Current Economic Update - HLB Mann Judd (Insolvency WA)€¦ · • Eurozone real GDP growth has...

Wednesday, 3 August 2016

Current Economic Update

Presented by Bevan Sturgess-Smith – Senior Investment Advisor at Macquarie Bank

STRICTLY CONFIDENTIAL

Market update Expert insights in a changing world

Presented by Bevan Sturgess-Smith

03 August 2016

Global business cycle remains de-synchronised

and highly fragmented

Source: Macquarie Research, July 2015

What volatility?!!

Price movements by sector 2016

Price return off YTD low

Sector Price return

Materials 37.80%

Energy 23.40%

Property Trusts 19.20%

Utilities 16.50%

Industrials 15.40%

Health Care 14.90%

Consumer Discretionary 13.00%

Information Technology 11.90%

Telecommunication Services 10.10%

S&P ASX 200 9.70%

Financials 5.60%

Financial x Property Trusts 3.40%

Consumer Staples 1.00%

Brexit and global growth.

• Brexit is a political and social shock for both the UK and Europe. The uncertainty associated with how developments will proceed will

impact the global economic outlook most prominently near term through financial market turmoil. Central bank policy, however, should

act as an offset and help to ensure that negative implications for global growth will be only modest. This should enable the current

global expansion and long grinding cycle to persist.

• Our 2016-18 global real GDP growth forecasts are 2.3%, 2.6% and 2.7%, respectively. Recent revisions have taken 0.1% off our

forecast for 2017 global real GDP growth.

• UK real GDP growth has been reduced: 2016 1.8% (1.9%), 2017 0.9% (2.3%).

• Eurozone real GDP growth has been reduced: 2016 1.6% (1.8%), 2017 1.5% (1.7%)

Chinese urbanisation

Source: United Nations and MWM Research, November 2014

0

10

20

30

40

50

60

70

80

90

100

% China Japan South Korea India Europe US Australia

forecast

Commodity Forecasts

Source: Macquarie Securities

A longer period of low rates and policy divergence, implies

an extended A$ trough

Sources: RBA, ASE, Bloomberg, Macquarie Research, June 2016

0

1

2

3

4

5

Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

US & Australia: Monetary policy divergence

%

RBA cashrate

Macq(f)

Federalfunds rate

Marketpricing

40

45

50

55

60

65

70

75

80

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jun-96 Jun-01 Jun-06 Jun-11 Jun-16

AU$ (LHS)

TWI (RHS)

Australia: CurrencyIndexUS$

Macq(f)

CPI only just reaching the bottom of target band. We expect

~25bp of further rate cuts will not be passed on to end

borrowing rates.

Sources: ABS, RBA, Macquarie Research, June 2016

1.4

1.8

2.2

2.6

3.0


HistoricalRBA Aug-15 (f)RBA Nov-15 (f)RBA Feb-16 (f)RBA May-16 (f)

Australia: Trimmed mean inflation(annual % change, RBA forecasts)%

0

2

4

6

8

10


Australia: Monetary policy%

Standardvariable

rate

Macq(f)

RBA cashrate

A compositional shift in employment

Source: ABS, Macquarie FX Strategy, Macquarie Research June 2016

-80 -60 -40 -20 0 20 40 60 80

Education and Training

Wholesale Trade

Mining

Other

IT and Telecoms

Utilities

Healthcare and Social Assistance

Finance and Insurance

Rental, Hiring and Real Estate

Agriculture, Forestry and Fishing

Arts and Recreation

Manufacturing

Public Aministration and Safety

Construction

Administrative

Transport and Postal

Accommodation and Food Services

Retail Trade

Professional, Scientific and Technical services

Employment change (thousands)

AUD: A compositional shift in employment

Debt and mortgage servicing: Rate cuts providing support to

spending

Sources: RBA, ABS, Macquarie Research, June 2016

4

6

8

10

12

14


Australia: Household debt servicing

%

Totalhousehold

debt

Housing debt

16

20

24

28


Australia: Mortgage servicing cost(% of household disposable income)%

Principal+ interest on

average loan

Post Jun-03average: 23%

1993-2003average: 19%

Housing: High density, concentrated supply burst coming.

Signs of approval fatigue in key regions

Sources: RBA, ABS, Macquarie Research, June 2016

0

10

20

30


Australia: Dwelling approvals by capital city(Houses, rolling annual total)

'000

Melbourne

Sydney Brisbane

Perth

0

10

20

30

40


Australia: Dwelling approvals by capital city(Other dwellings, rolling annual total)

'000

Melbourne

Sydney

Brisbane

Perth

Housing: Foreign demand

0

6

12

18

24


Total

Established dwellings

New Dwellings

Australia: FIRB Real estate approvals(per cent of dwelling turnover by value)%

Investment approvals for real estate have

surged over 2014/15 & 2015/16.

Limited participation in established housing

market (which requires permanent residency, or

substantial alterations).

Key test for market will be the settlement of

sales to offshore participants, and secondly

what those participants do with the property

(e.g. Will they supply to rental market?)

Sources: RBA, FIRB, Macquarie Research, June 2016

Current mortgage rates remain well below previous cycle

lows... Sydney house prices strong but growth rate

moderating

Sources: RBA, RP Data – Corelogic, Bloomberg, Macquarie Research, June 2016

0

2

4

6

8

10

12

14

16

18

Jun-59 Jun-68 Jun-77 Jun-86 Jun-95 Jun-04 Jun-13

Long Term Standard Variable Mortgage

Rate

%

-10

-5

0

5

10

15

20

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Australia

Melbourne

Brisbane

Perth

Adelaide

Sydney

Australia: House prices(RP Data-CoreLogic, annual % change)%

Mega cap EPS growth and RoE deterioration must reverse....

Source: Macquarie Research, June 2016

15.2

16.4

10.0

15.0

20.0

25.0

30.0

May-00 May-03 May-06 May-09 May-12 May-15

Returnon Equity (%) ASX20 vs Ex20

Forecast

-2%

19%

-40%

-20%

0%

20%

40%

60%

80%

May-00 Nov-02 May-05 Nov-07 May-10 Nov-12

ASX20

Ex20

Forecast Net Income Growth ASX20 vs Ex20

DPSg outpaces EPSg of Industrials... while Resources slash

dividend payments

Sources: Factset, Macquarie Research, June 2016

-25

-20

-15

-10

-5

0

5

10

15

20

40

50

60

70

80

90

FY07 (A)

FY08 (A)

FY09 (A)

FY10 (A)

FY11 (A)

FY12 (A)

FY13 (A)

FY14 (A)

FY15 (A)

FY16 (E)

FY17 (E)

EPS /DPS growth (YoY)

Payout ratio (%)

Industrials

Payout ratio (LHS)

EPSg (RHS)

DPSg (RHS)

Actual Fcast

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

110

120

130

FY07 (A)

FY08 (A)

FY09 (A)

FY10 (A)

FY11 (A)

FY12 (A)

FY13 (A)

FY14 (A)

FY15 (A)

FY16 (E)

FY17 (E)


Payout ratio (%) Resources

Payout ratio (LHS)

EPSg (RHS)

DPSg (RHS)

Actual Fcast

Banks continue to slow both DPS & EPS g ... While LPTs are

more stable

Sources: Factset, Macquarie Research, June 2016

-20

-16

-12

-8

-4

0

4

8

12

16

20

60

70

80

90

FY07 (A)

FY08 (A)

FY09 (A)

FY10 (A)

FY11 (A)

FY12 (A)

FY13 (A)

FY14 (A)

FY15 (A)

FY16 (E)

FY17 (E)

EPS /DPS growth (%, YoY)

Payout ratio (%)

Banks

Payout ratio (LHS)

EPSg (RHS)

DPSg (LHS)

Actual Fcast

-30

-25

-20

-15

-10

-5

0

5

10

15

60

70

80

90

100

110

FY07 (A)

FY08 (A)

FY09 (A)

FY10 (A)

FY11 (A)

FY12 (A)

FY13 (A)

FY14 (A)

FY15 (A)

FY16 (E)

FY17 (E)


Payout ratio (%)

LPTs

Payout ratio (LHS)

EPSg (RHS)

DPSg (RHS)

Actual Fcast

2015 repricing initiatives to offset dilution from raisings

Banks raised ~$25bn of additional equity

throughout 2015

This was predominantly to address APRA’s

toughened stance on mortgage risk weights

Average risk weights for Advanced banks is now

~25%

Earnings dilution from raisings is ~4-7%

Banks continued to benefit from favourable

domestic industry structure and repriced

mortgages

~45-50bps for investor loans

~15-20bps for owner occupied loans

Repricing provided 5-13bps margin benefit and

4-7% earnings benefit for FY16, largely

offsetting earnings drag from the raisings

Capital raised and associated dilution

Source: Company data, Macquarie Research, April 2016

-4.1-3.5

-7.3

-5.0

-8

-6

-4

-2

00

2

4

6

8

10

ANZ CBA NAB WBC

%$b

Capital raised Dilution

Repricing completed so far and the benefit to earnings


3.5

6.0 6.36.8

0

2

4

6

8

10

0

10

20

30

40

50

60

ANZ CBA NAB WBC

%bps

Owner occupier Investor Earnings benefit

Credit quality remains the key material near term downside

risk

Credit quality trends remained benign going

into FY16

FY14/15 BDD charges at the lowest level since

2007, but still above 1994-2007 “super benign”

cycle

Banks used CP provision releases and write-

backs to support BDDs

BDD charges still remain below the long term average


0

2

4

6

8

10

12

14

0

50

100

150

200

250

300

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016F

2017F

2018F

$bnbps

Majors BDD (RHS) BDD/Average NHL Long term average

Provisioning levels are also below the long term average


-

20

40

60

80

100

120

140

160

180

200

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

bps

Coll provisions / NHL Average

Contribution to earnings growth from BDDs


8.5 9.2

6.75.5

7.7

0.6 0.1

8.8

3.9

1.5

-2.2-0.3

0.6

-0.9 -1.1

-15

-10

-5

0

5

10

15

ANZ CBA NAB WBC Sector (ex NAB)

%

FY11 FY12 FY13 FY14 FY15

Pockets of stress (mining/resource, NZ diary) but still small

Ongoing deteriorating around mining/energy

sectors is putting pressure on BDDs

Banks have been impacted by large single

name exposures which led to earnings

downgrades and concerns from investors

Overall exposures are only 1.5-2% of overall

balance sheets, but $15-20bn is still material

NZ diary is showing signs of weakness ... but

losses are likely to be contained

Mining and resource related exposures across the majors


0.0

0.5

1.0

1.5

2.0

2.5

0

5

10

15

20

25

ANZ CBA (1H16) NAB WBC

%$b

Oil & Gas Iron Ore Mining services Coal Other % of Group EAD (RHS)

NZ Dairy exposures and growth in Agri portfolios


0

2

4

6

8

10

12

0

2

4

6

8

10

12

14

ANZ CBA NAB WBC

%NZ$b

Exposures 3yr CAGR (RHS)

Dividend’s are broadly sustainable (ex NAB)

Capital positions have been supported by

recent capital raisings;

We expect banks to accumulate more capital

over time but largely organically and through

business optimisation;

Also capital ratios are likely to be boosted by

other forms of capital (ie. hybrids) ... Expect to

see impact on margins;

Dividends are largely sustainable in a low

credit growth environment

NAB’s payout ratio appears stretched;

ANZ can resolve its dividend sustainability via

balance sheet optimisation and ROE

improvements.

The recent tone from the regulator has

softened

Banks are likely to have more time to grow into

higher capital positions

Proforma CET1 post mortgage risk weight increases, capital raisings, divestments and wealth management debt instruments

ANZ CBA (1H16) NAB WBC

FY15 RWA 401,937 392,662 399,758 358,580 Additional weightings on mortgages from 2H16 24,467 42,487 33,876 44,963 Proforma RWA 426,404 435,149 433,634 403,543 FY15 core tier one capital 38,526 40,216 40,937 34,069 Capital raisings since balance date 3,497 Proforma core tier one capital 38,526 40,216 40,937 37,566 Proforma core tier one ratio 9.0% 9.2% 9.4% 9.3% Corporate activity Divestments 0.2% 0.5% NAB demerger -0.4% Implied proforma core tier one 9.2% 9.2% 9.6% 9.3% WM instruments (FY16-FY18) -0.1% -0.5% -0.3% Implied proforma core tier one post WM 9.1% 8.8% 9.3% 9.3%


Bank dividend sustainability on a steady state basis from FY18

FY18 ANZ CBA NAB WBC

Cash earnings 7,900 10,465 6,669 8,891 RoIC 15.6% 21.2% 14.5% 18.1% Normalised RoIC for BDDs 15.1% 20.8% 14.2% 17.5% Balance sheet growth 6.0% 6.0% 6.0% 6.0% Implied sustainable payout ratio 58.0% 70.0% 56.1% 63.4% Implied sustainable payout ratio with ongoing DRP 69.2% 81.9% 66.2% 75.5%

Source: Macquarie Research, April 2016

Books are now skewed towards mortgages

This coincided with a reduction in commercial exposures following the GFC

Source: RBA, September 2015

Housing equates for over 60% of outstanding credit, up from 52% in the GFC and 23% in 1990

Source: RBA, Macquarie Research, September 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan

-1990

Oct-

1990

Jul-

1991

Ap

r-1992

Jan

-1993

Oct-

1993

Jul-

1994

Ap

r-1995

Jan

-1996

Oct-

1996

Jul-

1997

Ap

r-1998

Jan

-1999

Oct-

1999

Jul-

2000

Ap

r-2001

Jan

-2002

Oct-

2002

Jul-

2003

Ap

r-2004

Jan

-2005

Oct-

2005

Jul-

2006

Ap

r-2007

Jan

-2008

Oct-

2008

Jul-

2009

Ap

r-2010

Jan

-2011

Oct-

2011

Jul-

2012

Ap

r-2013

Jan

-2014

Oct-

2014

Jul-

2015

Owner Occupier Investor Personal Business

Housing now makes up over 60% of total credit outstanding (37% owner-occupier, 23% investor).

This is up from 52% in 2008 and 23% in 1990.

Following the GFC, commercial property exposures have reduced from ~9% to current levels of

just about 6%.

Retail market outlookNo shortage of international retailers wanting to expand into Australia

Source: Macquarie Research, Industry contacts, May 2016

Infrastructure sector IRRs

Changing IRR of the sector over the last 18 monthsSector has been declining with IRRs all contracting over the last 18

months.

Bond rates have been a key driver, declining over this period.

Since Sept-15, when concession extensions and strong traffic

growth (MQA, TCL and SYD) were factored in, IRRs have fallen 50-

190bps, with MQA’s falling the furthest.

The IRRs of both TCL and SYD are broadly in line with private

sector pricing of bonds + 5-6%.

MQA, with a business in Europe and the US, is still at a ~7.0-7.5%

risk premium, demonstrating some value.

Source: Factset, Macquarie Research, June 2016

Source: Macquarie Research, June 2016

Australian 10y bond rate

Sep-14 Mar-15 Sep-15 Mar-16 Jun-16

TCL 8.58% 8.24% 8.80% 7.95% 7.21%

MQA 8.27% 8.12% 9.90% 8.01% 7.18%

SYD 10.81% 8.54% 9.14% 8.66% 7.91%

AZJ 8.72% 7.65% 7.30% 9.08% 7.00%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Mar 06

Mar 07

Mar 08

Mar 09

Mar 10

Mar 11

Mar 12

Mar 13

Mar 14

Mar 15

Mar 16

Strong FCF to support capital management

Telstra reported cumulative excess free cashflow Telstra ordinary dividend – by year

Note: Cumulative excess free cash flow since the start of FY12

Source: Company data, Macquarie Research, May 2016 Source: Company data, Macquarie Research, May 2016

1.0 0.91.6 1.8 1.8

4.7

3.32.8

2.2

2.1

0

1

2

3

4

5

6

1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 p.f.

Cumulative excess FCF Autohome divestment

A$bn

TelstraClear sale offset

by FY12

dividend

and interest costs

Sale of Sensis stake (70%)

and CSL stake

(76%)

Spectrum payment

and

acquisitionsPacnet acquisition

30.5 31.5 32.0 32.0 32.0 32.0

4.0 4.0 4.0

20

22

24

26

28

30

32

34

36

FY15 FY16e FY17e FY18e FY19e FY20e

cps

Ordinary DPS Special DPS

Market has not de-rated

Sources: Macquarie Research, June 2016

Annual performance of asset classes

10 Year Market Returns

10.5%

9.4%

8.6%

8.5%

8.5%

8.1%

7.7%

7.6%

6.9%

6.4%

6.3%

5.2%

4.5%

3.8%

2.3%

-0.1%

High Yield Hedged

Australian Direct

Property

US Small Cap

Australian Large

Cap

US Large Cap

Australian Equities

Emerging Market

Bonds

Global Property

Global Bonds

Hedged

Australian All

Maturities

Emerging Market

Equities

Hedge Funds

Cash

Australian Small

Cap

Developed World

Commodities

201420132012201120102009200820072006

Emerging

Market Equities

34.5%

Commodities

28.0%Aust Large Cap

21.2%Aust Equities

19.8%

Aust Small Cap

18.8%Global Property

17.1%Developed

World

16.9%

Emerging

Market Bonds

16.6%Hedge Funds

15.2%Aust Direct

Property

14.0%

US Large Cap

12.7%US Small Cap

11.8%Global Bonds

Hedged

6.4%

Aust All

Maturities

5.7%Cash

5.3%High Yield

Hedged

4.5%

Aust Small Cap

30.3%

Global Property

27.0%Aust Equities

22.9%Aust Large Cap

21.7%

Emerging

Market Equities

19.7%Aust Direct

Property

18.8%Developed

World

14.5%

High Yield

Hedged

12.1%US Small Cap

10.9%US Large Cap

7.8%

Cash

5.7%Hedge Funds

5.4%Global Bonds

Hedged

4.4%

Aust All

Maturities

3.1%Emerging

Market Bonds

2.7%Commodities

-9.2%

Emerging

Market Equities

21.2%

Aust Direct

Property

21.1%Aust Equities

17.0%Aust Small Cap

16.5%

Aust Large Cap

15.4%Commodities

10.0%Global Bonds

Hedged

6.6%

Cash

6.2%High Yield

Hedged

4.1%Aust All

Maturities

3.4%

Hedge Funds

-0.6%Developed

World

-1.9%Emerging

Market Bonds

-3.7%

US Large Cap

-4.1%US Small Cap

-11.0%Global Property

-21.5%

Aust All

Maturities

14.1%

Emerging

Market Bonds

11.2%Global Bonds

Hedged

10.2%Cash

6.4%

Hedge Funds

2.1%Aust Direct

Property

-0.3%US Small Cap

-16.4%

Commodities

-18.4%US Large Cap

-23.2%High Yield

Hedged

-23.3%

Global Property

-32.6%Developed

World

-36.2%Aust Large Cap

-43.9%

Aust Equities

-48.4%Emerging

Market Equities

-52.8%Aust Small Cap

-68.0%

Aust Small Cap

48.2%

High Yield

Hedged

47.6%Aust Equities

34.9%Emerging

Market Equities

32.7%

Aust Large Cap

32.4%Global Bonds

Hedged

8.0%Global Property

7.0%

Cash

3.2%US Small Cap

2.0%Aust All

Maturities

1.8%

US Large Cap

1.6%Emerging

Market Bonds

1.1%Developed

World

1.1%

Commodities

-2.8%Hedge Funds

-5.5%Aust Direct

Property

-9.1%

High Yield

Hedged

18.6%

US Small Cap

13.1%Aust Small Cap

10.9%Aust Direct

Property

10.2%

Global Bonds

Hedged

8.0%Global Property

7.6%US Large Cap

6.8%

Aust All

Maturities

6.3%Cash

4.3%Aust Equities

4.0%

Commodities

3.6%Emerging

Market Equities

2.0%Aust Large Cap

2.0%

Emerging

Market Bonds

1.3%Hedge Funds

-2.6%Developed

World

-2.7%

Aust Direct

Property

11.4%

Aust All

Maturities

10.8%High Yield

Hedged

10.0%Global Bonds

Hedged

9.6%

Emerging

Market Bonds

9.0%Cash

4.6%Global Property

3.8%

US Large Cap

2.2%US Small Cap

-3.2%Hedge Funds

-4.6%

Commodities

-7.9%Aust Large Cap

-9.7%Aust Equities

-11.5%

Developed

World

-15.2%Emerging

Market Equities


-22.8%

Aust Large Cap

19.7%

Global Property

19.5%Aust Equities

17.9%High Yield

Hedged

17.2%

Emerging

Market Bonds

15.5%US Small Cap

13.9%US Large Cap

13.8%

Emerging

Market Equities

13.1%Developed

World

11.5%Global Bonds

Hedged

10.2%

Aust Direct

Property

8.5%Aust Small Cap

7.8%Aust All

Maturities

7.5%

Hedge Funds

4.7%Cash

3.6%Commodities

-4.8%

US Small Cap

50.1%

US Large Cap

45.4%Developed

World

34.0%Hedge Funds

24.8%

Aust Large Cap

20.3%Aust Equities


17.1%

Commodities

10.9%Emerging

Market Equities

10.6%High Yield

Hedged

9.7%

Aust Direct

Property

9.3%Emerging

Markets Bonds

8.9%Cash

2.7%

Aust All

Maturities

2.0%Aust Small Cap

0.6%Global Bonds

Hedged

0.2%

2005

Global Property

30.4%

US Large Cap

21.7%US Small Cap

14.5%Emerging

Market Bonds

14.4%

Hedge Funds

12.7%Aust Direct

Property

9.9%Aust All

Maturities

9.4%

Aust Large Cap

6.1%Global Bonds

Hedged

5.7%Aust Equities

5.5%

Emerging

Market Equities

4.3%High Yield

Hedged

4.2%Cash

2.5%

Developed

World

1.5%Aust Small Cap

-3.8%Commodities

-10.4%

Source: Macquarie Private Bank


10.5%

9.4%

8.6%

8.5%

8.5%

8.1%

7.7%

7.6%

6.9%

6.4%

6.3%

5.2%

4.5%

3.8%

2.3%

-0.1%

High Yield Hedged

Australian Direct

Property

US Small Cap

Australian Large

Cap

US Large Cap

Australian Equities

Emerging Market

Bonds

Global Property

Global Bonds

Hedged

Australian All

Maturities

Emerging Market

Equities

Hedge Funds

Cash

Australian Small

Cap

Developed World

Commodities

201420132012201120102009200820072006

Emerging

Market Equities

34.5%

Commodities

28.0%Aust Large Cap

21.2%Aust Equities

19.8%

Aust Small Cap


17.1%Developed

World

16.9%

Emerging

Market Bonds

16.6%Hedge Funds

15.2%Aust Direct

Property

14.0%

US Large Cap

12.7%US Small Cap

11.8%Global Bonds

Hedged

6.4%

Aust All

Maturities

5.7%Cash

5.3%High Yield

Hedged

4.5%

Aust Small Cap

30.3%

Global Property

27.0%Aust Equities

22.9%Aust Large Cap

21.7%

Emerging

Market Equities

19.7%Aust Direct

Property

18.8%Developed

World

14.5%

High Yield

Hedged

12.1%US Small Cap

10.9%US Large Cap

7.8%

Cash

5.7%Hedge Funds

5.4%Global Bonds

Hedged

4.4%

Aust All

Maturities

3.1%Emerging

Market Bonds

2.7%Commodities

-9.2%

Emerging

Market Equities

21.2%

Aust Direct

Property

21.1%Aust Equities

17.0%Aust Small Cap

16.5%

Aust Large Cap

15.4%Commodities

10.0%Global Bonds

Hedged

6.6%

Cash

6.2%High Yield

Hedged

4.1%Aust All

Maturities

3.4%

Hedge Funds

-0.6%Developed

World

-1.9%Emerging

Market Bonds

-3.7%

US Large Cap

-4.1%US Small Cap

-11.0%Global Property

-21.5%

Aust All

Maturities

14.1%

Emerging

Market Bonds

11.2%Global Bonds

Hedged

10.2%Cash

6.4%

Hedge Funds

2.1%Aust Direct

Property

-0.3%US Small Cap

-16.4%

Commodities

-18.4%US Large Cap

-23.2%High Yield

Hedged

-23.3%

Global Property

-32.6%Developed

World

-36.2%Aust Large Cap

-43.9%

Aust Equities

-48.4%Emerging

Market Equities


-68.0%

Aust Small Cap

48.2%

High Yield

Hedged

47.6%Aust Equities

34.9%Emerging

Market Equities

32.7%

Aust Large Cap

32.4%Global Bonds

Hedged

8.0%Global Property

7.0%

Cash

3.2%US Small Cap

2.0%Aust All

Maturities

1.8%

US Large Cap

1.6%Emerging

Market Bonds

1.1%Developed

World

1.1%

Commodities

-2.8%Hedge Funds

-5.5%Aust Direct

Property

-9.1%

High Yield

Hedged

18.6%

US Small Cap

13.1%Aust Small Cap

10.9%Aust Direct

Property

10.2%

Global Bonds

Hedged

8.0%Global Property

7.6%US Large Cap

6.8%

Aust All

Maturities

6.3%Cash

4.3%Aust Equities

4.0%

Commodities

3.6%Emerging

Market Equities

2.0%Aust Large Cap

2.0%

Emerging

Market Bonds

1.3%Hedge Funds

-2.6%Developed

World

-2.7%

Aust Direct

Property

11.4%

Aust All

Maturities

10.8%High Yield

Hedged

10.0%Global Bonds

Hedged

9.6%

Emerging

Market Bonds

9.0%Cash

4.6%Global Property

3.8%

US Large Cap

2.2%US Small Cap

-3.2%Hedge Funds

-4.6%

Commodities

-7.9%Aust Large Cap

-9.7%Aust Equities

-11.5%

Developed

World

-15.2%Emerging

Market Equities


-22.8%

Aust Large Cap

19.7%

Global Property

19.5%Aust Equities

17.9%High Yield

Hedged

17.2%

Emerging

Market Bonds

15.5%US Small Cap

13.9%US Large Cap

13.8%

Emerging

Market Equities

13.1%Developed

World

11.5%Global Bonds

Hedged

10.2%

Aust Direct

Property

8.5%Aust Small Cap

7.8%Aust All

Maturities

7.5%

Hedge Funds

4.7%Cash

3.6%Commodities

-4.8%

US Small Cap

50.1%

US Large Cap

45.4%Developed

World

34.0%Hedge Funds

24.8%

Aust Large Cap

20.3%Aust Equities


17.1%

Commodities

10.9%Emerging

Market Equities

10.6%High Yield

Hedged

9.7%

Aust Direct

Property

9.3%Emerging

Markets Bonds

8.9%Cash

2.7%

Aust All

Maturities

2.0%Aust Small Cap

0.6%Global Bonds

Hedged

0.2%

2005

Global Property

30.4%

US Large Cap

21.7%US Small Cap

14.5%Emerging

Market Bonds

14.4%

Hedge Funds

12.7%Aust Direct

Property

9.9%Aust All

Maturities

9.4%

Aust Large Cap

6.1%Global Bonds

Hedged

5.7%Aust Equities

5.5%

Emerging

Market Equities

4.3%High Yield

Hedged

4.2%Cash

2.5%

Developed

World

1.5%Aust Small Cap

-3.8%Commodities

-10.4%

Annual performance of asset classes


19.8%

22.9% 17.0%

-48.4%

34.9%

4.0%

-11.5%

17.9%

18.7%

5.5%

Equity Market Outlook – A Little Chaos

Australia is caught between a rock (global) and a hard (domestic) place.

The global backdrop is unlikely to provide much of a tailwind for the domestic economy and equity market. Risks remain slanted

towards the downside:

Secular stagnation – weak/low growth due to high debt and on going deleveraging;

Tightening global liquidity (Fed will gradually raise rates and ZIRP doesn’t lift credit or steepen yield curves as

intended);

Ongoing deflationary pressures due to global excess capacity;

Rising credit costs and reduced credit availability;

Rising volatility in central bank policy decision making (reduced predictability); and

Politics...

Domestically, the economy appears on a more solid footing than it actually is. GDP has been boosted by an export payoff

(volumes) and continued population growth. Fundamentals are weak and at risk of getting weaker:

Income growth is non existent with jobs growth coming through in lowly paid services;

Demand weakness will persist and continue to drive disinflationary pressures;

Non mining business investment has not picked up inline with lower rates;

Fiscal policy offers limited hope of upside with the election result likely to move closer to a “stalemate”;

RBA to cut the cash rate to 1% with long bonds down below 2%; and

A$ needs to remain sustainably below US$70 for the transition from mining to be completed.


Market return prospects have declined. We think ~7-10% TSR over the coming 12 months:

Valuations are a broad constraint to upside at 16x forward earnings – expensive on an absolute and relative basis;

Dividend payout ratios have reached the limit (mid 70%). DPS growth is set to slow (from ~7-8% down to ~2-3%);

The valuation distribution is extremely skewed with strong “momentum” and “herding” bias evident in stock

performance;

Earnings risks for Industrials (retail, housing related) and Banks remains elevated with no pricing/volume offsets

coming;

Large cap resources & Energy lack sustained leadership qualities with Healthcare performance narrowing; and

The cost of capital has bottomed and is increasingly subject to global oscillations.

Source: Factset, Macquarie Research, June 2016


This drives a number of investment conclusions through year end:

1. Yield sensitive areas will continue to outperform despite what are already high absolute and relative valuations.

However, relative performance will increasingly reflect two factors:

The distinction between those who can sustain DPSg vs. those where payout ratios are close to limits (i.e. Banks).

Relative value within the yield cohort. For instance, REITs are trading at a 50% premium to Banks, and a 30%

discount to the Infrastructure sector.

2. A rebound in the A$ is some way off. While the trough will not get deeper (we estimate US$0.65 in mid 2017), the dollar is

unlikely to turn from a tailwind into a headwind for stocks benefitting from translations gains for some time to come.

3. There is more pressure coming on domestic cyclicals (particularly spending sensitive areas such as Retail). Weak domestic

demand driving a lack of pricing power and the pass through of a lower exchange rate continue to be absorbed via margins.

These pressures will not alleviate in the near term are likely to get worse particularly as rate cuts are working against both an

overleveraged consumer and significant excess capacity.

4. Infrastructure and utilities, while expensive, in a sweet spot. Private sector demand will remain elusive despite a declining

cost of capital. However, public sector spending will continue to underpin this trade. We think the government will ultimately be

called upon to provide more comprehensive fiscal support for monetary policy but this remains some way off.

5. Stronger growth and not a sell-off in bonds will end the yield trade. We cannot see the signals that this is underway.

Domestically this implies we remain focussed on areas of structural growth- online and outdoor media (CAR, OML); tourism

(QAN, SGR); outsourcing services (ECX) – while avoiding areas reliant on a cyclical upswing (Consumer & Construction

related). Globally we maintain our underweight on Miners and overweight on Energy.

Our “preferred” portfolio.

Share price Portfolio ASX 200 ActiveSector Company Ticker 14 Jul 16 Weight (%) Weight (%) Weight (%)

Financials 40.2 45.1 -4.9

Banks 26.6 26.9 -0.3

ANZ Banking Group ANZ 24.8 6.5 5.1 1.4

Commonwealth Bank of Australia CBA 75.6 11.1 9.1 2.0

Westpac Banking Corporation WBC 29.8 9.0 7.0 2.0

Diversified Financials 1.0 4.9 -3.9

Eclipx Group Limited ECX 3.7 1.0 0.0 1.0

Insurance 2.1 3.9 -1.8

Suncorp Group Limited SUN 12.7 2.1 1.2 0.9

Real Estate 10.5 9.5 1.0

Goodman GMG 7.3 3.3 0.8 2.5

GPT Group GPT 5.6 3.2 0.7 2.5

Westfield Corporation WFD 11.0 4.0 1.5 2.5

Cyclical Industrials 27.4 16.3 11.1

Consumer Discretionary 9.5 4.9 4.6

Aristocrat Leisure ALL 13.7 1.6 0.6 1.0

Carsales.com Limited CAR 12.2 1.7 0.2 1.5

Fairfax Media FXJ 1.0 1.7 0.2 1.5

Mantra Group Limited MTR 3.2 1.2 0.1 1.1

oOh Media! Limited OML 5.1 1.5 0.0 1.5

The Star Entertainment Group SGR 5.6 1.8 0.3 1.5

Industrials 17.9 11.4 6.5

Amcor Limited AMC 15.6 3.2 1.3 1.9

James Hardie Industries JHX 21.7 1.6 0.7 0.9

Nufarm NUF 7.7 1.4 0.1 1.3

Orora Limited ORA 2.8 1.7 0.2 1.5

Qantas QAN 3.0 2.1 0.4 1.7

Sydney Airport SYD 7.1 3.6 1.1 2.5

Transurban Group TCL 11.8 4.3 1.7 2.6

Defensive Industrials 22.2 22.2 0.0

Consumer Staples 4.5 6.8 -2.3

Wesfarmers WES 40.8 4.5 3.4 1.1

Health Care 6.4 7.2 -0.8

Cochlear Limited COH 126.0 1.9 0.5 1.4

CSL Limited CSL 112.8 4.5 3.6 0.9

Telcos, Infrastructure & Utilities 11.3 8.2 3.1

AGL Energy Limited AGL 20.0 2.9 0.9 2.0

Contact Energy Limited CEN 5.3 1.0 0.0 1.0

Telstra Corporation TLS 5.8 7.4 4.9 2.5

Resources 10.2 16.5 -6.3

Energy 4.1 4.0 0.1

Oil Search OSH 7.0 2.1 0.6 1.5

Santos Limited STO 4.8 2.0 0.5 1.5

Miners 6.1 12.5 -6.411.9

Evolution EVN 2.9 2.2 0.2 2.0

Rio Tinto RIO 50.2 3.9 1.5 2.45.2

Total 100.0 100.0 0.0

Focus List and Sector Preferences

U/W N O/W

Financials

Banks

Diversified Financials

Insurance

Real Estate

Cyclical Industrials

Consumer Discretionary

Industrials

Defensive Industrials

Consumer Staples

Health Care

Telcos, Infrastructure, Utilities

Resources

Energy

Miners

Performance ending Date

3

Months

(9%)

6

Months

(%)

Month

to Date

(%)

Quarter

to Date

(%)

Year to

Date (%)

Portfolio 7.0 4.8 0.9 0.9 (0.3)

ASX200 Accum 5.7 0.8 0.7 0.7 (2.1)

Relative 1.4 4.0 0.2 0.2 1.7

14-Jul

About Macquarie

Macquarie has built a uniquely diversified business since its inception in 1969. It is a global business built

upon a range of products and sectors in which it has world-leading expertise

1. As at 30 June 16

Global provider of banking, financial, advisory, investment and funds management services

Listed on Australian Stock Exchange (ASX: MQG; ADR: MQBKY)

Assets under management $A496 billion1

Founded in 1969, currently employs more than 14,000 people and operates in over 28 countries1

Service offering – Macquarie Wealth Perth

full-service stockbroking in domestic and international markets

investment management

cash flow and budgeting

retirement and estate planning

superannuation and pension funds, including self managed superannuation funds

debt management and mortgages

income and wealth protection

Our offering comprises of a broad range of comprehensive advisory services,

investment opportunities and high quality solutions including:

This information is provided by Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL") and does not take into account your objectives, financial situation or needs. Before acting on

this information, you should consider whether it is appropriate to your situation.

Past performance is not a reliable indicator of future performance. Forecast information is predictive in character and therefore investors should not place undue reliance on the forecast

information. The views and opinions expressed in this document are those of the relevant author/analyst and do not necessarily reflect the views or opinions of MEL. We accept no obligation to

correct or update the information or opinions in this document. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any

direct, indirect, consequential or other loss arising from any use of this material and /or further communication in relation to this material.

Macquarie Bank Limited (MBL) is an authorised deposit-taking institution under the Banking Act 1959 (Cth) and is the only member of the Macquarie Group that is an ADI. The obligations of the non-

ADI members of the Macquarie Group do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any Macquarie

Group entity, unless stated otherwise.

Disclaimer

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