WEEKLY ECONOMIC COMMENTARY Week beginning 22 nd June 2015 ECONOMIC DATA ROUNDUP

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WEEKLY ECONOMIC COMMENTARY Week beginning 22 nd June 2015 ECONOMIC DATA ROUNDUP DATA RELEASED LAST WEEK Economic Data Period Actual Previous New Motor Vehicle Sales May -1.3% -1.

2% respectively while the sale of passenger vehicles increased by 2.2%. Six of the states and territories experienced a decrease in new motor vehicle sales, with only New South Wales (+1.

followed by South Australia (-3.2%) and Western Australia and Tasmania (both -2.0%).

1 WEEKLY ECONOMIC COMMENTARY Week beginning 22 nd June 2015 ECONOMIC DATA ROUNDUP DATA RELEASED LAST WEEK Economic Data Period Actual Previous New Motor Vehicle Sales May -1.3% -1.5 Westpac/MI Leading Index May -0.1% -0.1% New Motor Vehicle Sales fell by 1.3% in May to be up only 0.8% over the last year. Sales of sports utility and other vehicles decreased by 6.1% and 0.2% respectively while the sale of passenger vehicles increased by 2.2%. Six of the states and territories experienced a decrease in new motor vehicle sales, with only New South Wales (+1.9%) and the Northern Territory (+0.3%) posting growth for the month. Victoria recorded the largest fall (-4.0%) followed by South Australia (-3.2%) and Western Australia and Tasmania (both -2.0%). The Westpac/Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months in the future, declined 0.1% in May. The six-month annualised trend growth rate fell from +0.19% in April, to in May. After a positive start returning four months of above trend numbers, the Leading Index growth rate has dropped back to zero this month indicating more subdued growth in line with long term averages. Nearly every sub-component contributed to the decline. The minutes of the June Reserve Bank Board meeting did not repeat the comment used by the Governor in his Brisbane speech a week earlier that signalled a qualified easing bias with the comment, We remain open to the possibility of further policy easing, if that is, on balance, beneficial for sustainable growth. Nor did it provide any new information on the economy or the outlook for policy. That said, the minutes did highlight uncertainty as to whether the RBA has done enough easing with broad agreement that the RBA s stance on monetary policy should be accommodative. So, there is still a willingness from the RBA to lower interest rates further if necessary, saying that it will look to incoming data to assess whether policy settings are correct. The data dependency hurdle for another rate cut appears to be high. Data over the next week Economic Data Date Period Forecast Previous House Price Index 23 June March Quarter +2.0% +1.9% DEER Internet Vacancies Index 24 June May n/a -0.1% ABS Job Vacancies 25 June May n/a +0.8% Weekly Market Commentary 1

2 ECONOMIC COMMENTARY LAST WEEK With a lack of important economic data out last week it was no surprise to find that market action has been dominated by offshore events and, in particular, reaction to developments with respect to Greece (or more precisely the lack of positive developments). Uncertainty about outcomes in Greece weighed heavily on European markets with flight to safety buying of the US dollar and government bonds pushing yields lower. The US Federal Reserve met last week. While the official policy statement was rather stale, their accompanying forecasts brought a cheer from investors as the expected trajectory for rate hikes in 2016 and 2017 was trimmed by 25 basis points, although the first US rate hike remains on track for late this year. The lower trajectory for US rate increases had traders hopeful that cheap money will be around longer than currently expected, which pushed yields lower last week. By the close of trading on Friday, the 90-day bank bill was trading at 2.14% compared to 2.16% a week earlier. In the long term maturities, 3 and 10 year bond yields closed at 1.86% and 2.89% respectively, from 2.06% and 3.02% a week earlier. CURRENCY The downgrade in US interest rate projections from the US Federal Reserve and a subsequent weakening in the US dollar coupled with stronger commodity prices, especially gold and iron ore price,s helped the Australian dollar rally to a one-month high of USD last week. By the close on Friday the Australian dollar was trading at USD compared to USD a week earlier. EQUITIES Weakness in European equity markets around the Greek negotiations was offset by positive sentiment in the US. This followed the US Federal Reserve Board meeting that included revised US economic growth numbers and lower potential rate hikes - although the US Fed did say that the US economy was strong enough to withstand an interest rate hike later this year. This brought out the buyers and the US equity market reversed early losses to post some gains over the week. Our market also had a rollercoaster week following the US lead and printed a small gain over the week. By the close on Friday the S&P/ASX200 Index was trading at 5,597.0 compared to 5,545.3 a week earlier. THIS WEEK Another quiet week ahead for economic data releases. The ABS House Price Index for the March quarter is out on Tuesday with a further 2% rise in house prices expected. This would re-accelerate the annual pace of growth in house prices from 6.8% to 7.5%, and there is a slight risk that the Index will increase by more than forecast based on the outcome of other house price data already out in the quarter. The only other releases this week are two minor labour market indicators, namely the Department of Employment s monthly Internet Vacancies Index (on Wednesday) and the ABS Job Vacancies Index (on Thursday). INTEREST RATE VIEW Following the latest round of commentary from RBA officials and the latest Board minutes, it is likely that the RBA has an Official Cash Rate locked in at 2% for some time going forward and could be done with their easing for this cycle. However, for the next few quarters, financial market pricing to the downside will continue to dominate while any prospect of a rate hike will remain a distant thought. The futures curve currently has a 50% chance of another 25 basis point rate cut priced in by year-end. Economic Data 12 months ago 6 months ago 3 months ago 1 month ago Now Official Cash Rate day Bank Bill day Bank Bill year swap year swap year swap year swap AUD/USD S&P/ASX200 Index 5, , , , ,597.0

CHART OF THE WEEK Demand for non-residential property drives returns Fuelled by strong investor demand, the latest PCA/IPD Australian All Property Index reveals that non-residential property has

The lure of high and relatively stable income is driving investors to bid up property prices. Non-residential property generated an income return of 6.

3 CHART OF THE WEEK Demand for non-residential property drives returns Fuelled by strong investor demand, the latest PCA/IPD Australian All Property Index reveals that non-residential property has performed strongly in recent years. Direct non-residential property has been a key beneficiary of the hunt for yield, and for good reason. The lure of high and relatively stable income is driving investors to bid up property prices. Non-residential property generated an income return of 6.9% in the past year, underpinning the total return of 10.7%, as shown in Figure 1. This is now the sixth consecutive year of positive total returns since the GFC. Figure 1: Non-residential Property Annual Returns to 31 March 2015 Source: PCA/IPD Australian All Property Index. The PCA/IPD Australian All Property Index tracks the performance of 1,293 non-residential property assets with a combined value of $137 billion. Participants represent A-REITs, unlisted wholesale and retail property funds, syndicates and private investors. Property returns by sector Industrial property was the standout performer over one and three years with a total return of 12.4% for the year and 11.2% p.a. for the 3 years to 31 March 2015 (Figure 2). The relative high yield (+8.2% in the past year) and the repositioning of the sector from manufacturing to high quality distribution centres leased to blue-chip tenants driven by the growth in logistics (transport and storage) is attracting significant investment into industrial property. The industrial sector is also benefiting from rising land values as the rezoning of inner city industrial land to residential gathers momentum, particularly in Sydney and Melbourne. Figure 2: Non-residential Sector Returns, One and Three Year to March 2015 Source: PCA/IPD Australian All Property Index

CHART OF THE WEEK The next best-performing sectors were retail centres and other property (car parks, self-storage, medical centres, etc.), both with a total return of 10.

4 CHART OF THE WEEK The next best-performing sectors were retail centres and other property (car parks, self-storage, medical centres, etc.), both with a total return of 10.9% for the year to March The robust retail sector performance was driven by solid capital growth the 4.1% capital return was the highest of the major property sectors. The recent cut in interest rates to their lowest level on record, lower fuel costs and a pick-up in housing activity have contributed to an improvement in retail sales however the rate of growth remains below the historical average. As evidenced by the recent sales updates from the listed retailers, parts of the retail environment still remain challenging due to both cyclical and structural factors (on-line retailing, changing retail formats etc.). Despite this, investors continue to chase retail centres, particularly sub-regional and neighbourhood centres; the major regional centres rarely change hands given they are tightly held by Westfield, AMP, Lend Lease and QIC. Despite the office sector returning a healthy 10.2% for the year and 9.5% p.a. over three years, there is growing divergence in the performance of the major office markets. Melbourne CBD was the best-performing office market with a total return of 13.5%, 6.6% of which came from capital growth. Next best was the Sydney CBD office market with a total return of 11.5%. Both markets are benefiting from the strong competition from investors for office assets and signs that tenant demand is improving. At the other end of the scale, the Perth CBD and Brisbane CBD markets are being impacted by the slowdown in the mining sector. Both markets recorded declines in value over the year of 1.9% and 0.3% respectively. We expect values in both these markets to fall further in the year ahead. Weak demand and further new supply will push the vacancy rate in both markets higher above 15.0% in Brisbane and more than 20% in Perth putting further downward pressure on rents and values. Property versus other asset classes Whilst non-residential property was not immune from the GFC fallout (capital values fell 12.5% in 2009), its performance over the longer-term has been stellar, generating a total return of 10.4% p.a. over the past 15 years outperforming A- REITs (+5.9% p.a.), Australian equities (+9.1% p.a.), and bonds (+7.7% p.a.) (Figure 3). As a rule of thumb we expect non-residential property to generate a total return of 10% over a cycle with circa 7% coming from income and 3% from capital growth. Figure 3: Non-residential Property versus Other Asset Classes, Annualised Total Return 15 Years to 31 March 2015 Source: PCA/IPD Australian All Property Index, MSCI Indices As we approach the half way mark of 2015, we expect continued strong investor demand for non-residential property to support total returns above 10%. According to IPD, the spread between bond rates and non-residential yields is now 432 basis points, well above the long-term average 232 basis points. With 10 year bond yields not far off their historic lows, on this measure, non-residential property looks attractive. For global investors, Australian non-residential property looks cheap relative to the 3-5% yields on offer in the gateway cities of London, New York, Tokyo and Hong Kong. A significant amount of equity has been raised to invest in property globally. One example that typifies this global phenomenon is the private equity juggernaut, Blackstone, who recently raised $US15 billion ($19.5 billion) from pension funds and endowment foundations, to invest in global real estate some of which is earmarked for Australia. Add leverage to this, and they have a $30 billion war chest to deploy.

5 CHART OF THE WEEK We also have a huge wave of Asian capital, particularly from the Chinese and Singaporeans, looking for a home in Australian property. Debt market conditions are favourable, both availability and cost, and as one global investor told me on a recent trip to Hong Kong, Australian property may look expensive to you but to us it is not our cost of capital is lower than your domestic capital and this is not going to change anytime soon. Risks to watch for Despite interest rates being at historical lows, investors should continue to assess how various interest rate scenarios may impact the performance of property going forward. Although we expect rates to stay lower for longer, investors need to keep an eye on the long-end of the yield curve, as it is the long term bond rate (not the cash rate) that property investors use as the yardstick for comparing property cap rates. Any rise in long bonds over the next two years is likely to be modest or even delayed if the Australian economy weakens further. However, the recent sell-off in bonds in response to comments made by the US Federal Reserve Chair Janet Yellen, served as a timely reminder of continuing volatility in global capital markets and one thing is assured, Australian non-residential property will not be immune from any future impending fallout. Whilst interest rates are an important consideration in the purchase of property, they are not the only consideration. Investors need to exercise caution that acquisitions make sense on a through-the-cycle basis and capital structures (debt levels and LVR covenants) remain relevant through the cycle. Property is a total return proposition and the current focus on yield may not entirely compensate investors for loss of capital down the track if yields blow-out. With below trend economic growth forecast in the next few years, we expect tenant demand to slowly improve across most Australian non-residential property sectors and sub-markets. The cost of securing tenants will remain high with elevated incentive levels leading to lacklustre rental growth. When asset prices are being driven by unprecedented liquidity being injected into the financial system rather than underlying real estate market fundamentals, we find ourselves heading into uncharted territory. As a result, we are now in an environment where investors need to exercise caution. It is imperative therefore, that investors identify and quantify the risk in their property portfolios. Factors such as the supply and demand dynamics of the market, strength of lease covenants, duration of the leases, and rent review mechanisms remain fundamental to the assessment of risk. Answers to these will be critical in the investment decision to either buy at this point in the cycle or sell assets in order to take advantage of investors who are becoming increasingly aggressive in their requirement to deploy capital. If there is one thing that remains a priority for all investors it is having a well-diversified portfolio. Bought well, nonresidential property has a key role to play in a mixed asset portfolio. Source Cuffelinks, Connecting Investors with ideas Article by Adrian Harrington on 11th June, 2015 Adrian Harrington is Head of Funds Management at Folkestone LimitedX:FLK). This article is for general information only and does not take individual objectives into account. Please seek personal advice before making investment decisions.

6 Rural Bank Limited is a wholly owned subsidiary of Bendigo and Adelaide Bank Limited and specialises in providing banking products and services to the Australian Agribusiness sector. Our customers are predominantly based in rural and regional Australia, although many of our deposit customers are from metropolitan areas. Rural Bank s heartland is in rural Australia. We are fully committed to providing a leading, specialised banking service to primary producers, agribusiness participants and individuals or businesses seeking business loans. As part of the Bendigo and Adelaide Bank Group, we also offer customers the benefit of the broader capabilities offered by Bendigo and Adelaide Bank. Our products and services are available at over 400 regional locations nationally including Bendigo Bank branches, Elders Rural Services branches and our Investment Centre in Adelaide. Postal Address: PO Box 3660, Rundle Mall, SA 5000 Telephone: Facsimile: service@ruralbank.com.au Disclaimer: This information has been prepared by Rural Bank s Treasury. Any advice given or perceived to have been given within this document does not take into account your relevant personal circumstances, objectives, financial situation or needs. Before acting on this advice, you should carefully consider the appropriateness of the advice to your personal circumstances and you should seek independent advice before acting on this information. Whilst all care has been taken in compiling the information in this brochure, the information should not be relied upon as substitute for professional advice where necessary. Rural Bank Limited accepts no responsibility for the accuracy, completeness or timeliness of the information and disclaims all liability in relation to any loss or damage suffered by the use of or reliance upon any information contained herein or in any attachment or annexure hereto by any person. Rural Bank Limited ABN AFSL Registered office: L6, 80 Grenfell St, Adelaide SA 5000.

WEEKLY ECONOMIC COMMENTARY Week beginning 5 th December 2016

WEEKLY ECONOMIC COMMENTARY Week beginning 5 th December 2016 ECONOMIC DATA ROUNDUP DATA RELEASED LAST WEEK Economic Data Period Actual Previous Building Approvals October +3.0% -8.7% Private Sector Credit