Ch… Ch… Ch… Changes

After several years of stellar performance from the Canadian securities in our portfolio, I can’t help thinking that this is somewhat familiar to 2000 in that we couldn’t get enough US securities. The sectors that we had ignored or were underweight as we weren’t rewarded with stellar returns are the sectors that started out performing at that time. Although we continue to like the prospects of the Canadian market going forward, we can’t ignore the risk that almost half of the S&P/TSX is made up of material and energy companies. We see increasing opportunities in the foreign markets and for the reasons below are taking some profits on our Canadian equity holdings in favour of markets afar.

As was widely expected the U.S. Federal

Reserve (Fed) increased the Fed Funds Rate for

a 15th consecutive time to 4.75% at the March

Federal Open Market Committee Meeting

(FOMC). The language in the press release

following the meeting made it clear that the

Fed intends to continue raising short-term

interest rates until U.S. economic growth slows

to a more sustainable pace. With this in mind

the current data points to further rate hikes

ahead. While there are signs of slowing in the

housing market, this has yet to be reflected in

the still-healthy consumer spending. At the

same time U.S. corporate spending has picked

up. The solid domestic demand combined with

signs of stronger global growth from Japan and

Europe point to continued strength in the U.S.

economy.

In Canada, economic growth remains robust.

Unemployment is near 30-year lows and there

are signs of wage pressures, but the results are

skewed by exceptionally strong activity in

Alberta and, to a lesser extent, British

Columbia. The Bank of Canada also seems

focused on the outlook for global growth in

2007 and beyond. As a reflection of concerns

for the future and Canada’s current skewed

economic performance, the Bank appears

reluctant to raise Canadian short-term rates

much further. We believe that following an

additional 25 basis point increase in its key

overnight rate to 4.00% on April 25th the Bank

of Canada will move to the sidelines.

Against a backdrop of continued Fed tightening, the European Central Bank (ECB) appears poised to increase interest rates and the Bank of Japan has indicated that it will move away from its zero interest rate policy in coming months.

Equity markets regained their footing of late. North American equity markets remain broadly on track with the pattern of previous extended bull markets. The underlying fundamentals are solid and comparable to that of previous bull markets at the same stage. Our research department’s 12-month forecasts continue to support the position to overweight equities within your asset mix strategy. While we expect equities to outperform bonds and cash, we would highlight gains from here are likely to

be modest. We continue to monitor interest rates closely but do not believe they pose a major threat to the outlook for equities as long as bond yields do not far exceed 5%.

We highlight the increased risk profile of the Canadian equity market with 45% of the S&P/TSX Composite in the materials and energy sectors (Chart 1). While we would continue to hold these sectors within portfolios, we believe investors need to be cautious with respect to their exposure and

ensure portfolios are not excessively weighted in these areas. Recognizing the Canadian equity market is concentrated in a relatively few sectors we urge investors to look beyond our borders for

diversification opportunities into other sectors and regions of the world.