Economic & Market Update Matthew Drennan Executive General Manager, Zurich Investments
General Advice Warning This information in this presentation is general in nature and does not take into account the financial situation, needs or objectives of any person and is not a personal recommendation about any securities, stocks or options mentioned. Unless otherwise indicated the information in this presentation is, dated April 11, is given in good faith and has been derived from sources believed to be accurate as at this date and is subject to change. However, it should not be considered as a comprehensive statement on, or study of, any matter and should not be relied on as such. Please consider the Important information on the final slide. EBUK-005009-2011 EBUK-005178-2011
Agenda A world gone topsy turvy Australia - firing on one cylinder Equity market recap and outlook
A world gone topsy turvy Default Country Years in default since 1800* US 0 UK 0 France 0 China 13 Brazil 25.4 Indonesia 15.5 Public Debt Advanced economies Emerging & developing economies World 70 80 90 00 10 15 0 120 100 80 60 40 20 Public debt / GDP (%) * Share of years in default or rescheduling since independence or 1800 Source: IMF, This Time Is Different (Reinhart, Rogoff)
US Treasuries seen as a safe haven US 2Y Yield Percent % 6 5 4 3 2 1 0 US 2Y yield Oct 2005 Jul 2007 Apr 2009 Jan 2011 How to lose money on a risk-free asset Economy improves Interest rates expected to normalise Yields rise Capital loss Weak economic growth Government debt issues continue Market demands risk premium Yields rise Source: Bloomberg
Papering over the cracks Euro debt issues have not gone away You don t get much for 750 billion these days CDS Spread (bp) 1200 1000 800 600 400 200 0 Pay to hedge the risk of default May 9th rescue package Greece 13.93% 5 year bond yield Portugal 8.21% Source: Bloomberg Greece 5Y CDS Portugal 5Y CDS
Energy tensions Oil is a geopolitically sensitive asset Middle eastern unrest has proven the sensitivity of oil prices Energy prices to triple says Origin chief The Australian 2010 How will this shape consumer behavior? Political backlash over rising electricity prices to fund green energy Focus on drawing less energy from the grid? Self-sufficiency?
Middle East unrest - A tax on global growth Country % of world production % of pop. under 25 yrs Youth unemployment estimates (%) Corruption ranking (178 countries) Libya 2% 47.4% 40-50% =146 Iran 5% 45.6% 20% =146 Iraq 3% 60.6% 45% 175 Saudi Arabia 11% 50.8% 39% 50 UAE 3% 31.0% 13% 28 Unrest driven by youths who account for large proportion of the population They have few viable employment opportunities and are frustrated by their lack of political voice Source: CIA World Fact book, The Economist, Transparency.org
Japanese disaster Most effected region of Tohoku accounts for only 4% of Japanese GDP To put the economic damage in perspective; 30% of Japan s power generation is nuclear Fiscal funding issues down the line? Some downstream production issues but won t derail global recovery Forecast net impact of earthquake and tsunami to GDP (- 0.4%) Estimated impact of GFC to GDP (-10%) How long will plants stay off line?
Japanese disaster - implications for Australia Following disaster, interest rate futures were pricing in high likelihood of RBA rate cut next month. Won t happen! Short term negative impact on Australian exports Competition for raw materials for the rebuild will add to inflationary pressures, but good for Australian exports Disruption to nuclear power supply will also result in higher demand for Australia s LNG and coal exports
BOJ - $475 billion wall of liquidity S&P 500 performance over 6 months following Quantitative Easing Announcements 140 +37% 130 120 110 +17% 100 90 1 17 33 49 65 81 97 113 129 Re-indexed at 100 on day of announcement QE1 start date 17 March 2009 QE2 start date 27 August 2010 Source: Bloomberg Trading days from announcement QE1 QE2
An economic snapshot Australia March 2008 (%) June 2009 (%) Latest (%) Unemployment rate 4.1 5.8 5.0 Inflation rate (YoY) 4.2 1.5 2.7 Cash rates 7.25 3.0 4.75 House price growth* (YoY) 13.8-1.4 5.8 Real GDP growth (YoY) 3.4 0.9 2.7 *Weighted average of capital cities Source: Bloomberg, ABS
Firing on one cylinder - two economies, one monetary policy 190 180 170 160 150 140 130 120 110 100 Dec-99 Aug-02 May-05 Feb-08 Nov-10 NSW GSP WA GSP WA GSP +84% NSW GSP +30% Reindexed at 100 in Dec 1999 Source: Bloomberg
The economic cost in 2011 Damage bill from Cyclone Yasi still being tallied The flooding along Eastern Australia is expected to detract approx. 0.5% from Australian GDP in 2011 Some immediate impacts Federal Government redirects spending, budget cuts Flood Levy $1.8bn Consumer & business confidence hit Spike in headline inflation ignored by Reserve Bank, but longer term issues... Source: Goldman Sachs
Economic impact for 2012 Inflation isn t a concern initially, BUT Construction to rebuild will drive activity Competition for construction materials & labour will mean inflation becomes a more prominent issue Interest rate hikes late 2011 and throughout 2012
Financial Markets
Equity valuations are not stretched 12 month forward PE ratio ASX 200 19.0 17.0 15.0 13.0 11.0 9.0 Jul 95 Feb 98 Sep 00 Apr 03 Nov 05 Jul 08 Feb 11 Source: ATI
Why global shares? Diversification benefits Australia represents less than 4% of world s total share markets Resources and banks account for 65% of our market Virtually no exposure to technology, utilities or pharmaceuticals Most important, recent currency experience has clouded the long-term benefits
How did equity markets fare in 2010? Domestic vs Global 120 110 S&P 500 +13% 100 90 ASX 200-3% 80 Jan 10 Apr 10 Aug 10 Dec 10 ASX 200 S&P 500
The AUD is trading at post-float highs 1.05 0.95 0.85 0.75 0.65 Average $0.73 0.55 0.45 Dec 83 May 89 Oct 94 Mar 00 Aug 05 Jan 11 Where to from here? History tells us the AUD is trading at abnormally high levels Right now global shares are on sale Source: Bloomberg
Summary Global developments should be closely monitored Australia is well placed but risks remain Will the AUD have a repeat of last year s appreciation? Doubtful => don t ignore global equity opportunities
Thank you
Important information Whilst all due care has been taken in preparing the material contained in this presentation, Zurich Investment Management Limited, nor any related entities, their employees or directors (Zurich) gives any warranty of reliability or accuracy, nor accept any responsibility arising in any way by including by reason of negligence for errors or omissions. Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511. 5 Blue Street North Sydney NSW 2060. Phone 131551.