In September 2016 we provided an update to clients on the state of the global economy and financial markets.

1. Slide 1
Baiocchi Griffin Private Wealth
Economic and
Investment Markets Update
26th September 2016

2. Slide 2
General Advice Warning
This presentation and the associated discussion is
general in nature and does not take your individual
situation into account. You should not act on
anything contained herein, or discussed as a
consequence of the contents of this document,
without receiving personal financial advice from a
suitably qualified person such as a financial advisor.

3. Slide 3
What will be covered
The State of the Australian Economy
&
Key Global Issues
&
The Stock Market

4. Slide 4
The Australian Economy

5. Slide 5
A few key issues
Australia faces a few key issues and challenges, including:
• Continuing wind-down of mining investment
• Weak household and business confidence
• Political uncertainty and instability

6. Slide 6
Mining investment still weak
A common theme
The collapse of
investment in
mining is widely
known and has been
extensively
discussed

7. Slide 7
GDP growth still strong despite mining
3.3% annual growth rate
Interestingly, Australia has
now had 100 quarters of
GDP growth without a
recession, close to catching
up on the global record of
the Netherlands in the
years leading to the GFC

8. Slide 8
GDP track record

9. Slide 9
But GDP figures can mislead
GDP = C + I + G + Net Exports
C = spending by consumers
I = investment by businesses
G = government spending
Net Exports = value of our exports less the value of our imports
Tend to be capital
intensive, not labour
intensive

10. Slide 10
Jobs growth is in services
Mining exports may be
contributing to
economic growth, but
not to any growth in
employment

11. Slide 11
Confidence is key
Household and business spending decisions tend to drive economic
activity, but indicators are mixed
Consumer sentiment is
holding up reasonably
well
(measured as people’s
perceptions of their
personal finances relative
to the previous year)

12. Slide 12
However retail sales growth is slowing
Recent decline in
retail sales growth
suggests consumers
are reluctant to
spend

13. Slide 13
Despite evidence that we’re saving less
The household saving ratio suggests that households are saving less, but
it’s not reflected in retail sales, so where is the money going?

14. Slide 14
If we look again at employment
The growth in
employment in
Household services
suggests we are
spending our
money on
education, health,
hospitality, art and
recreation, rather
than ‘buying things’

15. Slide 15
A serious issue is the level of debt
Household debt levels have
risen at an alarming rate in
the past few decades,
although current low
interest rates have kept loan
interest payments low

16. Slide 16
Gold medal winners
Italy
Germany
France
USA
Japan
UK
Korea Canada
Australia
Household Debt as a % of Net Disposable Income
High level of household debt as a % of income is related to…

17. Slide 17
…high house prices
House prices compared to average incomes Australia
Canada
UK
USA

18. Slide 18
A quick look at the business sector
Business conditions
and confidence are
reasonable

19. Slide 19
Although it depends on the sector
Firms involved in
engineering or the
machinery and
equipment sectors
have suffered due to
their involvement
with mining

20. Slide 20
Finally, one of the issues which impacts both
households and business

21. Slide 21
Key Global Issues

22. Slide 22
Current global issues
Key global issues which are impacting markets include:
• The US Presidential election in November
• The prospect of interest rate increases in the United States
• Ongoing issues with too much sovereign debt in parts of Europe
• The continuing slow down in economic growth in China

23. Slide 23
Long Term Returns – a discussion
One of the questions which we regularly discuss is this:
Are the next 20 to 30 years going to be consistent with the previous 20 to 30 years?

24. Slide 24
30 years of history

25. Slide 25
Demographics is an issue
Australia

26. Slide 26
Demographics 101
Good demographics: India Bad demographics: Japan

27. Slide 27
Why does demographics matter?
In general, a younger population implies:
• Increased demand for goods and services through an increase in
population
• A greater number of working age citizens as compared to retirees
• Greater levels of productivity growth
• Greater increases in national wealth and incomes

28. Slide 28
For many countries, there is a problem
Productivity Ratios: Proportion of 35-54 year olds as compared to 0-24 and >65 year olds
‘Peak’ productivity

29. Slide 29
Global impact
The argument is that the past 30 years have been a boom period
due a ‘perfect storm’ of factors such as:
• China re-entering the global economy in the 70’s,
• The fall of the Soviet Union,
• The spread of globalization, and most importantly
• Coincidental peak in demographic productivity in advanced
economies (previous slide)

30. Slide 30
The glass half-empty view
A recent Deutsche Bank report:
“In the modern era it seems that ever since the beginning of the
1980s the global economy has been dominated by globalisation
and also a complimentary and massive change in
demographics. This has had a profound impact on the global
economy at a macro and micro level. It’s also had a huge impact on
asset performance. We will argue that this era is close to being over
and the economic, political, policy and asset trends that
accompanied it could soon start to reverse.”
i.e. share prices

31. Slide 31
What does this mean for us?
Yes, changing demographics is a challenge and the next 30 years will
not be exactly the same as the past 30 years…
However, from an investment perspective the key to managing any
future change is to ensure that your investments have robust
business models and a favourable long-term outlook
Healthcare, supermarkets, financial services and others

32. Slide 32
The Stock Market

33. Slide 33
A volatile year
ASX 200 Index – 22 Sep 2015 to 21 Sep 2016
5,066 at the start
5,324 at the end
(5.10% gain)

34. Slide 34
Smaller companies have outperformed
ASX 200 Index vs. ASX Small Ordinaries Index
Small Ords
ASX 200

35. Slide 35
Why haven’t we changed our approach?
Although smaller companies have outperformed the larger ones, an
investment in such companies is far riskier than an investment in the
companies which we tend to favour.
The current craze for small company investments should not be
expected to last any longer than it takes for the next financial crisis
to occur.

36. Slide 36
Small companies long term view
ASX 200 Index vs. ASX Small Ordinaries Index
30 Sep 2007 to 21 Sep 2016
Small Ords
ASX 200

37. Slide 37
A longer term view of the market
ASX All Ords Index – 1 Jan 1985 to 21 Sep 2016
1987 crash
End of ‘dot-
com’ bubble
& Iraq
invasion
The GFC
European
debt crisis
First Gulf
War
1994 bond
market crisis

38. Slide 38
The past 5 years
European debt crisis
Strong returns in 2012,
2013 and 2014
Market falls in 2015
and early 2016

39. Slide 39
Another long term view
Based on measures such as the PE Ratio, CAPE Ratio and others, the
Australian market is broadly in line with long term valuations

40. Slide 40
Stock market - Summary
• The past 18 months have been difficult for the market, particularly for the
larger companies (CBA, ANZ, WES, TLS, WOW, BHP…etc.)
• The trend of outperformance by smaller companies remains intact, however
we view the increased risks as outweighing the potential for increased returns
• On most historical valuation measures the Australian stock market looks
reasonably valued, although certain sectors appear more desirable than others
(healthcare, energy for example)

41. Slide 41
Looking ahead
Our thoughts on the rest of the year and into 2017.
• The US election and any actions by the US Fed (interest rate increases) will
be sources of volatility through the end of the year.
• We consider the Australian stock market to be reasonably priced,
although future gains may depend on the ability of companies to grow
earnings.
• An investment focus on well-capitalised, profitable and mature
companies, which offer the prospect of sustainable and reasonable
dividends, is likely to be a successful one.

42. Slide 42
Gunther Doyle Griffin
Griffin da Roza

43. Slide 43
?
Thank you
Please join us for morning tea