cibc global asset management inc. for internal use asset allocation and quantitative team quarterly...

CIBC Global Asset Management Inc. For internal use

Asset Allocation and Quantitative Team

Quarterly Forecast2011 Highlights

Asset Allocation and Currency Management TeamFebruary 7, 2011

CIBC Global Asset Management Inc. | January 11, 2011For internal use

B Currency Strategy Highlights

A Global Economic Highlights

Agenda

C Equity Strategy Highlights

D Investment Themes and Return Forecasts


Global Growth: Upward Revisions To Outlook

We have revised up our 12-month global growth forecast from +4.1% to +4.4%.

We are expecting a US-led growth reacceleration in the developed world over the second half of 2011 to 2.2%.

Growth in the emerging world will still largely exceed that of the developed world, reaccelerating in second half of the forecast horizon to +7.2%.

CGAM 12-month Global Growth Forecast: Winter 2011

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2

3

4

5

6

7

8

Fall 2010 Winter 2011 Fall 2010 Winter 2011 Fall 2010 Winter 2011

Source: Datastream, CIBC Global Asset Management Inc. calculations

Developed Emerging World

y/y

% c

han

ge

A. Global Economic Highlights


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2008 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1

Upward revisions to our global inflation forecast to +3.4% owing to improved commodity outlook.

Immediate risk of deflation is falling. Inflation forecast revised up from +1.0% to +1.4% in the developed world. Muted core inflationary pressures.

Inflation re-acceleration in the emerging world to +6.0%. Food & energy price inflation to exert upward pressure on headline inflation in Emerging Asia.

CPI Inflation: Emerging vs. Developed Countries

CGAM 12-month projection

| Page 4


Global Inflation: Upward Revisions To Outlook

Emerging World

Developed World



Global Monetary Policy: Further Normalization In many emerging economies, an ultra-easy monetary policy stance can no longer be justified. Central

bankers will be taking the foot off the accelerator.

Given the lackluster recovery and the fiscal drag ahead, most central bankers in the developed world will stay on the sidelines.

The end result is a global monetary policy stance that still qualifies as very accommodative through 2011.

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Developed Emerging Asia LATAM EmergingEurope

World

current policy rate 12M forecast

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tA. Global Economic Highlights

| Page 5


World: Policy Rate Increases Projected Over the Next 12 Months


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J apan UK Spain Europe I taly US France Germany SW Sweden Norway AustraliaCanada

The Canadian recovery has been consumer led, with consumer spending via strong credit expansion the main growth factor in 2010.

Solid labor market conditions point to continued albeit slower growth in consumer spending next year.

Relative to others, Canada will enjoy the largest growth contribution from consumer spending in 2011.

Canada: Consumer Led Expansion

Source: CIBC Global Asset Management Inc.

Growth Contribution Consumer Spending (Current vs. 12-Month Forecast)

Strong contribution expected in 2011

Per

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- 2

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Canada Norway Australia Japan US France Spain SW UnitedKingdom

I taly Europe SwedenGermany

The strength of the Canadian dollar is deeply hurting the Canadian export sector.

Canadian net exports have acted as an important drag on growth in 2010 and are projected to continue to do so in 2011.

In 2011, Canada will be the developed economy most impacted by the strength of its currency.

Canada: Currency Strength Sapping Exports


Contribution to Real Growth: Net Exports (Current vs. 12-Month Forecast)

Biggest drag on growthfrom net exports 201

0

2011



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1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1

perc

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United States

Canada

One of the key changes in our baseline forecast is an improved outlook for the U.S. economy. We have revised upward our 12-month U.S. economic forecast from +2.2% to +2.7%.

The extension of the Bush tax cuts and the compromise announced by the President, result in a major reduction in the fiscal drag in 2011.

Additionally, the U.S consumer should provide a bigger boost to overall economic activity in 2011. Employment and wage conditions are expected to improve, and progress is being made by U.S. households in terms of debt deleveraging.

U.S.: Anticipating An Economic Growth Acceleration

Total Household Debt as % of Disposable Income: United States vs. Canada

projection




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1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1

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United States

Canada

U.S. household debt as a percentage of total net worth at more than 30% remains high by historical standards. Continued efforts to deleverage are expected until this ratio is more in line with its long term average. This should keep the U.S. economic recovery relatively modest by historical standards as this ratio declines closer to 24% which seems to be the leverage ratio households have been historically comfortable maintaining.

Deleveraging also appears necessary for Canadian households, but the magnitude is much smaller.

U.S.: Consumer Debt Deleveraging Cycle Not Over

Total Household Debt as % of Net Worth: United States vs. Canada




- 200 - 50 100 250 400 550

Germany

France

Europe

I taly

Spain

I reland

Norway

Portugal

Switzerland

Sweden

Greece

Monetary conditions in Europe as a whole are actually -93 bps easier than they were at the start of 2009. Nonetheless, the divergence across the region is striking.

Monetary conditions have substantially tightened in Greece, Sweden, Switzerland, Portugal, and Norway. However, conditions have eased in Germany, France and Italy. These three core countries account for

66% of the European Monetary Union.

Europe: Easy Monetary Conditions


Change in Monetary Conditions* Since Start of 2009 (in bps)


* Monetary conditions refer to the combined change in short-term and long-term interest rates,


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J apan U.K. Spain Europe I taly U.S. France Germany Switzerland Sweden Norway Australia Canada

Consumer spending should contribute more substantially to overall European growth in 2011. Europe should benefit from an expected pick up in German consumer spending through their exports to this

largest Eurozone market.

Europe: Consumers To Provide A Boost


Growth Contribution From Consumer Spending (Current vs. 12-Month Forecast)

Boost from EU consumer

German consumer recovery

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115

employment cycle

In terms of employment, emerging Asia is well ahead of the developed world. While most developed economies have only partially recovered so far, emerging Asia is moving into its

second year of expansion. China, India and Indonesia are well ahead of the pack.


Business Cycle Positioning

Asia: Well On The Road To Recovery

RECESSION RECOVERY EXPANSION Y1 EXPANSION Y2

• Singapore• Taiwan

• Philippines

• India• Indonesia

• China

• South Korea and Hong Kong

• Malaysia


• Developed World


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Developedworld

Korea India Singapore EM Asia Thailand Indonesia Hong Kong Philippines Malaysia

The Asian consumer has awakened. In sharp contrast to the developed world, consumer spending has been the main source of growth across Asia.

The strongest growth in consumer spending has been observed in Malaysia, the Philippines, Hong Kong and Indonesia.

Asia: A Consumer-Led Recovery


Contribution to Yearly GDP Growth Emerging Asia - Consumption 2010Q2

Per

cen


sharp contrast between emerging

Asia and the developed world


We expect the C$ to rise modestly against the U.S.$ over 12 months helped by strengthening energy prices and widening interest rate differential as the Bank of Canada continues its renormalization of monetary policy.

CAD/USD appreciation is expected to be modest as the exchange rate remains overvalued based on our proprietary longer term valuation metric.

We believe the US dollar will be weaker on a broad and trade-weighted basis. We expect U.S. short term interest rates to remain amongst the lowest in the world, making the dollar unattractive from a yield perspective relative to other countries. We expect foreign exchange reserve managers to continue diversifying their assets out of the U.S. dollar and into other G10 and some emerging currencies. Finally, the U.S. needs to see its current account deficit narrow further particularly relative to Asia which entails a weaker dollar relative to emerging Asian currencies as part of the ongoing economic rebalancing process.

We anticipate the Euro to appreciate slightly vis-à-vis the U.S. dollar over the forecast horizon. We expect that strong political commitment from Eurozone member countries will prevail and that the core countries will continue to support the periphery but by imposing stringent restructuring conditions. Volatility will remain present as policy coordination within the Eurozone will be slow and uncertainty regarding banking sector losses will remain high. The Euro should underperform its regional neighbours based on relatively weaker domestic demand and lower interest rates.

The outlook for the Japanese yen has not yet improved. We anticipate foreign interest rates to move further against Japan as more central banks pursue monetary policy tightening via higher policy rates while the Bank of Japan boosts its quantitative easing program through more purchases of government bonds in order to support a flailing economic recovery.

Currency: Forecast Summary

B. Currency Strategy Highlights



Canadian Dollar: Cyclical Support To Oil Prices, The Loonie A continuing global economic recovery with better contribution from U.S. demand is expected to push oil prices close to $100/ barrel (WTI). In recent years, the correlation between the CAD/USD exchange rate and oil prices has been particularly high. Our expectation of higher energy

prices points to further upside for the Canadian dollar as Canada’s terms of trade improve. Stronger U.S. domestic demand should also improve Canada’s trade balance.

Volatility may emerge as views evolve around such themes as the appropriate degree of Chinese monetary policy tightening and the resolution of European sovereign debt challenges.

Source: Datastream.

CAD/USD to Move Up with Oil Prices


We now have greater confidence that the Canadian dollar will trade slightly stronger than parity at times during the year ahead, with improving economic fundamentals underpinning this more constructive view. The Bank of Canada is likely to embark on a modest second round of monetary policy tightening from mid-year that pushes the Canada/U.S. short-term interest rate differential further in Canada’s favour.

Nonetheless, and despite a sounder fiscal position in Canada than the U.S., our longer term valuation metrics suggest that the Canadian dollar is overvalued. This greatly truncates our CAD$ bullishness.


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2000M01 2001M09 2003M05 2005M01 2006M09 2008M05 2010M01

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fair value

USDCAD (LHS)

deviations from fair value (RHS)


Canadian Dollar Valuation (USDCAD & Fair Value Estimate)

C$ undervalued

C$ overvalued

Canadian Dollar: Valuation Roadblock


With continued current account surpluses in Asia and a large current account deficit in the U.S., there is further room for economic rebalancing in 2011.

This current account imbalance exists mainly because authorities in major emerging economies have been intervening in the currency market to slow the appreciation of their currencies to foster export competitiveness. As shown in the chart below, the greater the intervention in the form of FX reserve accumulation, the lesser the currency appreciation.

With China and other Asian economies facing increased political pressure to help rebalance economic growth away from exports and foster more domestic-led growth, we expect Asian currencies to appreciate particularly against the Yen and the USD.


Asian Currencies: Authorities Hampering Inevitable Appreciation

Real Effective Exchange Rates and Reserves

Source: Datastream.

* From November 2009 to November 2010


Canadian/U.S. Equity: Sector Valuation Comparison (continued)

Canada vs. U.S. Sector Valuation

Source: IBES

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95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Energy Relative Forward P/E

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95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Materials Relative Forward P/E

The outperformance by the Canadian Energy and Materials sectors has pushed their P/E valuations to historical peaks relative to their U.S. counterparts.

This should make it more difficult for these sectors to continue the same pace of outperformance, particularly if the U.S. recovery become a little more robust in 2011.

C. Equity Strategy Highlights


U.S. P/E in Various Inflation Environment


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Average P/E

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Average 1-Year Change in P/E

U.S. Equity: P/E Expansion Possible In 2011

The equity market prefers an environment of stable inflation, with the inflation “sweet spot” being between 1% and 3%. Below 1%, the threat of deflation and the uncertainty on earnings pushes valuation lower. Currently, P/Es are consistent with this type of environment. But inflation is now stabilizing and as deflation becomes less probable, P/Es should rise.

US and European equities should get a marginal boost from higher P/Es. Emerging markets, while enjoying stronger growth, will face heftier monetary policy tightening leading to flatter P/Es.

The notable exception is Canada, where P/Es are already trading above fair value. The energy and materials sectors, accounting for 50% of the market, are expensive relative to their international peers.



Emerging Markets: Supported By Strong Fundamentals

The outperformance of emerging equities was well supported by stronger earnings and dividend growth. Since 2001, earnings in emerging markets have grown by 14.4% annualized while they grew by 5.8% in the developed world.

Furthermore, ROE in emerging markets was consistently above that of the developed world by an average of 2.4% per year.

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Emerging marketsDeveloped markets

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Emerging marketsDeveloped markets

Earnings Dividends

Source: MSCI, CIBC Global Asset Management Inc calculations.



Emerging Markets: Investment Outlook Summary

The bottom line is that the outperformance of emerging markets over the last 10 years was fully justified by stronger fundamentals and did not lead to any over-valuation.

The structural economic outlook of emerging markets is sound and should translate into better earnings growth over the long term.

However valuation will be less of a tailwind and future excess return generated by emerging equities should not be expected to be as high as it was in the past.

The next 12 months should be more challenging. Most emerging countries are past the cyclical sweet spot of strong growth with no inflation. As their economic cycles move ahead they will face more inflation that will lead to a tightening of monetary conditions, making outperformance more difficult.



Strategy: Maintain Course on Risky Assets

Fixed Income: Underweight (With Corporate Overweight) Signs of continued world economic expansion with inflationary pressures growing in the emerging world should continue to put

upward pressure on long term bond yields. Market sentiment moves away from fears of deflation and the related flight to safety.

The Bank of Canada will raise short term rates only modestly within the next 12 months. With the major world Central Banks continuing to anchor short term interest rates, yield curves should remain steep.

Corporate bonds are still expected to finish in first place but with a smaller lead over government bonds. We maintain our international bond underweight due to continued uncertainty with sovereign debt issues in Europe and

deteriorating sovereign debt positions in the U.S. and Japan. Our underweight is also motivated by a modest appreciation of the Canadian dollar relative to a basket of foreign currencies.

Equity: Overweight Earnings have been the main driver of equity return over the last year and will remain the main source of price increase over the

next 12 months. Decent economic growth will help earnings grow by 15-25% depending on the region, still robust growth but a slowdown from recent peak momentum.

Having reached a cyclical trough in valuation, some regions will also benefit from an increase in P/Es as investors remove the deflationary risk premium embedded in equity prices. The combination of rising earnings and increasing P/E’s should result in strong total equity returns for the year.

One of our core strategies for the long term will be temporarily challenged as emerging markets might struggle to outperform developed markets given the need to tighten monetary policy, particularly in China and Brazil. We expect to tactically reduce our emerging market overweight.

The U.S. equity market can be considered fairly to undervalued based on our fair value measure. Combined with our U.S economic outlook, there is even room for some P/E expansion during 2011. Corporate balance sheets remain flush with cash pointing to increased M&A activity, share buybacks and increased dividend payments. We will look to bring the U.S equity from underweight to overweight.

Canada’s trailing price / earnings ratio is trading at a premium to global price / earnings ratios. Based on our fair P/E calculations, actual trailing P/E’s are also above our fair value estimates. We expect to reduce Canadian equity back to neutral.

With their strong underperformance in 2010, European equities present some of the cheapest stocks globally. This valuation discount provides some cushion to ongoing sovereign debt risks. With the European economic recovery supporting earnings growth, and a commitment from government officials to support peripheral countries, we expect to close our International equity underweight.

D. Investment Themes and Return Forecasts


Potential Risks During 2011

European Sovereign Debt Concerns

Spain remains a concern given its economic size is almost twice that of Greece, Ireland and Portugal combined. While its sovereign debt situation is much less dire than other smaller peripheral countries, there remain uncertainties related to its banking system. The Spanish government will need to bring more clarity to the potential recapitalization of the banking sector before market participants can relax about sovereign debt sustainability.

Rising Bond Yields With ample liquidity in the global economy, the prospect of higher commodity prices leads to emerging

countries with higher headline inflation. There is a risk that inflation expectations deteriorate over the course of the year pushing yields higher. The rise in bond yields could be exacerbated by the unwinding of the large mutual fund bond inflows that followed the financial crisis. Rising bond yields could short circuit the ongoing but still fragile economic expansion.

Chinese Economic Hard Landing The tightening efforts deployed so far by the PBOC have not been sufficient to contain inflationary

pressures. How much more tightening will be necessary to bring inflation under control remains a risk early in 2011 as continued strength in commodity prices could force the hand of the government to restrict lending growth more than current expectations. Other large emerging countries such as Brazil have also warned of tighter monetary policy. The greater importance of emerging countries for global economic activity makes monitoring their monetary policy stance increasingly important for financial markets.

Currency Tensions With continued efforts from the Federal Reserve to stimulate the U.S. economy through quantitative easing,

continued broad weakness of the U.S. dollar could aggravate tensions in the global currency markets.

D. Investment Themes and Return Forecasts


This presentation is provided for general informational purposes only and does not constitute investment advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. The information contained in this presentation has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do

not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this presentation are as of the date of publication unless otherwise indicated, and are subject to change.

CIBC Global Asset Management Inc. uses multiple investment styles for its various investment platforms. The views expressed in this document are the views of the Global Asset Allocation team and may differ from the views of other

teams.

© 2011 CIBC Global Asset Management Inc. operates under the name of CIBC Asset Management in Canada and is a member of the CIBC Group of Companies. CIBC Asset Management is a Registered Trademark of CIBC / CIBC Global Asset

Management Inc. licensee.

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