Nat Bank Canada Geopol

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Pierre Fournier

Angelo Katsoras

THE IMPACT OF

STRUCTURAL CHALLENGES TO

GROWTH IN ADVANCED

ECONOMIES

August 2010

Global Investment Strategies In

The New Geopolitical Order


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GLOBAL INVESTMENT IMPLICATIONS AUGUST 2010

PIERRE FOURNIER / ANGELO KATSORAS 1

Pierre Fournier, Geopolitical Analyst

(514) 879-2423

[email protected]

TABLE OF CONTENTS

Angelo Katsoras, Senior Associate

(514) 879-6458

[email protected]

1. WHY THE CURRENT AUSTERITY/STIMULUS DEBATE IS IRRELEVANT 3

2. SLOW GROWTH AS AN INEVITABLE BY-PRODUCT OF KEY STRUCTURAL

PROBLEMS IN ADVANCED ECONOMIES 4

3. UNSUSTAINABLE STRUCTURAL DEBT LEVELS AND POLITICAL UNREST 6

4. THE DEMOGRAPHIC CHALLENGES AND IMMIGRATION BACKLASH 11

5. ARE PROTECTIONISM AND TRADE WARS INEVITABLE? 13

6. GEOPOLITICAL CHALLENGES TO GROWTH IN ADVANCED ECONOMIES 15

7. INVESTMENT STRATEGIES AND THE NEW WORLD ORDER 18

FOOTNOTES 22

DISCLOSURES 23


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PIERRE FOURNIER / ANGELO KATSORAS2

HIGHLIGHTS

The current debate between the proponents of austerity measures and those who favour

additional stimulus is largely irrelevant because most of the socio-economic problems faced

by advanced industrial countries are structural rather than cyclical.

Increased global competition, de-industrialization and a loss of control over innovation have

undermined the ability of advanced industrial economies to sustain normal or historical

levels of economic growth.

We believe a combination of structural long-term debt, deteriorating demographics, a

backlash against immigration, spending cuts and stagnating incomes will lead to political

gridlock and instability in developed economies, further undermining efforts to deal with slow

economic growth.

The current global economic and political situation increases the likelihood of protectionism

and trade tensions.

Economic power and geopolitical power are inextricably linked. We believe the decline in the

geopolitical clout of advanced countries will carry negative implications for economic growth.

Conversely, economic growth in developing countries will benefit from their expanding sphere

of influence.

Investors have to be mindful of the increasing disconnect between economic growth and

market performance at the national level.

Investment Conclusions: Emerging markets will continue to outperform developed markets;

U.S. markets will outperform most other advanced economies; Indian markets will outperform

Chinese markets; Latin American investments are favoured over African ones; Commodities

will outperform, as will investments geared to global mega-trends.


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1. WHY THE CURRENT AUSTERITY/STIMULUS DEBATE IS IRRELEVANT

Those who believe that the solution to the current predicament of the advanced

industrial economies lies in finding the right mix of austerity measures to tackle

crippling deficits and financial stimulus to sustain the recovery are in for a rude

awakening. While lip service has been paid to structural problems, and while the rapidemergence of a multipolar environment has been well documented, efforts to draw conclusions

from these new realities generally remain embryonic.

Most analysts view the current headwinds including high unemployment, stagnating wages,

high debt levels, the European crisis and the current housing overhang as temporary and

short term. Hence the intense debate between those who believe that an additional injection of

stimulus spending will allow the economy to clear its last hurdle and those who argue that

deteriorating government debt levels could undermine the economic recovery. Current debt levels

are unsustainable and are an obstacle to growth, and the economy is unlikely to grow at a

normal pace without further spending or investments (regardless of the source).

With this in mind, this report will further expand on issues that we discussed in earlier reports.For instance, in our 2009 Geopolitical Outlook (January 2009), which was published in the

midst of the financial crisis, we focused on the debt issue, the challenges facing advanced

industrial economies and on the likely continued outperformance of developing countries. In our

Why the U.S. Economy Is Condemned to a Decade of Slow Growth Geopolitical

Hotline (Geopolitical Hotline, November 2009), we listed some of the structural issues that

would weigh on U.S. economic growth, including an inadequate educational and social safety

net, insufficient R&D investments, a dysfunctional political system and a foreign policy that was

unlikely to lead to sustainable geopolitical gains.

We remain convinced that an increasingly competitive global economy, deficient economic

structure, unsustainable government and consumer debt burdens, stagnant living standards, apopulist backlash against spending cuts, the rise of protectionism and trade tensions, the

escalating costs of accessing resources, unfavourable demographics and shrinking spheres of

influence in the geopolitical realm will combine to act as a drag on long-term growth in the

advanced economies.

While we have no idea how global markets will perform in the short term, over the longer term,

emerging markets should continue to outperform. Country risk, however, will expand beyond the

usual suspects, such as unstable dictatorships, to include economic, trade and political tensions

between the worlds major powers, and inevitably have repercussions within their spheres of

influence. Additionally, there will be a growing disconnect between national growth rates,

corporate earnings and performance of national stock indices.


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2. SLOW GROWTH AS AN INEVITABLE BY-PRODUCT OF KEY STRUCTURAL

PROBLEMS IN ADVANCED ECONOMIES

At the most basic levels, the economies of advanced countries have been developed on the

assumption of relatively high levels of sustainable economic growth and continuously improving

living standards. Governments, businesses and individuals have acted and borrowed accordingly.

Policies and strategies with regard to trade, outsourcing, employment, social welfare andimmigration, among other things, have also been formulated around this central premise.

Yet, we tend to forget that the economic and political structures that emerged from World War II

were both exceptional and unsustainable. In the immediate aftermath of World War II, the United

States was the only major global power left standing. Europe, Russia and Japan had been

devastated by the war and were forced to engage in an extensive and costly reconstruction

process. China and India were largely paralyzed by self-destructive political, religious and class

conflicts, with little concern for economic development. This set of circumstances provided the U.S.

with significant and unprecedented advantages: a huge manufacturing apparatus built up over the

war years, a homeland untouched by the ravages of war, an economy based on free enterprise

and innovation, an ability to attract the most talented immigrants, global military dominance,

access to cheap and abundant natural resources at home and abroad, and a virtual monopoly in

the global export markets. As Europe, Japan and Russia gradually re-emerged in the 1950s and

1960s, the prosperity and competitive edge of the U.S. remained largely intact. The threat from

the Soviet Union was much more political and ideological than economic.

Even though most of the above is self-evident, it should have came as no surprise that the world

would eventually become a more competitive place. Over the past 20 years or so in particular,

both the democracies and dictatorships of Asia have experienced phenomenal growth, which in

turn has pulled one billion people out of poverty in a relatively short time period. Up until

recently, the leaders of the industrial world watched the emergence of these new economic

powers with unmitigated enthusiasm. Unlimited supplies of cheap labour and the opening of huge

new markets would prove irresistible for Western multinationals. Volatile, cyclical, low-tech andlabour-intensive industries were transferred from the U.S. and Europe to China and other emerging

countries. This allowed corporations to cut operational costs, reduce prices on the goods and

services they sold, and increase profit margins at the same time. As for the developing world, it

was provided with an opportunity to diversify away from subsistence-level agriculture.

Ideologically and politically, this seismic shift created the most enduring myth of our times:

getting rid of low value-add manufacturing would be more than compensated in the developed

world by the accelerated development of a new economy based on knowledge, finance, services,

innovation and advanced manufacturing. However, it soon became obvious that companies

transferring their operations and technologies to emerging countries, such as China, would

eventually enhance the manufacturing and technological capabilities of companies based in thedeveloping world. The weak to non-existent intellectual property laws in many of these countries

only accelerated this process further. To a significant extent, the long-term competitive edge of

leading Western corporations, as well their capacity to create jobs in their home countries, was

sacrificed on the altar of short-term profits.

In a particularly enlightened article in BusinessWeek(July 1, 2010), Andy Grove, the co-founder

and president of Intel from 1987 to 2005, takes a very critical view of the outsourcing strategies

of major U.S. high-tech companies. He believes that the declining job creating potential of the

computer, alternative energy and advanced battery sectors, for example, result from a general

undervaluing of manufacturing the idea that as long as knowledge work stays in the U.S., it


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doesnt matter what happens to manufacturing jobs. Today, manufacturing employment in the

U.S. computer industry is about 166,000 lower than it was before the first PC was assembled in

1975. Meanwhile, a very effective manufacturing industry has emerged in Asia employing

about 1.5 million workers. Apple, for example, has about 25,000 U.S. employees, while some

250,000 Foxconn employees in Southern China produce Apples products. The same roughly 10-

to-1 relationship holds for Dell, Seagate Technology and many other U.S. high-tech companies.

In the recent downturn, while U.S. manufacturers account for only 12% of GDP, industrial firms

laid off more than two million workers or 25% of the total. As of June 2010, fewer than 10% had

been hired back (U.S. Bureau of Labor Statistics quoted by The Globe and Mail, August 6, 2010).

The automobile sector is a good example of the structural challenges faced by the U.S. economy.

When GM and Chrysler were on the verge of bankruptcy, the U.S. government felt obligated to

put together a $60 billion bailout, largely because of high unemployment levels. In the year before

the bailout, 355,000 jobs were lost. In the year following the bailout, only 50,000 jobs have been

created, even though automobile workers accepted significantly lower wages and benefits. Yet,

while some have chosen to put the blame on mismanagement by auto executives, the automobile

sector is a low-tech industry where it is difficult to compete. While the job numbers will eventually

improve somewhat, most manufacturing companies can deal with increased demand without having

to significantly increase jobs. Where are the high-paying jobs that the high-tech sectors were

supposed to create?

Even more important, the link between manufacturing and innovation has been broken. As Grove

puts its, there is more at stake than exported jobs. With some technologies, both scaling and

innovation take place overseas Without scaling, we lose our hold on new technologies. In the

case of advanced batteries, for example, the U.S. lost its lead 30 years ago when it stopped

making consumer electronic devices. U.S. companies did not participate in the first phase and

consequently were not in the running for all that followed, including the key automobile battery

market. More generally, Grove noted, abandoning todays commodity manufacturing can block

you out of tomorrows emerging industry. While advanced industrial economies still dominate

many high-tech manufacturing sectors, including the military industry, and large parts of theservice industry, including the financial sector and consulting, major emerging economies will

eventually be able to penetrate virtually all of these sectors. China, for example, is in the

process of building a commercial airplane that will compete with Airbus 320 and Boeing 737

starting in 2016. With strong state support, Comac, which was created two years ago, projects

it will sell 2,000 planes over the next 20 years. This would give it a 10% market share.

As noted, it was inevitable that the world would become more competitive, with rising pressures

on employment, higher commodity prices, economic policies favouring indigenous production and

aggressive actions by an increasing number of state actors to tilt the playing field to support

economic and geopolitical objectives. One cannot help thinking, however, that the current

predicament of advanced economies is in no small measure the result of self-inflicted wounds. De-industrialization; underinvestment in education, innovation and R&D; misguided geopolitical

priorities; unsustainable debt levels; and a political structure that encourages short-term gains at

the expense of long-term development have weakened the pillars of growth and long-term

economic fundamentals. Bluntly put, the current economic structure will not sustain the type of

recovery that will allow advanced economies to achieve normal growth and employment levels for

the foreseeable future. In turn, the slow growth scenario will deepen the debt crisis,

sharpen geopolitical tensions, increase internal political polarization and instability,

increase the backlash against immigration, and fuel the flames of protectionism and

regulation all of which will conspire to complicate efforts to protect living standards.


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3. UNSUSTAINABLE STRUCTURAL DEBT LEVELS AND POLITICAL UNREST

Among the self-destructive policies adopted by governments and consumers in advanced

industrial societies, the dependence on high debt levels ranks near the top. Government debt in

the developed world is rising faster than any time since World War II. The charts below show

that if current trends persist, debt/GDP ratios will rise rapidly. Over the next decade alone, the

debt/GDP ratio for Japan would rise to 300%, 200% for the United Kingdom and 150% for

Belgium, France, Ireland, Greece, Italy and the United States.

*These projections use gross rather than net public debt, the latter being debt minus financial assets.

Source: OECD & The Future of Public Debt: Prospects and Implications, Bank for International Settlement, March 2010.

GOVERNMENT DEBT/GDP PROJECTIONS: Bending these curves will not be easy


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The situation is even bleaker when private sector

debt is included. Total private sector debt

currently stands at 3 GDP. The deleveraging

process will take years. According to the Mckinsey

Global Institute, the combined levels of public and

private sector debt for the 10 countries listed onthe right rose from an average of 200% of GDP

in 1995 to 300% in 2008. The data for 2009 is

no doubt even bleaker.

Reducing these debt/GDP ratios, which are

unsustainable at current trends, will require a

combination of large tax increases, spending

cuts and major structural economic reforms

over many years. A challenge best captured by

Herman Van Rompuy, the EUs European Unions

(EU) full-time president, in the following quote: The crisis has revealed our weaknesses. Our

structural growth rate is too low to create jobs and to sustain our social systems.1

If the handling of the Greek crisis by the EU and bank bailouts by the U.S. is any indication,

markets have good reason to be worried. In both cases, politicians waited until their backs were

against the wall before acting. But, the longer one waits to deal with a crisis, the worse it gets.

Despite growing signs of trouble, European leaders continued to underestimate Greeces

problems until it was almost too late. It was only after the bond markets virtually abandoned

Greece, sovereign bond yields began rising in other European states and banks became hesitant

in lending to one another that European powers finally began to act seriously. Unfortunately, by

then the price to calm the markets had skyrocketed. In March 2009, people were talking about

a commitment of $35 billion. This sum ballooned to $140 billion by early May. But by then therewere growing fears other European countries would need bailouts as well. This forced EU

countries and the International Monetary Fund (IMF) to pledge almost $1 trillion to reassure

investors.2

Special mention goes to Germanys Angela Merkel for being the driving force behind the EUs

late response. She did not want to be seen by her electorate as rewarding Greek profligacy,

especially just before a crucial regional election (which she lost). Ironically, her hardline position

ended up costing Germany more money than would have been the case if she had been more

cooperative from the outset. The harder the position she took, the more nervous markets

became and the more Germany and other countries had to eventually pledge to reassure

markets.

As a result of how the Greek crisis was handled, the markets are understandably nervous about

how the EU will deal with potential future crises, such as restructuring Greeces and/or another

EU countrys debt or dealing with a debt crisis in Central Europe. (A significant percentage of

the debt in Central Europe consists of foreign currency loans taken out by households and

businesses from Western European banks.) One of the risks is that the lack of public support

among the populations of the Euro zones core states for helping smaller indebted countries in

and outside of the Euro zone could lead to policy reversals at the most inopportune times.

OWE DEAR

Debt as % of GDP, 2008

Source: "Repent at leisure," The Economist,

June 24, 2010.


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Much like slow growth is an inevitable by-product of structural economic issues, high debt levels

are a long-term structural problem in a slow growth economy. Massive, underfunded health and

pension liabilities, low rates of personal savings, stagnating incomes and employment, and a

sharp drop in the net worth of households (more than one in seven households are in

foreclosure or arrears in the U.S.)3 will force the governments of advanced economies to enact

deeper and longer-lasting austerity measures (including tax increases) than the current politicalleaders are willing to admit or envisage, which in turn will significantly dampen consumer

spending. These measures will be particularly harsh in Europe, where a very substantial portion

of GDP comes from the government. Even in the U.S., fully 27% of personal income originates

from the public sectors, which is the highest level in history and nearly double 1950 levels.

In the U.S., it is estimated that state and local pension funds alone are underfunded by $3

trillion. To compound the problem, most pension plans assume an 8% return on their

investment. A 5% return would mean that the hole would be getting deeper by $75 billion a

year (C. Collins and A.J. Rettenmaier, Center for Policy Analysis, quoted by J. Mauldin, The

Problem with Pensions, Thoughts from the Frontline Weekly Newsletter, August 6, 2010). Finally,

in most states, the law will not allow for adjustment of pensions, meaning that taxpayers are

completely on the hook.

Even though we are only in the early stages of dealing with structural debt, the political and

popular opposition to spending cuts is mounting, creating enormous challenges for incumbent

governments.

Germany. Chancellor Angela Merkels government, which is leading efforts for budget

restraint at home, has seen its popularity collapse, with only 19% of the German population

saying they are satisfied with the government. Meanwhile, the left-leaning Social Democratic

Party (SPD) and Green Party are making important gains in the polls (up to 28.3% and

16.6%, respectively), which could potentially threaten the viability of the government

coalition (Stratfor, July 4, 2010). France. In March, the centre-right forces of French President Nicholas Sarkozy suffered

heavy losses, giving socialists control of 21 of 22 metropolitan regions in France. Sarkozys

popularity is at its lowest level since he assumed power in May 2007.

Spain/Portugal. Minority governments in Spain and Portugal are also looking increasingly

fragile. Indeed, Spains coalition government barely passed the first of what should be many

more cuts to come by a vote of 169168 in the Spanish Parliament, with 13 abstentions.

Not surprisingly, if an election were held today, the government in power would lose.

England. Britains Labour Party lost power after a May 6 election. The nation is

experimenting with its first coalition government since the end of World War II. Although

short on specifics, for now the budget cuts adopted by the newly elected Conservativegovernment will act as a test case for the effects of spending cuts on growth and

employment, and on the ability of Western governments to stay the course in what is likely

to be an increasingly conflictual environment. From a macro-economic perspective, David

Camerons plan to resurrect Britains industrial base by providing tax credits and other breaks

for high-tech manufacturing, revamping the education system and boosting government

spending on R&D is likely on target. But it will not provide a short-term solution to boost

the economy.


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Japan. In Japan, political instability and gridlock have thwarted efforts to tackle high

unemployment, stagnant growth and high debt levels. The country has had six prime

ministers in the past four years. In August 2009, the Democratic Party of Japan (DPJ) scored

a landslide victory, which ended the Conservative Partys 50-year grip on power. This July,

barely a month after Naoto Kan became Prime Minister and leader of the party, the DPJ

suffered serious setbacks in the election for the upper house of parliament as a result of the

new PMs proposed sales tax increase to deal with the countrys debt crisis.

Hungary. Hungary is another country where the backlash to austerity measures is in full

swing. Talks with the IMF and the EU were prematurely suspended on July 17 without a

resolution to the nations program review. The Economy Minister bluntly stated that the

country had dealt with austerity measures for five years and the further measures were out

of the question (Statfor, July 19, 2010).

United States. The polls are showing that Obamas Democratic Party could lose control of at

least one of the two Houses in Congress in the upcoming November mid-term elections. The

loss in January of the Massachusetts Senate seat that was held by Democratic icon Ted

Kennedy prior to his death is seen as a canary in the coal mine for the Democrats, especially

if unemployment figures do not improve. Growing ideological differences between Democrats

and Republicans, meanwhile, is making it increasingly difficult to govern, a trend that is

exacerbated by the Tea Partys successful efforts to push out moderate Republicans. Finally,

both parties are not yet willing to pay the political price of implementing the combination of

tax hikes and budget cuts required to get Americas fiscal house in order.

A solid performance by the Republicans in November along with an election of a Republican

President in 2012 based on promises to reign in out of control government spending to cure the

countys economic ills would likely create another round of unmet expectations. The high level of

uncertainty among ordinary Americans only partially explains the reluctance to consume, and thus

a quick turnaround is not in the cards. Six in 10 working Americans do not think they will get

social security benefits when they retire, the most pessimistic outlook since the Gallup poll beganasking the question in 1989. More than half of retired Americans expect that their existing social

security benefits will eventually be cut. (Gallup News, July 20, 2010)

The winning electoral strategy remains the same: no new taxes and no cuts to federal

government social programs. To complicate matters, over 60% of Americans support creating jobs

through new economic stimulus spending. (Gallup News, June 17, 2010)

From a public opinion perspective, one of the most negative cumulative effects of the financial

crash, the debt crisis and the Gulf oil spill is the decline in the populations faith that

governments and businesses will act responsibly. As can be observed in the chart below, only

22% of U.S. citizens surveyed say they trust the U.S. government. This is the lowest figure in

over half a century.


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The ratings are similarly abysmal for large U.S. corporations (only 25% trust them) and financial

institutions (only 22% trust them).4 This anger increases the risk of governments rushing ahead

with ill thought-out policies to score short-term political points. The passing into law of the

Sarbanes-Oxley Act in 2002 following the bursting of the tech bubble is a perfect case in point.

Not only did it not prevent the financial crisis, but it ended up burdening smaller companies

with excessive bureaucracy.

Going forward, political discontent is likely to spike once voters discover that the recent

combination of budget cuts and/or tax increases are only the beginning of a long austerityperiod. Political instability, gridlock and polarization in advanced industrial countries is one of the

key geopolitical risks investors face because it could further undermine economic growth and

efforts to deal with debt. Over the past six months, labour unions, public sector workers and

other individuals affected by spending cuts participated in violent protests and strikes in many

European countries. In all likelihood, this marks the beginning of a long period of political unrest

in advanced democracies and other countries. As we show below, the backlash against

immigration and free trade is already underway. In the longer term, advanced democracies could

very well find themselves embroiled in renewed social conflicts to redistribute wealth, particularly

if the gap between rich and poor widens. The taxation system, advantageous public sector

pensions, corporate profits and the remuneration of senior executives are all likely to be under

stress. Dividing a growing pie has always been easier than sharing the burdens of austerity.

Source: "Distrust, Discontent, Anger and Partisan Rancor," (Section 1), The Pew Research Center, April 18, 2010.


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4. THE DEMOGRAPHIC CHALLENGES AND IMMIGRATION BACKLASH

The current debt burden and fiscal pressures are not the result of the recent financial crisis, but

of the needs of rapidly ageing societies. An aging population undermines the governments

finances by both reducing the tax base and by increasing the financial burden of caring for the

growing number of elderly people. Britain is a perfect case in point. According to the IMF, the

credit crunch, bank bailouts and the recession accounted for only 14% of the expected increase

in Britains public debt burden. The remaining 86% was caused by the growth in public spending

on health care and pensions. Most other developed countries are in the same predicament. The

credit crunch merely brought forward the inevitable age-related fiscal crisis.5

The median age of baby boomers in the U.S. today is 52 years old. A majority will have retired

by 2020, gradually exacerbating fiscal pressures over the next decade and likely provoking an

intergenerational showdown. Organized, educated and with an unprecedented demographic

footprint (see chart below), baby boomers will wield enormous political power and can be

expected to resist any attempt to have their benefits reduced through inflation or other means.

The baby boomers will also become a force for the status quo in the political system. Clearly,

this represents yet another obstacle to growth.

* Defined as population 20+ due to data availability

Source: NBF Economy & Strategy (data via US Census)

WORLD: A DEMOGRAPHICS ROADBLOCK AGAINST INFLATION

Population aged 55+ as a share of voter population*

Economic pressures and unemployment have also produced a backlash against immigration, often

tainted by racism. The number of migrants to OECD countries dropped by 6% in 2008, the first

decline since 2002. It is expected that 2009 numbers will show an acceleration of the decline. It

is no secret that many governments have adopted more restrictive immigration policies in thepast couple of years. Once again, short-termism undermines the necessity for advanced industrial

societies to support immigration in an effort to maintain a demographic balance conducive to

economic growth.

The formidable growth and prosperity the U.S. has experienced throughout much of its history is

largely based on its unparalleled capacity to attract and integrate immigrants from all over the

world. Even illegal immigrants, who provide vital but low-paying labour in many sectors,

including agriculture, have contributed significantly to the competitiveness of the U.S. economy.

Today, however, based on recent polling data (Gallup News, July 27, 2010), 45% of Americans


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believe immigration should be decreased, 17% support an increase and 34% think that it should

be kept at present levels. The understandable paranoia that followed the 9/11 events and

backlash against illegal (mainly Latino) immigration, which is linked to high levels of

unemployment, has provoked a divisive debate that could discourage or shut out both high-quality

and less qualified immigrants. Although Arizonas new immigration law (enacted in April 2010)

specifically forbids racial profiling, it will inevitably target people of Hispanic origin by focusing on

those reasonably suspected of being in the country illegally. Some 20 states are contemplating

following Arizonas lead. Given the unemployment situation and that Americans of Hispanic origin

will eventually make up a quarter of the countrys population, the issue is potentially explosive.

The White House has challenged the Arizona law in the courts, and the issue is likely headed to

the Supreme Court. In July, President Obama urged Congress to pass an immigration reform bill

to create a pathway to citizenship for the approximately 11 million people (mostly Latinos) who

live in the U.S. illegally. Obama called the current immigration system broken and dangerous. He

failed, however, to provide concrete proposals to Congress, apparently concerned about the

potential negative impact on the Democrats in November.


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5. ARE PROTECTIONISM AND TRADE WARS INEVITABLE?

In our report entitled Facing Up To Protectionism (April 2009), we argued that an increase

in protectionism and an escalation of trade-related tensions was increasingly likely. If present

trends continue, government will find it increasingly difficult to resist pressures in favour of

restricting trade.

Indeed, protectionism has become one of the tools used by states in search of comparative

economic advantage in an increasingly competitive multipolar global environment. Despite the lip

service paid to free trade, all governments practice many forms of protectionism, including

tariffs, import quotas, subsidies, exchange rate manipulations, local content provisions and

regulatory barriers. As the chart below illustrates, the economic slowdown and the rise of

unemployment have prompted many G20 countries to adopt protectionist measures.

Infrastructure

Investment

Supportfor small

businesses

Social

safety nets

Support forhousing a nd

construction

Strategicindustries

support Other Examples of protectionist measures

Argentina Increased regulation; some auto subsidies

Autstralia

Brazil Some auto subsidies

Canada Some auto subsidies

China Tightened import standards, auto subsidies

France Price supports*, s ome vehicles and dairy* subsidies

Germany Price supports*, s ome vehicles and dairy* subsidies

India Ban on Chinese toys

Indonesia Some goods can only be sold in five ports, airports

Italy Price supports*, s ome vehicles and dairy* subsidies

Japan Price s upports

S. Korea Price s upports

Mexico

Russia Increased tariffs on used autos

Saudi Arabia

U.K. Price supports*, s ome vehicles and dairy* subsidies

U.S. Price supports*, s ome vehicles subsidies

Data as of Feb. 23, exc ludes South Africa and Turkey because details of stimulus measures w erent available. * European Union Measures

STIMULUS SCORECARD

An overview of stimulus measures and protectionist actions taken by G-20

countries in response to the global economic crisis

Sources: International Monetary Fund (stimulus measures); World Bank (protectionism). March 2009

In the short term, China has been the focus of a heated debate over unfair trade practices. China

is, of course, playing a dangerous game because it is seeking all the benefits of an

export-led economy fuelled by an artificially undervalued currency, while simultaneously

expanding and protecting its indigenous industries through forced technology transfers,

subsidies, local content provisions and lax intellectual property laws. To varying degrees, theU.S., Europe, Japan, India and Brazil have voiced their frustration and, in many cases, have

challenged a number of Chinese trade practices in international trade courts.

In the U.S., trade unions, certain members of Congress and a variety of special interests have

been pushing for a tougher line against Chinese trade practices for a number of years. These

efforts have thus far largely failed because top U.S. multinationals and the White House have

been staunch defenders of free trade. There are now worrying indications, however, that this last

line of defense against protectionism in the U.S. is crumbling.


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Former Intel CEO Andy Grove, who ironically presided over Intels expansion in the Chinese

markets, now believes that the U.S. should impose a tariff on products made overseas and make

the proceeds available to companies who choose to expand their operations in the U.S. If the

result is a trade war, he adds, treat it like other wars, fight to winUnemployment is

corrosive. If what Im suggesting sounds protectionist, so be it.

Other U.S. business leaders are also becoming increasingly concerned about the business climate

in China. In a politically incorrect statement at a private dinner, General Electric CEO Jeffrey

Immelt said: I really worry about China. I am not sure that in the end they want any of us to

win, or any of us to be successful.6 According to EU Trade Commissioner Karel De Gucht,

Chinese procurement policies are becoming increasingly opaque in favouring local firms, and

intellectual property protection remains a major concern. Beijings policy to protect and prioritize

indigenous innovations will make it more difficult for foreign firms operating in the IT and

clean energy sectors. The EU also believes that Chinas Great Firewall system of internet

censorship will negatively affect European companies active in Chinas service sector. (Stratfor,

July 22, 2010.) The EUs trade deficit with China has almost tripled since 2003 and is now larger

than the U.S.China trade deficit.

Given that public opinion in advanced industrial economies increasingly views China as an

economic threat rather than an opportunity, pressure is mounting to repatriate jobs and

innovations, thus increasing the likelihood of protectionist measures.


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6. GEOPOLITICAL CHALLENGES TO GROWTH IN ADVANCED ECONOMIES

Trade tensions are only one component of the structural changes affecting the geopolitical

landscape in a multipolar world. The growing economic clout of emerging countries, such as

India, China, Brazil and Indonesia, is already translating into greater geopolitical power, which, in

turn, will allow them to promote their economic interests on the world stage more aggressively.

Conversely, the shrinking geopolitical influence of advanced industrial countries will carry negativeimplications for their economic growth potential. The expulsion of U.S. and other Western

business interests from Russia, Venezuela and other Latin American and African countries would

have been unthinkable when the world was unipolar.

While the U.S. and its allies will continue to benefit from overwhelming military superiority for

the foreseeable future, their ability to control events and project global power is gradually

diminishing. Again here, the pursuit of a foreign policy based on enlightened self-interest,

defined as the achievement of sustainable geopolitical and economic advantages, has too often

been undermined by policies based on idealism and ideological imperatives, such as the wars in

Vietnam and Iraq.

The new multipolar world will see five major powers the United States, China, Russia, Indiaand the European Union attempting to maintain and expand their spheres of political influence

and economic power. Russia, for example, is in the process of reasserting its influence over

many of the former Soviet Republics. After a brief fling with the West, Ukraine has recently

returned to the Russian fold, essentially for economic and geopolitical reasons. China has also

been extending its regional hegemony to Myanmar, Nepal and Mongolia. Economic, strategic and

military imperatives will probably even bring Taiwan back into the fold. Last June, China signed

a historic trade deal with Taiwan that eliminates tariffs on hundreds of products. The deal

favours Taiwan far more than China, but over time it will make Taiwan even more economically,

and therefore politically, dependent on China.

As for Africa, it is gradually drifting into the Chinese orbit. Political instability, ethnic and tribalconflicts, endemic corruption, human rights abuses and the rise of radical Islam have dampened

the enthusiasm of many Western corporations. China, on the other hand, has provided massive

aid and loans, and has built large infrastructure projects in exchange for access to the

continents abundant natural resources. Africa is one of the many examples where China has

used the power of the state via its multiple agencies and public corporations to achieve both

economic and political goals at the expense of Western corporations and governments. State

capitalism and enlightened leadership in the post-Mao period is responsible for many of the

achievements of modern China. This includes reducing the poverty level from 84% to 16% of

the population (World Bank), developing a powerful manufacturing hub based on cheap and

disciplined labour, building a modern growth-orientated infrastructure, imposing social cohesion

and political stability, and vacuuming up large chunks of the worlds natural resources. Whilestate capitalism faces many obstacles in the road ahead, it has for now given China

formidable competitive advantages in the redistribution of global economic power.

We do not agree with those who predict that a prolonged global slowdown will decapitate

Chinas export-led economy or that the transition to a consumer-driven economy will fail. Steadily

increasing wages and growing state investment in health care and pensions will propel

household consumption into the main engine of the Chinese economy. Global economic and

political necessities will drive this structural shift. China is now likely close to allowing its

currency to appreciate. This would allow its economy to benefit from low commodity prices,


18/28



provide greater flexibility to control inflationary pressures and lower costs for importing

specialized manufacturing equipment. Chinese consumers are also well positioned to navigate the

transition, with a consumer debt/GDP ratio of 7%, compared to 94% in the U.S.

It would be nave to believe, however, that the end of ultra-cheap labour in China will

meaningfully reduce competitive pressures on advanced industrial economies, or, for that matter,

that growth rates below 8% would cause the Chinese system to implode. What analysts toooften forget, but many Chinese citizens remember all too well, is the decades of poverty and

crisis that preceded the current era of growth. Further, a growing middle class with a stake in

the system will also contribute to stability. For the foreseeable future, the main benefactors will

be other emerging countries in Latin America, Asia and Eastern Europe. As China moves up the

manufacturing chain and starts penetrating deeper into the service sector, the dominance of the

advanced industrial economies will be reduced to fewer and fewer sectors.

Similarly, India has developed a sustainable model for continued economic growth. It has

outperformed during the financial crisis despite relatively low stimulus spending levels. Among its

many strengths are:

An economy based on domestic consumption and services, and therefore less vulnerable to a

global slowdown.

High levels of savings and investment, a stable financial system (unexposed to toxic assets)

and the worlds largest middle class.

Favourable demographics: median age of 25.9 compared to 35.2 for China, according to the

World Bank.

A strong relative advantage in high-tech industries IT, biotech, pharma, telecommunications

and high R&D levels.

An economy based on private multinationals that are expanding in world markets.

A stable democracy for the past 60 years.

The competitive advantages of English as a working language.

Relative social cohesion, where nationalism mostly trumps regionalism.

About 80% of the population is Hindu.

Geopolitical advantages: tensions with Pakistan and China unlikely to lead to serious

confrontations, and strong relations with the U.S., Europe, Japan and other democracies in

the region.

Despite major military, economic and political commitments to the Middle East, particularly in the

aftermath of 9/11, the influence of the U.S. and other Western powers more generally is waning

in this region. The balance of terror between Iran and Iraq was one of the foundations ofrelative stability in the Middle East. Whether through civil war or other means, Iraq will

eventually drift into the Iranian orbit as the Americans draw down their troops. The sanctions on

Iran, toward which China and Russia are adopting an essentially wink-wink, nudge-nudge

approach, will push the country and its resources into Chinas and Russias spheres of influence.

Bombing Iran would only accelerate the process, while at best only delaying Irans nuclear

ambitions ( Bombing Iran: Measuring the Risk,October 2009). One way or the other, Irans

regional influence will grow. The war in Afghanistan is unwinnable, and mounting domestic

pressure in the U.S. will hasten the end game. While a temporary deal could be reached with


19/28



the Taliban, Afghanistan will never become an ally of the West, nor a place for Western

companies to do business and certainly not a model for democracy in the region. Meanwhile,

China and Pakistan are forging closer links. From an economic perspective, China, Russia and

India are increasingly involved in the exploration and production of the regions oil and gas

resources. The resurgence of Turkey in the Middle East, which had the potential to be a

moderating pro-western force, has taken an ominous turn in the past couple of years. Clearly,

the days of the Middle East as a secure source of oil for Western countries are drawing to a

close.

In the coming years, the U.S. will likely choose to consolidate its key relationship with Latin

America, which has been largely neglected in the past decade. With the Chinese and others

making significant investments in Latin Americas resources, and using Venezuela, Cuba, Bolivia

and other Central American states as a beachhead, the U.S. will want to turn the tide. Even key

political ally Mexico is becoming increasingly frustrated with the perceived anti-Mexican backlash

in the U.S., while the deadly cartel wars are being blamed on the insatiable appetite of the

American consumers for cocaine. (Mexico: Too Strategic to Fail with Strong Long Term

Fundamentals,Country Report: March 2010)


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7. INVESTMENT STRATEGIES AND THE NEW WORLD ORDER

In a global multipolar environment where most portfolio managers have no choice but to invest

in emerging market countries, it is unquestionable that current risks and complexities are

unprecedented since World War II. While we have no idea where global equities will be in six

months, opportunities abound over the longer term for those who get it right.

A) The growing disconnect between economic growth and market performance

Sluggish economic growth in advanced industrial countries does not exclude solid performance

from individual companies, sectors and even national stock indices. Similarly, for reasons we

explain below, rapid growth in China will not necessarily translate into significant outperformance

of its stock indices. The performance of stock markets in the period starting March 2009 has

clearly demonstrated that corporate profits can be robust even in a slow-growth macro

environment. Low interest rates, tight cost controls (including keeping employment as low as

possible), outsourcing production to low-cost countries and increasing exports to fast-growing

emerging countries have kept margins in better shape than the top line and the overall

economic performance of advanced industrial countries. According to the St. Louis Federal

Reserve, corporate profits hit $1.37 trillion in the first quarter of 2010, an all time high

(Washington Post, August 8, 2010).

Historically, for example, the S&P has maintained a high correlation with U.S. retail sales. There

are signs that this correlation is in the process of breaking down. In the second quarter of

2010, U.S. industrial companies, such as Caterpillar and 3M, reported stronger-than-expected

earnings largely because of strong demand from China, India and other emerging countries. The

recent spat between Glushkin Sheff Chief Economist David Rosenberg and Merrill Lynch Chief

Strategist David Bianco is symptomatic of a larger malaise. Rosenberg predicts that slumping

U.S. consumer demand and the drop in the Shangai index spells bad news for the S&P 500.

Bianco holds on to an aggressive 12-month target of 1,350 for the S&P 500 and argues that theearnings of many of the S&P 500 companies will benefit from their high exposure to exports

and overseas economies. Similarly, as of July 2010, the rising optimism of stock analysts

earnings estimates in the U.S., Europe and China stands in sharp contrast with the expected

erosion of global manufacturing indexes (PMI).

B) Emerging economies will continue to outperform advanced economies

For all the reasons mentioned in this report, we reiterate our long held view that emerging

markets overall will outperform developed economies. Emerging economies are expected to grow

7% this year and 6.2% in 2011, compared to 2.4% and 1.9%, respectively, for developed

economies. Growing inter-emerging market trade will help to protect many developing countriesfrom the full impact of slower growth in the advanced industrial economies.


21/28



C) Outperformance of U.S. markets relative to most other advanced countries

Despite the multitude of challenges facing the U.S. economy, including the likelihood of a long

and arduous re-industrialization process, U.S. companies and the U.S. market will likely

outperform most other advanced countries, with the likely exception of resource-rich Canada and

Australia. Because of its relatively low taxes, the U.S. has far more flexibility than Japan and

most European countries. The U.S. also still enjoys a significant R&D edge, a dominant militaryand a better demographic outlook. A number of U.S. companies are well positioned to benefit

from the increasingly sophisticated needs of developing countries and from the global mega-

trends that have emerged. In the short term, the ability of many companies to maintain high

profit margins, despite a retrenching domestic consumer, has left many U.S. companies with

large cash positions, now estimated at $2 trillion (Washington Post, August 8, 2010). Will these

cash reserves be invested and help create employment, or will they be used for stock buybacks,

acquisitions and dividend increases?

D) China vs. India: Advantage India

China has a 12- to 14-year lead over India based on most socio-economic indicators, includingGDP, purchasing power, urbanization, infrastructure and literacy rates. As the transition from an

export-led to a consumer-driven economy takes hold, companies focused on exports and local

infrastructure are likely to underperform companies focused on Chinas internal market.

Chinas macro challenges are well known. They include the demographic boomerang; income

inequalities; food, water and energy shortages; a high dependence on export markets; and the

conflict between political and economic objectives. Perhaps the greatest challenge, however, is to

manage the complex but necessary transition toward a more open, less authoritarian socio-

economic and political system. Indeed, the more economically advanced a country becomes, the

less it can depend on central planning to push its economy forward. A centrally planned

economy is also more vulnerable to policy mistakes than a market-orientated one. Chinas futurewill require more democracy, freedom, entrepreneurship and individual creativity. Investors in

Chinese companies trading or doing business in China also need to be concerned

about increasing trade tensions with the developed world, which includes a hostile

posture toward foreign investors (e.g., Rio Tinto) and the imposition by China of

conditions that will undermine corporate profits.

The risks to foreign investments in China, and for that matter Russia, extends to its sphere of

influence. It would be nave to believe, for example, that Ivanhoe Mines long-term mining

investment in Mongolia could not be undermined by trade-related conflicts between China and

Western countries.

Indias road ahead is also fraught with difficulties. High levels of poverty (42%); an inefficientagricultural sector; dependence on foreign capital; a weak central government; excessive

regulation; corruption; underdeveloped education and healthcare systems; water, food and energy

shortages; and the inherent short-termism of democracies could all conspire to waste the

countrys 20- to 30-year demographic advantage and impede the modernization of its economy.

India also has a limited sphere of influence and lives in a tough neighbourhood, including

Pakistan and China, and to a lesser extent the growing Maoist movement in Nepal and radical

Islam in Bangladesh. Overall, however, we believe that Indias consumer-led growth,


22/28



strong geopolitical alliances with the U.S., Europe and other democracies in the

region, stable democracy and a legal framework that protects private business and

investors, will allow Indian markets (and foreign companies with large markets in the

country) to outperform their Chinese counterparts.

E) Latin America vs. Africa: Advantage Latin AmericaLatin America and Africa have much in common. They both have benefited from their vast

resource wealth and from the global power shift in favour of producing countries at the expense

of resource-consuming countries. They currently stand at the epicentre of increasing competition

between the major powers to access and control the worlds mineral and energy sources.

Historically, both continents have also been affected by unstable and corrupt political systems

and extensive violence. In our view, however, Latin America has clear advantages as an

investment destination. Despite the emergence of Hugo Chavez in Venezuela, whose regime is

looking increasingly fragile, Latin America remains largely within the U.S. sphere of influence,

whereas China is rapidly becoming the dominant power in Africa. By and large, Latin American

countries have evolved into stable democracies with improving educational and social systems, a

rapidly growing middle class, reduced inequalities and poverty, and the emergence of a national

identity that supersedes tribal or regional identities. Africa, by contrast, is marred by seemingly

unresolvable border disputes; large-scale tribal, religious and ethnic violence; extreme levels of

poverty and inequality; the growing disruptive force of radical Islam; a lack of infrastructure; and

an endless string of coup detats.

Many Western companies have already decided to pull out of Africa. Particularly for energy and

mining companies, who commit to large investments in fixed assets over a 20- to 30-year time

frame, the risks appear excessively high even though the rewards seem irresistible. The misfortune

of Canadas First Quantum Minerals in the Democratic Republic of Congo (DRC), for example, was

entirely predictable ( Kolwezi: The Geopolitics of a Slam Dunk,August 2009).

Brazil continues to be our top pick in Latin America. Its advantages are self-evident: abundant

natural resources, a consumer-driven economy, a growing middle class, a stable financial system,

favourable demographics, a mature democracy, decreasing levels of poverty and inequality, market-

friendly policies and low geopolitical risk. ( Brazil: Sustainable Outperformance,November

2009.) Because it is seeking regional leadership and wants to project power abroad, Brazil can be

expected at times to take positions that will antagonize the U.S., such as its opposition to U.S.

military bases in Colombia and its involvement with Turkey in direct negotiations with Iran on its

nuclear program. It would be a mistake to over-dramatize these events.

F) Commodities will outperform

Commodity prices and equities will continue to be extremely volatile and overly dependent on

the short-term economic growth forecasts for advanced industrial economies. Long-term global

growth, however, especially in emerging countries, will continue to sustain commodity prices. We

reiterate that, in a multipolar world where the playing field is rarely level and where state

actors from emerging countries are playing an altogether different game, specific country risks

as well as macro geopolitical tensions (particularly as they relate to the sphere of influence of

the major powers) must be carefully and constantly reassessed.


23/28



In Canada, we maintain our long held bullish view on oil ( The Politics of Oil and Gas

Edmonton CFA Presentation, January 2005 and The Future of the Oil Sands, Geopolitical

Hotline, October 2008). The geopolitical squeeze on available oil supplies is growing tighter by

the day, and phasing out of oil in the energy equation remains far down the road. Despite the

legitimate environmental concerns and significant opposition in the U.S., a combination of strong

demand and technological improvements in extracting oil will trump other considerations. Whilesome of the oil may eventually find its way to Asian markets, it is difficult to believe that the

U.S. government will not sooner rather than later want to lock in this secure source of

supply. The U.S. is generally far better at playing defense (i.e., the rejection of Chinas attempt

to take over Unicol in 2005), but it will ultimately have little choice but to engage the Canadian

government and oil producers on the future of the oil sands.

G) Investing in the mega-trends

In addition to identifying international friction points and country risks that can affect individual

equities and national and global markets, geopolitical analysis also seeks to zero in on structural

mega-trends that will determine the direction of future economic growth and investments.

In global terms, there is little doubt that emerging countries will continue to be

primarily driven by basic socio-economic necessities. Even dictatorships ultimately have to

meet the needs of their populations to ensure their political survival. Emerging countries, like

China and India, will have to make massive investments to prevent food, energy and water

shortages. We have developed specific investment recommendations for the agricultural and food

sectors ( What the Looming Food Crisis Means for Investors,June 2009), for natural gas

( Investing in the Natural Gas Revolution,June 2009) and for rising electricity demand

( How to Play the Growing Global Demand for Electricity,September 2009). With regard

to these mega-trends, we have, in most cases, expressed a preference for equipment

manufacturers and infrastructure investments.

Other sectors set to benefit from global mega-trends include the military industry (The

Military Industry and Global Instability,February 2010), health care, clean energy and

environmental technologies.


24/28



FOOTNOTES

1 Europe: Danger zone, The Financial Times, May 16, 2010.

2 Hesitation by leaders drove cost of Europes crisis higher, The Washington Post, June 16,

2010.

3 One in five mortgages is underwater in the U.S., with a total negative equity of $800 billion.

4 Distrust, Discontent, Angst and Partisan Rancor, The Pew Research Center, April 18, 2010,

and The Most Damaging U.S. Deficit: Trust, BusinessWeek, June 18, 2010.

5 This is the age of war between the generations, Times (UK Daily), June 2, 2010.

6 The EU is also growing more critical of Chinas trade practices, June 30, 2010.


25/28



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26/28



NOTES


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RESEARCH ANALYSTS

METALS & MINING

Senior GoldsTanya Jakusconek 416.869.6766Associate:Joanne van Ballegooie 416.869.6767

Junior GoldsTara Hassan 416.869.7118Associate: Brian Szeto 416. 869.6538

REAL ESTATE & HOSPITALITY

Jimmy Shan 416.869.802Associate: Tanya Bouchard 416.869.793

Heather Kirk 514.390.786Associate:Marco Giurleo 514.390.798

SPECIAL SITUATIONS

Hugues Bourgeois 514.879.257Associate: Frederic Tremblay 514.879.249

Trevor Johnson 416.869.851Associate: Keegan McCormick 416.869.780

TECHNOLOGY

Clean TechRupert Merer 416.869.8008Associate:Jeremy Mersereau 416.869.6768

Communications Equipment & BroadbandKris Thompson 416.869.8049Associate: Manik Verma 416.869.749

TELECOMMUNICATIONS & CABLE

Greg MacDonald 416.869.6775Associate: Kevin Krishnaratne 416.869.6585

Ihor Danyliuk 416.869.7522Director of Research

Caroline Jukes, 416.869.8039Administrative Manager

ECONOMICS AND STRATEGYStfane Marion, 514.879.3781Chief Economist & Strategist

Yanick Desnoyers, 514.879.3140Assistant Chief Economist

Benoit Mayer-Godin 514-879-2378Quantitative Strategist

Paul-Andr Pinsonnault, 514.879.3795Senior Fixed Income Economist

Marc Pinsonneault, 514.879.2589Senior Economist

Marco Lettieri, 514.879.3195

EconomistMatthieu Arseneau, 514.879.5149Economist

DERIVATIVES & STRUCTURED PRODUCTSPat Chiefalo 416.869.7931

TECHNICAL ANALYSISDennis Mark 416.869.7427

BIOTECH & PHARMACEUTICALSHari Sambasivam 416.869.7801Associate: Jing Feng 416.869.6515

DIVERSIFIED FINANCIALSShubha Rahman Khan 416.869.6425

Associate: Sunny Singh 416.869.8045

ENERGY

Energy ServicesBrian Purdy 403.290.5448Associate: Ian Thies 403.290.5628

Research Publications

Vanda BrightManager, Publishing Services 416.869.7141

Publishing Associate:Maria Cojan 514.879.5357

National Bank Financial (the Firm) is an indirect wholly owned subsidiary of National Bank of Canada.The particulars contained herein were obtained from sources which we believe reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis andinterpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The Firm may act as financial advisor, fiscal agent or underwriterfor certain of the companies mentioned herein and may receive a remuneration for its ser vices. The Firm and/or its officers, directors, representatives, associates, may have a position in the securitiesmentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise.To U.S. residents: NBF Securities (USA) Corp., an affiliate of the Firm, accepts responsibility for t he contents of this report, subject to any terms set out above. Any U.S. person wishing to effecttransactions in any security discussed herein should do so only through NBF Securities (USA) Corp.This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever nor may the information, opinions or conclusions contained in it bereferred to without in each case the prior express consent of National Bank Financial.

Energy Infrastructure, Pipelines & UtilitiesPatrick Kenny 403.290.5451Associate: Anthony Sze 403.290.5445Associate: Scott Russell 403.290.5102

O&G E&P Seniors/Oil Sands/IntermediatesPeter Ogden 403.290.5629Associate: Steve Murray 403.290.5621

Oil and GasGrant Hofer 403.290.5436Associate: Dale Lewko 403.290.5446

Oil and Gas Intermediates/TrustsMenal Patel 403.290.5622Associate: Jeremy McCrea 403.290.5627Associate: Gilbert Bong 403.290.5624

FERTILIZERS

Hari Sambasivam 416.869.7814Associate:Jing Feng 416.869.6515

INFRASTRUCTURE AND ENGINEERING

Benoit Caron 514.879.5230Associate:Andrew Moussa 514.879.2543

COMMUNICATIONS & MEDIA

Adam Shine 514.879.2302Associate:Peter Stusio 514.879.2564

MERCHANDISING & CONSUMER PRODUCTS

James Durran 416.869.7930Associate: Robert McKee 416.869.7572Associate: Hussein Sunderji 416.869.7116

Marie-Nol KorcazFrench Translation 514.879.2492

Zuhair (Kash) KashmeriChief Research Editor 416.869.7535


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Portage La Prairie2 - 602, Saskatchewan Ave E.Portage la Prairie MB R1N 0K5204.857.4749

Qubec900, boul. Ren Lvesque estBureau 640Qubec QC G1R 2B5418.649.2525

Qubec5500, boul. des Galeries,bureau 105Qubec QC G2K 2E2418.627.5777

Qubec - Everest2875, boul. LaurierBureau A 515Qubec QC G1V 2M2418.651.0680

Repentigny534, rue Notre-DameBureau 201Repentigny QC J6A 2T8450.582.7001

Rimouski180, rue des GouverneursBureau 004Rimouski QC G5L 8G1418.721.6767

Rivire-du-Loup10, rue BeaubienRivire-du-Loup QC G5R 1H7418.867.7900

Saskatoon410-22nd Street EastSuite 420Saskatoon SK S7K 5T6306.683.1400

St-Bruno1307, rue RobervalSt-Bruno QC J3V 5J1(450) 441-3300

St-Hyacinthe1355, rue Johnson Ouest, Suite 4100St-Hyacinthe QC J2S 8W7450.774.5354

Ste-FoyPlace de la Cit2600, boulevard LaurierSuite 700Ste-Foy QC G1V 4W2418.654.2323

St-Jean1050, boul. du Sminaire Nord,Local 6St-Jean-sur-Richelieu QC J3A 1S7450.349.7777

St-Lambert - Everest594, rue Victoria, 1er tageSt-Lambert QC J4P 2J6450.465.1393

St-Lonard

6476, boul. Jean-Talon Est,St-Lonard QC H1S 1M8514.256.7767

St-Sauveur-des-Monts11, rue Robert,St-Sauveur-des-Monts QC J0R 1R6450.227.2777

Steinbach102-344 Main StreetSteinbach MB R5G 1Z1204.320.9536

Sherbrooke455, rue King ouestBureau 600Sherbrooke QC J1H 6E9819.566.7212

Sidney2537, Beacon Ave. Suite 205Sidney BC V8L 1Y3250.657.2200

Sorel26, Pl. Charles-de-MontmagnySorel-Tracy QC J3P 7E3450.743.8474

Steinbach102-344 Main StreetSteinbach MB R5G 1Z1Tel (204) 320-9536

Sudbury10 Elm Street, 5th FloorSudbury ON P3C 1S8705.671.1160

TorontoThe Exchange Tower130 King Street WestSuite 3200Toronto ON M5X 1J9416.869.3707

Toronto121 King Street WestSuite 1700Toronto ON M5H 3T9416.865.7400

The Exchange Tower130 King Street WestSuite 3030Toronto ON M5X 1J9416.869.8840

Toronto - Aquilon280 King Street EastToronto ON M5A1K7416.363.3050

Trois-Rivires7200, rue MarionTrois-Rivires QC G9A 0A5819.379.0000

Val dOr647, 3e AvenueVal dOr QC J9P 1S7819.824.3687

VancouverPark Place666 Burrard StreetSuite 3300Vancouver BC V6C 2X8604.643.2774

Vernon3100 - 30th Avenue, Suite 101Vernon BC V1T 2C2250.260.4580

Victoria700-737 Yates StreetVictoria BC V8W 1L6250.953.8400

Victoriaville650, rue Jutras EstBureau 150Victoriaville QC G6S 1E1819.758.3191

WaterlooAllen Square180 King Street SouthSuite 340Waterloo, ON N2J 1P8519.742.9991

White Rock1688 - 152nd StreetSuite 108South Surrey BC V4A 4N2604.541.4925

Windsor1 Riverside Drive WestSuite 600Windsor ON N9A 5K3519.258.5810

Winnipeg801-400 St. Mary AvenueWinnipeg MB R3C 4K5204.946.0297

International

National Bank of CanadaFinancial Inc.

Geneva (NBF International S.A.)15 rue du CendrierCH-1201 Geneva, SwitzerlandTel.: 41.22.716.4747

NBF Securities UK(Regulated by The Financial Services Authority)71 Fenchurch Street, 11th floorLondon, England EC3M 4HDTel.: 44 (0) 20.7680.9370

New York65 East 55th Street, 31st FloorNew York, NY 10022Tel.: 212.632.8610

New York65 East 55th Street, 34th FloorNew York, NY 10022Tel.: 212.546.7500

Boston1 Federal Street, 25th FloorBoston, MA 02110Tel.: 617.357.5757

Nat Bank Canada Geopol

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