Market volatility and its impact on Australian and international share markets Prepared by BT...

Market volatility and its impact on Australian and international share markets

Prepared by BT Financial Group for the adviser marketUpdated to 30 June 2008

5. What this means for Australian investors

3. A quick look at international markets

1. What’s contributing to current market volatility?

6. BT’s approach to managing volatility

7. And insights for investors

2. How has volatility affected the Australian market?

4. Volatility in perspective

Many factors contributing to ongoing volatility

Seven consecutive interest rate rises in two years, over geared investors de-leverage

Strength of $Aus and fears of US recession

Market volatility

Rising price of oil

US sub-prime crisis and resulting global ‘credit-crunch’ slowing growth

3

4

Inflation now a key contributor

Early in 2008, there was concern the ‘credit crunch’ and weakening US economy would lead to a significant slowdown in global growth.

Outlook for global growth now appears better than anticipated, helped by continued strong commodities demand from emerging markets.

However, strong demand for commodities (particularly oil) means strong commodity prices – a key contributor to upward inflationary pressures.

Combating rising inflation has now become a key concern for the worlds’ central banks.

6

Source: BT Financial Group, Bloomberg

S&P/ASX300 Accumulation Index – 12 months to 30 June 2008

Rising market volatility has seen the Australian share market fall 13% in the 12 months to 30 June 2008

Series Rebased: 30th June 2007 = 100

80

85

90

95

100

105

110

115

Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08

80

85

90

95

100

105

110

115

Jun-08

7


S&P/ASX300 Accumulation Index – 10 years to 30 June 2008

…but it remains at elevated levels over the long-term, up 197% over the last 10 years!

Series Rebased: 30th Jun 1998 = 100

0

50

100

150

200

250

300

350

400

Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08

0

50

100

150

200

250

300

350

400

9


Major international markets – 12 months to 30 June 2008

Market volatility has affected all markets, not just our domestic market….


DJ Euro Stoxx 50 (Europe)(-25.3%)

Nikkei 225 (Japan) (-25.6%)

S&P500 (US) (-14.9%)

FTSE 100 (UK) (-14.9%)

60

65

70

75

80

85

90

95

100

105

110


60

65

70

75

80

85

90

95

100

105

110

Jun-08

10


Global share markets – 12 months to 30 June 2008

And the global share market has fallen over 21% in the 12 months to 30 June 2008….


75

80

85

90

95

100

105


75

80

85

90

95

100

105

MSCI World ex Aust $A

Jun-08

1-year returns (%)

Growth assets delivered strong returns last year, however, most affected by volatility this year…

Source: Bloomberg market benchmark returns

29.2

7.8

23.7

4.0

5.7

26.3

17.7

6.4

-13.7

-21.3

-13.7

4.4

7.9

-37.7

-20.3

7.3

-50.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0

Australian shares

International shares

International shares (H)

Australian bonds

International bonds (H)

Australian property

International property (H)

Cash

to 30 June 2007

to 30 June 2008

Annual returns of Australian shares (%) – All Ords / ASX S&P Accumulation Index (since 1956)

Source: Standard & Poor’s

-30

-20

-10

0

10

20

30

40

50

60

70

19

56

19

59

19

62

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

Volatility can hurt returns in the short term…

13

Rolling 5 year returns of Australian shares (% annualised) – All Ords / ASX S&P Accumulation Index (since 1960)


-10

-5

0

5

10

15

20

25

30

35

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

… but it’s a different picture over the longer term

14

Rolling 10 year returns of Australian shares (% annualised) – All Ords / S&P Accumulation Index (since 1965)


And the longer the better!

-10

-5

0

5

10

15

20

25

30

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

15

17

What does this mean for Australian investors?

Economy still robust with low unemployment, high commodity prices - we expect the Australian economy will hold its own in the near-term.

Investors concerned the RBA may raise interest rates in the second half of 2008, which could impact on the Australian consumer.

Weaker consumption could offset the growth we’re seeing in the stronger resources and infrastructure sectors.

Interest rate rises also mean an increase in cost of capital. Re-evaluating and repricing the outlook for funding is contributing to short-term market movements.

Short-term volatility to continue. The Australian market should start to recover when RBA is satisfied inflation has been contained, and commodity prices have stabilised.

18

And what is the longer-term outlook?

The threat of rising inflation and subsequent higher interest rates will remain a concern for central banks, and this will probably limit global growth over the next year or so.

Australia continues to be influenced by global markets battling inflationary pressures, a slowdown in global economic growth, and a view that emerging markets growth may be unsustainable.

However, we will continue to benefit from the continuing urbanisation in China and India, boosting the performance of our big miners and underpinning Australia’s growth rates.

The income return from Australian shares is now much more attractive than that from bonds, which should provide an additional boost for share prices.

20

Diversify, focus on risk, invest in quality

One of BT’s strengths is that we always focus on the right levels of diversification and risk within our portfolios, whether its Australian shares, listed property or fixed income.

Our focus on diversification, risk management and investment insight is what prevents BT’s portfolios from being damaged excessively in the sort of down market we’re seeing now.

We continue to ensure we have the right valued stocks in our portfolios by investing in companies with secure cash flows, limited expectations in their valuations and sound management teams.

At BT, we’re happy in our ability to sidestep some of the blow ups that have really triggered the downturn in the last six - nine months.

Ten investing truthsInsights into successful investing

Don’t panic – invest for the long-term

Global shares measured by the MSCI World ex-Australia (net dividends) Index in A$ to 30 June 2008.Source: BT Financial Group, MSCI

Impact of major market events on global shares since 1986

Maintain your composure and always keep the end goal in sight

700

1,200

1,700

2,200

2,700

3,200

3,700

4,200

4,700

5,200

5,700

6,200

Jun-86 Jun-88 Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08

Jan 91Gulf War

Feb 94Bond Market Crash

Aug 97Asian Currency Crisis

Jul 98Russian Bond Crisis

Jul 01Tech Wreck

Sep 01Attack on Twin Towers

Jun 07US Sub-prime Crisis

Oct 87Wall Streetcrash

Nov 89Fall of the Berlin Wall Mar 03

Troops enter Iraq

Understand risk

-40%

-20%

0%

20%

40%

60%

80%

100%

All investing involves a trade-off between risk

and return

Australian shares, one year returns - Greater volatility over the short-term

Source: Datastream. S&P/ASX 300 Accumulation Index annualised returns to 30 June 2008 shown

Australian shares, five year returns - Reduced volatility over the long-term

-40%

-20%

0%

20%

40%

60%

80%

100%

1985 2005200019951990

Diversify your investments

The more you spread your investments, the less chance you have of losing money

Cash

Fixed interest

Individual securities

Property

Shares

Investment managers (or styles)

RegionsAsset classes

Source: Australian Bank Bill 0+ Index, S&P/ASX 300 Accumulation Index, MSCI World ex-Australia (net dividends) Index in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years index, Citigroup World Government Bond, Unhedged in A$

Every asset class has time in the sun

Best performer each year (%)

Diversification also applies to regions

Source: MSCI World Index as at 30 June 2008

World share market values (%)

23.1

3.3

47.010.5

10.31.6

US

Europe

UK

Australia

Asia (ex-Japan)Japan

Avoid chasing returns

Can you pick next year’s winner?

Best performing asset class for each year is highlighted. Source: Australian Bank Bill 0+ Index, S&P/ASX 300 Accumulation Index, MSCI World ex-Australia (net dividends) Index in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years index, Citigroup World Government Bond, Unhedged in A$

One-year returns to 30 June (%)

Australian 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Cash6.77 5.11 5.04 5.58 6.08 4.66 4.97 5.30 5.64 5.76 6.42 7.34

Fixed Interest16.76 10.88 3.28 6.17 7.42 6.21 9.78 2.33 7.79 3.41 3.99 4.42

Listed Property29.21 9.74 3.96 15.62 13.91 15.24 12.17 17.21 18.40 18.09 26.32 -37.74

Shares27.16 1.63 15.13 18.49 9.11 -4.54 -1.61 21.73 26.03 24.02 29.21 -13.67

International 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Fixed Interest9.13 26.19 -2.57 13.73 14.54 3.14 -2.46 1.71 -1.66 2.23 -9.93 3.44

Shares28.56 42.16 8.17 23.81 -6.01 -23.50 -18.53 19.37 0.06 19.88 7.77 -21.26

Don’t forget – time is on your side

Enrol in a get rich slowly program – the power of compound interest

$153,971

142,566

132,006

122,227

113,174

104,790

97,028

89,841

83,186

77,024

71,319

66,036

61,144

56,615

52,421

48,583

44,943

55

54

53

52

51

50

49

48

47

46

45

44

43

42

41

40

39

Assumptions: 8% p.a. interest, all reinvestedSource: BT Financial Group

$98,471

90,251

82,639

75,592

69,067

63,025

57,430

52,250

47,454

43,013

38,901

35,093

31,568

28,304

25,281

22,483

19,891

41,61438

38,53137

35,67736

33,03435

30,58734

28,32233

26,22432

24,28131

22,48630

19,89129

17,49228

15,27027

13,21326

11,30925

9,54524

7,91223

6,40022

$5,00021

Sally

17,492

15,270

13,213

11,309

9,545

7,912

6,400

$5,000

-

-

-

-

-

-

-

-

-

-

Matt

Time, not timing, is important

All Ordinaries Index, annualised returns (%)

Note: The returns are shown as historical, investment returns are volatile and past performance is not necessarily indicative of future returns

Minus the 10 best days







Full 2,609 trading days

June 1998- June 2008

0.96

2.89

-2.44

-0.81

11.52

7.60

5.03

-3.98

What is dollar cost averaging?

$10010.0$10$100January

Total valueUnits purchased

Unit price InvestmentMonth

$65065.0$500Total

$65010.0$10$100May

$44012.5$8$100April

$21320.0$5$100March

$18012.5$8$100February

Note: No allowance made for inflation, taxation, fees or expenseSource: BT Financial Group

Find hidden value

Economic trends$

The best investment research processes unlock hidden value

Research analysis Industry trends$

Company analysis$Supplier/competitor environment$

Employ experts

Even the smartest investors (including many corporate investors) use managed funds

A managed fund provides investors with: More convenient investing Broader diversification with less investment dollars Professional fund managers who monitor and actively manage your portfolio Economic research and specific company information Assets not available to individual investors Alternative styles of investment strategies

Seek professional advice

“What is your main information source for making investment decisions?”

Source: BT Investor Poll, October 2004

Financial adviser/accountant

Magazines/newspapers

Other family members

Spouse/partner

Internet

Friends

Other

None/don’t know

Why do senior executives, sports stars, politicians and entertainers all get expert help to manage their money?

10.0

7.0

4.0

5.0

10.0

12.0

13.0

38.0

Expertise

Efficiency

What you get from your financial adviser

1. A holistic approach

2. Asset allocation

3. Security selection

4. An education

Tax-effective investing

Tax-effective investing

Focus on the after-tax return, not the tax Prepay your interest – it may be tax-effective Hold on to your investment for more than a

year Invest through superannuation Invest in companies that offer franking credits

… and seek tax advice!

Benefits of dividend imputation

Individual (marginal tax

rate 46.5%)

Individual (marginal tax

rate 16.5%)

Franked dividend received (cash) $500.00 $500.00

Gross up (imputation credit) $214.29 $214.29

Taxable income $714.29 $714.29

Tax payable $332.14 $117.86

Franking credit offset $(214.29) $(214.29)

Tax payable/(refundable) $117.86 $(96.43)

Effective Tax Rate 16.5% -13.5%

After tax cash received $382.14 $596.43

Note: Tax rates current as at 1 July 2007Source: BT Financial Group

It’s all about income

What defines asset value?

What defines asset value? The present value of both current and future (expected) income

Investing in value Asset prices move toward income-based value in the long-term Investors profit from buying assets priced below value and selling

when prices rise above it

49

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.

This document was accompanied by an oral presentation, and is not a complete record of the discussion held.

No part of this presentation should be used elsewhere without prior consent from the author.

For more information, please call BT Customer Relations on 132 135 8:00am to 6:30pm (Sydney time)

Market volatility and its impact on Australian and international share markets Prepared by BT...

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