> Macro Investment Outlook

> Macro Investment Outlook Dr Shane Oliver Head of Investment Strategy and Chief Economist October 214

The challenge for investors how to find better yield and returns as bank deposit rates stay low 9 8 7 6 5 4 Percent Average bank 3 yr term deposit rate 3 2 Average bank 1 yr term deposit rate Official cash rate 1 2 3 4 5 6 7 8 9 1 11 12 13 14 Source: RBA, Bloomberg, AMP Capital // 2

213-14 saw solid returns, particularly from growth assets 4 35 3 Percent return * 212-13 25 2 15 1 5 17% 2% 22% 213-14 6% 8% 11% 15% 8.5% 2.7% Aust equities Int'l equities ($A) Int'l equities (local) Aust bonds Global bonds Aust listed property Global listed property Direct property Cash * pre fees and taxes. Source: Thomson Reuters, AMP Capital 3 // 3

Recent rough patch, but trend in shares remains up 25 2 Australia - ASX 2 15 1 5 US - S&P 5 1 2 3 4 5 6 7 8 9 1 11 12 13 14 Source: Datastream, AMP Capital Investors // 4

Economic and investment outlook > Gradually improving global growth 213: 3.%, 214: 3.5% > Australian growth to pick up on a more sustainable basis over the year ahead > Global interest rates to remain low. Australian interest rates on hold into next year > The $A is headed towards $US.8 over the next few years > Bonds and term deposits offer low returns > Cyclical bull market in shares is likely to continue, but expect more volatility > Key risks: China; Ukraine; Iraq; Ebola; earlier than expected Fed rate hike Source: AMP Capital // 5

Global business conditions indicators point to okay global growth, but no boom Manufacturing PMI s Global Manufacturing PMI average 7 6 US PMI (LHS) 1 9 6 55 World GDP growth (RHS) 6% 5% 5 4 3 European PMI (LHS) India PMI (RHS) Japan PMI (LHS) 8 7 6 5 45 Global Manufacturing PMI (LHS) 4% 3% 2% 2 5 1% 1 China PMI (RHS) 4 4 % Brazil PMI (RHS) 1 2 3 4 5 6 7 8 9 1 11 12 13 14 3 35 5 6 7 8 9 1 11 12 13 14-1% Source: Bloomberg, AMP Capital // 6

After the March quarter soft patch US economic growth has picked up 7 5 3 Annual % change Manufacturing conditions PMI (RHS) 7 65 6 55 1 5-1 -3 US GDP growth (LHS) 45 4 35-5 2 4 6 8 1 12 14 3 Source: Thomson Reuters, AMP Capital // 7

The US is reinventing itself: energy, manufacturing & tech boom and a shrinking budget deficit 12 1 12 mth avg, million barrels/day Surging US Energy Production Total Energy Production 4 2 Sharp decline in US Federal budget deficit Budget deficit, % of GDP Surplus 8-2 6 Crude Oil Production -4 4 2 Gas & Other Energy 192 1935 195 1965 198 1995 21-6 Deficit -8-1 -12 8 85 9 95 5 1 Source: Bloomberg, US EIA, AMP Capital // 8

Companies announcing manufacturing expansion in the US Source: AMP Capital // 9

The Eurozone recovery has faltered more ECB easing underway 6 4 Annual % change Manufacturing conditions PMI (RHS) 65 6 2-2 -4-6 European GDP growth (LHS) 2 4 6 8 1 12 14 55 5 45 4 35 3 Source: Bloomberg, AMP Capital // 1

The Japanese recovery is likely to continue, despite the sales tax hike 7 5 Annual % change Japan GDP growth (LHS) 65 6 3 1-1 -3-5 -7 Manufacturing conditions PMI (RHS) 4 6 8 1 12 14 55 5 45 4 35 3 Source: Bloomberg, AMP Capital // 11

Chinese data is running hot and cold, but consistent with growth around 7.5%. The main risk is the property downturn 14 13 Chinese growth is actually quite stable Annual % change Chinese PMI 66 62 14 12 Property prices slowing, like 28 and 211 7 city property prices new data 3.5 3. 12 11 1 manufacturing conditions indexes (RHS) 58 54 1 8 6 Annual % change [LHS] 2.5 2. 1.5 9 5 4 1. 8 7 6 Chinese real GDP growth (LHS) 46 42 2-2 Monthly % [RHS].5. -.5 5 5 6 7 8 9 1 11 12 13 14 38-4 5 6 7 8 9 1 11 12 13-1. Source: Thomson Reuters, AMP Capital // 12

Interest rates likely to remain low for a long time. But debate about the first Fed hike will pick up as 215 approaches 8 Interest Rates % 7 6 Australia 5 4 3 Europe 2 US 1 Japan 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14 Source: Thomson Reuters, AMP Capital // 13

The Australian economy mining investment slowing but there have been signs of life elsewhere in the economy 8 7 6 5 Mining investment looks to have peaked Mining investment as % GDP Forecast 2 18 16 But dwelling construction is looking up (dwelling approvals, monthly 's) 4 14 3 2 12 1 49/5 59/6 69/7 79/8 89/9 99/ 9/1 15% which should help boost retail sales 1% Retail Sales % yoy 5% % -5% 9 92 94 96 98 2 4 6 8 1 12 14 Source: Thomson Financial, AMP Capital 1 8 9 92 94 96 98 2 4 6 8 1 12 14 and then eventually non-mining investment 1 9 Non-Mining investment as % GDP 8 Forecast 7 6 5 4 3 2 1 49/5 59/6 69/7 79/8 89/9 99/ 9/1 // 14

Business surveys point to stronger jobs and investment growth ahead 4 3 2 1 NAB survey points to improving employment growth Employment growth, annual % change (LHS) NAB Employment intentions, +6 mths (RHS) 2 15 1 5-5 -1-15 -2 4% 3% 2% 1% % -1% -2% NAB survey points to improving capex Actual business investment, annual % change (LHS) NAB survey investment plans, +12 mths (RHS) 6 5 4 3 2 1-1 -1 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15-25 -3% 9 92 94 96 98 2 4 6 8 1 12 14-2 Source: ABS, NAB, AMP Capital // 15

Nearing the end of seasonal weakness for shares 1.3 1.2 1.1 1..99 The seasonal pattern in US and Australian shares Seasonal share price index, 1985-212 Australia US.98.97 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg, AMP Capital // 16

Bull markets are born on pessimism, grow on scepticism, mature on optimism and die of euphoria. John Templeton Source: AMP Capital // 17

Share markets are generally cheap Share market valuation indicators Australia -4 Expensive -3-2 -1 1 2 3 Cheap 4 89 91 93 95 97 99 1 3 5 7 9 11 13 USA -4 Expensive -3-2 -1 1 2 3 Cheap 4 95 97 99 1 3 5 7 9 11 13 Source: Thomson Reuters, AMP Capital Europe -4 Expensive -3-2 -1 1 2 3 Cheap 4 91 93 95 97 99 1 3 5 7 9 11 13 Japan -4 Expensive -3-2 -1 1 2 3 Cheap 4 89 91 93 95 97 99 1 3 5 7 9 11 13 // 18

US shares are at record highs, but underpinned by record profits much more than just quantitative easing 22 2 18 16 14 12 1 8 6 4 2 Source: Bloomberg, AMP Capital US S&P 5 (LHS) US earnings per share (RHS) 9 92 94 96 98 2 4 6 8 1 12 14 12 1 8 6 4 2 // 19

QE3 soon to end but the US/global economy is more robust that it was in 21 and 211 26 24 22 2 18 16 14 12 1 8 6 Source: Bloomberg, AMP Capital Fed quantitative easing and US shares US Treasuries & mortgage backed securities held by the Fed, $USbn (RHS) QE1 +56% QE2 +3% QE3 +48% S&P5 (LHS) 8 9 1 11 12 13 14 5 4 3 2 1-1 -2-3 // 2

There is still plenty of scepticism regarding shares and plenty of cash on the sidelines Wisest place for savings Superannuation system cash weighting 6 5 % response Bank deposits or pay debt 16 14 Cash weighting 4 3 Real estate Shares 12 1 8 2 6 1 Superannuation 4 92 94 96 98 2 4 6 8 1 12 14 2 88 9 92 94 96 98 2 4 6 8 1 12 14 Source: ABS, Westpac/Melbourne Institute, AMP Capital // 21

Australian shares at all time high if dividends are allowed for 35 3 25 ASX 2 - Accumulation index,ie total return 2 15 1 5 ASX 2 - Price index 1 2 3 4 5 6 7 8 9 1 11 12 13 14 Source: Bloomberg, AMP Capital // 22

Australian shares remain very attractive relative to bank deposits 1 9 8 7 6 5 Percent Grossed up dividend yield - Aust shares 4 3 Bank 1 year term deposit rate 1 2 3 4 5 6 7 8 9 1 11 12 13 14 Source: RBA, Bloomberg, AMP Capital // 23

Shares beat cash and bonds over the long term Australia Source: Bloomberg, AMP Capital // 24

The power of compound interest Bought for 1 cents in 1938 and sold for $3.2m in 214 a compound return of 25.5% pa! Source: AMP Capital Investors // 25

Don t forget the cycle 4 3 Rolling 5 year change in All Ords, %pa Mean reversion in Australian shares 2 1-1 -2 188 19 192 194 196 198 2 Source: ASX, Bloomberg, AMP Capital // 26

Beware prognosticators of boom. // 27

and doom // 28

The $A has further to fall Extreme short positions in the $A have been closed The $A remains high compared to levels suggested by relative prices 12, 1, 8, 6, 4, 3. 2.5 2. $US per $A, at June each year 2, -2, 1.5 1. Latest -4, -6, Net speculative positions in AUD -8, -1, 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 12 13 14.5. Purchasing power parity implied level (based on relative consumer prices) 19 191 192 193 194 195 196 197 198 199 2 21 Source: Bloomberg, AMP Capital // 29

Aust real house prices are pushing back well above their long term trend. Expect a slowing in yr ahead 16 Real house prices indexed to 1926=1 8 4 2 Long term trend Real house prices 13% above trend 1 1926 1936 1946 1956 1966 1976 1986 1996 26 216 Source: ABS, AMP Capital // 3

Australian housing is very expensive. Expect slower house price growth in the year ahead House price to income and rent ratios 8% % deviation from long term average 6% House price to rent ratio 4% 2% % -2% House price to income ratio -4% New Zealand Canada France Norway Australia UK Sweden Netherlands Spain Italy Switzerland Portugal US Ireland Germany Korea Japan Source: OECD, AMP Capital // 31

Traffic light signals from DAA process Signal Equities Listed property Fixed income Commodities Valuation Legend Favourable Cycle On watch Liquidity Negative Sentiment Technical Result Overweight Neutral Underweight Overweight Source: AMP Capital. As at September 214 // 32

Economic and investment outlook > Gradually improving global growth 213: 3.%, 214: 3.5% > Australian growth to pick up on a more sustainable basis over the year ahead > Global interest rates to remain low. Australian interest rates on hold into next year > The $A is headed towards $US.8 over the next few years > Bonds and term deposits offer low returns > Cyclical bull market in shares is likely to continue, but expect more volatility > Key risks: China; Ukraine; Iraq; Ebola; earlier than expected Fed rate hike Source: AMP Capital // 33

What should investors consider in the current environment? > There is always a cycle > The power of compound interest > Invest for the long term consider goal based investing if you can t > Diversify > Turn down the noise > Focus on investments providing decent and sustainable cash flows > Buy low and sell high > Avoid the crowd > Seek advice Source: AMP Capital // 34

Important note While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 1 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. 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. // 35

Projected medium term returns, %pa, pre fees and taxes Current Yield # + Hedge Points + Growth = Return US Equities 1.9 1.5 4.5 7.9 Asia ex Japan Equities 2.6.4 7. 9.9 Emerging Equities 2.7-1.6 6.5 7.6 World Equities, local currencies 2.4 1.9 4.2 8.5 Australian Equities 4.4/5.8*. 4.7 9.1/1.5 Unlisted Commercial Property 6.. 2. 8. Australian REITS 4.6. 2.5 7.1 Global REITS 3.6 1.4 2. 7.1 Unlisted Infrastructure 6.. 3.1 9.1 Global Listed Infrastructure 3.6 1.6 3.1 8.3 Australian Gov t Bonds 3.1.. 3.1 Australian Corporate Debt 4.1.. 4.1 Australian Cash 3.5.. 3.5 Diversified Growth Mix* 7.6 # Current dividend yield for shares, distribution/net rental yields for property and 5 year bond yield for bonds. * With franking credits added in. Source: AMP Capital // 36

Changes in asset allocation since inception 1% Change in growth/defensive mix and hedge ratio Allocations Current AA (%) Range (%) Growth 69. 9 Australian Shares 13.5 5 % Allocation 75% 5% International Shares (Developed Markets) International Shares (Emerging Markets) 26.5 15. 5 Global REITs 4. 25 Commodities 1. 25 Global High Yield Credit. 25 Defensive 31. 1 1 25% Australian Sovereign Bonds 9. 25 Global Sovereign Bonds. 25 Global Investment Grade Credit 5. 25 Total growth assets Total defensive assets AUD hedge ratio % Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Global Inflation Linked Bonds. 25 Cash 17. 5 Hedge Ratio 6. 1 Source: AMP Capital, asset allocation as at October 214. // 37

Dynamic Markets Fund Performance against CPI target cumulative return since inception $14, $13, $12, $11, $1, $9, Feb 11 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 DMF CPI + 4.5% As at September 214. Returns are before fees and tax. Inception date is March 211. Source: AMP Capital, RBA. Past performance is not a reliable indicator of future performance. // 38

Fed monetary tightening is not always bad for shares US shares before and after first Fed rate hikes, % Hike -6 mths -3mths +3mths +6mths +12mths +24mths* Oct 8 19.9 4.8 1.6 4.2-4.4 2.4 Mar 84-4.1-3.5-3.8 4.3 13.5 22.5 Nov 86.8-1.5 14. 16.4-7.6 4.8 Mar 88-19.6 4.8 5.6 5. 13.9 14.6 Feb 94 7.5 2.9-6.4-4.9-2.3 14.9 Mar 97 1.2 2.2 16.9 25.1 45.5 3.3 Jun 99 11.7 6.7-6.6 7. 6. -5.6 June 4 2.6 1.3-2.3 6.2 4.4 5.5 Average 3.6 2.2 2.4 7.9 8.6 11.2 * % pa Source: Thomson Reuters, AMP Capital 39 // 39