- After positive returns in the first three quarters of 2011, global markets saw negative returns in the second quarter due to normal volatility, though prospects for economic recession remain remote. - While economic growth has slowed globally, it is still positive and temporary factors like disruptions from Japan's disasters and commodity price rises have contributed; leading indicators remain positive. - European sovereign debt issues continue regarding some countries' debt levels and management, but efforts to address problems have been taken and debt is still seen as manageable. - Outlook remains positive for continued growth in the second half of 2011 and beyond, though expect continued short-term market volatility; long-term discipline and diversification are recommended.

1. Mid-Year Market Review 2011
Current market pause
Scott Penman, Executive Vice-President and Chief Investment Officer I.G. Investment Management, Ltd.
is normal
After three consecutive quarters of economic output as measured by rhetoric, the need for action in the
positive returns, global markets Gross Domestic Product. Eurozone form of cuts in spending and
registered a negative quarterly return member states have proven to be increases in revenue are unavoidable.
in the second quarter this year. Capital highly resourceful in managing the
markets are inherently volatile, debt situation through concerted
especially when measuring shorter efforts in the form of bailouts through
Headlines driving
periods. Over longer periods of time a newly formed European Financial
market sentiment
this volatility diminishes, leading to Stability Fund. Countries have no We have said it before and we will say
attractive risk adjusted returns as choice but to implement austerity it again! It is common for the economy
outlined later on in this report. measures following years of and capital markets after taking steps
mismanaged public finances. forward to pause and appraise the
future. After a swift advance from
U.S. debt. Both household and
early July 2010 through to March
government debt have been a focus
2011, markets need time to digest
for the media. There has been little
Economic growth. The global new-found levels.
recognition for the more recent
economy is still growing, but at a
improvements in household debt Prospects for an economic recession
slower pace than experienced in the
levels. Notably the savings rate and are remote. Our analysis of past U.S.
last half of 2010, and at a lower rate
net worth for households has economic cycles show that three
of growth than had previously been
increased and, at the same time, critical factors need to be in place for
expected. The reasons are likely
household debt levels have declined a recession to occur; an inverted yield
temporary and, in part, due to the
for ten consecutive quarters. This curve, a year over year decline in
global supply chain impact resulting
momentum needs to continue, but leading economic indicators and, a
from the tragic events in Japan as
progress is evident. reversal in the trend of initial jobless
well as from the impact of rising
claims. None of these conditions exist
commodity prices (which in many The debt situation at all levels of
today, and specifically we are
cases have recently leveled off or government led Standard and Poor’s
experiencing:
dropped). China has also engineered to opine that there was a
a slowdown through policy initiative to “deteriorating outlook” which gained n A steepening yield curve. The yield
contain its domestic growth at a huge media attention despite the fact curve identifies interest rate yields
manageable pace. For context, recent and, within the same opinion, the U.S. at various term intervals. Currently,
economic indicators foretell nowhere government retained their top tier two year U.S. government bonds
near the slowdown witnessed a credit rating status, Even with these yield 0.47% while 10 year bonds have
year ago. high levels of debt, interest rates a yield of 3.11%. This represents a
continue to hover near record low steepening yield curve with longer
European sovereign debt. As was the levels which has the impact of terms having higher yields, rather
case a year ago, issues continue lowering debt service costs and than an inverted yield curve where
regarding select European country showing evidence that lenders who short term yield exceed longer
debt levels, mismanagement and fund U.S government debt are term yields.
poor fiscal policies, and its potential confident that the debt situation is
impact on the markets. Attention has manageable and, contrary to the
shifted from Ireland and Portugal to doomsayers, there is no risk of
Greece, which incredibly only default Budget deficits have to be
accounts for 2.5% of Europe’s entire dealt with and, despite political

2. MID YEAR MARKET REVIEW 2011
n Leading economic indicators that developing nations. This trend is likely are important characteristics of any
are positive. Leading economic enduring given the growing middle long-term plan.
indicators, a composite of items class demographics within most Canadian markets have benefited
tracked that collectively foretell developing economies that provide significantly from the strong resource
economic activity, are still in sustenance to the vitality, maturity, and orientation and a strengthening
positive year-over-year territory.
quality of economic activity. currency. While these trends remain
n Initial jobless claims that also strong, foreign diversification is a
Time, patience, and discipline
We believe these strong influences, worthy consideration given attractive
remain positive. Initial jobless
Moving forward What to do?
claims reported in weekly intervals together with the resumption of more relative values offered by other
remain in positive territory when normal supply chain patterns, have the regions, together with a broader
observed on a rolling four week potential for positive impact in growth universe of investable industry groups.
smoothed basis. for the second half of 2011 and beyond.
We all know when challenges appear,
Perhaps the most encouraging and In the short term, expect volatility to opportunities abound. From our own
under-recognized trend is for small continue. We have confidence that analysis of previous market cycles we
and medium sized businesses, which issues presenting challenges today know that no two cycles are the same
are being dealt with. It is important to and, that typically economies and
account for one half of the economic
recognize that growth and market markets do not grow without periodic
output in the U.S. and, until recently, pause. We also know that it is
returns over the past year have
had not participated in any growth survived many significant events such impossible to time these ups and downs
activity. This vital segment of the as the aforementioned natural with precision and, using periods of
economy has been hiring and disasters and evolving geo-political consolidation like the one at present as
continues to pronounce intentions to situations, that only one year ago may an opportunity to invest more money is
continue to hire. This employment have seemed unimaginable. typically met with reward.
activity, collectively, is eclipsing that Corporate profits have been stronger Achieving the important goal of
of large businesses and provides for a than previously estimated which financial security is both a worthy and
more stable and sustainable increases confidence and the honorable endeavor. And achieving
underpinning to the general economy. probability for continued capital financial security takes time,
expenditures and employment gains. patience, and discipline. A
Another key influence is the more Market valuations are attractive commitment to achieving a goal
balanced nature of this economic cycle. especially considering the strong means sticking with a plan, being
While the developed world is still a very financial position of the constituent willing to live with the ups and downs
important factor, the contribution to companies and the high operating of the markets, and committing to a
global economic growth is more margins and earnings growth they are diversified portfolio that provides the
broadly sourced this cycle from a blend achieving. kind of asset allocation to help buffer
of developed and developing the inevitable volatility of the markets.
Applying a long-term focus and
economies and it is the latter which is disciplined commitment to a Financial
having a stronger influence. In the Plan helps chart a course through
1990’s, developing markets accounted the inevitable volatility surrounding
for approximately 15% of global short-term market activity. Observing
economic growth as measured by long term periods like 30 years
show that on average, equity
Gross Domestic Product (GDP). Current
markets provide a 5.3% return after
estimates are that approximately 35%
Scott Penman
inflation. Diversification and balance
of growth is now attributable to
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