WAs Economic Report Card Ben Devenish Shadforth Financial Group - PDF document

WA’s Economic Report Card Ben Devenish Shadforth Financial Group Presented by Economics, markets and WA update Ben Devenish, WA Manager Advisory Services March 2017

Disclaimer This presentation contains general advice only and does not take into account your financial circumstances, needs and objectives. Before making any investment decision, you should consider your objectives, financial situation and needs, and seek advice from a financial adviser. You should obtain and consider a copy of the relevant Product Disclosure Statement from your financial adviser, before you acquire a financial product. Examples are illustrative only and are subject to the assumptions and qualifications disclosed. Information has been prepared based on information that is believed to be accurate and reliable at the time of publication. Past performance is not a reliable indicator of future performance. 3 Ceteris paribus 4

5 Expect bouts of volatility Volatility Index 34 China China 30 U.S. Fed Brexit Trump 26 Index 22 18 More Risk 14 10 Less Risk Apr 2015 Aug 2015 Dec 2015 Apr 2016 Aug 2016 Dec 2016 Risks: • The Trump factor • Geopolitical: Brexit, General elections in Europe • Low/negative interest rates 6 Source: Bloomberg 2017, IOOF 2017

Political events raise risks in 2017 Political developments and the trend toward protectionism could be a source of market volatility 15 March 2017 March 2017 23 April 2017 07 May 2017 Netherlands United Kingdom France France Elections for the Lower Article 50 to be Presidential election Presidential election House triggered (first round) (second round) Oct - Nov 2017 September 2017 October 2017 China Germany Czech Republic 19th National Congress General/Parliamentary Parliamentary election of the Communist Party elections of China 7 Source: IOOF 2017 Global economic growth Prospects for 2017 are better with the World Bank forecasting 2.7% GDP growth But there are some hurdles: • Unsustainable credit growth in China • Brexit will impact growth in the UK and Eurozone • European politics 8 Source: Bloomberg 2017, World Bank 2017, IOOF 2017

Quantitative easing Almost 10 years since the GFC, money is still being injected into the system 9 Source: ECB 2016, BOE 2016, BOJ 2016, IOOF 2016 Global indebtedness Fiscal policy will be constrained by high government debt levels 10 Source: BIS 2016, IOOF 2016

United States 11 Source: The Odyssey Online 2016 Trump’s bounce? Markets generally perform well irrespective of who is President 12 Source: Bloomberg 2016, IOOF 2016. Returns under Trump have been calculated between election day and 15/02/2017

Europe 13 Source: Business Standard 2016 Brexit has weakened the outlook for Europe GBP/USD 2  Economic impact will depend on:  UK-EU post exit relationship  Trade barriers 1.8  Labour movement restrictions 1.6 1.4 1.2 Referendum 1 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 14 Source: Bloomberg 2016, IOOF 2016

Consumer and business confidence is higher Europe is experiencing a steady economic recovery despite Brexit and the upcoming political events 15 Source: Bloomberg, IOOF Inflation has ticked higher Eurozone: 1.8% YoY in January 16 Source: Bloomberg 2017, IOOF 2017

Negative interest rates Five central banks experimenting with negative interest rates 17 Source: Bloomberg 2016, IOOF 2016 China’s GDP growth is wtabilising GDP Growth YoY % GDP growth recorded 6.7% in 16 2016 15 • The economy is transitioning to consumption and services 14 13 • But there is a concern that 12 China is over reliant on 11 credit to meet economic targets 10 9 8 7 6 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 18 Source: Bloomberg 2017, IOOF 2017

China’s capital outflows are stabilising China's Estimated Capital Flow PBOC is playing its part: 100 • Clear communication • Easing restrictions on capital flow 50 0 But, if the USD strengthens: USD (Billions) • Outflows will likely continue -50 • Foreign investors will be more bearish • Investors will reduce exposure to -100 • Chinese equities and renminbi • denominated deposits -150 -200 2009 2010 2011 2012 2013 2014 2015 2016 19 Source: Bloomberg 2017, IOOF 2017 Australia avoids recession GDP growth rebounded in Q4 to record 1.1%QoQ and 2.4%YoY 20 Source: ABS 2017, IOOF 2017. The graph does not include a statistical discrepancy adjustment

Economic growth The bounce in commodity prices will provide some support to the economy 21 Source: Bloomberg 2017, IOOF 2017 Inflation Inflation is not expected to reach the RBA’s 2 -3% target until 2018 • As a result, there is no pressure to increase interest rates in 2017 22 Source: Bloomberg 2017, IOOF 2017

Australian Dollar AUD remains highly correlated to the price of iron ore Australian Dollar vs Iron Ore 1.20 200 • AUD has strengthened as commodity prices have risen 180 1.10 160 1.00 • This will be partially offset by 140 rising interest rates in the U.S 120 0.90 100 • AUD strength may: 0.80 80 • Hamper Australia’s economic 60 0.70 recovery 40 • Impact growth 0.60 20 • Impact exports 0.50 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 AUD/USD (LHS) Iron Ore (RHS) 23 Source: Bloomberg 2017, IOOF 2017 Bond markets The shift to fiscal stimulus in the U.S. will impact bond yields Australian Yield Curve 2.8 2.6 2.4 Yield (%) 2.2 2 1.8 1.6 1.4 0 2 4 6 8 10 Maturity June 2016 February 2017 24 Source: Bloomberg 2017, IOOF 2017

Equity market valuations Equity valuations are expensive on an absolute basis, but they are justified in this macro environment Developed market equity valuations 20 18 16 14 12 P/E (x) 10 8 6 4 2 0 UK Australia U.S. Italy World France ACWI Spain Germany Japan Forward P/E 10 year average 25 Source: Bloomberg 2017, IOOF 2017 The WA economic report card… • Industry • Investment activity • Jobs and Wages • Property • Cost of living • Population • State budget 26

27 28

WA industry split – consumer sensitive? 29 30

31 Income growth ($$) Source: ABS 32

Wage growth slipping behind Source: WATC 33 34

So what are the important commodities to WA? 35 36

Where is the investment happening? 37 So where are the jobs? 38

WA median price 39 Relative house price movement last 12 months Source; Corelogic 40

WA rents and vacancy rates 41 Cost of living 42

Cost of living – Perth hot spot 43 WA state budget 44

WA state budget 45 Iron ore price chart 46

47 The silver lining… http://www.dsd.wa.gov.au/about-the-state/quality-of-life/stability 48

2017 outlook • The lower growth environment will continue • Inflation will remain weak in many developed economies, but deflation fears have passed • Politics will influence markets to an excessive degree so expect bouts of volatility • U.S. Fed tightening and fiscal stimulus will push yields higher, causing further capital losses on bonds. Australian yields to be dragged higher at long end • The continued hunt for yield, better top line growth together with low discount rates and funding costs will support equities, even at current valuations. Increased M&A activity is also likely • The Australian dollar will trade between 70-80c and will be supported by U.S. infrastructure and the demand for commodities 49 Thank you 50