What s Inside Our monthly update on markets with a focus on Term Deposit rates.

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1 September 2013 Markets Review & Outlook What s Inside Our monthly update on markets with a focus on Term Deposit rates. An update from Debbie Alliston head of Portfolio Management AMP Capital 30 September 2013, performance data. Key issues over the September Quarter (and a bit of October) Equity Markets not as soft as could have been Equity markets were spooked to a FAR LESSER degree this time the US Congress decided to play Chicken with the global financial system as the two major Political parties (Republicans and Democrats) traded tit for tat threats over the passing of the US Budget and raising of the Debt ceiling. Earnings reports delivered for the last financial year showed strength due to cost cutting across most industries. Notably, Mining and Mining Services reports highlighted the now well flagged slow down in Resources projects being undertaken. However, banking reports for Commonwealth, Bank of Queensland and even Bendigo Bank showed strength as a result of a correction in bad debt provisions. Interestingly all three banks commentaries highlighted concerns over non residential lending demand (being not as strong). International Equity markets showed strength, particularly in the USA, where in spite of the potential for a total melt down of financial markets, the US equity market improved to over 15,000 points and by Mid October was holding onto gains steadily won over the last three months. European Equity markets were less buoyant as economic news disappointed. However the electoral win by the Christian Democratic Union s Angela Merkel in German federal elections brought a bit of heart for investors that see the stability of Europe centred on a strong political base in Germany. Asian Equities were led lower in August by weakness in Japan (primarily) as bond markets reversed some of their previous gains. However, there was a strong run up in Japan towards the end of September, which (of course) faltered in October but has been reversed largely towards the end of October. Japan remains focussed on its strategy of creating liquidity through the use of Quantitative Easing by the bank of Japan at a rate that is about the same as that of US Federal Reserve. Australian Interest Rates & Currency valuations The Australian Dollar reversed its previous softness as the Global financial landscape altered to reflect two major events: 1.-The US Federal Reserve did NOT reduce its use of Quantitative Easing and therefore markets assumed that the risk on equation was still valid reducing demand of $US and increasing demand of cyclical investments. This was NOT the expected outcome & 2.-The US Congress failed to deliver a sensible decision regarding the extension of the US Debt ceiling and also failed to pass the US Budget, forcing a partial shut down of some US Government services and payments. This caused a sharp (but short term) decline in value of the $US. The Reserve Bank lowered the cash rate to 2.50% in August, but it has remained at this level since. The cash rate is 1.00% lower now than it was 1 year ago and 2.25% lower than it was in October Key Investment Data snapshot (September Quarter) Indicator September 13 June 13 Change / performance ASX Up % Copper $US/tonne $7,290 $6,750 Up % Iron Ore (Spot) $US/t $134 $115 Up $19 90 day bank bill % 2.58% 2.80% Down 0.22% $A 10 year Bond % 4.00% 3.54% Up 0.46% Notable move! $A / $US Exchange rate Up just under half a cent $A gold price / oz (Troy) $1,399 $1,304 Up A$98.00/ oz

2 September Markets Summary In the main, International equity markets were strong in the September Quarter. This was due primarily to the maintenance of accommodative monetary policies by major Central banks - in particular the US Federal Reserve and just as importantly, the Bank of Japan. Towards the end of September Quarter, it was expected (and announced in early October) that the successor to Mr Ben Bernanke as chairman of the US Federal Reserve would be Professor Janet Yellen. Professor Yellen has been the Vice Chair of the Federal Reserve since 2010 and is politically aligned with the Democrat party. The appointment of Professor Yellen was taken (correctly) as a confirmation of current monetary policies i.e. the extension of quantitative easing and other stimulus for the US Economy. Economic data was in the main positive for major markets, but overshadowed by confusing signals from the US regarding the continuance of current policies. These questions were resolved after the appointment of Professor Yellen. Western analytical focus on Chinese economic performance has been bearish for some time. However, as we have pointed out on numerous occasions Western analysis has been way incorrect and we are pleased to report continues so. The GDP report for the September quarter for China released mid October demonstrated ongoing strength in China with GDP rising at 7.8% year on year. This result has material impact for Australian exports, which have increased to China over the last twelve months in spite of what some domestic analysts might say. We are constantly bemused by the ongoing and unwarranted bearishness of some analytical commentary regarding China and its impact on Australia. It has been interesting to see that Iron Ore prices continue to appreciate (steadily) as Chinese buyers of bulk commodities spread their shopping across a number of counterparties as one would expect them to do having been subject to unfavourable pricing by BHP and Rio for some time. Although major markets delivered positive growth, a number of International Funds were struggling to deliver much by way of performance. This was due to the unsteadiness of some markets that had had a stellar performance run up in the June quarter (currency adjusted). The real event was not in equity markets, it was bonds. We had flagged this previously and the theme continued into the September Quarter as world credit markets eased further in expectation of the Federal Reserve commencing Tapering that is, the gradual reduction in asset purchases. While the actual event failed to occur, the writing is on the wall now and markets have already priced in Tapering for 2014 and beyond. As a result US and other Bond market prices now show a steepening in yield curves and will (we are not quite sure when) result in the $US appreciating. Key investment areas of focus: - TERM DEPOSITS Term Deposit rates have been declining in yield (return) since the Reserve Bank commenced their rate cutting in Clients may remember that during 2008, there was a small pick up in inflation and the RBA responded with official interest rate rises. That all changed after the collapse of Lehmann Brothers in October 2008 and the cycle of rate cuts has been the policy since then. While official rates have an impact on lending rates to a very strong degree, they are less of an issue for deposit rates as the Banks need domestic funding to maintain liquidity for operations and for some time in 2008/9 and to a degree into 2011 International money markets were low on liquidity. This is no longer the case after Quantitative Easing policies have been in place for some time. As a result of additional liquidity in International markets, domestic Banks have reduced their reliance on domestic funding. However, Banks like using Term Deposits as a way to link investor confidence in domestic investment and thus will pay higher than they need to in order to retain client loyalty. Clients might think that Term Deposit rates are low. The fact is they are high relative to alternate sources of funding offshore. But the decision to keep term deposit rates high reduces potential infiltration from offshore banks from establishing market share in the lucrative Australian market.

3 Interestingly many clients who were attracted to term deposit rates of (say) 5-6% are unable to obtain these rates now. There were special rates on offer from the bank from time to time, but these rates are no longer available. Indeed getting a term deposit rate with a 4% is now very hard. This is not surprising and given the expectation that the RBA may well have to reduce the official cash rate (at least) once again makes the likelihood of term deposit rates rising a low percentage bet. The reduction of interest rates for term deposits makes it hard for retirees to earn the income they desire to provide living incomes. Thus we have seen a large percentage of term deposit redemption money move into a variety of asset classes where more risk exists. The conundrum for investors currently is that money markets such as 90 day and 180 bank bill markets are priced on the expectation of official short term rates likely headed lower. The term deposit markets are priced to reflect demand for funds (borrowing demand) and availability of investment cash, matched against the location (Institutional source) of the funds. Currently the Australian banks have decided that in order to protect their oligopoly the best course is offer a decent rate to the domestic investor. It might not be as good as it once was, but it is a rate higher than just about any other investor is getting in the Western world. For illustrative purposes we graph here a range of term deposit rate maturities over the last six years. It makes for interesting observation. Data source: Reserve Bank of Australia. Clients should consider the impact of the moves in interest rates as part of the overall portfolio construction for their investment and superannuation portfolios. Our advice is tailored to provide you with the balance appropriate for your situation in the context of markets performance. Prepared by: David Stogdale SF Fin;

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