Slide 1

Baiocchi Griffin Private Wealth

Economic and Investment Markets Update

23rd September 2015

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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.

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What will be covered

The Current Turmoil in Financial Markets

&

The Australian Economy

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The Current Turmoil in Financial Markets

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2015 - a year of extremes

ASX All Ordinaries – 1 Jan to 9 Sept

12% Gain -17.22% Loss

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Causes of the volatility

Four primary reasons for the increase in market volatility and the stock market correction:

1. Greece

2. The Chinese stock market and economy

3. The prospect of rising interest rates in the United States

4. The weak state of the Australian economy

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1. Greece’s ongoing debt saga

More drawn-out than a live recital of Homer’s The Iliad

The key facts:• The Greek government is insolvent and has been so for much of recent history (Greece has spent 90 of the past 192 years in either default or debt restructuring)

• Europe, led by Germany, is likely to keep ‘kicking the can down the road’ for as long as possible, hoping the Greek economy eventually recovers enough to repay the debt (unlikely)

• Our view is that Greece is most likely to leave the Eurozone, adopt its own currency and default on its debts

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The challenge facing Greece:

Source: ING

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2. The situation in China

152% Gain 39% Loss

The Shanghai Stock Exchange – a textbook bubble

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Does the Chinese market matter?China’s Stock Market The Australian Stock Market

Retail investors dominate(80% of all trades)

Institutional investors – 41%Foreign investors – 43.2%Retail investors – 14.40%

Questionable accounting practices Adherence to global accounting standards

Significant level of government interference No government involvement

Emphasis on speculation, not income Focus on both growth and dividends

Not an important source of capital Very important to companies as a source of capital

“Gambling” “Investing”

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China’s economy is important

Monthly value of Australian exports to China (in AUD)

Millions of dollars

Monthly trade values peaked at around $9.5 billion p/month in 2014

Source: ABS

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Not news: China is slowing

Much of the recent concern has been focused on the news that Chinese economic growth is

slowing – this is not surprising and is not news

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Slower growth in China

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China’s economy – no surprises

Clients with keen memories may remember this from our client presentation in September 2010:

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OrdosIn Northern China, Ordos is a brand-new city for 1 million people,

but it sits empty

Rush-hour in Ordos

Client Presentation 12 Sep 2010

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More Ordos

Orodos Central Business District

Client Presentation 12 Sep 2010

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Ordos: That was then, this is now

Orodos Central Business District

Ordos in 2015

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Ordos: That was then, this is now

Orodos Central Business District

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Ordos: That was then, this is now

Orodos Central Business District

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What we said: March 2011

Client Presentation 17 Mar 2011

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Well, what happened?

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Another viewBloomberg Commodity Price Index

Back to 2002 levels

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Global dependence on ChinaThe world (and especially Australia) became overly dependent on China as a source of

demand for goods and commodities

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More evidence of the China effect

Share of world commodity consumption: China vs. The United States

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The long-awaited rebalancingThe Chinese economy is transitioning to one which is

less reliant on construction and investment

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As Chinese economic growth slows…

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…the impact is felt in Australia

Mar-2010

Jun-2010

Sep-2010

Dec-2010

Mar-2011

Jun-2011

Sep-2011

Dec-2011

Mar-2012

Jun-2012

Sep-2012

Dec-2012

Mar-2013

Jun-2013

Sep-2013

Dec-2013

Mar-2014

Jun-2014

Sep-2014

Dec-2014

Mar-2015

Jun-2015

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Australia: Quarterly GDP Growth Rate

Slowest quarterly growth in over two years

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The challenge for AustraliaAs China moves from this… …to this

Australia needs to move from this… …to this

?

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3. Rising US interest ratesThe third factor which is unsettling investment markets is the prospect of rising

interest rates in the United States

2000-01

2000-07

2001-01

2001-07

2002-01

2002-07

2003-01

2003-07

2004-01

2004-07

2005-01

2005-07

2006-01

2006-07

2007-01

2007-07

2008-01

2008-07

2009-01

2009-07

2010-01

2010-07

2011-01

2011-07

2012-01

2012-07

2013-01

2013-07

2014-01

2014-07

2015-01

2015-070.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

US Interest RatesJan 2000 to Sep 2015

Source: St Louis Fed

“ZIRP”

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Rising US interest rates – should we care?

Rising interest rates act as a dampener on economic growth by increasing the cost of borrowing for both business and households.

The real risk from an increase in interest rates is likely to come from:

- Investors who borrowed money at 0% to invest in assets such as shares or property and may need to sell, and

- Companies in developing or emerging markets who borrowed money in US dollars and will see an increase in the local currency value of their debts.

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How it works

Borrows USD$2 billion from Citigroup Bank in 2010 at 3.5%

interest rate

Potential strategies to mitigate the risks:- Currency swap- Interest rate cap

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RSA vs USA Interest Rates

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The currency effectUSD to ZAR Exchange Rate 2010 – 2015

USD $2 billion = ZAR R14 billion

USD $2 billion = ZAR R27.8 billion

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Countries to watch

Brazilian Real vs. USD Turkish Lira vs. USD

Others include Argentina, India, Mexico, Nigeria Venezuela…

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4. The Australian economy

The good news:Memories of the GFC are fading

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More good newsThe Australian dollar is falling, which benefits sectors such as tourism, agriculture, education,

manufacturing and companies with overseas operations (CSL, BHP, QBE, Resmed)

AUD vs. USD 2010 to 2015

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But there is bad news

Mining

Manufacturing

Everything else

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Where to for Australia?

Lazy

The reform list:

- Tax reform- Welfare reform- Media reform- Electoral reform- Competition reform- Workplace reform

“…lift investment in infrastructure, improve competition and regulation, boost employment”

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The stock market

To conclude the presentation, a quick look at:

- Market sector performance, and

- The stock market over the long term

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Market sector performance (30 June)

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The stock market over the long term

‘87 crash

1st Gulf War

“dot-com” bubble

GFC

ASX All Ords – 1985 to 2015

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Final thoughtsInvesting under the current set of circumstances involves focusing on company fundamentals:

► high level and consistent profitability

► strong balance sheet (low debt)

► respected management

► robust business model

► attractive industry factors

Where appropriate (and where possible) we have been using cash in bank accounts to make selective investments (the banks, QBE, Medibank Private, CSL, Ramsay and others)

Same as last time

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?Thank you

Please join us for morning tea