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Investing in Volatile TimesPanic or Opportunity?
Steve MaccoraSenior Business Development Manager
DisclaimerThis presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled Superannuation Trust ABN 51 982 884 624. The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on 13 13 36.
All products are issued by Colonial First State. Product Disclosure Statements (PDSs) describing the products are available from Colonial First State. The relevant PDS should be considered before making a decision about any product.
This presentation does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.
The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation.
Stocks referred to in this presentation are not a recommendation of any securities.
This presentation cannot be used or copied in whole or part without our express written consent.
© Colonial First State Investments Limited 2008.
“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on
euphoria”.
Origins of a mess
The late Sir John TempletonAustralian Financial Review
2 July 2008
All Ords – Past Year to 10th Nov 08
6853.6
3755.4
-45.2%
A Previous Episode
1987 Stock Market Crash
1985 1,820.0 to 2,621.9 +44.1%
1986 2,621.9 to 3,991.0 +52.2%
1987 3,991.0 to 6,197.2 +55.3% to 30 Sept 1987
1st October 1987 to 31st October 1987
6197.2 to 3586.1 - 42.1%
All Ords – Past Five Yrs to 10th Nov 08
10/11 4060
Down from$157.45 to $61.83
-60.7%
Down from$44.84 to $18.60
-58.5%
Down from$44.16 to $18.23
-58.7%
MSCI World Ex Aus in AUD
0
200
400
600
800
1000
1200
1400
1600
1800
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Crash of ‘87
Tech wreck
Credit crunch
Source: Bloomberg. Data from 1 January 1985 to 1 October 2008 (weekly).
Global Sharemarkets 1986 - 2008
To the rescue!?
Source: BBC World Service
The cost of distress
The sub-prime hospital list
Absorbed RAMS Bear Stearns Countrywide Financial Merrill Lynch Lehman Brothers HBOS Washington Mutual Wachovia Bradford & Bingley Other small US banks
Losses Citigroup JP Morgan Morgan Stanley UBS Deutsche Bank
Other fallout Fannie Mae Freddie Mac Northern Rock AIG Fortis Dexia Centro Properties ABC Learning Allco Finance Babcock & Brown Hypo Real Estate Glitnir (Iceland)
Source: Colonial First State
50
100
150
200
250
J an-87 J an-92 J an-97 J an-02 J an-07 J an-12
US house prices… are falling
Source: S&P / Case-Shiller 10 City index, Bloomberg. Data to 31 July 2008
Index
Los Angeles -26.2%
San Francisco -24.8%
New York -7.4%
10 city decline is 17.5% over 12 months
US house prices falls are slowing
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10
Source: Bloomberg. Case-Shiller Composite 20 Home Price Index. Data to 30 June 2008
Case-Shiller Composite 20 Home Price IndexMonth on month %
US Sub-prime delinquencies by vintagePercentage of issuance by loan tranche
Source: RBA, BIS
Not all have gone bad!
Oil Prices – Some relief
0
20
40
60
80
100
120
140
160
J an-72 J an-82 J an-92 J an-02 J an-12
Source: Iress. Data to 31 October 2008
$US
US financial crisis management
1. Reduce the Fed Funds rate
2. Grant more financial institutions access to the Fed’s lending facilities
3. Step in to rescue individual institutions
4. Ban on short selling of financial institutions
5. Establishment of a Troubled Asset Relief Program (TARP) to purchase illiquid assets
6. Further Fed Fund rate cuts
Source: Colonial First State
Federal Reserve Lowers Rates to 1%
CHINA
Can China continue to grow?
Post Olympics interest rate cut
Domestic demand is a major driver of growth
Strong economic position
1. Large Current Account Surplus
2. Substantial Foreign Exchange Reserves
3. Strong Fiscal Surplus
4. Inflation is retreating
Source: Colonial First State
Australia – heading for recession?
Strong terms of trade – resources boom
Scope to cut official interest rates
Scope to spend fiscal surplus
Current infrastructure investment plans
Banks still profitable
Improved rural outlook
The population is growing
Source: Colonial First State
The Australian dollar
Source: Bloomberg. To 31 October 2008
Against the US dollar
0.4
0.6
0.8
1.0
1.2
J an-80 J an-90 J an-00 J an-10
-3
0
3
6
9
12
Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
Inflation… has ticked up
Source: ABS 6401.0. Data to 30 June 2008
GST ‘blip’
%Annual rate of inflation
Co-ordinated Rate Cuts Globally
OFFICIAL INTEREST RATES
0
2
4
6
8
J an-00 J an-02 J an-04 J an-06 J an-08
0
2
4
6
8
% %
US
UK
Euro
J apan
Australia
Source: CBA Economics Team
Focus on Listed Australian Property Trusts
Source: IRESS, Colonial First State. Data shown is the S&P/ASX 200 Property Accumulation Index (ASX Property Trusts Accumulation Index pre April 2000). *Data from 30 September 1988 to 30 June 2008. Percentage return over rolling one year. Past performance is no indication of future performance.
Returns of Australian property securities 30 September 2008
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Annualised return: 9.85%*
New supply conditions differ from prior recession
Source: Deutsche Bank, Note FY209 and beyond are based on JLL estimates
Sydney Office Construction as per cent of Total Stock
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Now
1990 recession
A-REITs significantly better value
Source: Deutsche Bank
0%
1%
2%
3%
4%
5%
6%
7%
8%
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
5yr avg spread
Trust yield differential relative to real bonds
Financial risk management
Refinancing risk is being managed
A-REIT debt profile is transparent- improved disclosure
A-REITs with higher gearing have underperformed, and are restructuring
Repaying debt Distribution cuts - but should grow from here Reduced financial engineering
Valuations likely to fall, but focus is on cash flows
Debt Refinancing Risk now under control
Source: Credit Suisse, Company Information, IRESS, CFS
2008 2009 2010 2011 2008-2011Westfield 4% 6% 11% 17% 38%Macquarie Countrywide 0% 0% 31% 38% 69%CFS Retail 0% 5% 19% 34% 58%Stockland 0% 17% 5% 21% 43%Mirvac Group 6% 0% 23% 50% 79%Dexus Property group 0% 16% 16% 25% 57%ING Office 0% 0% 41% 3% 44%Goodman Group 0% 12% 12% 12% 36%Commonwealth Property Office 0% 0% 24% 42% 66%ING Industrial 0% 1% 9% 62% 72%
A_ REIT Debt Rollover Profile
Very little debt to refinance in next 1-2 years
Comparison of gearing across the sector
0%
10%
20%
30%
40%
50%
60%
CFS Ret
ail
Wes
tfiel
d
Comm
onwealth
Pro
perty
Offi
ce
Mirv
ac G
roup
ING O
ffice
Dexus
Proper
ty g
roup
Stock
land
Goodman
Gro
up
ING In
dustria
l
Mac
quarie
Country
wide
0%
2%
4%
6%
8%
10%
12%
14%
16%
Distribution yield (RHS)
Gearing- Debt to Total Assets (LHS)
Higher debt reflected in price vs yield
Outlook for A-REIT market
REIT Profit Results Triggered major restructuring Drive to - reduce debt
- simplify business structure Lower distributions but steady growth is expected over medium
term
Property Valuations Very few transactions Buyers waiting for absolute bargains Banks lending to “quality” clients only
Sector rationalisation likely given steep discount to NTA
AUSTRALIAN
MARKETS
Markets
Australian share prices ..the All Ordinaries Index
Source: Bloomberg. Data to 3 November 2008. Past performance is no indication of future performance.
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
J an-05 J an-06 J an-07 J an-08 J an-09
March 2005Down 8.0%
October 2005Down 6.0%
May 2006Down 9.1%
March 2007Down 4.9%
August 2007Down 12.2%
November 2007 to October 2008Down 45.2%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
ConsumerDiscretionary
PropertyTrusts
Materials Fin x Prop All Ords ConsumerStaples
Energy
Sector returns since November 2007
Source: Iress. Data from 1 November 2007 to 7 October 2008.
Nowhere to hide!
All Ordinaries PE ratio
Low inflation period average is 16.5
Source: Iress. Data to 30 September 2008
8
12
16
20
24
J an-90 J an-95 J an-00 J an-05 J an-10
As at 4th November – Market at 9.18 PE
Company profits……..going up
Source: ABS 5676.0 Gross operating profits converted to an index started in September 1985 at 10000. Data to 30 June 2008.
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Dec-85 Dec-91 Dec-97 Dec-03 Dec-09
Reporting Season Wrap
Profit growth up 12.4% for 2H 2008Non-resource earnings rose 6.0%Resource earnings rose 38.5% (19.8% ex Rio and BHP)
Positives Negatives
Source: GSJBW, Bloomberg
Profits and the sharemarket
Index based at 10,000 in 1985
Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June 2008. All Ordinaries index to 10 October 2008.Past performance is no indication of future performance.
Corporate profits
All ordinaries share price index
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Dec-85 Dec-91 Dec-97 Dec-03 Dec-09
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Sep-85 Sep-90 Sep-95 Sep-00 Sep-05 Sep-10
Profits and the sharemarket - possibilities
10%
25%
40%
42% fall over 2 years
Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June 2008. All Ordinaries index to 3 November 2008.Past performance is no indication of future performance.
Decline in profits
over next 12 months
10%
US recessions: always trigger bear markets in US stocks
Performance of S&P500 around US recessions
recession start
recession end
duration (months)
S&P500 peak
S&P500 trough
duration (months)
peak to trough fall
next 12 months
Dec-69 Nov-70 11 May-69 May-70 12 -34.7% +43.7%
Nov-73 Mar-75 16 Jan-73 Oct-74 21 -48.4% +38.0%
Jan-80 Jul-80 6 Feb-80 Mar-80 2 -17.1% +37.1%
Jul-81 Nov-82 16 Nov-80 Aug-82 21 -27.1% +58.3%
Jul-90 Mar-91 8 Jun-90 Oct-90 4 -19.6% +29.1%
Mar-01 Nov-01 8 Mar-00 Oct-02 31 -49.1% +33.7%
Jun-08? ? ? Oct-07 Oct-08? 12? -45.8%? ?
Source: Datastream, UBS calculations, Colonial First State
Australian sharemarkets and US Recessions
Performance of All Ordinaries around US recessions
US recession
start
US recession
end
All Ords peak date
All Ords trough date
Duration(months)
size of peak to trough fall
subsequent 12 months
performance
Australian recession
Dec-69 Nov-70 Jan-70 May-70 4 -28.6% +4.0% no
Nov-73 Mar-75 Jan-73 Sep-74 20 -59.2% +50.9% yes
Jan-80 Jul-80 Feb-80 Mar-80 2 -20.3% +39.0% yes
Jul-81 Nov-82 Nov-80 Jul-82 20 -40.6% +38.7% yes
Jul-90 Mar-91 Aug-89 Jan-91 17 -32.4% +38.9% yes
Mar-01 Nov-01 Jun-01 Mar-03 21 -22.0% +27.3% no
Jun-08? ? Nov-07 Oct-08? 11? -45.2% ? no?
Source: Datastream, UBS calculations, Colonial First State
Summary
Australia is not immune from US financial problems
High interest rates are hurting the Australian economy
Australia still has many drivers of growth
2008-09 will continue to be a bumpy ride
The sharemarket grows with earnings over time
Source: Colonial First State