Clime Asset Management

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1 Clime Asset Management AIA National Investors Conference 2015 Macro Outlook 2015/16 John Abernethy Chief Investment Officer Clime Asset Management

2 Disclaimer The information contained in this document is published by the Clime Group. The information contained herein is not intended to be advice and does not take into account your personal circumstances, financial situation and objectives. The information provided herein may not be appropriate to your particular financial circumstances and we encourage you to obtain your own independent advice from your financial advisor before making any investment decision. Please be aware that investing involves the risk of capital loss and past results are not a reliable indicator of future performance and returns. Clime Asset Management Pty Limited (Clime), Select Asset Management Limited and its directors, employees and agents make no representation and give no accuracy, reliability, completeness or suitability of the information contained in this document and do not accept responsibility for any errors, or inaccuracies in, or omissions from this document; and shall not be liable for any loss or damage howsoever arising (including by reason of negligence or otherwise) as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this document, as it does not purport to be comprehensive or to render personal advice.

3 Agenda World economic overview investment climate Key international charts Australia key economic data Big calls for 2015 and 2016

4 World economic overview Investment climate

World economic overview constant tampering by central banks United States Growth slowed over the last six months with the rising USD having an impact; US company profit growth challenged by $US

5 World economic overview constant tampering by central banks United States Growth slowed over the last six months with the rising USD having an impact; US company profit growth challenged by $US strength; Reasonable upturn in housing and jobs has led to a lift in consumer sentiment but not credit demand; Whilst QE has ended the Fed balance sheet will be maintained Cash rates to be held at current levels till late year; Growth of US energy sector has potentially made US self sufficient but has destabilised world oil markets. In 2016 the Presidential election brings Chinese relationship into focus.

World economic overview constant tampering by central banks Europe Poor growth outlook remains but worst is over Bond yields are correcting from ridiculous yields; ECB activities check default risk

6 World economic overview constant tampering by central banks Europe Poor growth outlook remains but worst is over Bond yields are correcting from ridiculous yields; ECB activities check default risk (ex Greece) Negative real interest rates seen in 5 year bond yields; High unemployment means Sovereign Debt levels will continue to rise ECB looking to purchase 5% of all Euro bonds on issue over next 18 months. 1.1 trillion euros. In 2016 Will the Union adjust to reality?

7 World economic overview constant tampering by central banks China Growth driven by emerging consumer middle class. This growth phase replaces the investment and trade focussed growth Aggressive monetary and fiscal policy to support the economic growth of 6% to 7% Currency and interest rate management is of critical importance for 2016 In 2016 will China export inflation to the world?

World economic overview Japan Remains a major trouble spot for the world in 2015.

8 World economic overview Japan Remains a major trouble spot for the world in Annual growth of just 1% despite the stimulation; Still experimenting with a massive QE program Currency devaluing and investment asset market bubbles QE has helped avoid calamity since 2013/14 but not a sustainable policy In 2016 can Japan justify another round of QE?

9 Key international charts

10 The G20 in context GDP of G20 countries (Real GDP in US$ billions, Oct 2014) Source: IMG, World Economic Outlook

11 World growth forecasts

12 Central banks will stay the course Major central banks balance sheets Source: Bloomberg, RBA, Thomson Reuters

13 10-year bond yields in a bubble 10-year government bond yields Source: RBA, Thomson Reuters

14 Global interest rate settings

15 US budget and debt

16 US employment growth

17 US housing starts New single-family houses sold in the United States

18 US oil production

19 European QE commences ECB asset purchases Source Capital Economics

20 How bad was the bond bubble?.april 2015

21 European growth over 7 years

22 European unemployment Unemployment rate

Asian growth driving world growth 40% 26% Asian economic growth GDP valuation (current international dollar billion) 1 based on Purchasing Power Parity Source: International Monetary Fund, World

23 Asian growth driving world growth 40% 26% Asian economic growth GDP valuation (current international dollar billion) 1 based on Purchasing Power Parity Source: International Monetary Fund, World Economic Outlook, April 2013; Austrade 1. An international dollar would buy in the cited country a comparable amount of goods and services a US dollar would buy in the United States. This term is often used in conjunction with Purchasing Power Parity (PPP) data.

24 The ASIAN Century has commenced Asian economic resurgence to continue Source: Australian Government White Paper

25 A third of the worlds growth. China and India

26 Chinese currency management

27 China s growth has stimulated growth across the world

28 Australia Key economic data

29 World population growth Australia 1.5% growth Population growth of OECD countries ( CAGR) Source: The World Bank 2014

30 Budget forecasts we don t totally agree with

31 Australian growth slowing March quarter? Australian GDP growth rate Source: ABS, Trading Economics

32 Non-mining capital investment has stalled

33 Business investment: why the focus?

34 Unemployment creeping up Unemployment rate Source: ABS, RBA

35 Historically low cash rates Australian cash rate Source: ABS, RBA

36 Australian bond yields near all time low 10-year Australian government bond yield Source: RBA

37 Australia s inflation under control this year Consumer price inflation* Source: ABS, RBA

38 Understanding Australia s net foreign debt External position Source: ABS, RBA

39 Government bond issuance has skyrocketed Bonds on issue in Australia Source: ABS, AOFM, RBA, State Treasury Corporations

40 Mortgage rates continue to fall to historic lows Australian housing lending rates Source: ABS, APRA, Perpetual, RBA

41 Household wealth of over $7 trillion Household Wealth and Liabilities* Source: ABS, RBA

42 Household debt nearing all time high as the cost of debt plummets and loan approvals soar

43 House prices in Australia Housing prices Source: CoreLogic RP Data, RBA

44 Commodity price declines Bulk commodity prices Sources: ABS, Bloomberg, IHS Energy Publishing, RBA

45 Export volumes continue to rise Bulk commodity exports Source: ABS, RBA

46 Australian exports dominated by China Exports by destination Source: ABS, RBA

47 In bound tourism picking up

48 Chinese inbound tourism a big positive

49 Big calls for 2015 and 2016

50 Observations and views that will affect markets 1. Asia will continue to drive world growth for the next 10 years 2. Developed world growth will be constrained by significant ageing demographics 3. Negligible savings rates are affecting income and therefore consumption of retirees 4. Japan, Greece, Italy, Portugal, Spain etc. etc. will never repay their national debt 5. There will be a great international bond restructure at some point 6. Central bank intervention remains for many more years. The RBA will consider QE. 7. China becomes the largest world economy (based on GDP) by Chinese consuming lower middle class reaches 500 million by China will move from exporting deflation to exporting inflation in next few years 10. An India/Australia FTA will be significant for Australia 11. Australia s superannuation and tax system will be significantly restructured by 2020

51 The CALLS for second half of 2015 and Weakening $A cuts towards US 70 cents. Commodity prices remain under pressure 2. A weak $A will support the Australian equity market and stop the risk of recession 3. Australian political environment weighs on sentiment and economic growth 4. QE4 considered in US and roles forward in Europe. So $US up and Euro down 5. European bonds weaken from current bubble yields but expect cracks in US economic growth lifts but corporate earnings hampered by appreciating $US 7. Japan QE continues as economy falters.capital flows into Aussie bonds 8. China will effect a relative devaluation against the $US 9. Inflation in Australia in 2016 becomes elevated again as currency weakens 10. Equity markets remain volatile. Asset and stock selection the key to a absolute return. Cash allocation should continue to be made to $US and Sterling before investing.

52 Clime Asset Management Absolute return value asset manager Australian & international equities Listed investment company (Clime Capital) Individually managed portfolios SMSF administration Investor education Sydney Melbourne Perth Level 7, 1 Market Street Sydney NSW 2000 Level 13, 200 Queen Street Melbourne VIC 3000 Level 1, 307 Murray Street Perth WA Phone:

The emerging Asian middle class -What does it mean for Australian & International Equities

Clime Asset Management The emerging Asian middle class -What does it mean for Australian & International Equities Presented by John Abernethy 1 Disclaimer The information contained in this document is