OUTLOOK 2003

Emerging Nations

As a follow up to our Outlook presentation, this piece is intended to give more of an overview on the macro issues we feel will be driving the world economy and hopefully address some of the changes we see going forward which will affect overall investment allocation.

A major theme going forward will be the "emergence of China" as an economic force and the re-balancing this creates in world economies, opening new areas of focus for the next 5 to 10 years.

We believe that the overall US economy, while it will grow, the growth will be below average. Our expectation is for earnings growth to be in the 5.5 to 6% range, below the long-term norm of 7% and the 90's growth pace of 9%+. Therefore, the US, while there are many great companies, will not be the next major growth driver.

After three years of losses, the public's doubt and suspicion of CEO's and Wall Street are now firmly implanted, it will not easily be exorcised and are due to haunt every stock market rally. The erosion of wealth, lack of pent-up demand for consumer goods and, to some extent, demographics, will lead to a greater propensity to save, somewhat reducing consumer spending - a major boon to the economy over the past couple of years.

For business, excess capacity, particularly in technology, will not disappear overnight. "Corporations, in a world of too much of everything (except earnings), including fierce competition, are in no rush to build and expand;" they feel more compelled to save rather than commit new capital unless necessary. They will be cautious, although there is some evidence of new borrowing from the industrial sector.

Foreign investors, so prominent in the US markets, have been repatriating funds after five years of flat returns, with the only gains being currency related. With returns on US fixed income investments so low as well, the incentive to "bring the money home" has been high for both European and Japanese investors.

This is why; neither the possibility of war nor the normal workings of the cycle completely explain the current US economy nor the recent US dollar decline. It takes time to rebalance and work off the types of excesses, which developed in the recent boom. This is part of the reason why we feel the US markets could trade in a very wide range for a number of years, making the individual stock selection and dividend growth strategies extremely important to success going forward.

Dividends become more significant when we are in a low-nominal rate-of-return environment. With dividends, you receive a significant part of your return up front in cash. Also, good and growing dividends will be a sign of future capital gains as it indicates the strength of the underlying earnings of the company itself. As well, the Bush proposals to reduce or eliminate taxation of this income should lead to dividends being taken seriously again after a 15-year hiatus.