Canadian Government Proposes Elimination of Foreign Investment Caps

    Business Editors

    BOSTON--(BUSINESS WIRE)--March 17, 2005--State Street Corporation (NYSE: STT):

    Freedom of Allocation for Tax Sheltered Funds

    When the Government of Canada announced the proposed elimination of the 30% cap on foreign property content limits for tax-sheltered retirement savings, including registered retirement savings plans (RRSPs), registered pension plans, deferred profit sharing plans and retirement income funds, markets reacted by driving the Canadian Dollar down to 80.5 cents US. While some analysts have predicted further falls, capital flight and further currency pressure is unlikely.
    Despite the easing of foreign property content limits on RRSPs and other tax-sheltered plans over the years, Canadian investors have consistently demonstrated a preference for local investment. From 1995-99 Canadians invested an average of C$17bn per year in foreign securities. By 2000, thanks to the tech bubble south of the border, that figure exploded to C$64 - fully 6.5% of GDP - before steadily diminishing to just C$16bn by 2004. Meanwhile, foreign capital inflows into Canada achieved a record C$53bn in 2004.
    By some measures this home-country preference has hurt Canadian investors. Over the 1980-2000 period commodities were in a secular bear market, reflecting the global disinflationary trend. Not surprisingly, Canada's S&P/TSX composite index, weighted to the resource sector, underperformed. But over the past 5 years, with secular disinflation and the secular decline in commodities over with, Canadian equities have outperformed global equities.
    Macroeconomic performance has been highly supportive of Canadian investment. The Canadian current account, for example, moved from a deficit of 3.4% of GDP in 1990 to a surplus of 2.6% in 2004. Compare this with a 2004 US current account deficit of over 5.5% of GDP.

    -- Secular Bull Market in Commodities Would Benefit Canada

    Canada today is better positioned than most developed countries to take advantage of a secular bull market in commodities -- driven by the resource demands in a booming Asia - that may drive Canadian equity outperformance and a rising Canadian dollar, thereby enticing more foreign capital into Canada and keeping Canadian capital at home.

    Our Research

    State Street Global Markets, the investment research and trading arm of State Street Corporation, develops proprietary research using information aggregated from more than 15 percent of the world's tradable assets.
    By aggregating and analyzing the holdings, flows and borrowings of institutional investors around the world, the research provides unique insights into institutional investor behavior and its interaction with global financial markets.

    State Street Corporation

    State Street Corporation (NYSE: STT) is the world's leading specialist in providing institutional investors with investment servicing, investment management and investment research & trading. With $9.5 trillion(a) in assets under custody and $1.4 trillion(a) in assets under management, State Street operates in 25 countries and more than 100 markets worldwide.

    (a) As of December 31, 2004

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CONTACT: State Street Corporation Hannah Grove, +1 617 664 3377 Email: hmgrove@statestreet.com or Carolyn Cichon, +1 617 664 8672 Email: ccichon@statestreet.com

KEYWORD: MASSACHUSETTS INTERNATIONAL CANADA INDUSTRY KEYWORD: ADVERTISING/MARKETING GOVERNMENT BANKING PRODUCT SOURCE: State Street Corporation

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