A global economic and market outlook

Dr Chris CatonFebruary 2014

2

QE matters– the Fed buys bonds, investors buy stocks

Euro-area government bond spreads (to German bonds)

3

The two that matter continue to improve(long-term bond yields (%))

4

5

Emerging markets have massively underperformed

Source: Datastream

Developed Index Asian Emerging Markets Index

Asian Emerging Markets Index (RHS)

World Developed Index (LHS)

6

2014 Growth Forecasts (%)

Month of Forecast

F-13 M-13 A-13 M-13 J-13 J-13 A-13 S-13 O-13 N-13 D-13 J-14

Australia 3.1 3.0 3.0 3.0 2.8 2.7 2.6 2.6 2.6 2.7 2.7 2.7

New Zealand

2.9 2.9 3.0 3.0 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.2

US 2.8 2.8 2.7 2.7 2.7 2.7 2.6 2.7 2.6 2.6 2.6 2.8

Japan 1.2 1.2 1.3 1.5 1.5 1.5 1.5 1.7 1.7 1.6 1.6 1.7

China 8.2 8.0 8.0 7.9 7.8 7.6 7.5 7.4 7.4 7.5 7.5 7.5

Germany 1.7 1.7 1.7 1.6 1.6 1.6 1.7 1.7 1.7 1.7 1.8 1.8

UK 1.7 1.6 1.6 1.6 1.7 1.7 1.9 2.1 2.2 2.3 2.5 2.6

“World” 3.3 3.2 3.2 3.2 3.2 3.1 3.1 3.1 3.1 3.1 3.0 3.1

Source: Consensus Economics

7

Financial Market Forecasts

Now (12 Feb)

End-Jun2014

End-Dec2014

AUD/USD 0.903 0.85 0.82

Official cash rate (%) 2.50 2.75 3.00

10 Year Bond yield (%) 4.18 4.30 4.60

ASX 200 5285 5400 5700

8

The Australian Dollar and US Trade Weighted Index

Source: Datastream

64

84

103

122

142

161

180

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0.40

0.52

0.64

0.76

0.88

1.00

1.12Index AUD/USD

US TWI inverted (LHS)

AUD/USD (RHS)

The volatility of the currency has been quite low

9

10

Real GDP growth in Australia and the US

Source: Datastream

-5

-2.5

0

2.5

5

7.5

10

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

USAustralia

Year to % change

The terms of trade should continue to decline (2010/11 average=100)

11 Source Deloitte Access Economics

12

Unemployment has risen significantly

Source: ABS

8500

9000

9500

10000

10500

11000

11500

12000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5000’s %

Employment (LHS)

Unemployment Rate (RHS)

Two speeds or not two speeds, that is the question

13

14

Australian Inflation has risen

Source: ABS

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Headline CPI Underlying inflation

%

BT Forecasts

GST Effect

Household financial ratios

15

House Prices - Australia v Brisbane

Source: ABS

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 12 13100

150

200

250

300

350

400

450

500

550

600

650

700 Index (1987 = 100)

We are very expensive compared with the United States

17

But not otherwise!

18

19

House prices are rising everywhere, particularly in Sydney and Melbourne

20

House price growth in the past decade has been moderate

21

Gross Domestic Product

Source: ABS

-3

-2

-1

0

1

2

3

4

5

6

7

8

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Qtly growth Year-to growth Non-farm year-to growth

%

BT Forecasts

GST Effect

Queensland’s problem—the bigger the binge the bigger the hangover?

22

Dwelling approvals are on the rise (but GC is down a long way from its peak)

23

Brisbane office vacancy rates very high. Gold Coast recovering slowly.

24

25

Australia simply doesn’t have a government debt problem (general govt debt as a proportion of GDP)

26 Source: Consensus Economics

GDP Inflation

Australia 2.9 2.6

New Zealand 2.6 2.2

United States 2.5 2.2

Norway 2.5 1.9

Canada 2.2 1.9

Sweden 2.2 1.6

United Kingdom 2.1 2.6

Switzerland 1.8 1.1

Spain 1.7 1.9

Germany 1.4 1.9

France 1.4 1.7

Netherlands 1.3 2.1

Japan 1.3 1.3

Eurozone 1.2 1.8

Italy 0.8 1.8

Global Medium-Term Economic Growth and Inflation Prospects (2013-2023)

27

Asia-Pacific Medium-Term Economic Growth and Inflation Prospects (2013-2023)

GDP Consumer Prices

India 6.8 6.4

China 6.7 2.9

Indonesia 5.6 5.1

Philippines 5.4 3.8

Malaysia 5.1 2.8

Thailand 4.6 3.0

Singapore 4.2 2.7

Taiwan 3.5 1.9

Hong Kong 3.5 3.2

South Korea 3.4 2.6

Australia 2.9 2.6

New Zealand 2.6 2.2

Japan 1.3 1.3

Source: Consensus Economics

28

Australian Share market Performance – ASX200

Source: Bloomberg

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

29

The Australian market is now close to fair value

30

There’s no sign of a bubble in global markets

31

We are in almost perfect sync with the United States market

32

A comparison with previous “big ugly bears”

33

Summary

Tapering of quantitative easing in the US has added to market volatility.

Eurozone debt is a serious issue; it will drag on for a long time but is unlikely to end in catastrophe.

We will always worry about China.

The Australian economy should continue to experience only moderate growth. The mining investment boom has ended but the downside may not be too steep.

The cash rate probably won’t fall again.

The exchange rate may continue to fall.

The Australian share market is close to fair value.

34

Disclaimer

This presentation has been prepared by BT Financial Group Limited (ABN 63 002 916 458) ‘BT’ and is for general information only.  Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described.  The presentation has been prepared without taking into account any personal objectives, financial situation or needs.  It does not contain and is not to be taken as containing any securities advice or securities recommendation.  Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.  BT does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation.  Except insofar as liability under any statute cannot be excluded, BT and its directors, employees and consultants do not accept any liability for any error or omission in this presentation or for any resulting loss or damage suffered by the recipient or any other person.  Unless otherwise noted, BT is the source of all charts; and all performance figures are calculated using exit to exit prices and assume reinvestment of income, take into account all fees and charges but exclude the entry fee.  It is important to note that past performance is not a reliable indicator of future performance.

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