Economic & Market
Outlook 2013-14
December 5, 2012
Warren Jestin, Chief Economist
Camilla Sutton, Chief Currency Strategist
Vincent Delisle, Investment Strategist

Economic & Market
Outlook 2013-14
December 5, 2012

Gains In Global Growth Will Be Moderate & Uneven
Economic & Market
Outlook 2013-14
December 5, 2012
China and other emerging market powerhouses will increasingly drive global activity, maintaining a wide growth lead over traditional developed nations.
If the U.S. avoids a turn-of-the-year fiscal cliff, it should edge out Canada as the top G7 growth performer.
It’s not a hard race to win.

Developed Nations Confront Big Headwinds
Economic & Market
Outlook 2013-14
December 5, 2012
Sluggish growth and ongoing fiscal drag will temper job creation, confidence levels and spending trends, particularly in Europe.

Europe Battles Long-term Challenges
Economic & Market
Outlook 2013-14
December 5, 2012
Europe’s debt crisis is far from over, with severe austerity measures undermining growth prospects well beyond mid-decade.
A number of debt-heavy nations, locked in recession, are experiencing substantial social and political fallout from sky-high youth unemployment rates.

Emerging Markets Increasingly Drive Global Growth …
Economic & Market
Outlook 2013-14
December 5, 2012
Robust growth in China and a number of other emerging markets will provide important support to global trade flows & commodity prices.

… Supported By Rising Income & Financial Resources
Economic & Market
Outlook 2013-14
December 5, 2012
Domestic demand is underpinning growth in China and other emerging markets, supported by rapid income gains and large financial resources.

Monetary Policies Remain Geared To Reviving Growth
Economic & Market
Outlook 2013-14
December 5, 2012
Slow growth, low inflation & fiscal austerity point to a continuation of pedal-to-the-metal monetary stimulus in many developed economies.

The Loonie Will Continue Flying High
Economic & Market
Outlook 2013-14
December 5, 2012
The Canadian dollar is supported by strong commodity earnings, rising foreign investor interest and relatively favourable fiscal and financial fundamentals.

Fiscal & Financial Strains Less Intense In Canada
Economic & Market
Outlook 2013-14
December 5, 2012
The U.S. housing market is beginning to revive, but a return to more balanced conditions is still years away.
Canada’s fiscal advantage provides a competitive edge as the U.S. and other nations confront the need to substantially boost taxes & scale back spending on key programs.

U.S. Begins To Play Catchup In Employment …
Economic & Market
Outlook 2013-14
December 5, 2012
Despite recent U.S. job gains, over 4 million jobs are still needed to return to pre-recession peaks.
Canadian employment is setting new records, with skilled labour shortages putting upward pressure on wage trends.

… And Big-Ticket Purchases
Economic & Market
Outlook 2013-14
December 5, 2012
Jobs gains, improving confidence & years of deleveraging are putting U.S. households in a mood to increase their spending.
With home ownership at record highs, tighter mortgage rules and high household debt levels are cooling home sales in Vancouver and Toronto.

Non-Res Construction Much Stronger In Canada
Economic & Market
Outlook 2013-14
December 5, 2012
Canadian non-residential construction continues to benefit from big resource projects, infrastructure development and more balanced commercial markets.

Resource Sector Drives Job & Income Gains
Economic & Market
Outlook 2013-14
December 5, 2012
Canada’s resource-rich provinces will continue to lead in job and income gains.

Economic & Market
Outlook 2013-14
December 5, 2012

2012 Forecast vs Performance
Economic & Market
Outlook 2013-14
December 5, 2012
8
SCOTIABANK FORECASTS VS ACTUAL RETURNS (2012)
4
0
JPY CAD GBP AUD EUR
-4
-8
SCOTIA'S FORECAST
ACTUAL RETURNS YTD
FORECASTING ACCURACY SUMMARY FROM 2012 (to November 29)
CAD – direction and magnitude
JPY – direction and magnitude
GBP – direction and magnitude
AUD – direction but over estimated rise
EUR – failed on both direction and estimate; as we had forecasted weakness & EUR is flat

Scotiabank’s Forecast
Economic & Market
Outlook 2013-14
December 5, 2012
FX - USD performance is mixed
2011 2012f 2013f 2014f
USDCAD 1.02
0.97
0.96
0.94
CADUSD 0.98
AUDUSD 1.02
EURUSD 1.30
1.03
1.04
1.29
1.04
1.06
1.25
1.06
1.09
1.21
GBPUSD 1.55
USDJPY 77
USDCNY 6.30
1.62
80
6.25
1.64
87
6.10
1.66
90
6.04

FX Themes – Year-to-Date
Economic & Market
Outlook 2013-14
December 5, 2012
Main themes in 2012:
1. Europe
2. Global growth outlook
3. Central bank policy response
Main themes in 2013
1. Global growth outlook
2. Europe
3. The US backdrop
4. Central bank policy
5. Politics: new leadership in China; Elections in
Italy, Japan, Germany, etc.

THEME 1: Growth – US & China vs EU & Japan
Economic & Market
Outlook 2013-14
December 5, 2012
• Can growth in China and the US offset weakness in Europe and Japan?
• A soft landing in China with 2013 GDP of 8.0%.

THEME 1: Growth – European Recession Ends
Economic & Market
Outlook 2013-14
December 5, 2012
• Europe exits recession; headlines should improve.
• Growth remains moderate at best and complicated by demographics.

THEME 2: Europe – Making Progress
Economic & Market
Outlook 2013-14
December 5, 2012
Problem Developments to date Still needed
Bank Solvency
Euro exit
Government debt
Growth
1. LTRO - provided liquidity
Resolution fund & deposit guarantee facility
2. Banking union plans
OMT - fiscal burden sharing
Austerity
Decelerating faster than expected; most countries in or entering recession
Politics: A framework for a closer fiscal union
Balance between growth & austerity a challenging one
This is biggest risk
Remaining tail risk decreasing decreasing unchanged increasing

THEME 3: The US Backdrop
Economic & Market
Outlook 2013-14
December 5, 2012
Source: Bloomberg & Scotia FX Strategy
• The fundamental USD story is not a strong one.
• US economy needs a weak USD; just like Eurozone needs a weak EUR.

THEME 3: The US Lacks A Fiscal Plan
US FISCAL & DEBT FORECAST
Economic & Market
Outlook 2013-14
December 5, 2012
FORECASTED US FISCAL DRAG
As % of GDP
• US fundamentals are typically those associated with a weak currency
• Short-term: fiscal cliff uncertainty lays foundation for temporary USD strength
• 2013 fiscal drag is expected to be between 1 and 2% -- assumes agreement
• Medium term: lack of credible fiscal plan should create USD weakness

THEME 4: Central Bank Response – FX Impact
Economic & Market
Outlook 2013-14
December 5, 2012
• Positive CAD – BoC has one of few hawkish central bank bias in advanced economies.
• Negative USD – QE3, rates on hold until mid 2015 & threat of QE3 expansion.

THEME 4: Central Bank Response – QE
Economic & Market
Outlook 2013-14
December 5, 2012
• Difficult to measure exact impact of QE programs.
• Fed: QE1 decreased 10-year bond yields by 40 to 110bpts;
• while QE2 decreased them by 15 to 45bpts.
• Expect QE3 to be expanded in December to include Treasurys.

THEME 4: Central Banks – The Fed’s Timeline
FED'S TIMELINE
QE3 launched - $40bn MBS/mth Q4 12
QE3 expasion - $20 to 45bn Treasurys / mth Q4 12
Q1 13
Q2 13
QE3 - Fed signals end of QE Q3 13
Q4 13
Q1 14
Q2 14
Halt reinvestment of MBS Q3 14
Halt reinvestment of Treasurys Q4 14
Q1 15
Fed hikes rates Q2 15
Q3 15
Source: Scotiabank FX Strategy & Economics
Economic & Market
Outlook 2013-14
December 5, 2012

THEME 4: Central Banks – Global Timelines
Economic & Market
Outlook 2013-14
December 5, 2012
FED'S TIMELINE GLOBAL CENTRAL BANK RATE HIKES
QE3 launched - $40bn MBS/mth Q4 12
QE3 expasion - $20 to 45bn Treasurys / mth Q4 12
Q1 13 Mexico & Indonesia
Q2 13 Brazil and Chile
QE3 - Fed signals end of QE Q3 13 Korea & Thailand
Q4 13 Australia, Norway & Columbia
Q1 14 Canada & China
Q2 14
Halt reinvestment of MBS Q3 14 India
Halt reinvestment of Treasurys Q4 14
Q1 15 UK (BoE)
Fed hikes rates Q2 15 Europe (ECB)
Q3 15
Source: Scotiabank FX Strategy & Economics

CAD Drivers & Outlook
Economic & Market
Outlook 2013-14
December 5, 2012
CAD FORECAST: STRENGTHENS TO 1.04 IN 2013
CAD STRENGTH CAD WEAKNESS
FED's QE program juxtaposed against neutral to hawkish BoC
• China expected to have a soft landing (GDP,
2012 7.7%; 2013 8.0%; 2014 8.4%)
• US moving into stronger recovery
Domestic risks: housing market, household debt, slowing employment growth
Triple A rated with a credible fiscal plan
CAD positive flows - Triple A rating; FX reserves; M&A
Oil (Scotiabank Economics forecasts WTI oil
Stable government until October 2015
Sentiment is bullish with traders holding CAD net long - however moderating
CAD vol at decade lows
External risks: Europe, US fiscal cliff & geopolitics - but none are our base case

Scotiabank’s Forecast
FX - USD performance is mixed
2011 2012f 2013f 2014f
USDCAD 1.02
0.97
0.96
0.94
CADUSD 0.98
AUDUSD 1.02
EURUSD 1.30
GBPUSD 1.55
USDJPY 77
USDCNY 6.30
1.03
1.04
1.29
1.62
80
6.25
1.04
1.06
1.25
1.64
87
6.10
1.06
1.09
1.21
1.66
90
6.04
Economic & Market
Outlook 2013-14
December 5, 2012

Major Risks
Economic & Market
Outlook 2013-14
December 5, 2012
MAJOR RISKS TO FORECAST
• Fiscal cliff – no compromise – major global growth consequences
• Global growth – China fails to engineer soft landing
• Inflation – central bank policy stems significant inflationary pressures
• Oil – geopolitical tensions rise; oil rallies and threatens global economy
• Europe – Escalates beyond current expectations

Economic & Market
Outlook 2013-14
December 5, 2012

Revisiting 2012: Equities Surviving Policy Fears
Economic & Market
Outlook 2013-14
December 5, 2012
•
Equities edging bonds in 2012; U.S., Mexico, Germany leading.
• Canada lagging; Brazil & China bucking trend with losses.
Global Market Returns (in USD, total return) - 2012 YTD & H2 27-Nov-12
Brazil
China
CRB Index
DXY Index
U.S. Govt Bond Index
US$ per C$
Japan
Canada Govt Bond Index
Canada (TSX)
U.K.
MSCI AC World
U.S. (S&P 500)
Mexico
Germany
H2/2012
2012 YTD
Source: Scotiabank GBM, Bloomberg

Revisiting 2012: Earnings Leadership Rules
• Positive earnings revisions in the U.S. and Germany…
• …negative trends in China, Brazil, and Canada.
Earnings Revisions Since January 2012
106
104
102
100
98
92
90
96
94
TSX
MSCI Germany
MSCI China
MSCI Brazil
MSCI Mexico
S&P 500
Economic & Market
Outlook 2013-14
December 5, 2012
106
104
102
100
98
92
90
96
94
Source: Scotiabank GBM, Thomson Financial.

Revisiting 2012: TSX Lag Due to Resources
• Mining, Golds, and Energy hurt…
• non-resources + dividend payers shine.
Total Return Performance: 2012 YTD, H1/12, and H2/12
As of Nov 27, 2012 2012 YTD H1/12
Non Dividend Payers
Low Dividend Payers
High Dividend payers
-8.3%
1.5%
8.4%
-16.2%
-2.5%
1.6%
H2/12
9.4%
4.2%
6.6%
TSX 4.0%
Energy
Materials
Mining
Gold
Industrials
Cons. Discretionary
Cons. Staples
Healthcare
Financials
Banks
Insurance
REITs
12.2%
15.8%
Technology
Telecoms
Utilities
14.7%
-4.5%
8.5%
0.1%
Source: Scotiabank GBM estimates, Bloomberg.
-3.1%
-6.1%
-13.9%
-10.5%
9.7%
16.2%
13.8%
19.0%
13.0%
-1.5%
-7.7%
-10.7%
-17.9%
-16.0%
5.0%
13.2%
8.8%
11.5%
5.5%
3.8%
6.3%
14.4%
-11.4%
1.9%
0.6%
5.6%
5.0%
5.1%
4.9%
6.5%
4.5%
2.6%
4.6%
6.8%
7.1%
8.2%
9.0%
0.3%
7.7%
6.5%
-0.5%
Economic & Market
Outlook 2013-14
December 5, 2012

Revisiting 2012: P/E Expansion Provides Lift
•
Valuations improved in 2012, Mexico premium jumps.
• Ex-Mexico, P/E multiples still below historical averages.
Forward P/E ratios (1992-2012)
25
20
TSX
S&P 500
MSCI Brazil
MSCI Mexico
15
Economic & Market
Outlook 2013-14
December 5, 2012
25
20
15
10
5
0
10
5
0
Source: Scotiabank GBM, Thomson Financial.

Stronger U.S. & China Momentum in 1H13
Economic & Market
Outlook 2013-14
December 5, 2012
•
Manufacturing surveys bottomed in Q3-12, expect recovery in 1H13.
• U.S. and China growing, Eurozone still negative.
Major Manufaturing PMI Indices (2005-2012)
65 65
60
55
50
60
55
50
45
40
35
30
U.S. ISM
Eurozone PMI
China PMI*
45
40
35
30
*China PMI: average of HSBC China PMI and official China PMI
Source: Scotiabank GBM, Bloomberg.

Post-China Easing supports TSX Gains
•
Positive reversal from a year ago.
• TSX and Latam (Brazil) hurt when China is tightening.
China Lending Rate, TSX and MSCI LatAm (1997-2012)
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
China Lending Rate YoY - LHS
TSX YoY - RHS
MSCI LatAm YoY - RHS
Economic & Market
Outlook 2013-14
December 5, 2012
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
Source: Scotiabank GBM, Bloomberg.

TSX versus S&P500 Return Recovering
Economic & Market
Outlook 2013-14
December 5, 2012
•
TSX coming back from extreme underperformance versus S&P500.
TSX vs. S&P 500 - Relative Performance YoY in US$ (1978-2012)
60%
TSX Outperforming
50%
40%
30%
20%
10%
0%
+1 St. Dev.
-10%
-20% -1 St. Dev.
-30%
-40%
-29% -28%
S&P 500 Outperforming
-31%
-39%
-9%
-26%
Source: Scotiabank GBM, Bloomberg.

Sub-9% China GDP = Muted CRB Gains
• Commodity upside limited by moderate China recovery…
• …will challenge TSX and EM leadership.
China GDP Growth and Commodity Price Impact (2001-2012)
13%
China Real GDP YoY - LHS
CRB Index YoY - RHS
12%
Economic & Market
Outlook 2013-14
December 5, 2012
80%
60%
11%
10%
9%
8%
7%
6%
40%
20%
0%
-20%
-40%
-60%
Source: Scotiabank GBM, Bloomberg.

Positive Reversal for Global Earnings
•
Recovering manufacturing positive for earnings outlook...
• …should support risk appetite in 1H13.
World PMI vs. MSCI AC World EPS (1998-2012)
70
65
Global earnings growth YoY
60
55
50
45
40
35
30
World Manufacturing PMI - LHS
MSCI AC World 12M Fwd EPS YoY - RHS
Economic & Market
Outlook 2013-14
December 5, 2012
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
Source: Scotiabank GBM, Bloomberg, Thomson Financial.

Sporadic Risk-On/Risk-Off Leadership to Continue
Economic & Market
Outlook 2013-14
December 5, 2012
•
Market environment remains volatile, challenging for buy-and-hold.
U.S. Risk-On/Risk-Off Indicator* (2002-2012)
50%
40%
30%
20%
10%
0%
-10%
-20%
Risk-On Trade
Extended
-30%
-40%
-50%
-60%
Risk-Off
Trade
Extended
S&P 500 "relative"
Overbought
Bonds "relative"
Overbought
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
*S&P 500 less long-term government bonds (TLT) 3M rolling relative return
Source: Scotiabank GBM, Bloomberg

U.S. Housing/Employment Recovery
Economic & Market
Outlook 2013-14
December 5, 2012
•
Stay constructive on S&P500/equities as long as U.S. housing and payrolls improve.
U.S. Housing Starts and Unemployment Rate (1990-2012)
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
U.S. Housing Starts ('000s) - LHS
U.S. Unemployment Rate (inverted) - RHS
3
4
5
6
7
8
9
10
Source: Scotiabank GBM, Bloomberg.

Recommended Asset Mix
Economic & Market
Outlook 2013-14
December 5, 2012
•
Modest Equity over Bond bias extended through 1H13.
• TSX and Latam could have strong start, but S&P500 should be among leaders again in 2013.
Scotiabank GBM Asset Mix - Q4/12 Update
Equities
Canada (TSX)
U.S. (S&P 500)
Europe (U.K./Germany)
Japan
Far East ex-Japan
LatAm
Asset Mix
Benchmark Recommended
60% 62%
5%
22%
12%
6%
7%
22%
13%
4%
10%
5%
10%
6%
Change From
Last
Bonds
Government
Corporate
40%
30%
10%
36%
22%
14%
Cash (91-D Tbills)
Source: Scotiabank GBM estimates
0% 2%

Canadian Index - Sector Strategy
Economic & Market
Outlook 2013-14
December 5, 2012
•
Global over domestic focus to kick off the year.
• Base Metals, Forest Products, Energy, Industrials, Insurance focus.
TSX Sector Strategy - November 2012
Sectors
Energy (Producers over Integrated)
Materials (Fertilizers/Forest/Mining OW)
Industrials (Capital Goods over Transport)
Discretionary
Staples
Healthcare
Financials (Insurance Over Banks)
Technology
Telecoms (Telco over Cables)
Utilities
Source: Scotiabank GBM estimates.
Recommendation
Overweight
Overweight
Overweight
Underweight
Marketweight
Marketweight
Underweight
Marketweight
Underweight
Underweight

Disclaimer Economic & Market
Outlook 2013-14
December 5, 2012
TM Trademark of The Bank of Nova Scotia. Used under license, where applicable.
This report has been prepared by Scotiabank Economics as a resource for the clients of
Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither
Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.