SUN LIFE GLOBAL INVESTMENTS

2012 Market Outlook

HIGHLIGHTS

MONDAY JANUARY 23, 2012

Valuations appear to favour equities over bonds U.S. stock market likely to offer better risk/reward trade-off than Canada, Europe, emerging markets Signs of domestic slowdown may mean good time to invest outside Canada Divergence in economic and market views creates investment opportunity

Opportunity knocks for stocks

Risk aversion was the paramount investment theme in 2011. This created a tough environment for equities and a much better one for bonds.

After last years strong gains bonds are unlikely to see significant upside from here, whereas attractive equity valuations indicate stocks could be positioned to move higher. We expect bond yields to rise at a slow and steady pace as investors risk appetite grows.

U.S. market looks better than most

Sadiq S. Adatia

Chief Investment Officer Sun Life Global Investments (Canada) Inc.

There are still many risks on the horizon for 2012 but there are also opportunities.

Ive been in the investment business for over 15 years, and very rarely have I seen such a disparate array of views among economists and money managers as to which way markets are headed. And that divergence makes it a good time to be a stock picker.

In terms of geographies, the U.S. equity market is likely to offer a better risk/reward tradeoff than Europe, emerging markets, or even Canada. While most countries are seeing their economies get worse, the U.S. economy appears to be gaining traction as the unemployment rate drops. The U.S. equity market outperformed most other markets in 2011 and we expect that trend to continue in 2012. We see equity market gains of between 6% and 9%. With the caveat that in addition to a full blown European debt crisis, its an election year, which could cause additional market upheaval.

Valuations appears to favour stocks over bonds

Many of the risks that were prominent in 2011 are still present, including the European debt crisis, Chinas economic slowdown, and turmoil in the Middle East. But much of the surprise factor has already been priced in. This bodes well for stocks as the markets get back to fundamentals.

Canadian economy faces growing risks

Signs of an economic slowdown in Canada mean now might be an opportune time to consider investing outside our borders. Domestic risks include a housing market facing a potential downturn, higher unemployment, and a slowdown in consumer spending.

SUN LIFE GLOBAL INVESTMENTS 2012 Market Outlook

As you can see in the chart below, the last two times Canadas housing price/income ratio was higher than the US (highlighting by the first two circles) the following few years saw major declines. Since we are in a similar situation today, we believe this merits continued monitoring.

Chinas economic slowdown could hurt Canada

The fast pace of Chinas economic growth is easing. The question is whether the economy comes in for a hard landing or a soft one. Either way, Canada is likely to feel it. If Chinas resource demand slows, it will take a bite out of Canadas economic output. Thats because our countrys primary exports are raw materials such as minerals and energy products. On the plus side, Chinas middle class continues to grow and the country doesnt have the debt problems of some of the more developed nations. We expect Chinas stock market to bounce back after last years double-digit decline. Were calling for equity market gains of between 7% and 10%, but with a fair amount of volatility. (We have a similar expectation for India.)

House Price to Income Per Capita (Index)

150 140 130 120 110 100 90 80 70 60

Canada US

150 140 130 120 110 100 90 80 70 60

1976

1981 1986

1991

1996

2001 2006

2011

Sources - Thomson Datastream, Capital Economics

Gold: more upside ahead?

We think emerging markets might provide a more attractive option for the longer term. We expect energy to be among the best performing sectors in the Canadian stock market as energy stocks play catch-up to the higher price of oil. We also expect the telecom sector to hold up relatively well as investors continue to gravitate towards healthy dividends, which are abundant in this sector. Overall, we see Canadian equity market gains of between 5% and 7%.

We see gold moving higher for a twelfth straight year as it plays its proper role as a hedge against risk. We expect the commodity to hold its value more than it has in recent months. Our call is for gold to end the year somewhere between US$1700 and US$1800 per ounce.

Conclusion

In summary, we expect 2012 to be a better environment for equities as investors gain some risk appetite. Even though many issues remain, were feeling confident the potential rewards are starting to outweigh the risks. We believe the wide range of views about market direction this year presents what could be a good investment opportunity.
This publication contains information in summary form, for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this summary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this summary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this summary.

Eurozone remains a wild card

The European debt crisis has been dogging investors heels for years, and were not out of the woods yet. However, it appears that now the depth of the problem is fully known and the surprise factor is limited. We foresee the possibility of a new economic treaty signed as early as the first quarter, but implementation could take much longer. Were calling for economic contraction of about 1% this year, and we expect equity markets to lag the rest of the world.

Sun Life Global Investments (Canada) Inc., 2012. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.