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BMO Asset Management Investment Strategy - Resources

BMO Asset Management Investment Strategy - Resources . Gavin Graham Director of Investments February 2009 . BMO Guardian Funds . History Established in 1962 Wholly-owned by BMO Financial Group since 2001 Currently $3.6 billion in assets under management

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BMO Asset Management Investment Strategy - Resources

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  1. BMO Asset Management Investment Strategy - Resources Gavin Graham Director of Investments February 2009

  2. BMO Guardian Funds • History • Established in 1962 • Wholly-owned by BMO Financial Group since 2001 • Currently • $3.6 billion in assets under management • Comprehensive offering of investment products

  3. BMO Guardian FundsInvestment management by 15 world-class firms that together manage over $1.6 trillion

  4. S&P 500 Annual Returns2008 3rd Worst on Record Source: Morgan Stanley Research/ Bloomberg

  5. Third worst selloff in TSX in last 50 years Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.

  6. Sell off in TSX greater than average for indexes suffering financial crisis Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.

  7. 15 Year Holding Period Returns are back in Negative Territory Source: TD Newscrest, John Aitkens

  8. Strong rebounds in indexes after historical bear markets – S&P 500 * Some market analysts (notably Stock Traders Almanac) break the 2001-2002 bear market into two separate bear markets. A 2000-2001 bear market associated with the 2001 recession and the 2002 bear market attributed to the earnings scandal focused on Enron and Worldcom Source: TD Newcrest, John Aitkens

  9. In the Great Depression the US Devalued in an attempt to Stimulate its Economy… Source: TD Newscrest, John Aitkens

  10. And Commodity Prices Rose Sharply. Source: TD Newscrest, John Aitkens

  11. U.S. and Canadian Interest Rates Have Declined to a 75 Year Low Interest Rates (%) Federal Reserve Bank of Canada 1.0% 0-0.25% Sources: Bank of Canada, U.S. Federal Reserve As of Jan 31, 2009

  12. The Fed is acting much faster than Japan did in the 1990s… Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.

  13. Following Sweden’s example, which saw its market recover rapidly Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.

  14. Yield Curve Offers Substantial Support U.S. Treasury Yields 12/31/06 12/31/07 Yield (%) Current Source: U.S. Department of the Treasury As of February 12, 2009

  15. … But the Bond Market is a Leading Indicator… The U.S. is in Recession Yield curve first inverts Yield curve first inverts Yield curve first inverts Yield curve first inverts S&P 500 peaks US Real GDP (yoy% chg) S&P 500 peaks S&P 500 peaks S&P 500 peaks S&P 500 peaks Shaded areas represent periods of U.S. recession Source: BEA, The Globe and Mail As of December 31, 2008

  16. Resulting in a Sharp Slowdown in U.S. Economic Growth % Change in U.S. GDP Source: Bureau of Economic Analysis As of December 31st, 2008

  17. Which Will Likely See the Deepest Recession in 25 Years Source: TD Newscrest, John Aitkens

  18. Despite the falls in Government bond yields, spreads on even good quality bonds, such as provincials, have widened to record levels Source: TD Newscrest, John Aitkens

  19. As have investment grade bonds Source: TD Newscrest, John Aitkens

  20. U.S B-Rated Corporate Bond Yields are starting to pull back… Is Quantitative Easing Starting to Work? Source: The Globe & Mail, January 7, 2009

  21. Deflation and Deleveraging Source: RBC Capital Markets, September 2, 2008

  22. Poor Economic Indicators… Source: RBC Capital Markets, September 2, 2008

  23. Global Industrial Production is Plummeting Sharply Reducing the Demand for Commodities… Source: TD Newscrest, John Aitkens

  24. And Hence their Prices… Source: TD Newscrest, John Aitkens

  25. Led by U.S. Auto Sales… Source: TD Newscrest, John Aitkens

  26. And U.S. Housing… Source: TD Newscrest, John Aitkens

  27. However, America No Longer Driving the Bus Percentage of World GDP Growth, 2004-07 Oil Exporters* 10% China 30% Other 31% Emerging Asia, ex-China 17% U.S. 12% * OPEC, Russia and Mexico Source: CIBC World Markets

  28. Positive Secular Driver Continues

  29. Asian Industrial Production Plummeting Source: TD Newcrest, John Aitkens, Feb, 2009

  30. But US Exports Not the Main Driver of Asian GDP * 10 Southeast Asian countries with a combined GNP of $1 trillion JP Morgan, 2007

  31. For Resources, we may be in a Cyclical Bear Market but a Secular Bull Market…. Cyclical Dynamic Are we here today? Long-term Trend 1980 2008 Time

  32. Some Seasonal & Cyclical Risks • China GDP Growth Slows to 7% • Unrest in China & India • Low Oil Revenues Causes Unrest In The Middle East • US Recession Deeper Than Expected • World Deflation vs Weakening Dollar • Naysayers Teetering Into Depression???

  33. The Cyclical Bear • USA Officially In Deepening Recession • Manufacturing is 85% of China’s Exports • Exports Are 1/3 GDP (excl Imports) The Good News • Huge Stimulus Package unveiled In China 10% of GDP • Infrastructure Spend; Tax Relief ; Low Interest Rates • China Centrally Planned Economy

  34. Asia’s Growing Ability to Consume GDP per Capita (US$) $45,000 $2,500 Thailand $2,000 $35,000 Japan $1,500 Hong Kong $25,000 China Singapore $1,000 Indonesia Korea $15,000 Taiwan India $500 $5,000 1980 1985 1990 1995 2000 1980 1985 1990 1995 2000 Sources: CEIC and Bloomberg

  35. China Urbanization Source: BHP Billiton

  36. Urbanization Leads to a Major Increase in Commodity Demand…

  37. Real Commodity Prices are Back Down to Bear Market Levels Source: Bloomberg, The Economist, Jones Heward

  38. And are Still Cheap vs. Stocks even with the Bear Market

  39. An 18 Year Bear Market in Commodities against Financial Assets Source: Bloomberg, Jones Heward

  40. US$ Commodities Index Drives TSX Index Source: Bloomberg

  41. US$ Commodities Index Drives TSX Resources Source: Bloomberg

  42. Canadian Dollar – To Parity and Back! 81 Source: Bloomberg As of Jan 31, 2009

  43. Having Performed Relatively Well Over the Last 5 Years… 5-Year Returns to January 31, 2009 Source: Bloomberg; (CDN$)

  44. …Canadian Equities Have Lagged Over the Last Year… 1-Year Returns to January 31st, 2009 Source: Bloomberg; (CDN$)

  45. …With Financials Continuing to Lag 1-Year Returns to January 31st, 2008 Source: Bloomberg; (CDN$)

  46. Oil Exports Are Falling… OPEC, Russia and Mexico (2005-2012) Source: CIBC World Markets

  47. Due to Soaring Rates of Car Ownership in Russia, China and Elsewhere Source: CIBC World Markets, Sept 2008

  48. Investment in the Global Energy Sector Source: Merrill Lynch Research

  49. ….But These Investments Are Not Yielding Increases In Supply Source: IEA, Merrill Lynch Commodity Research

  50. Depletion Adds to Needed Capacity Growth Source: CIBC World Markets

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