Economic & Investment Update - March 2016

Baiocchi Griffin Private Wealth

Economic and Investment Markets Update

17th March 2016

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.

What will be covered

The Stock Market

&

The State of the Australian Economy

&

Key Global Issues

The Stock Market

A difficult yearASX 200 Index – 10 Mar 2015 to 9 Mar 2016

Peak to trough: 21.50% decline

Greek debt crisis Part IIIChinese stock market crisis

Falls have been led by the leaders

ASX Small Ordinaries

ASX All Ordinaries

ASX Top 20

Some examples of this phenomenon

Company 12 Month Share Price Performance

BHP Billiton -44.21%

Commonwealth Bank -17.10%

National Australia Bank -29.28%

Telstra -18.62%

Wesfarmers -6.99%

Ramsay Healthcare -4.35%

Reasons for the large-cap falls

• High-yielding investments were attractive to overseas investors (zero and negative percent interest rates in the US, Europe and Japan).

• The prospect of rising interest rates in the US has encouraged a flow of money back to the US.

• Strong performance in previous years may have led to an element of profit-taking.

A longer term view - CBA

A longer term view - Telstra

A longer term view – Ramsay Healthcare

Business fundamentals are sound

Net Profit – June 2011 to June 2015

The longer term view of the market

ASX All Ords Index – 1 Jan 1985 to 9 Mar 2016

1987 crash

End of ‘dot-com’ bubble

& Iraq invasion

The GFC

European debt crisis

First Gulf War

1994 bond market crisis

A closer look at the past 10 years

Pre-GFC peak in late 2007

Market low in March 2009

Greek and European debt crisis

Recent market peak in April 2015

The stock market - Summary

• Underlying company fundamentals are better than the stock market is indicating.

• On a long term basis, the market appears to be somewhat undervalued (though further falls are always possible).

• While the falls have been led by the larger ‘blue chip’ companies, their ability to generate earnings and pay attractive dividends is still intact.

A final note on dividends

1-Feb-98

1-Jul-9

8

1-Dec-9

8

1-May-9

9

1-Oct-

99

1-Mar-0

0

1-Aug-00

1-Jan-01

1-Jun-01

1-Nov-0

1

1-Apr-0

2

1-Sep-02

1-Feb-03

1-Jul-0

3

1-Dec-0

3

1-May-0

4

1-Oct-

04

1-Mar-0

5

1-Aug-05

1-Jan-06

1-Jun-06

1-Nov-0

6

1-Apr-0

7

1-Sep-07

1-Feb-08

1-Jul-0

8

1-Dec-0

8

1-May-0

9

1-Oct-

09

1-Mar-1

0

1-Aug-10

1-Jan-11

1-Jun-11

1-Nov-1

1

1-Apr-1

2

1-Sep-12

1-Feb-13

1-Jul-1

3

1-Dec-1

3

1-May-1

4

1-Oct-

14

1-Mar-1

5

1-Aug-15

1-Jan-16

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$0.00

$0.02

$0.04

$0.06

$0.08

$0.10

$0.12

$0.14

$0.16

$0.18

Telstra: Share Price vs. Dividends

Telstra’s share price (LHS)

Telstra’s half-yearly dividend (RHS)

The Australian Economy

A few key charts: GDP growth

GDP growth remains

robust, with a most recent

annual rate of 3%

Household Saving Ratio

Although they remain cautious, households have shown a willingness to spend a little more and save a little less

Property remains strong

New housing approvals

remain strong, though recent

weakness is apparent.

The boom in apartment-

building is of some concern.

Household debt is a concern

Household debt continues to rise

after a brief slowdown during

the GFC.

Interest paid on debt has been kept low by an ultra-low RBA

cash rate.

Much of the debt is in housing

House prices have been supported

by increased debt levels, particularly in the Sydney and

Melbourne markets.

Median house price in Sydney is now $1 million.

Mortgage credit growth is an issue

Mortgage credit growth in the last 30 years has been spectacular - can it continue?

Unemployment – holding steady

Despite a sluggish economy,

unemployment has held up well, even

falling in recent months (though

doubts exist over the accuracy of the ABS

figures).

Salary increases are rare

Despite the relatively low

unemployment growth, wages are growing at a very

slow rate.

Workers are not seeing significant

increases in wages.

Falling commodity prices a problem

Falling prices for many of Australia’s exports – iron ore, coal, oil, rural commodities

Overall a mixed result

On the positive side,

• Economic growth is reasonably strong, although the two-speed economy has returned (this time NSW and VIC are strong, QLD and WA are weak).

• Unemployment is steady, although household finances are a risk due to high debt levels (principally linked to housing).

There are some concerns, particularly,

• Continued weakness in the prices of Australia’s major exports.

• The economy has been boosted by the property market, including new construction activity, and this appears to be slowing.

• Any interest rate increases will be an issue due to high debt levels.

Key Global Issues

US Election in 2016US Unemployment Rate Under Past Presidents

Trump or Clinton? From an economic perspective, does it matter?

The US Fed is more importantUS Federal Reserve Funds Rate

After 7 years of zero percent interest rates,

interest rates increased by 0.25% in December

2015

US Fed ‘Dot Plots’

Expectations of future interest rates by members of the

Fed OMC are significantly ahead

of market expectations.

FED OMC Members Interest Rate Expectations Dec 2015

The impact of rising interest rates

The prospect of rising interest rates in the US matters for a number of reasons:

• As in Australia, an increase in interest rates will slow economic growth, with particular emphasis on interest-rate sensitive sectors such as housing and corporate borrowing.

• The US dollar can be expected to appreciate relative to other currencies – this benefits Australian companies with extensive US operations (for example CSL, QBE Insurance Group, Resmed).

• A stronger US dollar implies lower prices for US dollar-denominated commodities. While this is bad for Australian miners and oil producers, a weaker Australian dollar will offset this to some extent.

• The US has been a significant source of financial liquidity due to ZIRP – the removal of this liquidity will cause a high level of financial volatility.

Emerging Markets are at risk

Emerging markets were beneficiaries of

the ZIRP as funds flowed to such

countries in search of reasonable returns – this process is now

reversing.

Flow of Funds to Emerging Markets - $bn 28 day moving avg.

UK ‘Brexit’ – June 26 Referendum

Potential implications of a UK exit include:

- rise in financial uncertainty

- blow to global integration and free trade

- possible worsening of the general state of the EU and UK economies

Chinese Debt LevelsDebt by Borrower: As a Percentage of GDP

The past six years has seen a significant rise

in debt levels in China, largely driven

by the corporate sector.

A slowing economy poses considerable

risks to these indebted corporates.

NPL’s are becoming an issue

Slowing economic growth in China has increased the level of bad loans

Looking aheadOur thoughts on the year ahead.

• Elections in the United States and Australia are likely to be sources of concern and volatility (elections tend to dampen economic growth due to uncertainty).

• Interest rate increases in the United States are likely to be slower than expected, but when they do occur they will cause a high level of volatility (especially if market expectations are wrong).

• We consider the Australian stock market to be attractively priced, although further falls are possible as the market ignores the underlying fundamentals.

• An investment focus on well-capitalised, profitable and mature companies, which offer the prospect of sustainable and reasonable dividends, is likely to be a successful one.

?Thank you

Please join us for morning tea

Economic & Investment Update - March 2016

Economy & Finance

Transcript of Economic & Investment Update - March 2016