> Economic risk and implications for

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1 > Economic risk and implications for financial markets Investment Strategy and Economics Multi Asset Group March 212

2 Outlook for the year ahead > Budget cutbacks in Europe and US, but global monetary easing, including in Aust > Global growth of 3% - ranging from mild recession in Europe to 8% growth in China > Expect 3% growth in Australia, but a slight rise in unemployment > Europe, oil, etc will result in a volatile ride, but expect stronger share markets helped by attractive valuations, continuing global recovery and monetary easing > Bonds are poor value > The $A is likely to remain volatile but strong Source: AMP Capital Investors // 2

3 The macro worry list of risks remains long but has faded a bit Risk assessment European debt medium/high US debt medium US fiscal drag medium/high China hard landing low Oil prices medium Extreme monetary settings in US, Europe and Japan low Near record low bond yields high Australian two speed economy low Australian house prices medium/high Source: AMP Capital Investors

4 Budget Deficit, % GDP Public debt problems remain data NZ Australia Low risk Emerging Avg China Spain UK Portugal Euro Area Ireland US Germany OECD Avg Iceland Italy Greece High risk Japan Gross Public Debt, % GDP Source: OECD, IMF, Eurostat, AMP Capital Investors // 4

5 Europe is probably already in recession, but recent economic indicators suggest it is mild 6 4 Annual % change European GDP growth LHS) PMI - business conditions (RHS) Source: Bloomberg, AMP Capital Investors // 5

6 and ECB support for banks and bond buying suggest the risk of a meltdown has receded 6% 5% 1 year bond yields, spread to German Italy 4% 3% 2% Spain 1% France % Source: Bloomberg, AMP Capital Investors // 6

7 Global business conditions indicators generally have stabilised or improved suggesting less risk of global recession 7 6 US ISM (LHS) European PMI (LHS) India PMI (RHS) Japan PMI (LHS) China PMI (RHS) Brazil PMI (RHS) Source: Bloomberg, AMP Capital Investors // 7

8 The US has avoided the much feared double dip recession GDP Growth 1 8 Annualised % change 6 US GDP SAAR Retail Sales 15 Annual % change US Retail Sales Source: Datastream, AMP Capital Investors // 8

9 Positive signs for the US from a longer term perspective > Housing bottoming > Manufacturing renaissance Maserati, Honda, Whirlpool, Caterpillar, Intel, Caterpillar all setting up plants in the US > US (shale) oil production rising strongly The US housing sector looks to be bottoming National Assoc of Home Builders' conditions index (RHS) US Housing Starts, ' (LHS) Source: Bloomberg, AMP Capital Investors // 9

10 There is no sign of a hard landing in China and authorities are starting to ease up on the policy brake Growth slowing not collapsing Annual % change Chinese PMI manufacturing conditions index (RHS) Chinese Real GDP growth (LHS) Cooling Inflation = room to ease Annual % change Headline CPI inflation Inflation ex food Source: 1 Thomson Reuters, AMP Capital Investors // 1

11 Emerging countries are the dominant driver of global growth will support growth & volatility Contribution to global growth 1% 3 year moving average 9% 8% 7% 6% Others - mainly emerging countries 5% 4% 3% 2% 1% % China Japan Europe The US Source: IMF, AMP Capital Investors // 11

12 Oil prices are not at a choke point - yet 1% 5% % -5% -1% -15% US GDP, % year on year (LHS) Crude oil price, % year on year (RHS) % 4% 3% 2% 1% % -1% Source: Thomson Reuters, AMP Capital Investors

13 Interest rates are likely to remain low globally. Australian and European interest rates to fall further Interest Rates % Australia Europe Japan US Source: Datastream, AMP Capital Investors // 13

14 Global growth watch list for 212 > Italian bond yields > US ISM manufacturing conditions index > Chinese money supply growth > $A > Oil price > December 21, when Mayan calendar ends! Source: AMP Capital Investors // 14

15 The Aust economy is recording soft growth but is multi speed The mining boom is driving an investment boom 4% 3% Fin year, % change Estimate 2 18 But building approvals are soft (dwelling, monthly 's) 2% 1% % -1% -2% % retail sales are weak and the labour market is soft 1% Retail Sales % yoy 5% % -5% Source: Thomson Financial, AMP Capital Investors 15 // 15

16 House prices caught between constrained supply and falling affordability $6, $5, $4, $3, $2, National average house price (LHS) $1, $ -$1, -$2, CBA/HIA Housing Affordability Index (RHS) Poor affordability Good affordability Source: 16 Commonwealth Bank/HIA, REIA, AMP Capital Investors // 16

17 High house prices, which have gone hand in hand with high household debt levels, are Australia s Achilles heel 16 8 Real house prices indexed to 1926=1 Real house prices Long term trend Aust house prices are 25% above their long term trend Source: ABS, AMP Capital Investors

18 Australian house prices are high relative to incomes 6% 5% 4% 3% 2% 1% % -1% -2% -3% -4% -5% New Zealand House price to income ratio % deviation from long term average Netherlands Spain Australia Denmark Canada Sweden France UK Italy Norway Ireland US Finland Switzerland Germany Japan Korea Source: OECD, AMP Capital Investors

19 Share market valuations are cheap Share market valuation indicators Australia 4 Expensive Cheap USA -4 Expensive Cheap Europe -4 Expensive Cheap Japan -4 Expensive Cheap Source: Thomson Reuters, AMP Capital Investors 19 // 19

20 There is plenty of scepticism regarding shares and plenty of cash still on the sidelines % response Wisest place for savings Real estate Shares Bank deposits or pay debt Superannuation Funds cash weightings Cash Superannuation // 2

21 Chinese shares are historically cheap expect a recovery this year as policy eases Citic 3 share price index (LHS) 1 Average PE PE (RHS) Source: Thomson Reuters, AMP Capital Investors // 21

22 Very low bond yields will mean low returns from bonds over the next 5-1 years US 1 year bond yields at their lowest level ever 1 year bond yield, percent Australian 1 year bond yields at their lowest since year bond yield, percent Source: AMP Capital Investors

23 Commodity prices still in a long term uptrend, which is good while it lasts but also a risk for Australia 25 S&P Goldman Sachs Commodity Index*, real $US 2 15 Secular bear market from mid 197s to late 199s Long term bull market 1 5 * Includes energy, precious metals, base metals and foodstuffs Source: Thomson Financial, AMP Capital Investors 23 // 23

24 Huge catch-up potential in China, along with other emerging countries, will drive commodity demand Chinese level per person as % of US level per person Road network 14 Rail network 6 Telephone lines 43 Living space 35 Passenger cars 5 Source: AMP Capital Investors // 24

25 Expect the $A to remain relatively strong 3. $US per $A, at June each year Latest Source: RBA, Thomson Financial, AMP Capital Investors // 25

26 Outlook for the year ahead > Budget cutbacks in Europe & US, but global monetary easing, including in Aust > Global growth of 3% - ranging from mild recession in Europe to 8% growth in China > Expect 3% growth in Australia, but a slight rise in unemployment > Europe, oil, etc will result in a volatile ride, but expect stronger share markets helped by attractive valuations, continuing global recovery and monetary easing > Bonds are poor value > The $A is likely to remain volatile but strong Source: AMP Capital Investors // 26

27 The macro worry list of risks remains long but has faded a bit Risk assessment European debt medium/high US debt medium US fiscal drag medium/high China hard landing low Oil prices medium Extreme monetary settings in US, Europe & Japan low Near record low bond yields high Australian two speed economy low Australian house prices medium/high

28 Important note Neither AMP Capital Investors Limited (ABN ) (AFSL ), nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this presentation. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this document, AMP Capital Investors makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. // 28