Adviser Use Only

Stephen HalmarickHead of Economic and Market ResearchColonial First State Global Asset Management

GLOBAL ECONOMIC OUTLOOKSHOW ME THE WAY

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Disclaimer

Adviser Use Only

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.

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Markets: A wild ride

The start of monetary policy normalisation in the US was always going to be a challenge for markets

Monetary policy among major central banks now diverging

Concerns over China slowdown

But this is an equity market event – not GFC Mark II

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US unemployment rate was 5.3% as at July 2015 (August data due tonight)

Enough to meet the “some further improvement” requirement for a September rate hike

Fed expects to reach full-employment projection of 5% this year

Inflation 1.2% for Core PCE – Fed expects a steady rise in coming years

Further declines in oil and commodity prices could delay the Fed

US: The Fed’s report card, lift off coming

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US: Fed funds rate and bond yields

Bond market continues to under-price expected Fed rate profile

Fed guiding the market to the first rate hike before year-end 2015

Vice-Chair Fischer says September still open – rate decision is finely balanced

Boston Fed President suggests going in September – but emphasising caution

Expect some upward movement in bond yields

But gradual nature of tightening could limit extent of bond sell-off

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China: Three challenges

China has three challenges:

1. A slowing economy

2. Equity market volatility

3. Capital outflow and currency depreciation

Chinese Premier Li once remarked that China’s GDP data was ‘man made’; He preferred to look at the change in bank lending, rail freight, and electricity consumption

This clearly shows a slowing economy. But job creation remains strong – 10m+ per year

Average GDP growth of 6.5% required to reach goal of doubling China’s real GDP by 2020

Further stimulus measures will be needed

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China: Asset market volatility

Chinese equity markets have traded with volatility due to margin financing, valuations and changing regulation

But the impact on the real economy should be limited

Authorities unlikely to focus too much on the level of the equity market

Property markets are recovering

8 Adviser Use Only

China: A range of easing measures have been deployed

Chinese financial conditions remain tight despite recent devaluation, interest rate cuts and RRR cuts

Expect more stimulus to come to boost growth

One off devaluation aimed at improving exchange flexibility, but also to pre-empt Fed moves and help weakening export sector

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Europe and Japan: More stimulus coming

Both the US Fed and Bank of England have finished QE

Bank of Japan accelerated its QQE program in October 2014 and likely to do more

ECB sovereign bond QE started March 2015 at €60bn a month

Will continue to at least September 2016 or when inflation is forecast at 2%

Total amount of central bank liquidity will continue to rise

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EU: Growth starting to improve, but significant divergence

Signs of some economic improvement

Unemployment rates now falling

Less fiscal austerity, weaker EUR and more stability in banking system is helping

Headline Eurozone growth hides significant divergence between countries

Ireland and Spain, early adopters of economic reform, now leading growth

Greece a clear area of ongoing concern, elections on 20 September

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Australia: Economic growth rate below trend and income growth flat

Q2 2015 GDP data for Australia showed annual growth down at 2.0%/yr

Growing largely below trend since 2007

Real Income in the economy very weak

Falling commodity prices, flat profits and low wages growth

Partly offset by a lower AUD – expect more depreciation

Negative impact on government revenue and Budgets

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Australia: Business and consumer confidence close to average – households saving less

Business confidence now a little above average – helped by lower AUD and NSW growth

Consumer confidence has been volatile

Retail sales doing a little better

But consumers saving less to maintain consumption given weak income growth

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Australia: Trade is still a source of economic growth

China still no. 1 export destination but has fallen with weaker commodity prices

Japan is no. 2. India and US to pick up share

Free Trade Agreements signed with Korea, Japan and China... India to come

Resource exports still dominate

Improvements in rural (beef) and services (education and tourism)

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Australia: Unemployment rate lower than expected, AUD below long-term average

RBA cut rates in February and May 2015 – as the unemployment rate continued to drift higher

Unemployment rate back to its peak of 6.3% in July

Still lower-than-expected and suggests Australia’s potential growth rate has declined

RBA expected to be on hold now

Lower AUD has helped and should move lower with Fed lift-off

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Australia: Housing market very strong – debt burden is rising, but repayments still affordable

House prices getting very expensive

Demand coming from: low interest rates, local investors, SMSF and foreign investors

Household debt to income hitting new highs around 160%

But low interest rates mean repayments are still affordable

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Australia: Infrastructure and housing supply are critical

Infrastructure critical to housing affordability, jobs and productivity improvement

Coming (mostly) from NSW

Residential approvals growing strongly

High-rise residential approvals now very similar to detached housing

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Australia: Potential economic growth will be lower

Australia’s potential economic growth rate could have fallen to around 2.5%–2.75%, from 3.25%

Ageing population

Unchanged labour force participation

Productivity challenges are critical

Real GDP per person set to fall

Real GDP growth potential set to fall without productivity enhancing and participation enhancing policies

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Outlook: Next 12 months

First rate rise in US still underestimated by markets

Equity market volatility and lift in short-end bond yields

More debate over impact on longer-term bond yields

China – going through an important adjustment.

Slower growth, more financial market reforms but a government who still wants control

Europe – third bailout package for Greece, growth divergence and a future of stronger institutional frameworks

Australia – slower growth, need for infrastructure and government to promote growth, lower interest rates unlikely

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Outlook: Issues surrounding lower potential growth

Thank You