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Overview

• Global economic conditions: Long term trends, key risks, and what to expect over the medium term.

• Australian economic outlook: Recent economic performance and the medium term outlook.

• International trade flows: Implications of recent economic conditions on the volume of trade, including containerised trade through major Australian ports.

• Investment in Australia’s ports sector: What is driving investment in the sector? Why have recent privatisations achieved high prices for State Governments? What might the future hold?

• Summary thoughts

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The global economy has been split for almost two decades

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Growing role of emerging countries a key feature

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The outlook and some key risks for the global economy • US economy expected to continue to recover over medium term, with labour market conditions strengthening.

• China and Europe are two regions where risks are heightened at present:

• Is China’s economic growth sustainable?

• Is China’s credit growth sustainable?

• European growth

• European banks (cf. recent frictions in Portugal)

• More generally, two big question marks cloud the global economic outlook:

• Unwinding of quantitative easing and move to higher global interest rates

• Asset prices

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Australia has benefited from growth in emerging Asia…

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…and will continue to benefit

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But the economy is in transition

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Interest and exchange rates will be crucial in the short term

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Economic growth slightly below average over the longer term

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Per capita income growth a key concern

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Some risks for the Australian economy • Hard landing in China

• Timing of resources exports and ‘construction cliff’

• Coal prices

• $A remains elevated and constrains transition to non-mining growth

• Global financial markets

• Long term productivity growth

• Disposable income growth

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Asia’s rise a positive for imports; exports now also lifting

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China an important driver

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Perfect complements

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Australia has become increasingly reliant on Asia

• “Tyranny of distance” has become the “advantage of proximity”.

• The trade and investment links between Australia and Asia have strengthened considerably over the last decade.

• Strong support to Australian growth during the global financial crisis; helped Australia to avoid recession and outperform other developed economies through 2008-09.

• Trade and investment links expected to develop and mature over the coming decades. Free trade agreements to help facilitate this changing economic relationship.

• Does reliance equal risk? Australia’s dependence on economic growth in Asia may be a source of vulnerability.

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Containerised trade volumes have also lifted strongly

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Trends in container shares reflect economic circumstances

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• Economic and financial market conditions are supporting a high level of private sector interest in Australian infrastructure assets, including ports.

• The implications for asset prices and deal activity are relevant for State Governments and existing (private sector) port owners.

• Current conditions are very positive for ports privatisations: • Australia a target destination for global flow of capital

• Asset prices have lifted

• Corporate deal activity more energised

• Commonwealth and State Government assets being privatised

• Is this sustainable?

Economic conditions supportive of private investment in ports

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Results of recent port privatisations have captured headlines

Date Asset Transaction value ($A, millions)

Multiple of EBITDA

Australia

April 2015 Port of Melbourne $??? ???

April 2014 Port of Newcastle $1,750 * 27.0x

November 2013 Port of Brisbane (27%) $5,496 24.7x

April 2013 Port Botany / Port Kembla $4,863 24.0x

December 2010 DP World Australia (75%) $1,885 18.9x

November 2010 Port of Brisbane $2,229 16.3x

International

September 2013 National Container Company (Russia) $1,755 11.7x

September 2012 Global Ports (Russia) (37.5%) $920 9.2x

March 2011 Forth Ports (UK) $1,200 14.7x

* All values are net of transaction costs except Port of Newcastle

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Everything seems expensive right now…

Port of Newcastle sells for $1.75bn

Transurban pays $7.1bn for QML

Cashed up PE firms looking for next target

Bumper M&A activity recorded

Yellen: Valuations for bio-tech and social media stocks are stretched

Sharemarket fully priced

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…except capital

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What is driving up asset prices? • Why have asset prices increased?

• Central banks are printing money • Higher household, corporate and government saving • Lack of investment opportunities in relatively low risk, long term assets • Capital is flowing into government bonds (including for zero real return) • Interest rates are being driven down to record lows; spillover into other assets such as infrastructure and equities

• But a mechanical lift in asset values as a result of lower interest rates is the most fundamental driver.

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These asset price trends are global “It’s a very broad based increase in activity across the M&A market...”

King & Wood Mallesons, April 2014

“The rebound in deal activity in Australia is the result of a release of pent-up-demand…”

Citigroup, June 2014

“I think it is likely that all previous [M&A] deal records will be broken in the next year or two…”

Jeremy Grantham, July 2014

“At the moment we have global pension funds looking for transactions like this.

Mike Baird, June 2014

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These asset price trends are global “It’s a very broad based increase in activity across the M&A market...”

King & Wood Mallesons, April 2014

“The rebound in deal activity in Australia is the result of a release of pent-up-demand…”

Citigroup, June 2014

“I think it is likely that all previous [M&A] deal records will be broken in the next year or two…”

Jeremy Grantham, July 2014

“At the moment we have global pension funds looking for transactions like this. Everyone knows these windows shut…”

Mike Baird, June 2014

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Three reasons this window will close • Reason #1: Monetary policy will tighten

• The current surge in liquidity is unsustainable. Some uncertainty around end of QE3 in the United States (October 2014), though likely to be challenges for emerging markets. Less of a challenge for Australia, but less liquidity overall and initial uncertainty may mean difficulties. Higher short term rates in the United States (c. mid 2015) a complicating factor. Key point: Bond yields to rise.

• Reason #2: Economic conditions (and returns) to lift • Stronger economic growth in the US a positive for the global economy. Investment returns likely to rise and ‘search for yield’ to moderate.

• Reason #3: Savings rates will fall • As economic conditions improve, so will labour market conditions and government finances. Savings rates likely to fall modestly, adding to withdrawal of liquidity.

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Summary thoughts • Global economy solid, but important areas of weakness and some notable risks.

• Australian economy undergoing a difficult transition. There remain risks around global economic and financial conditions, particularly Chinese economic growth. Australian growth likely to be at or slightly below historical average (~3% pa) in the years ahead.

• Continued growth in Asia will help to sustain Australian trade growth, which will support broad-based volume increases for Australian ports.

• Easy monetary policy and search for yield is driving deal activity. Low interest rates and supply of cheap funds are pushing up asset prices (and assets tend to be sold when prices are rising). The sustainability of these trends is questionable.

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