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Economic and Investment Update - September 2015
- 1. Slide 1 Baiocchi Griffin Private Wealth Economic and Investment Markets Update 23rd September 2015
- 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 Current Turmoil in Financial Markets & The Australian Economy
- 4. Slide 4 The Current Turmoil in Financial Markets
- 5. Slide 5 2015 - a year of extremes ASX All Ordinaries – 1 Jan to 9 Sept 12% Gain -17.22% Loss
- 6. Slide 6 Causes of the volatility Four primary reasons for the increase in market volatility and the stock market correction: 1. Greece 2. The Chinese stock market and economy 3. The prospect of rising interest rates in the United States 4. The weak state of the Australian economy
- 7. Slide 7 1. Greece’s ongoing debt saga More drawn-out than a live recital of Homer’s The Iliad The key facts: • The Greek government is insolvent and has been so for much of recent history (Greece has spent 90 of the past 192 years in either default or debt restructuring) • Europe, led by Germany, is likely to keep ‘kicking the can down the road’ for as long as possible, hoping the Greek economy eventually recovers enough to repay the debt (unlikely) • Our view is that Greece is most likely to leave the Eurozone, adopt its own currency and default on its debts
- 8. Slide 8 The challenge facing Greece: Source: ING
- 9. Slide 9 2. The situation in China 152% Gain 39% Loss The Shanghai Stock Exchange – a textbook bubble
- 10. Slide 10 Does the Chinese market matter? China’s Stock Market The Australian Stock Market Retail investors dominate (80% of all trades) Institutional investors – 41% Foreign investors – 43.2% Retail investors – 14.40% Questionable accounting practices Adherence to global accounting standards Significant level of government interference No government involvement Emphasis on speculation, not income Focus on both growth and dividends Not an important source of capital Very important to companies as a source of capital “Gambling” “Investing”
- 11. Slide 11 China’s economy is important Monthly value of Australian exports to China (in AUD) Millionsofdollars Monthly trade values peaked at around $9.5 billion p/month in 2014 Source: ABS
- 12. Slide 12 Not news: China is slowing Much of the recent concern has been focused on the news that Chinese economic growth is slowing – this is not surprising and is not news
- 13. Slide 13 Slower growth in China
- 14. Slide 14 China’s economy – no surprises Clients with keen memories may remember this from our client presentation in September 2010:
- 15. Slide 15 Ordos In Northern China, Ordos is a brand-new city for 1 million people, but it sits empty Rush-hour in Ordos Client Presentation 12 Sep 2010
- 16. Slide 16 More Ordos Orodos Central Business District Client Presentation 12 Sep 2010
- 17. Slide 17 Ordos: That was then, this is now Orodos Central Business District Ordos in 2015
- 18. Slide 18 Ordos: That was then, this is now Orodos Central Business District
- 19. Slide 19 Ordos: That was then, this is now Orodos Central Business District
- 20. Slide 20 What we said: March 2011 Client Presentation 17 Mar 2011
- 21. Slide 21 Well, what happened?
- 22. Slide 22 Another view Bloomberg Commodity Price Index Back to 2002 levels
- 23. Slide 23 Global dependence on China The world (and especially Australia) became overly dependent on China as a source of demand for goods and commodities
- 24. Slide 24 More evidence of the China effect Share of world commodity consumption: China vs. The United States
- 25. Slide 25 The long-awaited rebalancing The Chinese economy is transitioning to one which is less reliant on construction and investment
- 26. Slide 26 As Chinese economic growth slows…
- 27. Slide 27 …the impact is felt in Australia -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 Australia: Quarterly GDP Growth Rate Slowest quarterly growth in over two years
- 28. Slide 28 The challenge for Australia As China moves from this… …to this Australia needs to move from this… …to this ?
- 29. Slide 29 3. Rising US interest rates The third factor which is unsettling investment markets is the prospect of rising interest rates in the United States 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 US Interest Rates Jan 2000 to Sep 2015 Source: St Louis Fed “ZIRP”
- 30. Slide 30 Rising US interest rates – should we care? Rising interest rates act as a dampener on economic growth by increasing the cost of borrowing for both business and households. The real risk from an increase in interest rates is likely to come from: - Investors who borrowed money at 0% to invest in assets such as shares or property and may need to sell, and - Companies in developing or emerging markets who borrowed money in US dollars and will see an increase in the local currency value of their debts.
- 31. Slide 31 How it works Borrows USD$2 billion from Citigroup Bank in 2010 at 3.5% interest rate Potential strategies to mitigate the risks: - Currency swap - Interest rate cap
- 32. Slide 32 RSA vs USA Interest Rates
- 33. Slide 33 The currency effect USD to ZAR Exchange Rate 2010 – 2015 USD $2 billion = ZAR R14 billion USD $2 billion = ZAR R27.8 billion
- 34. Slide 34 Countries to watch Brazilian Real vs. USD Turkish Lira vs. USD Others include Argentina, India, Mexico, Nigeria Venezuela…
- 35. Slide 35 4. The Australian economy The good news: Memories of the GFC are fading
- 36. Slide 36 More good news The Australian dollar is falling, which benefits sectors such as tourism, agriculture, education, manufacturing and companies with overseas operations (CSL, BHP, QBE, Resmed) AUD vs. USD 2010 to 2015
- 37. Slide 37 But there is bad news Mining Manufacturing Everything else
- 38. Slide 38 Where to for Australia? The reform list: - Tax reform - Welfare reform - Media reform - Electoral reform - Competition reform - Workplace reform “…lift investment in infrastructure, improve competition and regulation, boost employment”
- 39. Slide 39 The stock market To conclude the presentation, a quick look at: - Market sector performance, and - The stock market over the long term
- 40. Slide 40 Market sector performance (30 June)
- 41. Slide 41 The stock market over the long term ‘87 crash 1st Gulf War “dot-com” bubble GFC ASX All Ords – 1985 to 2015
- 42. Slide 42 Final thoughts Investing under the current set of circumstances involves focusing on company fundamentals: ► high level and consistent profitability ► strong balance sheet (low debt) ► respected management ► robust business model ► attractive industry factors Where appropriate (and where possible) we have been using cash in bank accounts to make selective investments (the banks, QBE, Medibank Private, CSL, Ramsay and others) Same as last time
- 43. Slide 43 ? Thank you Please join us for morning tea