Slide 1

Baiocchi Griffin Private Wealth

Economic and Investment Markets Update

20th March 2015

Slide 2

General Advice Warning

This presentation and the associated discussion is general in nature and does not take your individual situation into account. You should not act on anything contained

herein, or discussed as a consequence of the contents of this document, without receiving

personal financial advice from a suitably qualified person such as a financial advisor.

Slide 3

What will be covered

Key themes for 2015

&

Australia: the State of the Nation

&

An update on investment markets

Slide 4

Key Themes For The Year Ahead

Slide 5

Three main themes for 2015…

1. Rising interest rates in the United States

2. Quantitative easing in Europe

3. The ongoing economic slowdown in China

Slide 6

US recovery = higher rates

The US economy is growing at a steady and consistent pace (annualised rates)

Bad weather blamed for slowdown in early 2014

Slide 7

Strong growth in jobs…

More than 1 million new jobs in last 3 months, nearly 12 million new jobs in 5 years

Slide 8

Unemployment is a beneficiary…

Unemployment in the US has nearly halved since the GFC

Slide 9

So interest rates will start to rise

Short-term rates in the US are rising, reflecting expectations of a higher Fed funds rate

Slide 10

Implications of higher interest rates

1. A stronger US dollar

2. Less financial liquidity

3. Dampening effect on economic demand

- Commodity prices

- US export competitiveness

- Asset prices

- Less spending by households and business

Slide 11

The US$ is strengthening

USD/EURExchange rate

USD/JPYExchange rate

Slide 12

The US stock market is vulnerable

Slide 13

Though it’s not all bad news

Slide 14

Europe: a different direction

Slide 15

European interest rates heading lower

Interest rates in many European nations are at or below 0%

Slide 16

ECB quantitative easing

From March 2015 to September 2016:

⇒ €60 billion per month will be spent on buying government & corporate bonds

(just under €1.1 trillion in total). But why?

Slide 17

ECB’s main target is deflation

EU economic growth is so slow that prices are falling and a deflationary spiral is a potential outcome

Slide 18

Market reaction to the ECB

Inflationary expectations

jumped as soon as the ECB

announcement was made

Slide 19

Other benefits from the ECB action

Quantitative easing in Europe will also result in:

1. A weaker Euro

2. Increased financial liquidity

3. Positive impact on economic demand

(essentially the reverse of what rising interest rates will bring in the United States)

Slide 20

This is why the EU has a problem

Slide 21

Deflation is not just an EU problem

Much of the world faces an environment of falling prices, with Japan a notable exception

Slide 22

China: somewhere in-between

Peak of the Chinese infrastructure

spending boom

Slide 23

Slower growth, but a larger base

Slide 24

Electricity consumption

Due to concerns over the official GDP numbers, other measures are often used to judge the state of the Chinese economy

Slide 25

The Chinese economy is changing

Less emphasis on industrial production

Slide 26

Less need for Australian commodities

Fixed asset investment growth is slowing – this is the primary driver of demand for imported iron ore, copper and other commodities.

Slide 27

The global picture: a summary

1. The US economy will continue to grow, with US interest rates set to rise slowly over the next few years

2. Quantitative easing in Europe was long overdue, but will assist through lower interest rates & a weaker currency

3. Chinese economic growth will slow even further as the economy continues to transition away from relying on fixed asset investment

Slide 28

Australia: State of the Nation

Slide 29

A challenging time…

Australia faces a number of challenges as it enters its 25th year since recording an economic recession:

1. The ongoing transition away from a reliance on mining-led economic growth

2. Political uncertainty

3. Lack of business or consumer confidence (the ‘animal spirits’)

Slide 30

The end of the mining boom

Western Australia’s contribution to GDP growth

Queensland’s contribution to GDP growth

Slide 31

A rebalancing is taking place

NSW’s contribution to GDP growth

The transition away from the reliance on mining is happening, it’s just taking a lot longer than was expected

Slide 32

A pick-up in credit growth is positive

Lack of growth in personal lending a sign of risk aversion

Slide 33

The memory of the GFC lingers

Households still focused on saving vs. spending

Slide 34

The RBA is doing what it can

Interest rates are at historical lows and are likely to go even lower

Slide 35

Concerns over the property market

The RBA is concerned that further rate cuts risk adding to an overheated property market

Slide 36

Ratio of house prices vs. rents

(100 is the average ratio from 1975 to 2015)

Slide 37

Overall a mixed outlook

Pick-up in non-mining Unemploymentsectors

Interest rates Mining slowdown

Weakening AUD US economic growth

Slide 38

The stock market

ASX All Ordinaries Index for the past 12 months

8.0% return

Slide 39

Returns were not evenly spread

Quarterly vs. annual returns for the year ended 31 December 2014

Slide 40

Banks have performed well

Slide 41

Although they are expensive

Slide 42

A long-term view of the market

Slide 43

The market over the past 30 years

1987 crash

End of the ‘dot-com’

bubble

Pre-GFC peak

“The recession we had to have”

ASX All Ords – 1985 to 2015

Slide 44

Finally, our expectations

• Low interest rates will eventually provide the assistance the economy needs to return to a higher annual rate of economic growth

• Interest rates may go lower during 2015 – any substantial rate hikes are some years away

• Low interest rates will continue to benefit assets such as property and shares, with some risk of overheating

• Higher US interest rates will cause considerable volatility in currency, commodity and stock markets

Slide 45

?Thank you

Please join us for morning tea