Vantage Point. In this Issue. Investment and Economic Briefs. i s s u e. Intelligence Unit. Investment Backdrop 1. Investment Outlook 1

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1 \ Intelligence Unit Vantage Point Investment and Economic Briefs In this Issue Investment Backdrop 1 Investment Outlook 1 Financial Markets 2 Australian Equities International Equities Fixed interest Australian Property Currencies Commodities Economic Brief 4 Australia United States Japan eurozone united kingdom china Benchmark Indices i s s u e 1 2 9

2 First Quarter 29 Issue One Investment Backdrop o o o The outlook for the global economy continued to be revised lower with the Organisation for Economic Cooperation and Development forecasting growth in the rich world to contract by 4.3 per cent more than tenfold worse than the.4 per cent decline it predicted late last year. Equity markets recorded relatively strong gains in the last month of the quarter on the back of some positive US data indicating that the economy might be passed its low point. Hopes (at the time) that the G2 Summit would arrive at a concerted plan of action also boosted sentiment. The G2 did not disappoint. Central Banks that still could, continued to lower rates. The Fed, the Bank of England and the Swiss National Bank implemented quantitative easing policies. Credit risk appears to be easing as shown in the sharp fall in the TED spread to below 1 bps down from a high of more than 45 bps in October 28 and closer to its 2-year average of around 5 bps. 5 TED Spread 4 3M Eurodollar LIBOR less 3M US Tbill rate 3 Basis Points Investment Outlook o Encouraging statistics from the US suggests that the worst may be behind it. Although lagging indicators would continue to give a negative rear view picture of the economy, these emerging positive signs would slowly instil a return in confidence investor, business and consumer sparking a virtuous cycle. o Government short-term bills and long-term bonds will continue to be among preferred investments as long as volatility remains relatively high and given the big central banks recent announcements of buying their countries debt issuances. o Despite the noticeable improvement in March, international and domestic equities sentiment remain fragile and susceptible to bad news. o Australian property market performance will be mixed: Housing will benefit from low interest rates and government grant; Commercial property would find it hard to lift before the economy improves and job insecurity eases; LPTs will remain plagued by gearing concerns but may benefit from nascent improvement in US housing market. o Gold will continue to remain the defensive asset of choice despite IMF sales. Expect a comeback when investors turn their attention to the prospect of rising inflation due to the significant expansion of the money supply. Financial Standard Intelligence Unit Vantage Point Report Published April 29 1

3 Financial Markets Australian Equities Losses in the All Ordinaries index slowed in the March quarter as encouraging economic data out of the US and concerted action by the G2 to revive capitalism inspired some confidence. Market valuation remains attractive as interest rates continue to fall. However, this offset by concerns about recent announcements of dividend suspension or reduction by some big market names. Lagging indicators will continue to be a source of downward pressure for equities in the near term. Beyond this, domestic equities stand to benefit from the economy s shallower contraction and the resumption of gains in commodity prices. Index All Ordinaries Index 75 All Ordinaries index -LHS P/E Ratio LT ave P/E 1Y ave P/E Ratio International Equities Despite the OECD s significant downgrading of the growth outlook for the world s developed economies, equity markets in the US, Japan, the Eurozone and the UK posted strong gains in the last month of the first quarter. Fresh stimulus packages, along with the Federal Reserve s quantitative easing policy have slowed the three-month downward momentum in these markets. While it may still be premature to call the bottom, investor confidence appears to be slowly returning and this would continue especially if emerging positive indications in the US persist over the next few months. Monthly change (% International Equities Jan-9 Feb-9 Mar-9 S&P 5 DJ Euro Stoxx Nikkei-225 FTSE-1 Fixed Interest Government bond markets continue to be supported by the market s conviction that interest rates are not due to go up anytime soon. The central banks of Australia and the Eurozone still have room to cut their policy rates further should economic conditions deteriorate further. With official interest rates at virtually zero, the US Federal Reserve, the Bank of England and the Bank of Japan have resorted to quantitative easing by buying their respective government s long-term debt. This effectively guarantees that long bond yields will remain low until the credit market s functioning returns to normal. Yield (%) Benchmark Bond Yields AUS EUR UK US JAP Financial Standard Intelligence Unit Vantage Point Report Published April 29 2

4 Australian Property Falling interest rates and the government s first homeowners grant have offset the downward pressure in the domestic housing market resulting from the weakening economy and the attendant job losses. Similarly, the decline in direct property is being cushioned by the Rudd government s A$4 billion commercial property assistance package, lower interest rates and fiscal stimulus. However, there appears to be no sign of easing in the LPT sell-off as investors remain concerned over their high gearing level and offshore exposure. Indications of a bottoming in the US housing market could slow further losses going forward. Currencies Emerging signs of improvement in the US economy, lessening risk aversion and positive interest rate and growth differentials appear to have revived interest in the A$. While correct to some extent, the A$ appreciation over the first three months of 29 is more largely due to the depreciation in the US currency after the Fed s decision to print money to afford the Administration and the Treasury s massive spending plans. The A$ stands to gain as the US continue to spend its way out of trouble. The A$ also stands to benefit from rising commodity prices if the US succeeds. Commodities Unlike crude oil, gold has been the beneficiary of the past boom and the current economic bust. During the economic boom of the early to mid-2, gold benefited from increased demand from the growing affluence, particularly in China and India. The global financial crisis, in turn, sent gold to fresh highs as investors sought its safety. The G2s decision to allow the IMF to sell its gold reserve to increase its cash holdings caused a setback. But this should be just transitory considering the implication of the huge expansion in money supply on inflation when the global financial crisis is over. Index US$ US$/ounce Direct & Listed Property FS Wholesale Direct Property Index S&P/ASX 2 A-REIT Accumulation Index - RHS A$/US$ Exchange Rate Source: Financial Standard/Thomson Reuters A$/US$ exchange rate CRB commodity prices -RHS Gold Crude oil -RHS Gold & Oil Index Index US$/barrel Financial Standard Intelligence Unit Vantage Point Report Published April 29 3

5 Economic Brief Australia The Australian economy is one quarter away from a technical recession after contracting by.5 per cent in the final quarter of last year. Recent economic releases have been mixed with the labour market slowly deteriorating and retail spending and housing generally holding up well. Household consumption has declined despite increased disposable income due to job insecurity and mixed messages from the Federal Government it is spending money to stimulate the economy while at the same time talking it down. The government will spend more and the RBA has room for more rate cuts if conditions deteriorate further. United States There were some encouraging signs for the US economy in final month of the first quarter of 29. Data releases showed improvement in the ISM manufacturing survey, durable good orders, home sales, chain store sales and lesser job cut announcements, among others. However, lagging indicators would still cast a pall over the economy as they continue to remind Americans of how bad things had become in the past. The outlook for the US has become brighter. Confidence will slowly return as more and more indicators improve. Annual change (%) No of Jobs (s) Australian Income & Spending Real household disposable income Real consumer spending US Labour Market Challenger Gray job cut announcements Unemployment rate -RHS Rate (%) Japan The Japanese economy continued to worsen in the first quarter. Economic data and surveys released during the period were all dreadful. Industrial production and exports set new year-on-year lows. The unemployment rate is rising and household spending marked its 12 th straight month of decline in February. Fiscal and monetary policies are unlikely to provide immediate support a fact evident in the dramatic fall in confidence among Japan s manufacturers. The economy will be unable to turn unless external demand starts to improve. Here the good news from the US and China are encouraging but this will take time to flow through. Annual change (% Financial Standard Intelligence Unit Vantage Point Report Published April 29 4 Japan Industrial Output & Exports Industrial production Exports -RHS

6 Eurozone Data out of the Eurozone remained dismal in the first quarter of this year. Industrial production and export plummeted while the unemployment rate continued to head higher. Not surprisingly, economic and consumer confidence sank to fresh lows. Yet the European Central Bank remains wary about following the US Federal Reserve and the Bank of England into lowering its interest rate towards zero as it could cause distortions in the economy. The ECB s cash rate stood at 1.5 per cent at the end of March. It begrudgingly cut rates to 1.25 per cent in early April as conditions continued to deteriorate. Like Japan, an upturn in external demand is key to improvement in the Eurozone. Index Eurozone Sentiment Economic confidence 7 Consumer confidence -RHS Index United Kingdom The Bank of England announced two historic policy moves during the first quarter it brought interest rates down to an all-time low of.5 per cent and it announced that it is engaging in a policy of quantitative easing to revive its crashing economy. The Bank aims to spend up to 75 billion in asset purchases over the next three months to increase liquidity in the financial system and improve the flow of credit. Industrial and manufacturing activity in the economy continues to collapse with dire consequences for the labour market. Given still deteriorating conditions in continental Europe, the BoE and the government may need to provide more stimulus. Annual change (%) UK Industry & Manufavturing Output Industrial production Manufacturing Asia Asian central banks have also been lowering interest rates in the wake of the global financial crisis. But while some continue to reduce borrowing rates, others are announcing an end to more interest rate reductions. Bank of Korea has stopped rate cuts as it tries to prevent further depreciation in its currency. Taiwan s central bank also hinted at no more interest rate reductions due to growing indications that the sharp slide in domestic economic activity is beginning to stabilise. Percent Asian Cash Rates South Korea Malaysia Thailand Taiwan Financial Standard Intelligence Unit Vantage Point Report Published April 29 5

7 Benchmark Indices 31 March 29 Period Return (%) Annualised Return (%) Index 1 Month 3 Months 1 Year 3 Years 5 Years Equities S&P/ASX 3 Accumulation Index S&P/ASX 2 Accumulation Index MSCI World ex Australia MSCI World ex Australia (A$ hedged) Fixed Interest UBSW Bank Bill Index UBSW Composite Bond Index Citigroup WGBI ex-australia (A$ hedged) Property S&P/ASX 2 A-REIT Index Financial Standard WS Direct Property Index * FS WS Direct Property Index figures are for 28/2/29, Financial Standard Financial Standard Intelligence Unit Vantage Point Report Published April 29

8 Australian Equities International Equities 5 5 Annual change (%) S&P/ASX 3 Accumulation Index Annual change (%) M SCI World ex Australia (hedged) M SCI World ex Australia (unhedged) Fixed Interest Australian Property Annual change (%) 18 UBSW Composite Bond Index 15 Citigroup WGBI ex-australia (A$ hedged) Annual change (%) Listed Property -4 Direct Property , Financial Standard Financial Standard Intelligence Unit Vantage Point Report Published April 29 7

9 Australian Equity Market Indices 31 March 29 Index Period Return (%) Annualised Return (%) Valuation Price Accumulation 1 Month 3 Months 1 Year 3 Years 5 Years P/E Ratio 1 Dividend Yld Broad Market S&P/ASX S&P/ASX S&P/ASX S&P/ASX S&P/ASX S&P/ASX Small Ordinaries GICS Sectors S&P/ASX 2 Consumer Discretionary S&P/ASX 2 Consumer Staples S&P/ASX 2 Energy S&P/ASX 2 Financials S&P/ASX 2 Financials ex A-REIT S&P/ASX 2 Healthcare S&P/ASX 2 Industrials S&P/ASX 2 Information Technology S&P/ASX 2 Materials S&P/ASX 2 A-REIT S&P/ASX 2 Telecommunication Services S&P/ASX 2 Utilities Notes: *P/E ratio is based on trailing earnings and excludes loss making companies, ASX, AFR Financial Standard Intelligence Unit Vantage Point Report Published April 29 8

10 S&P/ASX Accumulation Index ASX 3 ASX Small Ords 8 7 ASX Small Ords GICS Sectors IT Industrials Fin ex LPTs Cons Disc Financials Materials Energy Utilities A-REIT Cons Staples Telecom Healthcare 1 mth 1 yr 3 yrs Percentage change Financial Standard Intelligence Unit Vantage Point Report Published April 29 9

11 International Equities Developed 31 March 29 Percentage Change from: 12-Month Index Month Ago 3 Months Ago Year Ago 3 Years Ago 5 Years Ago High Low Accumulation Index MSCI World ex Australia MSCI World ex Australia (A$ hedged) Price Index MSCI North America Dow Jones S&P Nasdaq Composite Canada S&P/TSX Composite MSCI Europe DJ Euro Stoxx German Dax French CAC Milan MIB FTSE Swiss Market Index Nikkei Topix MSCI Asia ex Japan Hang Seng Singapore Straits Times NZSX Cap Note: MSCI price indices are in local currency terms Financial Standard Intelligence Unit Vantage Point Report Published April 29 1

12 International Equities Emerging 31 March 29 Price Percentage Change from: 12-Month Index Month Ago 3 Months Ago Year Ago 3 Years Ago 5 Years Ago High Low MSCI Emerging Markets MSCI Emerging Markets ex Asia MSCI EM Asia Shanghai Composite India Sensex Jakarta Composite Korea Composite Kuala Lumpur Composite Philippine SE Index Taiwan Weighted Bangkok SET MSCI EM Latin America Argentina Merval Bovespa Index Mexico Bolsa Venezuela SE General MSCI EM Europe, M/East & Africa Prague PX Warsaw General Index Moscow Times (RUR) Johannesburg SE All Share Note: MSCI price indices are in local currency terms Financial Standard Intelligence Unit Vantage Point Report Published April 29 11

13 Fixed Interest Markets 31 March 29 Accumulation Indices Period Return (%) Annualised Return (%) Index 1 Month 3 Months 1 Year 3 Years 5 Years UBSW Bank Bill Index UBSW Composite Bond Index Citigroup WGBI ex-australia (A$ hedged) Official Cash Rates Latest Month 3 Months Year Date Last Latest Basis (%) Ago (%) Ago (%) Ago (%) Changed Point Move Reserve Bank of Australia Feb-9-1 US Federal Reserve Dec-8-75 Bank of Japan Dec-8-2 European Central Bank Mar-9-5 Bank of England Mar-9-5 Short & Long-Term Interest Rates (% pa) 3-Month Bill Rate (%) 1-Year Bond Yield (%) Latest Month Ago Year Ago Latest Month Ago Year Ago Australia US Japan Eurozone UK Financial Standard Intelligence Unit Vantage Point Report Published April 29 12

14 Fixed Interest Market Percentage change mth 3 mths 1 yr 3 yrs 5 yrs 2 UBSW Bank Bill Index UBSW Composite Bond Index Citigroup WGBI ex-australia (A$ hedged) Central Bank Cash Rate Targets 8 7 Rate (%) AUS EURO UK US JP Financial Standard Intelligence Unit Vantage Point Report Published April 29 13