Market Review - as at December 31, 2011

Equities

Following a difficult third quarter, global equity markets rebounded in October, leaving them up for the fourth quarter. The MSCI World Equity Index ended the quarter up 7.6%, the MSCI Europe and MSCI Emerging Markets Index were up 4.5% and 7.5%, respectively. U.S. equity markets also fared well, as the S&P 500 rose by 11.8%. In contrast, the MSCI Far East Index was down 2.9%, primarily due to concerns surrounding a slowdown in economic growth in China.

Bonds

Bonds markets were positive in the fourth quarter. Following the equity markets, riskier high yield bond segments outperformed government issues. High yield corporate bonds were up 6.2% on the quarter while U.S. government bonds were up 0.7%. On a broad basis, the Citigroup World Broad Investment Grade Index (which includes both government and corporate bonds) was up 0.8% for the quarter.

Currency

In currency markets, the U.S. dollar generally strengthened against most other currencies. Over the quarter the Euro was down 3.3%, GBP was down 0.3%, and the Japanese yen also trended slightly lower and was down 0.2%. The U.S. dollar weakened against the Swiss Franc and the Canadian dollar which were up 3.3% and 2.8% respectively during the quarter.

The Economy

On the economic side, the past several months have seen a slight strengthening in the U.S. economic data. The unemployment rate in the U.S. has ticked down from 9.1% at the end of the third quarter to 8.6% at the end of the year. On the hiring side, the recent non-farm payroll numbers have been above expectations, and previous levels. Consumer confidence has picked up and is no longer at the levels of 2008, though still remaining below historical averages.

The current global macroeconomic situation remains weak as central governments across the developed world deleverage and put rescue packages in place. Recent drawdowns in equity markets are confirmation of the continued state of uncertainty. Accordingly, we continue to favour a defensively positioned portfolio.