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
Key Global Issues
&
The State of the Australian Economy
&
The Stock Market
5. Slide 5
Current global issues
Key global issues which are impacting markets include:
• The election of President Trump
• The prospect of interest rate increases in the United States
• Political instability in Europe
• The stability of the Chinese financial system
6. Slide 6
‘Trumpflation’
Our main concerns with President Trump are over
his policies which may result in a significant increase in inflation…
• Increased infrastructure spending
• Increased defence spending
• Tax cuts
While noting that many of his policies lack detail:
“We will provide massive tax relief for the middle class.”
President Trump, Address to Congress, 28 Feb 2017
12. Slide 12
Why are we concerned?
• Economic growth is reasonably strong
• The housing market has largely recovered from the GFC
• New car sales have returned to pre-GFC levels
• Wages are starting to increase again
So what is the problem?
13. Slide 13
Our major concerns:
• A strong economy + fiscal stimulus = the prospect of
higher inflation in the US
• Resulting in rising interest rates
• Which follows nearly ten years of 0% interest rates
• A stock market at record highs
14. Slide 14
The Dow Jones Index – 10 years ago
Australia
GFC low of 6,443
Current close
In 8 years, a gain of
around 220%
15. Slide 15
The last time the DJIA looked like that…
7000
8000
9000
10000
11000
12000
13000
14000
Dow Jones Index - 2002 to 2007
Close
In 5 years, a gain of around 87%
22. Slide 22
And US interest rates start to rise
US Fed ‘Dot Plot’
23. Slide 23
In summary
President Trump plans to boost US economic growth
– positive in the short term (hence the market rally)
But in the medium to long term we suspect the
outcome will be higher inflation, higher interest rates
and the eventual end of the market rally
25. Slide 25
Australian economic growth
The rate of
economic
growth
remains
relatively slow
GDP actually fell in
the Sep 2016 qtr.
(lower housing and
infrastructure
investment)
26. Slide 26
Inflation is not a problem
Key difference
between the US
and Australian
economies
30. Slide 30
How to address housing affordability?
The solution: make housing cheaper
Who wants to see lower house prices?
Existing homeowners?
Property investors?
State governments?
Local councils?
Federal government?
Would-be first homeowners?
CGT concessions
Negative gearing
31. Slide 31
The reason why the economy is sluggish
Since the end
of the mining
boom,
business has
been on an
investment
holiday
32. Slide 32
Credit growth has stalled
Much of our
economic
growth over
the past 20
years has been
driven by an
expansion in
credit
But how much
debt is
manageable?
38. Slide 38
The RBA’s dilemma
Overall, Australian economic growth remains sluggish…
• The RBA is reluctant to cut interest rates further, for fear of
pushing house prices even higher
• But higher interest rates are coming, courtesy of the United States
(higher interest rates in the US will impact our bank’s cost of
funding, which will be passed on to borrowers)
• And any prospect of fiscal stimulus seems remote
40. Slide 40
Thank you
Please join us for morning tea
The All Ordinaries – past 12 months
‘Brexit”
Trump is elected
All Ordinaries Index 25 Mar 2016 to 24 Mar 2017 – 12% gain
41. Slide 41
The long term picture
Australia
1987 crash
1994 bond
market
crisis
Pre-GFC
peak
Greek debt
crisis (Part 1)
ASX All Ords Index – 1 Jan 1985 to 13 Mar 2017
43. Slide 43
Smaller companies have outperformed
ASX 200 Index vs. ASX Small Ordinaries Index
Small Ords
ASX 200
44. Slide 44
The past 6 months: small vs. large cap
ASX Small Ordinaries
S&P/ASX 20 Index
45. Slide 45
Interest rates & the stock market
Generally speaking, rising interest rates are seen as heralding a market collapse
(although the dataset is limited)
46. Slide 46
Stock market - Summary
• The past year has been very positive for stock market returns, with the larger
companies (and mining companies) responsible for the majority of returns
(BHP 42%, RIO 41%, CSL 21%)
• The recent half-yearly reporting season was in line with expectations, although
only mining companies experienced any significant revenue and profit growth
• On most historical valuation measures the Australian stock market looks
reasonably valued
47. Slide 47
Looking ahead
Our thoughts on the rest of the year.
• We expect further increases in interest rates in the United States,
although the rate of increase will be slow.
• We consider the Australian stock market to be reasonably priced,
although noting that geo-political risks are extremely elevated and the US
market looks over-stretched.
• Overall we believe a more conservative investment approach than usual is
warranted, given the rising global risks.