay you to wait until stock markets recover, higher-yielding dividend-paying stocks may be worth considering.

Indeed, the stocks of some solid, well-capitalized companies have fallen with the markets, raising their dividend yields to historic highs.

These companies also offer the potential for capital gains, as strong well-capitalized companies are often among the first to recover.

Keep in mind, however, that higher yields can be a signal that the market perceives higher risk, and dividend reductions and cancellations have occurred. Advice is crucial when investing in this area, in order to ensure that the dividends are sustainable.

We can help you decide on the right dividend-paying stocks for your portfolio.

Income trusts and preferred shares

Income trusts can also offer attractive yields.

Research and expert advice are especially valuable in order to assess the sustainability of payouts.

As well, it’s important to evaluate each company’s future following the imposition of corporate taxes in 2011.

Preferred shares have also attracted increased attention in recent months, as investors look for high yields with a lower risk element. While they tend to offer less upside potential than common shares, at recent values they offer a good source of tax-advantaged income, with some capital gains potential.

A laddered approach with bonds

To balance these growth-oriented holdings, investors seeking security and income may consider adding to their bond holdings. An allocation to government bonds is always useful as a secure holding and a source of income. However, attractive yields have appeared in high-quality corporate bonds, which also offer potential for future appreciation as the market regains confidence.

For those looking to use a portfolio of bonds as a core holding, a bond ladder may be a timely strategy to deal with interest-rate fluctuations.

With a laddered portfolio, instead of investing, say, $100,000 in one bond, you could invest $20,000 in five bonds that mature over two, three, five, seven, and 10 years. When each bond matures, it could then be rolled over into a new 10-year product. While adding income to your portfolio offers a backstop against uncertain markets, the key to maintaining an effective portfolio is to strike a balance that makes sense in the context of your overall financial situation. Even for investors nearing retirement, some growth is necessary to maximize the life of your investment savings.

We can help you fine-tune your investment strategy and achieve the right mix of growth and income for you.

This is especially important in today’s climate, as economic conditions are changing quite rapidly. As a result, you may have more questions about your investments and how they affect different parts of your financial plan.

We can help you see how your overall financial picture affects your short-term and longer-term goals, and help you fine-tune your portfolio to address your concerns. As well, we can suggest strategies to keep you moving toward your goals. Here are some that you may want to explore.

Bridging the gap. A decline in your portfolio may have set back your progress toward achieving major financial goals. While in some cases it may be necessary to revise your time horizon, it may be possible to bridge the gap in other ways.

For instance, it could be worth considering boosting your savings by making short-term lifestyle changes. If you are near retirement age, you may consider an alternative strategy, such as negotiating a phased-in retirement with your employer or taking on a consulting role.

Depending on the kinds of assets in your portfolio, we can also consider selling certain assets to direct toward more important uses.

We can also revisit your risk profile to see whether rebalancing your portfolio with more growth securities is appropriate.

Boosting income. Some investors may have experienced a reduction in income as a result of reduced investment returns. Redeploying some of your assets into high-yielding dividend stocks, income trusts, or fixed-income investments can produce new sources of income, while still retaining some growth potential.

Today, for instance, corporate bonds have more attractive yields than government bonds. We can discuss these opportunities in the context of your goals and risk tolerance.

Tax-efficient investing. Paying less tax on your investment earnings is another important strategy in today’s more challenging climate. We can help ensure that your overall portfolio is managed from a tax perspective, including making full use of the Tax-Free Savings Account (TFSA).

Another strategy to increase your family’s after-tax income is to lend money to a lower-income spouse. The prescribed rate for family loans is at a historical low and creates an attractive income-splitting opportunity.

Addressing a portfolio imbalance.

Sudden market movements can quickly cause an imbalance in your portfolio, increasing your risk. In today’s markets, rebalancing your portfolio can present opportunities to increase your potential long-term gains by acquiring core equity holdings at low prices.

Revisiting estate issues. The sweeping revaluation of assets in recent months may have changed the value of property you have bequeathed to your heirs. We can carry out a strategic review of your estate plan, and suggest ways to rebalance your bequests to equalize their values. Depending on your estate-planning needs, this may involve bringing in our trust specialists or coordinating strategies with your lawyer and accountant.

While it’s important not to overreact to short-term changes in the markets and economy, taking a fresh look at your financial plan is a prudent decision whenever significant changes occur.

We can help your plan evolve to accommodate changing markets and your changing needs

In today’s cost-conscious climate, staying close to home can be a smart vacation choice. Here are some Canadian getaways to consider:

• Shaw Festival, Niagara-on-the-Lake, Ontario, April 1 – November 1 (shawfest.com). Renowned festival featuring works by George Bernard Shaw and his contemporaries.
• Bard on the Beach Shakespeare Festival, Vancouver, May 28 – September 26 (bardonthebeach.org). Canada’s largest not-for-profit Shakespeare festival.
• Just for Laughs festival, Montreal, July 16 – 26, and Toronto, July 15 -19 (hahaha.com). International comedy performers and street theatre.
• Capital Ex, Edmonton, July 17 – 26 (capitalex.ca). A historic celebration, with street parties, midway rides, and a parade.
• Royal St. John’s Regatta, St. John’s, Newfoundland, August 5 (stjohnsregatta.org). North America’s oldest continuing sporting event, and a grand party.
• The Canadian National Exhibition, Toronto, Ontario, August 21 – September 7 (theex.com). The largest annual fair in Canada.
• The Toronto International Film Festival, Toronto, Ontario, September 10 – 19 (tiff09.ca). It’s widely viewed as the world’s most important film festival after Cannes.

In order to qualify, the work must be completed by January 31, 2010, so if you’ve been planning a home renovation, this may be the time to act.

The Home Renovation Tax Credit can be used for most renovations to a house, condominium, or vacation home. The credit covers up to $10,000 worth of enduring changes (regular maintenance doesn’t qualify), with a maximum tax reduction of $1,350. It can be applied to more than one renovation project. That means it could make sense to combine two planned renovations to take advantage of the full amount available.

As well, the credit has a bonus feature: It can be “piggybacked” onto other government benefits that may apply to the same project. For instance, you can combine the credit with the ecoENERGY Retrofit grant for energy-efficient renovations.

Here are a few suggestions for renovations that make use of the HRTC on its own, or in combination with other government incentive programs.

Install a new, more efficient furnace. Eligible for the HRTC plus a federal ecoENERGY grant of $375 to $790 — in addition to the yearly savings from lower fuel bills.

Add insulation and weathersealing, new doors and windows. Eligible for the HRTC and an ecoENERGY grant, plus energy savings. The ecoENERGY grant will vary depending on the extent of the work and energy efficiency achieved.

Retrofit your home for a disabled family member. Combines the HRTC with the federal Medical Expense Tax Credit for necessary alterations that make the home more accessible.

Renovate your kitchen or bathroom. Eligible for the HRTC. Kitchen and bathroom renos typically give you maximum payback value when your home is resold.

Build an addition to your home or vacation property. In addition to the maximum HRTC, this may increase your vacation property’s resale value and make your home more livable.

Once your renovation is complete, the new tax credit can be claimed on your 2009 tax return, or on that of your spouse or common-law partner. As well, couples can divide the credit between them to get the maximum tax benefit.

The overall S&P/TSX Composite Index has rallied 37% from its March lows, led by sectors such as Financials and Energy. The capital rotation from a more defensive stance to cyclical and high-beta sectors has been prominent in recent weeks. Consequently, one of the laggards throughout this rally has been the telecom sector, as the S&P/TSX Telecom Services Index has increased a mere 10% over that same period. This material underperformance, in our opinion, was unwarranted and has left a gaping investment opportunity that encompasses various attributes including: income through dividends;, attractive valuation relative to historical standards and U.S. peers; and, a rare combination that offers defensive characteristics and exposure to discretionary and business spending (thereby positioning for an eventual economic recovery). Below we highlight 6 reasons for exploring investment opportunities in the telecommunications sector.

View the PDF

Insiders, Spring 2009

On June 18, the federal government passed its 2008 Budget bill into law. This was a milestone for investors because it meant that the new Tax-Free Savings Account (TFSA) would be available to millions of Canadians beginning in January 2009. No doubt you have seen and heard a lot about this new savings vehicle in some way, shape or form.

• Capital gains and other investment income earned in a TFSA will not be taxed.
• Withdrawals will be tax-free.
• You can withdraw funds from the TFSA at any time and for any purpose.
• The $5,000 annual contribution limit will be indexed to inflation in $500 increments.
• The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.

Call us today to find out how you can take advantage of the new Tax Free Savings Account in your savings strategy.

Recessions are short-lived
Technically, a recession is defined as two or more consecutive quarters of negative economic growth. In real terms, it’s a period of slowing demand, rising unemployment, reduced investment, and weaker corporate profits.

In some cases, recessions are accompanied by deflation — a sustained decline in prices caused by reductions in personal spending and investment.

Canada’s last recession was in 1990-1991. Every recession is different, and the good news is that these downturns have a limited lifespan. Since the 1930s, they have typically lasted between six and 16 months.

Your portfolio

Still, it’s a good idea to ensure that your portfolio is positioned to withstand current economic conditions and is positioned for a future rebound. Here are two ideas that can help in an uncertain economy:

• Focus on companies with high-profile brands, strong balance sheets,and low debt loads. Market leaders with deep pockets may gain market share as weaker competitors fail.
• Hold high-quality bonds and other secure fixed-income instruments for stability and potential gains. These are especially valuable in deflationary periods, since the buying power of their returns increases.

We can help ensure your portfolio reflects your investment objectives and is prepared for all economic and market climates.

While the decline in oil prices in late 2008 and the global credit crunch helped push alternative energy to the background, long-term concerns such as global warming and dependability of oil supply have kept green power a priority for global decision-makers.

Governments around the world are making alternative technologies an integral part of their energy strategies. Indeed, the new U.S. administration has included alternative energy into its national infrastructure plan.

Primary investments in this sector include major manufacturers of wind, solar, and nuclear power equipment. But there are also companies that produce biofuels, fuel cells, solar panels, and the components and materials for these technologies.

The list of green energy investments is limited in Canada. However, good opportunities exist in the U.S. and global markets, and several Canadian mutual funds invest specifically in this sector.

We can help you decide whether this growing and important sector is a good fit for your investment plan.

But while consumers are increasingly willing to pay more for food they believe is better for their health and the environment, many Canadians may not fully understand what the “organic” label means.

The meaning of “organic”

Organic food is produced without most of the widely used synthetic aids such as chemical fertilizers and pesticides, genetic modification, food additives, irradiation, and in the case of animals, growth hormones and antibiotics.

Advocates of organic food point to several benefits, including higher levels of vitamins and other nutrients, minimal levels of chemical residues, and less run-off contaminants in the soil and water during food production.

However, the question of whether organic food is more nutritious is hard to prove conclusively, as other factors such as the quality of the soil and the amount of sunlight during the growing season may affect nutritional values.

And some claim that organic food is no healthier than conventionally produced food, since all food in Canada must meet government standards. As well, organic food may be more susceptible to natural toxins.

New labelling to benefit consumers

Adding to the confusion, until recently, it was not always easy to know that what you were buying was organic, but that is changing.

This June, new mandatory guidelines will be established for organic labelling. The Canadian Food Inspection Agency will work with certification bodies to ensure that Canada-wide standards are met, and a special logo identifying the food as organic will be used on packaging.

A matter of choice

In the end, eating organic is a matter of personal choice, likely based on your values, your research on the subject, a food’s availability, its price, and its place in your diet.

For some, that will mean going the organic route. For others, it will involve choosing to consume more fruits and vegetables and ensuring a balanced diet. Some food organizations are now promoting the “100 mile” approach — eating food grown or raised within 100 miles of your home. This means a focus on fresher food that hasn’t been transported long distances.

Insurance solutions offer the potential to boost your long-term returns, while also guaranteeing your capital. The security of guaranteed principal, and in some cases guaranteed returns, can make insurance investments a strategic choice in uncertain times.

In addition, the favourable tax treatment accorded to insurance proceeds can enhance your estate-planning strategy. In most cases, life insurance benefits are tax-free.

Confidence in Canada

Recent problems with American insurers may have raised concerns about the stability of insurance investments in Canada.

Canadian insurance companies are strictly regulated, with robust capital requirements and industry-funded, government-endorsed plans to protect policy holders in case of the failure of a Canadian insurance company.

Your options

Depending on your goals, time frame, and risk tolerance, we can help you decide which insurance strategy is right for you. Here are some of the ways that you can use insurance solutions in your portfolio.

Get potentially higher returns with insured annuities. If you are a risk-averse investor, you may hold some or all of your fixed-income allocation in Guaranteed Investment Certificates (GICs) for assured returns. But the modest returns of GICs may not meet your needs, and they are fully taxable at your marginal tax rate when held in a non-registered account. The Insured Annuity strategy involves purchasing a Life Annuity, which generates a tax-advantaged income stream, along with a permanent life insurance policy. The returns generated are often significantly higher than other fixed-income investments.

Safeguard your capital with segregated funds (“seg funds”). These funds are sponsored by insurance companies and offer a low-risk way to participate in the stock markets while safeguarding your capital against volatility.

Seg funds are similar to mutual funds and offer growth aligned to the underlying equity investments. However, they are also insurance contracts that guarantee 75% to 100% of your original investment after a predetermined time period — typically 10 years — and at death.

Some segregated funds have a “reset” feature allowing you to lock in market gains on certain dates, increasing the amount of capital guaranteed. As well, the assets can be distributed directly to your beneficiaries upon your death, avoiding probate fees and delays.

Guaranteed Minimum Withdrawal Benefit (GMWB) products. These investments are segregated funds that are designed to provide guaranteed, potentially increasing, retirement income.

The income stream is initially based on a percentage of your original deposit. However, GMWB products usually offer an annual (non-compounding) bonus, for a predetermined number of years when withdrawals are not made. There is also the potential to increase your annual income and death benefit guarantees through periodic resets.

Enhance your estate plan with tax-exempt life insurance policies. One way to enhance your estate plan is to shift some assets from fully taxable investments such as bonds and GICs into a permanent insurance policy (Universal Life). The investment value grows on a tax-exempt basis inside the policy, and is paid to your beneficiaries tax-free at death.

With this type of policy, you can invest the assets conservatively or more aggressively, depending on your personal risk profile, with the option of choosing investments with contractual guarantees. You benefit from continuing insurance protection, a reduction in ongoing tax liabilities, and typically a much larger estate for your heirs.

Contact us to discuss whether an insurance solution could work as part of your diversified portfolio.

Disciplined investing

The asset mix that’s right for you will depend on your objectives, risk tolerance, and time horizon. Having the right allocation makes it easier to stay the course through challenging markets — a cornerstone of disciplined investing.

In volatile markets, having an asset allocation strategy takes on added importance, as it provides a framework to manage your portfolio through changing conditions.

For instance, when the markets are strong, the equity component of your portfolio may rise above your target weightings. In this case, following your asset allocation plan could mean selling some of your equities and reinvesting the profits in cash or fixed income. Doing so would reduce your risk and restore your portfolio’s balance.

Conversely, market corrections can reduce the value of your equity holdings, bringing them below their intended weighting. In that case, it may be prudent to sell some bonds or other fixed-income holdings, which may have appreciated, and reinvest in equities. This can present an opportunity to add shares of quality companies at lower prices, creating the potential for future gains.

Revisit your plan

Market downturns also present an opportunity to revisit your investment plan and make sure your asset allocation is still in line with your risk profile.

You may find that your risk tolerance is now lower than when you established your original allocations. As well, if you haven’t adjusted your investment plan for some time, it may be time to adopt a more conservative asset allocation that reflects your age.

Here are some principles to keep in mind as you review your asset allocation and determine whether your holdings need to be rebalanced.

Employ your cash. The cash portion of your portfolio becomes even more strategic in uncertain markets. It can provide security in case you need money quickly, and act as an investment fund to take advantage of new opportunities.

Average your costs. Investing on a regular basis can potentially help you smooth out the average price you pay for an investment. Dollar-cost averaging can be especially beneficial in changing markets, as it may reduce your average price.

Look for value. Volatile markets can create opportunities for investors with a medium- to longer-term horizon. We can help you to identify sound, market-leading companies which trade at attractive prices and which fit your risk profile.

Keep an eye on bonds. An appropriate fixed-income allocation, in line with your objectives, can provide welcome stability and income when equity markets are unpredictable.

Think long term. It’s important to have a portfolio that can outperform over the long term, through varying market conditions. While you may adjust your holdings, it’s a good idea to maintain a focus on solid companies with strong balance sheets and a record of paying dividends. Remember that dividends may represent asignificant part of your long-term returns.

Getting going

Now is a good time to review your asset allocation. Speak to us about how to prepare your portfolio for all market climates.

Guaranteed Investment Certificates are deposit instruments issued by Canadian banks guaranteeing investors a predetermined rate of interest for a stated term, while offering security of the principal. In general, these are nonredeemable and non-transferable prior to maturity, but there can be exceptions depending on the type of GIC being held.

Why Invest in GICs

This product works similar to a savings account in many ways, while offering an enhanced rate of interest as compensation to the investor for locking in the funds for a period of time. GICs are classified as “Senior Debt” of Canadian banks and rank the highest (along with client deposits, banker’s acceptances, bank deposit notes, senior deposit notes and step-up extendible notes) in terms of investor protection and when considering the universe of fixed income instruments issued by Canadian banks. Further, GICs with an original date to maturity of 5 years or less are insured for an amount of up to $100,000 (principal and interest) by CDIC per member institution.

• Non-Redeemable GICs generally yield a higher return because the funds are locked-in until maturity. They can be selected with terms to maturity of 1 to 10 years for minimum amounts as low as at $1,000 with interest being earned on a monthly, semi-annual, annual, or compounding basis. Non-redeemable GICs are available for nonregistered and registered accounts for personal clients, as well as non-registered accounts for businesses and other organizations.
• Cashable GICs are one-year term investments that can be cashed out at any time after 30 days (or after 60, 90, 120 or 180 days depending on the products offered by the issuer) with full interest to the date of redemption. Cashable GICs can also be redeemed within 30 days (or within 60, 90, 120 or 180 days) without any interest. Cashable GICs are available for non-registered accounts for personal clients, as well as non-registered accounts for businesses or other organizations. Cashable GICs are NOT available within retirement income plans (i.e.: RRSPs, RIFs and LIFs).
  • The earliest Cashable GICs can be redeemed is five business days after purchase. Partial redemption requests have to be in $1,000 increments and not take the remaining balance bellow $1,000. In the case of a partial redemption, the full redemption amount requested will be taken from the principal and the balance of the principal plus all accrued interest on the blended principal will be paid at maturity.

In the event that a GIC holder passes away, the GIC can be redeemed at par ($100) or re-registered to another account upon submitting the necessary documents in settling the estate. In a joint account with the right of survivorship, the surviving member can either choose to redeem the GIC at par or have it re-registered to another account.

GICs and the Canada Deposit Insurance Corporation (CDIC)

CDIC is a federal Crown corporation created by Parliament which insures Canadians’ savings in case their bank or other CDIC member institution fails or goes bankrupt. The CDIC insures your GICs with member institutions from $1 to $100,000 (including principal and interest). To be eligible for deposit insurance protection, your GIC must be payable in Canada, in Canadian currency and the GIC must be repayable no later five years after the date of deposit.

Calculation of CDIC Insurance

Many people deposit money into more than one account or financial product. For example, you might have a GIC held in your personal investment account, a GIC held in joint investment account with your spouse, as well as a GIC that is registered in an RRSP. CDIC takes this into account and to be insured, the GIC must be held in eligible accounts. For example, one individual could have a $100,000 GIC from one issuer in an account in his own name, another $100,000 GIC of that same issuer in a joint account and another $100,000 GIC with that same company in an RRSP to get a total CDIC coverage of $300,000. CDIC covers up to $100,000 (including principal and interest) for EACH of the following:

• GIC held in one name (personal, business or other organization)
• GIC held in an RRSP
• GIC held in a RRIF
• GIC held in an account in more than one name (i.e. joint account)
• GIC held in trust
• GIC held for paying realty taxes on mortgage payments¹

However, please note that if you buy a $100,000 GIC one issuer in an account held in one name at a particular financial institution and buy another $100,000 GIC of that same issuer at another financial institution in an account held in one name, you are only covered for up to $100,000. The coverage of $100,000 is a function of the issuer who is a member institution.

Risk Factors

Although fixed income investments (GICs) are generally considered to be safe, they are subject to two types of risk. The first is interest rate risk. Once you have purchased a GIC, and you are locked in to a set rate of interest for a specific term, there is always the chance that rates will rise and the rate you are earning may no longer be competitive. The longer the term of your GIC, the greater the chance that rates will rise at some point.

The second type of risk is credit risk, the possibility that your principal will not be repaid or that the issuer will default on the interest payments. This becomes a concern when buying a GIC over $100,000, which is the maximum amount covered by CDIC. Although yields are normally higher to reflect the increased risk, issuers may fail to pay interest or be unable to make required principal payments, resulting in a loss of capital or a delay in the receipt of funds. An easy way to compare the quality of various GIC issuers is by referring to the bond ratings of their senior debt published by firms such as the Dominion Bond Rating Service, Standard & Poor’s Investing Service, and Moody’s Investor Service.

Taxes

When investing outside of the tax-sheltered environment of an RRSP or RRIF, it is important to consider the investment’s after tax rate of return. Interest income earned from investments such as T-Bills, bonds, and GICs are generally taxed at the highest marginal tax rate. The marginal tax rate is the rate applied to each additional dollar of income you earn.

Non-Residents

Non-residents are able to buy GICs as a Social Insurance Number (SIN) is not required for a GIC purchase. Further, nonresidents now have another incentive since the Government of Canada eliminated the withholding tax on arm’s length interest paid or credited to non-residents.

Going into the budget, the most important questions were, will the budget encourage lenders to lend, consumers to consume and businesses to invest? Lending, consumption and investment are the three actions that can help the Canadian economy get back on track and begin to grow gain.

2009 Federal Budget Summary

What happened?

Volatility is a normal part of market behaviour. However, the hypervolatility experienced during 2008 was exceptional. Markets were taken down by some extraordinary events. For Canadian investors, the housing crisis in the U.S. and the “freezing” of world credit markets, combined with a slowing U.S. economy and falling resource prices, created an extremely difficult market environment.

The leveraging used by hedge funds and other professional investors greatly exacerbated the turbulence. As share prices fell, they were forced to sell quality assets along with their speculative holdings in order to pay investors who were redeeming their units and leaving the market. All of these pressures led to market volatility that was more than twice as great as historical averages.

Some of these factors were shortterm and will soon pass into memory. However, others are more fundamental.

For example, the U.S. economic weakness will continue to affect Canada significantly in the months ahead, as a result of slower trade with the U.S., falling retail sales, and a softening housing market.

What’s next?

U.S. weakness is likely to mean further slowing of the global economy as well. Economic growth is expected to falter in the high-flying BRIC countries (Brazil, Russia, India, and China). However, even with a slowdown from its previous double-digit growth rate, China’s GDP
may still rise 8% in 2009, enough to maintain its role as a driver of the world economy.

Market history

The good news for investors is that periods of market turmoil are rarely long-lived. History has shown that the markets tend to come back, often stronger than before. For example, after falling 20.2% from more than 4,000 in July 1987 down to 3,191 in the October 1987 Black Monday sell-off, the then TSE 300 Composite Index (now the S&P/TSX) came back by rising 25.4% in less than two years to close above 4,000 in August 1989. And following the technology crash of 2001-2002, the S&P/TSX Composite Index rose 57.9% — from less than 5,700 — to 9,000 in just over two years.

Investors with diversified holdings and sound portfolio management principles can come through these periods in a good position to make healthy gains as the markets resume their normal upward course.

Steering your portfolio

Here are some considerations to help you put the recent market volatility into perspective and plan your investment strategy for 2009.

•  Take a long-term view. Investing for the long term is the best way to limit damage from short-term market volatility. Over extended periods of time, market corrections become relatively insignificant dips in a long, upward price rise (see chart).
• Diversify your holdings. Holding a targeted mix of stocks, bonds, and cash allows you to participate when the market is rising, yet protects your capital during periods of volatility. Diversifying your holdings by sector and country can also help spread the risk.
• Rebalance your portfolio. To stay diversified and limit risk, it’s important to rebalance your assets when significant market moves cause your asset mix to stray from your targets. For example, if you’re a longterm growth investor with 70% of your portfolio in equities and 30% in bonds, a drop in the stock market may bring your equity allocation below its target weight. As part of a disciplined periodic rebalancing program, you might consider selling your “excess” bonds and reinvesting the money in stocks, to bring your asset allocation back on target. This would allow you to lock in any gains on the bonds and take advantage of new growth opportunities.
• Focus on fundamentals. Much of the activity during the 2008 sell-off was due to the unwinding of leveraged positions, rather than fundamental weakness in the companies being sold. This has created opportunities to invest in high-quality companies at reduced valuations. Taking advantage of these opportunities can create long-term value as the stocks recover over time.
• Keep a defensive core. During times of market volatility, it’s often wise to remain defensive in existing portfolios, holding quality stocks in less economically sensitive sectors such as gold, utilities, and consumer staples. These can produce steady long-term gains and help you weather volatility. When markets are down, consider enhancing this core with selected stocks in sectors that have been oversold.
• Don’t invest on emotion. In investing, emotion is your enemy. When trading is volatile, focus on maintaining your strategy rather than selling into falling markets. In these times, the winners are usually not those who sell their positions, but those who buy them for the long term.

The troubles in the U.S. financial system may take months to work out. We’re here to answer your questions and review your portfolio at every step of the way.

Staying disciplined and focusing on your longer-term goals can be trying during times like these. If you have questions about the current market conditions and how they may affect your portfolio, please do not hesitate to contact us.

Headline vs. core inflation. The overall or “headline” inflation figure reflects changes in the Consumer Price Index (CPI); the “core” inflation figure strips out volatile elements such as energy and food, giving a clearer picture of economic conditions. 
However, these more volatile items also contribute to total consumer costs.

The effects. Prices for fuel, food, and transportation have been rising recently. However, costs for many consumer goods have been falling for years, and wage inflation is relatively tame.

Interest rates. The Bank of Canada attempts to keep core inflation within a band of 1% to 3% by controlling interest rates. These changes affect borrowing rates and can slow or accelerate the economy, resulting in new inflation trends.

Your portfolio strategy. Gold and commodities can offer some shelter for investors in an inflationary environment. Real-return bonds also provide an inflation hedge, as they promise a return over and above the CPI rate. It’s important to keep in mind that equities have traditionally outpaced inflation over the long term.

Home prices have indeed softened as the economy has slowed. But if you’re buying with the intention of living in your home or condo, and follow some sound real estate principles, short-term market events shouldn’t be a reason to put your plans on hold.

Here are a few of the principles to keep in mind.

Look for value

Resale value will probably play a major role in your decision. You can boost your long-term return by looking for a home in a neighbourhood with upside potential, or buying a less expensive house on a good street and upgrading it.

Know what you need

If you’re trading up to a larger home, your wish list may be longer than it was when you purchased your first home. But luxuries, such as a pool, may not always translate into better resale value (renovated kitchens and bathrooms add much more to a home’s resale value).

If you’re downsizing, be sure to consider access to shopping, transportation, healthcare facilities, and entertainment. Be aware that “smaller” doesn’t necessarily mean “less expensive.” A luxury condo or a small home in a high-demand area may cost more per square foot than your current home.

Know your limits

Seek professional mortgage advice, and take advantage of online calculators that can help determine how much you can spend without straining your budget.

Get preapproved

If you’re not ready to buy and interest rates are on the move, don’t forget to get preapproved for a mortgage. This can allow you to lock in a preferred interest rate.

Consider variable rate

Locking in an interest rate is a better strategy when rates are low. However, when they are relatively high, a variable rate mortgage can allow you to benefit from future rate decreases.

Your home is part of your overall financial plan. Our team of experts at ScotiaMcLeod can help you determine how to fit a new home purchase into your long-term plan.

On June 18, the federal government passed its 2008 Budget bill into law. This was a milestone for investors because it meant that the new Tax-Free Savings Account (TFSA) would be available to millions of Canadians beginning in January 2009. No doubt you have seen and heard a lot about this new savings vehicle in some way, shape or form.

• Capital gains and other investment income earned in a TFSA will not be taxed.
• Withdrawals will be tax-free.
• You can withdraw funds from the TFSA at any time and for any purpose.
• The $5,000 annual contribution limit will be indexed to inflation in $500 increments.
• The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.

Call us today to find out how you can take advantage of the new Tax Free Savings Account in your savings strategy.

Surveys show that today’s retirees plan to be more active than their parents, engaging in travel, continuing their education, or starting a small business. However, these activities may affect your cash flow requirements during retirement.

Take some time to think through the following questions. Then come in and speak with us about how to ensure your income needs are met in retirement.

Where will you live?

Many retirees find that the family home is no longer appropriate for their needs. If you expect to move, your choice will have significant financial implications. Downsizing to a condo in the city, for example, could free up some cash for investment purposes and help you reach your savings targets quicker. On the other hand, investing in a winter retreat in the U.S. could introduce significant extra costs and complicate your estate plan.

How active will you be?

An active retirement can be significantly more expensive than a stay-at-home lifestyle. Perhaps you’re thinking of going back to university to pursue a passion or to prepare for a second career, or maybe you’d like to start a business.

Will you travel?

Travel ranks high on many Canadians’ retirement wish lists. Depending on the scope and extent of your plans, you might want to start building a vacation fund. The new Tax-Free Savings Account is an ideal place to save for an extensive stay abroad. You can contribute up to $5,000 a year, earn tax-free returns, and withdraw your money at any time with no tax implications.

Have you factored in inflation?

Even modest inflation of 2% a year can increase your costs significantly over the 20 to 30 years you may spend in retirement. This means it’s important to structure your portfolio with a prudent mix of equities. Historically, equities have outpaced inflation by a greater margin than fixed-income and cash-equivalent assets.

Will your family need help?

Many Canadians want to help their children or grandchildren financially after retirement. And with today’s longer lifespans, you may also find yourself caring for elderly parents while you are in your 60s or 70s.

What about health care costs?

It’s important to plan for future health needs, especially in your later retirement years. It’s possible that you or your spouse may need an extended stay in a nursing care facility. This can involve a significant cost. With extra savings or long-term care insurance, you can cover these expenses without drawing on your retirement savings.

What will you leave behind?

You may wish to leave a sizeable estate for your loved ones. This means you’ll need to live on your recurring income without touching these assets. This can affect how you allocate your assets, and the total savings you’ll need. We can work with you to build an overall retirement plan and calculate your financial needs to fund the retirement you envision.

Five brief months ago, the TSX Composite Index was at a record high. In 20 weeks, the market has lost nearly half its value; an unprecedented move in unprecedented times. Of the 241 companies in the TSX Composite Index, 126 have seen their share price decline more than 40% since the beginning of the year. Almost 180 companies in the S&P 500 have seen their share prices decline by a similar amount. As the calendar year-end approaches, it is timely to review portfolios in an effort to identify the positions currently trading at a loss that may be sold to take advantage of the tax benefits.

Tax Loss Information Sheet

How it works. Deposits into your account are not tax-deductible. However, any interest or investment earnings, including capital gains, are not subject to tax. As well, you can withdraw money at any time, for any purpose, without facing tax. Any amounts withdrawn can be put back at a later date, without reducing future deposit room.

Many ways to use. You can use your account to save for shorter-term goals, such as buying a car, renovating your house, or building an emergency fund. A tax-free account can also help you achieve more tax-efficient savings after you’ve filled your RRSP contribution room.

You can also contribute to your spouse’s or common-law partner’s tax-free savings account. And if you’re over 71 and have collapsed your RRSP, this account provides a new opportunity for tax-free savings growth.

This useful new savings tool is something that all investors should consider incorporating into their 2009 financial plans. If you’d like more information, we’re here to help.

Here are a few ways to avoid paying more than you need to.

• Tax-loss selling. Plan any tax-loss sales of securities before the end of the year, so they can be applied against capital gains made during 2008. For the 2008 taxation year, any tax-loss security sale should be made with sufficient time for your trade to settle before the end of the year.
• Mutual fund sales. Time any mutual fund sales to take place before the funds’ yearly distributions, usually made in December. These represent a taxable gain. We can help you decide if tax-loss selling and sales of mutual funds are right for your situation.
• Professional and business purchases. Complete any tax-deductible purchases before year end, in order to claim them for 2008. These include business equipment, such as computers and office supplies, as well as professional services such as lawyer’s fees.
• Charitable donations. Set aside the funds now for any charitable donations you intend to claim for 2008.

One of the many benefits of having a non-registered portfolio is that it allows you to benefit from the tax advantages accorded to some investment classes. 

There are three main types of investment income — interest income, dividends, and capital gains. Each of these is subject to different tax treatment when held outside your registered plan.

We can help structure your portfolio to effectively allocate your investments between your registered and non-registered portfolios, which can help to reduce the tax you pay on investment earnings.

Tax treatment of investments.

Equities and equity-based investments receive the most preferential tax treatment — only 50% of any capital gains earned are taxable.

Dividends received from shares of taxable Canadian corporations qualify for the dividend tax credit, which reduces the tax you pay on dividend income.

Interest income from investments such as bonds, Guaranteed Income Certificates (GICs), and high-interest savings accounts is fully taxable at your marginal rate.

Depending on your objectives and your holdings, it may make sense to hold interest-bearing investments inside your tax-sheltered registered plans, while holding investments that generate capital gains outside your RRSP.

A periodic review of your portfolio can help fine-tune your overall asset allocation.

Look for tax-efficient income.

Income trusts produce distributions in the form of interest, dividends, and return of capital, which is not taxable but can increase your future capital gains.

However, some distribute primarily interest income, which is fully taxable.

Choosing trusts that produce a higher level of dividends and return of capital will leave you with better after-tax gains.

Income trusts that produce predominantly interest income may be better held in your RRSP.

Fine-tune your cash flow. Holding a “ladder” of bonds with different maturities can be a good way to derive regular income from your portfolio. But while bonds have a place in every investor’s portfolio, there are other ways of producing the needed cash flow while minimizing your tax liabilities.

Distributions from high-income mutual funds, for example, may be more tax-effective than drawing income from an interest-bearing investment.

As well, you can derive income from a portfolio of mutual funds through a systematic withdrawal program, which uses the growth of the funds to provide the regular cash flow you need. Part of these returns may consist of tax advantaged capital gains.

We can ensure your overall portfolio is structured in a tax-effective manner that is tailored to your financial situation.

In North America and around the world, massive investment will be needed to build and replace roads, public buildings, water and electrical systems, airports, and other structures that modern economies depend on.

Growth and stability

Pension plans have long been advocates of infrastructure investing, favouring assets such as toll roads and utilities whose operations produce a long-term income stream.

Today, there are many opportunities for individual investors to participate in infrastructure as well. Because the ownership and management of these projects can run for decades, these investments have less correlation with stock and bond markets — making them a compelling diversification tool.

Why now?

Infrastructure in many developed countries is in need of dramatic overhaul. In 2005, Canada’s provinces and territories identified $97 billion in required spending on transportation facilities alone.

The American Society of Civil Engineers, meanwhile, estimates that after years of underinvestment, renewing the United States’ aging infrastructure will take an expenditure of about $1.6 trillion over five years. To cite one example, 3,500 of the nation’s dams are considered to be unsafe.

In China, India, and other developing countries, infrastructure need is being driven by urbanization. Populations are growing and people are moving to the cities, creating a demand for construction services and materials to build the schools, public transportation systems, and other facilities they will need.

How to invest

Perhaps the simplest way to benefit is to invest in the companies that will build and operate the new wave of projects. This includes the civil construction and engineering companies that plan and build large-scale projects. In some cases, engineering companies are choosing to manage the projects they build, adding a long-term income stream that can help stabilize returns on investment.

Canada has a handful of companies with domestic and international experience. But there are also opportunities in the United States, and in foreign markets such as India and Hong Kong, which can provide access to the burgeoning activity in Asia.

A wide variety of other companies will also benefit from the expected infrastructure boom. These include specialized service providers such as electrical contractors and environmental companies, and suppliers of heavy machinery, power generation equipment, pipelines, and electrical components. The list includes companies that supply basic materials used in construction projects.

There are many ways to take part in infrastructure. You can invest in individual stocks directly or gain diversification through mutual funds. Canada has a small, but growing number of funds that specialize in domestic and global infrastructure investments.

We can work with you to identify investment opportunities in the infrastructure sector that fit with your portfolio and investment goals.

Food, one of the world’s most basic commodities, has become a hot investment trend. While a strong dollar has helped keep Canadian food costs in check, world food prices have risen by 80% over the past three years, according to the World Bank. This has led to some significant gains in the share prices of some food and agriculture stocks. Should we expect more gains ahead?

Although food prices may moderate in the near term, several underlying trends are coming together to suggest that high prices may be a fact of life in the coming years.

The most prominent of these is the rising demand for meat and dairy in China, India, and other developing countries. Greater affluence in these countries is contributing to changing diets, which is driving up prices and also raising the cost of inputs such as animal feed and fertilizer. High oil prices have also made producing and transporting food more expensive.

The boom in biofuels has also contributed. Driven by government subsidies, ethanol production is leading to much higher prices for corn. Droughts in Australia and Africa have devastated crops, putting pressure on food supplies. The involvement of large investment funds in world food markets has also driven up prices. For investors, these factors point to continued strength in companies that produce food, farm equipment, fertilizer, pesticides, and other inputs. Railroads that move many of these products may also see some benefits.

Let’s discuss the role that agricultural stocks can play in your portfolio, in light of your goals and risk tolerance.

Please join us in welcoming Ryan Webster as the newest member of our team. Ryan has been a wealth advisor at ScotiaMcLeod for the past 2 years. During that time, he’s helped clients achieve their financial goals through personalized financial solutions and relationships built on trust, and we know he’s going to bring the same professional attitude to his work with us. Ryan has a post-grad degree in business and is working on his CFP designation. You can reach Ryan directly at (519) 660-3200.

On the Canadian front the S&P/TSX Composite gained 4.4% during April backed by a large 8.7% gain in the Energy sector, the Composite’s largest sector weighting, as the price of crude knocked on the door of US$120 per barrel amid strikes and geopolitical issues.

Fertilizer related companies soared during the month as fertilizer prices continued to move up. Food prices which have been climbing caused social unrest in various locations around the world, which will undoubtedly make “food for fuel” much more of a political hot potato going forward. By the end of the month fertilizer stocks had retreated but remained positive for the month. On a year-to-date basis the S&P/TSX Composite is positive by 3.9%, one of the few on a global basis, thanks primarily to the Energy and Materials sectors. Combined these two sectors represent 49% of the overall Composite, up from under 44% just one year ago, and 28.5% five years ago.

The event will take place at Springbank Gardens (formerly Wonderland Gardens – Wonderland Road – near the Guy Lombardo Museum) on Saturday, May 31st, 2008. Registration time is at 10:30 a.m. to be followed by the run/walk to Storybook Castle and back. Pledge forms are available at your local Scotiabank branch. Alternatively I may provide you with an electronic copy by email if requested.

The BCE (BCE) saga continued to drag on through March and despite two favourable
announcements the stock ended the month 2.6% lower at $34.75. The company won in the case filed by certain holders of Bell Canada bonds, however an appeal hearing will begin on April 28th.

The CRTC approved the purchase of BCE subject to certain conditions being met. Investors concerns seem squarely focused on whether or not the consortium led by Ontario Teachers’ Pension Plan will obtain the funding from the banks. TD Bank (TD) CEO Ed Clark has said publicly that “we will be there with our money.”

The biggest news story in the equity markets during March had to be that venerable Bear Stearns (BSC), which has been in business for 85 years, would be taken over for approximately US$2 per share (subsequently raised) by JP Morgan Chase (JPM). The Federal Reserve agreed to fund up to US$30 billion of Bear’s less liquid assets. The announcement of the deal unleashed another torrent of selling within the battered investment dealer and brokerage sector. Investors started to sell other investment banking firms including Lehman Bros. (LEH) with sellers routing the stock by more than 50% intraday on March 17th, before recovering some of the losses. Lehman subsequently reported earnings later that week which exceeded analyst consensus, and shares have subsequently rebounded. Bear Stearns which had a few days earlier said that it had no liquidity issues, suddenly had them as investors withdrew funds. The Fed announced that it had authorized the Federal Reserve Bank of New York to create a lending facility “to improve the ability of primary dealers to provide financing to participants in securitization markets.” This measure was put in place to help dealers obtain liquidity. So with the first quarter behind us, perhaps one of the simplest conclusions that we can make is that market volatility will be with us for some time to come.

Increased flexibility for locked-in retirement savings – Eligible Canadians 55 years and older are now entitled to unlock up to 50 per cent of their Life Income Fund (LIF) holdings into a tax-deferred savings vehicle with no withdrawal limits. As well, individuals aged 55 or older with holdings of up to $22,450 will be able to wind up their accounts with the option to convert to a tax-deferred savings vehicle.

Encouraging higher learning – Families now have more years to contribute to their children’s Registered Education Savings Plans (RESPs). The contribution period and the deadline to plan termination have been extended by 10 years to 31 and 35 years, respectively. (Note the maximum lifetime contribution limit of $50,000 has not been raised).

New ways to give – Canadians can now receive a capital gains exemption for donating unlisted securities to registered charities when they are first exchanged for publicly-traded securities. This is an extension of the existing capital gains tax exemption for donations of publicly traded securities.

Spotlight on Tax-Free Savings Accounts (TFSAs)

The introduction of TFSAs represents a huge new opportunity for Canadian investors. In effect, TFSAs are the mirror image of Registered Retirement Savings Plans (RRSPs).

While TSFAs are described in the budget documents as being helpful to people saving at any age, they will be especially helpful to people saving for retirement. For younger people, the prospect of tax-free investment returns over a period of 20 or 30 years is enticing. For people in their early 50s who need to step up their saving for retirement, TSFAs represent an additional source of significant tax savings that can remain open long after an RRSP has been collapsed. From a retirement income point of view, withdrawals from TFSAs should have a higher tax priority than withdrawals from unregistered assets, with the very important added advantage that the investment earnings inside the plan are tax-free.

Highlights:

Contributions can be made from after-tax income to a maximum of $5000 annually, and this will be indexed to inflation in $500 increments. On a practical note, eligible investments for these plans will be basically the same as for RRSPs, and any institution that can now open an RRSP will be able to open a tax-free savings plan in 2009.

The tax advantage of a TFSA is the absence of tax liability on any investment earnings inside the account. Nor is there any tax payable on withdrawals from the plan. This is an important contrast to RRSPs, where there is no tax liability on investment earnings within the plan, but total withdrawals (principal and investment earnings) are taxed immediately.
Since there are no tax consequences for withdrawals, there is no upper age limit when the plan must be collapsed (unlike an RRSP). This is a benefit for Canadians who work or are planning to continue working into retirement.

Unused contribution room in a TFSA can be carried forward, and a withdrawal creates contribution room equal to the amount withdrawn. Spousal TFSAs will be allowed. Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.

Unlike income from a RRIF (or other equivalents), withdrawals from a TFSA will not be considered pension income, and will not be eligible for pension income splitting.

Similar types of accounts are in use around the globe and have become a preferred savings vehicle for many investors. The TFSA is similar to the Roth IRA in the U.S. and the Individual Savings Account (ISA) in the U.K.  Both programs started with smaller maximum contribution rates, which have increased over time.

Have the fundamentals of many commodities all improved at the same time to justify seeing so many of them, whether they be energy, metals or agricultural, move higher in price?

In all likelihood the answer is no. Yes, we can attribute some of the increases seen to fundamentals and seasonality, but we’ve also likely seen momentum investors and hedge funds increase the flow of funds into this part of the market. As is the case with any market downturn, investors are constantly on the lookout for winning investments to offset losses. Commodities appear to have been the “winning” area of the market last month.  If not completely related to fundamentals, why have most commodities enjoyed such gains? The answer lies in the weakness of the U.S. dollar. Since almost all commodities traded globally are priced in U.S. dollars, if the U.S. dollar weakens then all of the sudden commodities become more expensive for Americans to buy, thus driving up U.S. denominated prices. For example, in the month of February, U.S. natural gas prices have increased 12.4% while oil prices were 11.0% higher in the energy space. Agricultural commodities were higher last month with corn, soybeans and wheat up 9%, 19% and 15%, respectively. On the precious metals front, gold prices added 5.2%, while silver prices finally played catch up to gold adding 17.1%. And in base metals we saw aluminum move higher by 14.8%, copper advance 15.8%, nickel add 15.3% and zinc climb 9.1%. Obviously there is a lot of money chasing these commodities at the same time when we see increases such as these across the board. For that reason we would advise caution when stepping into the commodity space today as investors must pay close attention to valuations. We can make a good argument for the gains made by some commodities such as precious metals as the U.S. dollar has weakened, supply/demand fundamentals remain tight and U.S. inflation remains high. However, it is becoming more difficult in the near term to justify the magnitude of other commodity gains, especially as the picture for U.S. growth remains unclear.

Our overall view of staying defensive in current markets is still in place. Although commodity prices may have provided support for the TSX Index during the month of February, we have seen little, if any improvement to the credit markets which will be a necessary catalyst to turn around equity markets in the long run.

In Canada, the S&P/TSX Composite which has risen for the last five years quickly erased all of 2007’s gains and delved into 2006’s returns, including a stomach-churning loss of 605 points on Monday, January 21st as equity markets worldwide sold off. Fortunately the U.S. markets were closed for a holiday that day, and the U.S. Federal Reserve (Fed) declared an intra-meeting Fed Funds interest rate cut of 75 basis points the next day. It was the first time the Federal Reserve had made an intra-meeting cut since September 2001.

The Fed cited the weakening economic outlook and increasing downside risks to growth. By month end the Fed had doled out another 50 basis point cut at its regularly scheduled meeting to leave the Fed Funds rates standing at 3.00%, down from the 5.25% level seen before its first cut in September, 2007.

The main catalyst for the slowing American economy has been the weak housing market and to put it into perspective, U.S. Federal Reserve Chairman Ben Bernanke noted that “about 21% of subprime adjustable rate mortgages are ninety days or more delinquent, and foreclosure rates are rising sharply.” The housing market has put continued focus on the ratings of so-called “monoline” insurers, which have provided insurance to numerous financial institutions on their Collateralized Debt Obligations (CDOs) and Residential Mortgage Backed Securities (RMBS).

By month end, bourses around the world had firmed up off their lows as bargain hunters combed through the market and the U.S. interest rate cuts gave some reassurance to investors. Nonetheless many world indices still posted double-digit percentage declines for January.

Fallout from credit markets will continue into the second quarter of 2008 and possibly the second half of the year, restraining financial performance and possibly the TSX Index.

The second half of 2007 became synonymous not only for equity price declines but also for words and phrases such as sub-prime, the consumer, asset backed commercial paper, and mortgage backed securities.

In hindsight, we can conclude that the market was caught off guard by the severity of what has been labelled as the “credit crunch.” We do not believe the market was surprised by the decline in the U.S. housing market, as this trend has been in place since 2006. We do however believe the surprise and resulting selling action was a result of the depth and magnitude of financial engineering which has resulted in investors and financial institutions sitting on credit related products which to this day are difficult to explain and value.

A lack of clarity leads to nervousness and nervousness leads to selling, which we saw not only in July and August but also in November and December as the extent of the credit crunch became more apparent. We could write volumes on the credit fallout but will summarize by saying that a lack of clarity amongst financial companies led to a broad market sell off and raised a number of questions about the direction of the U.S. economy. We do not believe investors will rush to put capital back into Financials until the full impact of the credit crunch becomes clear. The problem is, the fallout from the credit market continues to evolve and, there is no return to normalcy expected in the near future. Many U.S. and global banks took substantial write-downs in the fourth quarter of 2007. However, most investors expect more write-downs are forthcoming as credit markets have deteriorated further, leading us to conclude that Financial stocks will continue to come under pressure during the first quarter of 2008 and almost certainly beyond.

Canadian banks have shown that their exposure to riskier assets is not as severe as what has been revealed at U.S. and global financial institutions. However, the financial industry is a global industry, so investors tend to stay away from the sector as a whole regardless of geography.

Therefore, whether justified or not, Canadian bank stocks will likely be restrained by the credit markets until confidence is restored. Since Financials tend to make up a large percentage of many indices including the TSX, it is possible that some major exchanges worldwide will see little upward momentum in the first half of 2008

The TSX Index should move higher in 2008 with single digit returns, however, this does not mean that an overwhelming majority of stocks will finish the year in positive territory.

Even after the declines of the banks, Financials, Energy and Materials continue to comprise close to three quarters of the TSX Index.

If you want to know where the index is going this year, then you really only need to focus on these three sectors. Banks may underperform in the first half of the year but could see some momentum in the second half of 2008. The belief is that gold and fertilizers may offset any potential weakness amongst base metals thus supporting materials that suggest that Canadian energy stocks should be able to post positive returns in a high oil price environment.

You’ll also note that our enthusiasm for positive returns is somewhat restrained due to current credit markets and the related effects that may emerge worldwide.

We believe there is a good chance for the TSX to post a positive simple return in 2008, but that return will likely not reach double-digits.

We would also caution investors that market capitalization indices such as the TSX can be misleading due to the weighting of individual stocks within that index. A recent example shows that even though the TSX posted a simple price return of 7.16% in 2007, 155 stocks within the index declined whereas only 146 advanced and 2 were unchanged. In other words, the TSX only advanced because most of the higher weighted stocks appreciated while more of the lower weighted stocks declined. Our expectation for single digit returns again this year opens the possibility that we could see a repeat of what happened in 2007. In Canada, we believe there are a few focus themes that should emerge during the first half of 2008 if not the entire year:

• Defense may be the best offense
• Portfolios should continue to hold gold
• Canadian banks look attractive, but may outperform in the second half of the year following first half under-performance
• Base metals may lose some shine, but the Materials sector will likely move higher
• The days of sky rocketing energy equity prices are long over, but the sector still offers value
• Opportunities still exist amongst select telecommunications and technology stocks