An economic and
markets update
Andrew Seddon
Key Account Manager
Disclaimer
This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352
(Colonial First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the
issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale
Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and
interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation
Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled Superannuation Trust ABN 51 982 884 624.
The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other
employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees
for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au
or by contacting our Investor Service Centre on 13 13 36.
All products are issued by Colonial First State. Product Disclosure Statements (PDSs) describing the products are available from
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information is appropriate for you and consider talking to a financial adviser before making an investment decision.
The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any
person who relies on the information contained in the presentation.
Stocks referred to in this presentation are not a recommendation of any securities.
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© Colonial First State Investments Limited 2008.
Origins of a mess
“In a move that could help increase home ownership
rates among minorities and low-income consumers,
the Fannie Mae Corporation is easing the credit
requirements on loans that it will purchase from
banks and other lenders.”
Steven A. Holmes
The New York Times
30 September 1999
US house prices…
are falling
Index
250
Los Angeles -26.2%
200
San Francisco -24.8%
150
New York
-7.4%
100
10 city decline is 17.5% over 12 months
50
Jan-87
Jan-92
Jan-97
Jan-02
Source: S&P / Case-Shiller 10 City index, Bloomberg. Data to 31 July 2008
Jan-07
Jan-12
US retail sales are slowing
14
….remember the US consumer makes up 70% of the economy!
yoy%
12
10
8
6
4
2
0
-2
Jan-93
Jan-97
Jan-01
Source: US Census Bureau. Data to 30 September 2008
Jan-05
Jan-09
US job growth – monthly,000s
600
Job growth
400
200
0
-200
-400
-600
Dec-90
Job losses
Dec-95
Dec-00
Dec-05
Source: US Bureau of Labor Statistics. 3 month moving average. Data to 30 September 2008
Dec-10
The US sharemarket & company earnings
7000
6000
S&P 500
5000
4000
3000
2000
1000
Earnings of S&P500 companies
0
Dec-86
Dec-92
Dec-98
Dec-04
Source: Bloomberg. S&P500 index and earnings indexed to 1000 at December 1986. Data to
30 September 2008. Past performance is no indication of future performance.
Dec-10
US recessions:
always trigger bear markets in US stocks.
Performance of S&P500 around US recessions
recession recession duration
start
end
(months)
S&P500
peak
S&P500
trough
duration
peak to
(months) trough fall
next 12
months
Dec-69
Nov-70
11
May-69
May-70
12
-34.7%
+43.7%
Nov-73
Mar-75
16
Jan-73
Oct-74
21
-48.4%
+38.0%
Jan-80
Jul-80
6
Feb-80
Mar-80
2
-17.1%
+37.1%
Jul-81
Nov-82
16
Nov-80
Aug-82
21
-27.1%
+58.3%
Jul-90
Mar-91
8
Jun-90
Oct-90
4
-19.6%
+29.1%
Mar-01
Nov-01
8
Mar-00
Oct-02
31
-49.1%
+33.7%
Jan-08?
?
?
Oct-07
Oct-08?
12?
-42.5%?
?
Source: Datastream, UBS calculations
Can China continue to grow?
 Post Olympics interest rate cut
 Domestic demand is a major driver of growth
 Strong economic position
1. Large Current Account Surplus
2. Substantial Foreign Exchange Reserves
3. Strong Fiscal Surplus
 Urbanisation & industrialisation
Source: Colonial First State
Economic growth, year on year
%8
Average since 1960 is 3.7%
6
4
2
0
-2
Jan-90
“The current decade so far has seen average growth of 3.4 per
cent, though the next couple of years will probably see growth
noticeably lower than that.” – Glenn Stevens - May 2008
Jan-95
Jan-00
Source: ABS, Colonial First State. Data to 30 June 2008.
Jan-05
Jan-10
Jobs are still being created in Australia
Monthly job growth
60,000
40,000
20,000
0
-20,000
-40,000
-60,000
Jan-90
Jan-95
Jan-00
Source: 3 month moving average of jobs created.
ABS, Colonial First State. Data to 30 September 2008
Jan-05
Jan-10
Interest rates...
a sharp rise from November 2007, then….
13.0
Interest rate, %
11.0
Standard variable mortgage rate
9.0
7.0
5.0
RBA cash rate
3.0
Jan-92
Jan-98
Source: RBA. Rates as at 4 November 2008.
Jan-04
Jan-10
Profits and the sharemarket
80,000
70,000
Index based at 10,000 in 1985
60,000
50,000
Corporate profits
40,000
30,000
20,000
10,000
All ordinaries share price index
0
Dec-85
Dec-91
Dec-97
Dec-03
Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June 2008.
All Ordinaries index to 3 November 2008.
Past performance is no indication of future performance.
Dec-09
Australian sharemarkets and US Recessions
Performance of All Ordinaries around US recessions
US
US
recession recession
start
end
All Ords
peak date
All Ords
trough date
Duration
(months)
size of
subsequent
Australian
peak to
12 months
recession
trough fall performance
Dec-69
Nov-70
Jan-70
May-70
4
-28.6%
+4.0%
no
Nov-73
Mar-75
Jan-73
Sep-74
20
-59.2%
+50.9%
yes
Jan-80
Jul-80
Feb-80
Mar-80
2
-20.3%
+39.0%
yes
Jul-81
Nov-82
Nov-80
Jul-82
20
-40.6%
+38.7%
yes
Jul-90
Mar-91
Aug-89
Jan-91
17
-32.4%
+38.9%
yes
Mar-01
Nov-01
Jun-01
Mar-03
21
-22.0%
+27.3%
no
Jun-08?
?
Nov-07
Oct-08?
11?
-42.5%
?
no?
Source: Datastream, UBS calculations, CFS
Time in the market, not timing
Australian shares to 31 October 2008
Ten years less
-1.63%
30 best days
Ten years less
20 best days
0.71%
Ten years less
10 best days
4.03%
Ten years less
5 best days
6.12%
Ten year return
-5.00%
8.64%
0.00%
Source: IRESS, Colonial First State *All Ordinaries Accumulation Index used.
Returns are expressed in per annum terms.
Past performance is no indication of future performance.
5.00%
10.00%
The current battle…………..who will win?





Hedge fund redemptions
Derivative losses
Equity raisings
Analyst profit downgrades
Global Recession
Source: Colonial First State





Lower interest rates
Rescue packages
Fiscal spending
Valuations
Sideline cash