Economic and Market Outlook 2009 - 2010

 Canada - Still a Great Place to Invest

GARETH WATSON, CFA - DIRECTOR, PORTFOLIO ADVISORY GROUP

After a rocky first quarter of 2009, Canadian equity markets appreciated by 19% in the second quarter and continued to post impressive returns in the third quarter by adding another 9.8% bringing year-to-date gains as of September 30 to the 26.8% level. Over 90% of these gains have come from the three highest weighted sectors in the TSX Index (Financials, Energy and Materials), thus indicating that investors expect signs of economic recovery already witnessed will only strengthen.

 In the past we have provided you with some larger macroeconomic arguments; however, since those arguments really haven't changed much we will instead provide you with some observations as to what we are currently witnessing from an economic and market perspective:

• Equity markets worldwide have rebounded nicely off their lows. Canada is not alone as the emerging BRIC (Brazil, Russia, India and China) markets have lead major market returns in 2009. The TSX Index has provided the best equity market returns this year amongst the G7 Industrialized nations.

• The worst of the credit crisis is likely behind us, but problems will persist for years. A real estate crisis ballooned into a corporate credit crisis and is now a consumer credit crisis south of the border. While the absolute worst of the credit crisis is likely over, we will feel remnants of it for years to come and especially as governments and central banks continue to provide life support to the global financial system.

• Government intervention/rescue/stimulus appear to have averted a depression. Now we just need to see the global economy get back to a self sustaining level without the need for intervention.

• Canadian interest rates are at all time lows and will remain there for months. While this is good news for individuals that want to borrow and can get access to such credit, it is also remarkably clear that over the next few years interest rates have nowhere to go but up.

• Emerging markets are recovering more quickly as producers replenish inventories. Before the western world can consume goods and services, the emerging markets have to produce them in the first place. Therefore, it is only logical to see the emerging markets improve economically before the western world follows.

• The western world consumer appears to be saving rather than spending - unemployment is still high and U.S. housing prices are still low. These factors do not create an environment ripe for consumption; therefore the global recovery is not without its challenges.

• The recession may technically end in the third quarter for North America, but the recovery could be sluggish if the consumer does not pick up his/her rate of consumption. The specific time the recession ends is irrelevant; how we position ourselves for the recovery is what's important.

• U.S. dollar weakness has pushed commodity prices higher and speculators have returned to markets they briefly abandoned. Fundamental analysis of commodity prices can become meaningless when commodities are used for investment rather than consumption.

• Canada emerged as a winner during a difficult time. Not only has our financial system withstood the blows of the credit crisis; our federal and provincial governments are holding in much better than our counterparts in the United States. While deficits are certainly a reality this year, those deficits in relative terms to our debt are still manageable.

There is no denying the fact that the rebound for the TSX Index has been impressive. While we can raise some near term concerns when it comes to things such as resource prices and U.S. consumer equity, we are bullish for the Canadian stock market over the long term and believe this country will be a great place to invest as the global economy accelerates into 2010 and beyond.

This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it.The author is an employee of ScotiaMcLeod, a division of Scotia Capital Inc. ("SCI"), but the data selection, analysis and views expressed herein are solely those of the author and not those of SCI.The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value aresubject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor SCI can make any warranty as to the accuracy or completenessof information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or othertransaction on the basis of this publication, but should first consult your Wealth Advisor, who can assess all relevant particulars of any proposed investment or transaction. SCI and the author acceptno liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice.® Registered trademark used under authorization and control of The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member CIPF.833 9567-241 10/09