Economic Update Mark Rider, Head of Investment Strategy.

Economic UpdateMark Rider, Head of Investment Strategy

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Global growth: better and worse

The Transition Twins: China and Australia

Equities: home, away or just stay away?

What it all means for your clients

Three themes and their implications

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Global Growth - better as at long run trend …

Source: Thomson Reuters Datastream, ANZ Global Wealth

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… and unemployment has fallen a long way

Source: Thomson Reuters Datastream, ANZ Global Wealth

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But worse as lower trend growth means lower returns

Source: Bloomberg, ANZ Global Wealth

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Growth has disappointed this year…

2015 ANZ Forecast Dec 14

Source: Thomson Reuters Datastream, ANZ Global Wealth

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Weaker potential growth lower interest rates

DM avoids home grown deflation end to negative rates

Weak EM imparts a deflationary shock lower rates, commodities, resources stock and AUD

Bottom line: Interest rates to remain low

Implications

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China – slowdown you move to fast

Source: Bloomberg, ANZ Global Wealth

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A slowdown where it hurts Australia

Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

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It’s not all bad news, just different

Source: China National Bureau of Statistics, ANZ Global Wealth

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The economy may be slower than GDP suggests

Source: China National Bureau of Statistics, ANZ Global Wealth

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Where will it end?

Source: Thomson Reuters Datastream, ANZ Global Wealth

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Where will it end?

Source: Thomson Reuters Datastream, ANZ Global Wealth

?

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As China’s nominal growth collapses…

Source: Thomson Reuters Datastream, ANZ Global Wealth

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As China’s nominal growth collapses…

Source: Thomson Reuters Datastream, ANZ Global Wealth

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A capex cliff looms

Source: Australian Bureau of Statistics, ANZ Global Wealth

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Housing is the only source of growth

-3.0% -0.5% +0.5%

Source: Australian Bureau of Statistics, ANZ Global Wealth

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AUD remains under pressure

Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

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China not growing how it used to lower commodity prices

Australian capex cliff sub trend growth and lower rates

A$ under pressure

Implications

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Equities – home, away or just stay away?

Source: Bloomberg, ANZ Global Wealth

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It’s all to do with earnings

Source: Bloomberg, ANZ Global Wealth

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Current versus “mid cycle” earnings

Source: Bloomberg, ANZ Global Wealth

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Equities – reasonable value

Source: Thomson Reuters Datastream, ANZ Global Wealth

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Home or away?

3.8

3.9

4.0

4.1

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4.3

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4.6

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4.8

0.3

0.4

0.5

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1.0

1.1

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1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Australia's Terms of Trade and Equity Performance

Relative Performance (LHS) Terms of Trade (RHS)

Source: Thomson Reuters Datastream, ANZ Global Wealth

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Equities – no longer cheap, but not really expensive

Earnings growth likely issue for Australia and EM

Falling terms of trade favours DM over Australia

Implications

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10 year bond yields – where to now?

Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

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10 year bond yields – where to now?

Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

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10 year bond yields – where to now?

Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

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10 year bond yields – where to now?

Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

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Lower expected returns in prospect

Source: Mercer, Bloomberg, ANZ Global Wealth

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Forces continue for low interest rates but now poor returns

Equity valuations okay, but earnings growth the issue

Prospective returns have moderated

Tactically cautious

Conclusions

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