Brigette Leckie

1
Investment Markets Outlook Outlook 2005
dealing with the China syndrome

• Brigette Leckie
• Head of Investment Markets Research

December 2004
2
Key points

• Global growth downturn well advanced US led the
  way

• The day of reckoning comes for US imbalances

• The best outcome unexciting growth low
  interest rates

• Positioning for investment markets

• Equities well placed easy valuations,
  trend-line growth
• Fixed income limited interest rate rises
• Foreign exchange modest US weakness

Source Perpetual Investments
3
Changing global dynamics
China Syndrome
- Weaker synchronised growth
Source Perpetual Investments
4
Is the globe on a sustainable path?
Global economic environment
Source Perpetual Investments
5
Is the globe on a sustainable path?
US grappling with imbalances
Europe modest restructuring gains
Global economic environment
Japan shows renewed life
Non-Japan Asia re-rates
Australia booms
Source Perpetual Investments
6
US grappling with imbalances
Falling interest rates
Consumption and housing
Growth
Government spending / tax cuts
But
Deficit
Government sector
Deficit
Household sector
ballooning current account deficit
Source Perpetual Investments
7
Addressing the US savings imbalance
Most preferrable
Least preferrable
Inflation US slides
Solid productivity growth
US fiscal consolidation
PE compression
PE sideways / up
Source Perpetual Investments
8
The Post Stimulus US economy
US GDP growth
ch qtr, annualised
8
7
6
5
4
3
2
1
0
-1
-2
97
98
99
00
01
02
03
04
05
Source Datastream
9
Is the globe on a sustainable path?
US grappling with imbalances
Europe modest restructuring gains
Global economic environment
Japan shows renewed life
Non-Japan Asia re-rates
Australia booms
Source Perpetual Investments
10
Europe modest restructuring gains

• Increased labour market flexibility

• Move to longer work weeks
• Trade unions less powerful
• Increased use of flexi-workers

• Europe catches up on IT

• 1990 IT capital stock 15 of GDP
• Now 20 - close to US

Heightened productivity growth a new Europe
Source Perpetual Investments
11
Is the globe on a sustainable path?
US grappling with imbalances
Europe modest restructuring gains
Global economic environment
Japan shows renewed life
Non-Japan Asia re-rates
Australia booms
Source Perpetual Investments
12
Japan shows renewed life
Corporate sector restructuring
Government policy changes
Source Perpetual Investments
13
Is the globe on a sustainable path?
US grappling with imbalances
Europe modest restructuring gains
Global economic environment
Japan shows renewed life
Non-Japan Asia re-rates
Australia booms
Source Perpetual Investments
14
Weaker synchronised growth
Global GDP growth
ch yr
6
5
4
3
2
1
0
-1
94
95
96
97
98
99
00
01
02
03
04
05
Source Datastream, JP Morgan
15
Investment Markets
16
Global equity markets
Markets end 2004 on a positive note

• Earnings estimates less demanding

Source Perpetual Investments
17
Earnings estimates are no longer unobtainable
Earnings revisions
Ratio
3.0
2.5
2.0
1.5
1.0
0.5
0.0
96
97
98
99
00
01
02
03
04
Source IBES, Merrill Lynch
18
Global equity markets
Markets end 2004 on a positive note

• Earnings estimates less demanding

• Improved growth data, lower oil prices

• Less fear of higher interest rates, political
  stability

• Valuations more favourable

Source Perpetual Investments
19
Valuations back at historical averages
SP 500 Price Earnings Ratio
Ratio
26
24
22
20
18
16
14
12
10
92
93
94
95
96
97
98
99
00
01
02
03
04
Source Datastream, IBES
20
Global equity markets
Markets end 2004 on a positive note

• Earnings estimates less demanding

• Improved growth data, lower oil prices

• Less fear of higher interest rates, political
  stability

• Valuations more favourable

• Seasonal flows Christmas rally

Equities modest gains in 2004
Source Perpetual Investments
21
Global equity markets
2005 looks reasonable

• Unexciting but non-threatening growth

• Valuations undemanding

• Achievable earnings expectations

• Falling energy prices

High single digit returns
Source Perpetual Investments
22
Sector opportunities
Source Perpetual Investments
23
Retailing luxury is back

• 1990s generic products boom
• Now moving on up!!

Luxury 1
Luxury 2
Aspirational
Generics
Source Perpetual Investments
24
Over the top luxury

• Neiman Marcus 2004 Christmas book
• Zeppelin Airship US10m
• Underwater Aviator US1.7m
• 2005 Maserati Quattroporte Cars US125,000
• Bejewelled Mr Mrs Potato Heads US8,000
• His Hers bowling centre from US1.5m

Source Perpetual Investments
25
Sector opportunities
Large caps Dividend focus
Source Perpetual Investments
26
Australia
27
Is the globe on a sustainable path?
US grappling with imbalances
Europe modest restructuring gains
Global economic environment
Japan shows renewed life
Non-Japan Asia re-rates
Australia booms
Source Perpetual Investments
28
The Impact of China
Australia Terms of Trade
ch yr
30.0
Oil price shock 1 (1973)
25.0
20.0
Vietnam War (1964)
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
Plaza Accord (1985)
04
60
63
66
69
72
75
78
81
84
87
90
93
96
99
02
Source Australian Bureau of Statistics, Merrill
Lynch
29
Australian equities
Near term more new record highs?

• Strong earnings estimates
• Increased MA activity
• Surging inflows, NCP delisting

Medium term some caution

• Full valuations
• Weaker earnings revisions

• A strength

Source Perpetual Investments
30
Summary

• Global growth downturn well advanced US led the
  way

• The day of reckoning comes for US imbalances

• The best outcome unexciting growth low
  interest rates

• Positioning for investment markets

• Equities well placed easy valuations,
  trend-line growth
• Fixed income limited interest rate rises
• Foreign exchange modest US weakness

Source Perpetual Investments
31
Companies need to start spending their cash
SP 500 ex Financials Net Debt to Capital
47 45 43 41 39 37 35 33
Source US Factset, Citigroup
32
General advice
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