Economic and market prospects

1
Economic and market prospects

• Brian Parker CFA
• Investment Strategist
• MLC Investment Management
• August 15 2008

2
General advice warning and disclaimer

• Any opinions expressed in this presentation
  constitute our judgement at the time of issue and
  are subject to change. We believe that the
  information contained in this presentation is
  correct and that any estimates, opinions,
  conclusions or recommendations are reasonably
  held or made as at the time of compilation.
  However, no warranty is made as to their accuracy
  or reliability (which may change without notice)
  or other information contained in this
  presentation. To the maximum extent permitted by
  law, we disclaim all liability and responsibility
  for any direct or indirect loss or damage which
  may be suffered by any recipient through relying
  on anything contained in or omitted from this
  presentation.
• This presentation contains general information
  and may constitute general advice. It does not
  take into account any persons particular
  investment objectives, financial situation or
  individual needs. It should not be relied upon
  as a substitute for financial or other specialist
  advice. It has been prepared solely as an
  information service for financial advisers and
  should not be distributed to clients.
• Before making any decisions on the basis of this
  presentation, you should consider the
  appropriateness of its content having regard to
  your particular investment objectives, financial
  situation or individual needs.
• Opinions expressed constitute our judgement at
  the time of issue and are subject to change. The
  presenter is a representative of MLC Investments
  Limited. MLC Investments Limited ABN 30 002 641
  661 105-153 Miller Street, North Sydney NSW 2060
  is a member of the National group of companies.
• MLC Investments Limited is the issuer of the MLC
  MasterKey Unit Trust. Information about the MLC
  MasterKey Unit Trust is contained in the current
  Product Disclosure Statement (PDS), copies of
  which are available upon request by phoning MLC
  on 131 831 or on our website at mlc.com.au.

3
27 years of balanced fund returns
Source Mercer. Performance is after fees and
superannuation tax
4
A tough time for share and LPT investors
Source Thompson Financial Datastream. Last
observation is 13 August 2008
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Global economy in snapshot
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A global crisis of confidence?
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The US economy is probably in recession already
Source Thomson Financial Datastream
8
US housing the state of play
Source Thomson Financial Datastream
9
House prices in the English speaking (!?)
economies. US houses have come down a long way
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..which has improved affordability..
Source Thompson Financial Datastream
11
..but thats a fat lot of good if the banks
arent lending!
Sources US Federal Reserve, Datastream
12
How much more debt can be rammed down the throats
of consumers in the English speaking world
anyway?..
Source Thomson Financial Datastream
13
Europe and Japan are in real danger of recession
14
China is not immune, but is well placed to
weather the storm

• Chinese exports have slowed a little, and are
  likely to slow further, but the overall impact on
  growth is not likely to be severe.
• Domestic spending is the key driver consumer
  demand has accelerated, and investment spending
  not likely to slow dramatically, despite a series
  of policy tightening measures.
• Inflation has soared on the back of food and
  energy costs, but core inflation is still very
  subdued.

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Global economic and investment prospects

• US is either in recession now or heading into
  one, and the other major economies are slowing
  down.
• Inflation concerns are largely misplaced, and the
  rate hike by ECB has only made growth prospects
  marginally worse..
• ..but the Chinese economy is well-placed to
  weather the storm (good news for Australia)
• The US Federal Reserve and Treasury now
  understands the magnitude of the problem, and
  have responded (aggressive rate cuts, massive
  liquidity injections, public support to key
  institutions)..
• ..and the economy and financial markets will
  recover (every crisis, every recession, every
  market downturn comes to an end!)..
• ..but we are most unlikely to see a repeat of the
  kind of investment returns seen in recent years.

16
Australia in summary

• Reported growth still solid in March quarter, but
  more recently..
• Retail sales have been flat since end 2007
• Credit growth has slowed dramatically
• Home loan approvals have plunged
• Consumer sentiment is just above 17 year lows
• Business surveys have shown significant
  weakness..
• And all this has happened BEFORE the bulk of the
  impact of past rate hikes could be expected to
  hit the economy
• Bright spots?
• Exports
• Huge pipeline of investment spending
• If domestic demand continues to weaken (likely)
  RBAs inflation worries will evaporate. The next
  move in rates is DOWN, and very soon!

17
RBA has done enough (borrowing costs already too
high?)
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Interest rates and oil prices are biting
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Business surveys are the weakest in nearly seven
years
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Huge pipeline of resources projects
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The A big picture
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Key drivers of the Australian Dollar
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Lets keep the recent weakness in perspective
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1987
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1987
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1987
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1987
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1987
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1987
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1987
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..Maybe I should head into cash until things
settle down?!?

• Need to get 2 calls right when to get out, AND
  when to get back in
• Macro indicators are often useless when it comes
  to timing these things
• Dalbar (2007) Investor performance 20 years to
  end 2006
• Market return (SP500) 11.8
• Investors return 4.3
• The difference? Trying to time markets!

32
.. there are known unknowns that is to say we
know there are some things we do not know. But
there are also unknown unknowns -- the ones we
don't know we don't know."

• What we dont know(and may not know, that we
  dont know)
• How far US house prices will fall
• How much damage will be done to household balance
  sheets
• The full impact on US financial institutions
  balance sheets (and hence their ability to create
  credit)
• The full impact on household spending and hence
  the economy
• The full impact on corporate earnings

33
The cash trap I can get 7-8 at the bank. Why
shouldnt I take it?

• Market timing is difficult for the best managers,
  and impossible for the average person
• 7.25 is a cyclical peak cash and TD rates are
  likely to FALL from here
• For non-super money, you lose up to half in tax
  and half through inflation
• For superannuation money, Cash NEVER builds
  long-term wealth
• Would you rather lend to the bank or own it?
• Quoted Div. Yield Grossed-up
• NAB 7.3 10.4
• ANZ 7.8 11.1
• CBA 5.9 8.4
• SGB 5.6 8.0
• WBC 5.6 8.0
• Banks Index 6.5 9.2

Source MLC Investment Management, ASX. Data as
at 12 August 2008. Datastream index of
Australian Bank stocks. Quoted dividend yield
multiplied by 1.429
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Theres always things to worry about

• The 1929 crash
• Great depression
• WW II
• Korean War
• Cuban missile crisis
• Vietnam War
• OPEC oil crisis I
• OPEC oil crisis II
• Latin American debt crisis
• Australias banana republic moment
• 1987 stockmarket crash

• The fall of the Berlin Wall
• Iraq War I
• US savings and loan crisis
• The recession we had to have
• Bond market crash 1994
• Mexican debt crisis 1995
• Asian crisis 1997
• Russian debt/LTCM crisis
• Tech wreck
• September 11
• Afghanistan
• Iraq War II

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Some questions

• Do you know your own tolerance for risk (the
  sleep-at-night test)?
• Do you know your financial goals and needs (both
  near term and longer term)?
• Do you understand what kind of investment returns
  are achievable and sustainable over time?
• Is all of this embodied in a financial plan
  produced by an appropriately qualified financial
  adviser?
• If the answer is yes to all of the above, then
  nothing thats happened in markets recently
  should cause you to do much at all!