Australian Japan Business Co-operation Committee Viewing Change as Opportunity: Financial Connection Ms Shemara Wikramanayake Head of Macquarie Asset Management 9 October 2017 STRICTLY CONFIDENTIAL
The Financial Connection – connecting capital to investment opportunities Banks Insurers Capital Investment (from savers opportunities and nations) Wealth Managers Asset Managers Identify, shape, de-risk, and add value to investment opportunities STRICTLY CONFIDENTIAL MACQUARIE PAGE 1
Changes driving investing environment Geopolitics Regulation Technology / Disintermediation Demographics STRICTLY CONFIDENTIAL MACQUARIE PAGE 2
Today’s investing environment Quantitative Easing has driven inflation of financial asset values and low volatility but this tailwind is abating S&P500 vs US Federal Reserve balance sheet 5.0 2,500 Federal Reserve assets (LHS, $tn) 4.0 2,000 S&P 500 (RHS) 3.0 1,500 2.0 1,000 1.0 500 - - 2008 2011 2014 2017 Source: US Federal Reserve STRICTLY CONFIDENTIAL MACQUARIE PAGE 3
The global “new normal” appears to be an ongoing decline in population and economic growth World Population and Economic Growth Outlook Middle Cohort Population Growth 6.0% 3.0% 3.0% World GDP Growth 2.5% World GDP Growth Trend Trend (LHS) World Population Growth 5.0% 2.5% China 2.0% World Population Population Growth Growth (RHS) 1.5% 4.0% 2.0% 1.0% USA 3.0% 1.5% 0.5% 0.0% Japan UK 2.0% 1.0% -0.5% Europe -1.0% 1.0% 0.5% -1.5% 1950 1980 2010 2040 2070 0.0% 0.0% Period Beginning 1950 1980 2010 2040 2070 2100 Source: Brad DeLong & Angus Maddison (LHS), United Nations (RHS) STRICTLY CONFIDENTIAL MACQUARIE PAGE 4
Yield on 10-year JGBs has been at zero for many years 10.00% 7.50% 5.00% 2.50% 0.00% -2.50% Zero Yield Policy -5.00% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Annual Return Yield STRICTLY CONFIDENTIAL MACQUARIE PAGE 5
Yet global savings continue to grow, with increasing deployment challenges OECD pension fund assets grown by ~150% in the past 14 years OECD pension fund assets 24.8 24.1 24.0 ($UStr) 21.7 20.0 18.5 18.4 16.7 16.5 15.0 14.5 14.0 12.6 10.8 10.3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: OECD STRICTLY CONFIDENTIAL MACQUARIE PAGE 6
Investors continue high exposure to defensive, lower return investments DB/DC Split 2016 1,2 Asset allocation 2016 Source: Willis Towers Watson and secondary sources 1. 1 DC assets in Switzerland are cash balance plans where the plan sponsor shares the investment risk and all assets are pooled. There are no pure DC assets where members make an investment choice and receive market returns on their funds. Therefore, Switzerland is excluded from this analysis. 2 In January 2017, the UK’s Office for National Statistics stated that the figures previously disclosed for DC entitlements w ere significantly overestimated. As a result there is a significant decrease in UK DC pension assets this year when 2. compared to the previous editions of this study. This change has a very limited impact on the P7 DC assets; in the order of a one percent reduction. STRICTLY CONFIDENTIAL MACQUARIE PAGE 7
Japanese investment in JGBs (¥ JPYtr ) 1,200 1,000 800 600 400 200 0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Japan Offshore STRICTLY CONFIDENTIAL MACQUARIE PAGE 8
Risk aversion is a contributing factor Months to recover from a crisis: 100% Equities / 60% Equities 40% Bonds 1987 2007 Japan - 1989 Still Counting 68 72 53 40 38 287 23 21 17 Australia US Australia US Nikkei is still not back to its 1989 levels Source: Macquarie and Bloomberg. For the US based on S&P 500 Index and 10 year US Treasury Bonds, for Japan based on the Tokyo Stock Exchange Price Index and 10 year Japanese government bonds. For Australia based on Australian All Ordinaries index and 10 year Australian Commonwealth Government Bond STRICTLY CONFIDENTIAL MACQUARIE PAGE 9
Reward for risk is decreasing in traditional asset classes U.S. equity risk premium vs. GDP trend 20% 5% 16% 4% 12% 3% 8% 2% 4% 1% 0% 0% -4% -1% 1822 1834 1846 1858 1870 1882 1894 1906 1918 1930 1942 1954 1966 1978 1990 2002 2014 Equity risk premium World GDP trend (RHS) Source: Bloomberg, April 2016 STRICTLY CONFIDENTIAL MACQUARIE PAGE 10
Our industry’s role is to shape higher return investment opportunities for risk Banks Insurers Capital Investment (from savers opportunities and nations) Wealth Managers Asset Managers STRICTLY CONFIDENTIAL MACQUARIE PAGE 11
The largest contributor to world economic growth is now Emerging Markets % 6 4 2 0 -2 -4 1991 1994 1997 2000 2003 2006 2009 2012 2015 Emerging Markets Growth Developed Markets Growth World growth China Growth US Growth EU Growth STRICTLY CONFIDENTIAL MACQUARIE PAGE 12
What are you getting in Emerging Markets? Asia is a key opportunity MSCI Emerging markets benchmark breakdown Real GDP growth Non- Asia Growth 27% gap 6.0% 4.5% Asia (ex- Japan) 1.9% 73% Emerging Non-Asia EM Asia ex-Japan Markets Source: IMF, MSCI, Macquarie Investment Management STRICTLY CONFIDENTIAL MACQUARIE PAGE 13
You need to be “on the ground” in Asia Travel, language and culture are a significant barrier Morgan Stanley Asia ex-Japan UK Capital International Asia US 11 countries Japan World 1,419 cities 75% in three countries Many languages and 75% in 2 languages dialects Easy to cover from Vast cultural differences anywhere in the world The “western approach” works Source: Bloomberg STRICTLY CONFIDENTIAL MACQUARIE PAGE 14
Asia’s positive long-term outlook will drive infrastructure demand Share of global GDP 1 Urbanisation 2 100% 56% 3b 48% 37% 75% 50% 2b 50% 640 million 2.8 63% 2.1 1b 25% people 50% 0% 0b 2015 2030F 2015 2030F Asia Global ex-Asia Urban population % of Asian population Middle class population 3 Total savings 4 By 2030: 4b 44% 66% $16tn 45% 1 billion people 34% 3b $12tn in China 2b $8tn 3.2 12.7 475 million 1b $4tn 1.2 6.7 people in India 0b $0tn 2015 2030F 2015 2030F Population % of Global middle class population Savings % of Global savings 1. IMF WEO Database as at 9 December 2016 2. United Nations Department of Economic and Social Affairs: World Urbanization Prospects 3. EY: Hitting the sweet spot - The growth of the middle class in emerging markets (middle class defined as earning $US10-100 per day) 4. World Bank: Global Saving in 2030, World Bank: Capital for the Future - Saving and Investment in an Interdependent World STRICTLY CONFIDENTIAL MACQUARIE PAGE 15
Infrastructure in Asia will require substantial capital Of the $20.2 trillion projected demand… Asia Infrastructure Projected Demand for Capacity and Replacement (2016-2030) 1 $20.2 trillion $13 trillion $4 trillion $3 trillion from China alone from India from Southeast Asia 7.0 Transport Resulting to an infrastructure funding gap of 0.7 Water/Sanitation $3-4 trillion 2.0 Telecommunications 1.5 Renewables Augmented by robust brownfield opportunities, as a result of 9.0 Electricity Non-core asset sales and capital recycling for new infrastructure 1. Asian Development Bank: “Meeting Asia’s Infrastructure Needs”, 2017; International Energy Agency: World Energy Outlook 2015 STRICTLY CONFIDENTIAL MACQUARIE PAGE 16
Why we like Infrastructure Assets Characteristics of Infrastructure assets Benefits to Investors Essential services Stable returns to the community and low volatility Monopolistic High yielding position High barriers Inflation linkage to entry Allowed return Resilient performance often set by regulation in different economic environments STRICTLY CONFIDENTIAL MACQUARIE PAGE 17
Investors’ needs from their investment portfolios vary Yield Growth Long duration Shorter OECD Emerging markets Sub-sector Returns / Risk Debt / Mezz Super Core Core Core-Plus STRICTLY CONFIDENTIAL MACQUARIE PAGE 18
Making Opportunity from Change Be pro-active Be selective Collaborate Adapt Embrace complex Participate where Use innovative Create tailored assets and situations competitive edge is partnerships to access solutions for clear and there is deep appropriate skill and counterparties understanding of the pricing asset STRICTLY CONFIDENTIAL MACQUARIE PAGE 19
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