Investor Update November 2013
Agenda Outlook for the Australian Economy Investment strategy Share market outlook Questions 2
Booms i inevitably b bust
Are we we abo bout ut t to o fall i into t the he mi mining d g ditch ? Mining investment Australian Investment Profile - Based on GS Project Probability % of GDP 7 A$bn 140 Level implied from ABS 6 capex expectations 120 '13-14 5 100 4 80 60 3 40 2 20 1 0 CY11 CY12E CY13E CY14E CY15E CY16E 0 Mining Transport Utilities Community 88 93 98 03 08 13 Source: ABS, J.P.Morgan. Manufacturing NBN Other
Compos positi tion on o of the Austral alian E n Econom nomy (Trend Growth = +3.25%) $bn $bn Forecast 1700 +3.7%yoy Forecast 300 +15.1%yoy +2.0%yoy +3.6%yoy -10.7%yoy +2.3%yoy 250 1500 200 1300 150 1100 100 900 50 0 700 2012 2014 2016 2012 2014 2016 Engineering Construction Machinery & Equip Consumption Dwelling Investment Govt Non-res Building Intangibles Inventories Net exports Other 5
A sof ofter er hous househol ehold d sec ector or Share of household disposable income • Household income growth has 140 20 7 averaged 6.5% from 1990. We 1 17 120 15 5 expect it to drop to 3-4% in the 100 72 medium term. 80 • Employee compensation 60 continues to slow 40 12 • Rising unemployment, ongoing 20 11 cost focus of business and high 0 GOS Mixed income Comp of Property Welfare Mortgage Consumer Income tax Other Dwellings Employees income interest interest $A = low employee compensation receiveable Compensation of Employees Employment growth • Lower rates – less benefit to YoY% 20 Wages per hour growth mortgages going forward; Av hours worked per employee 15 businesses continue to de-lever Compensation of Employees 10 • Government transfers benign – Public sector consolidation under 5 conservative government 0 -5 1/03/1986 1/06/1992 1/09/1998 1/12/2004 1/03/2011 6
Demogr ographi phics a and delev everagi aging ng weigh gh o on c consum umpt ption ion Consumption and age structure Population Growth by Age Group 2.50 14 %YoY %YoY 20-29 30-39 40-49 50-59 2 12 2.00 10 1.5 1.50 8 1.00 1 6 0.50 4 0.5 0.00 2 0 -0.50 0 Jun-89 Jun-04 Jun-19 -0.5 Growth in pop aged 20-59 less pop 60+ (LHS) 1980 1990 2000 2010 2015 2020 Nominal consumption growth (RHS) Debt to disposable income Percent 175 UK 150 Australia New Zealand 125 Spain US 100 Germany 75 France 50 00 02 04 06 08 10 12 14 Source: BEA, ECB, RBA, RBNZ 7
NAB’s Business Conditions Survey: Ongoing weakness in GDP “ Business conditions undershoot again. Capacity utilisation falls sharply – especially in manufacturing, construction, mining and retail – despite low interest rates and improved housing and equity markets. Other forward indicators deteriorate, paring back earlier gains and implying a continuing soft outlook for domestic demand” NAB Business Survey
Outlook for 2014 and beyond Australian exports by commodity Outlook Summary: 80 • Weaker growth as mining investment $bn, real per qtr begins to run off and household sector 70 remains subdued LNG • Some countercyclical support from 60 government but not be enough to counter softness in private sector 50 COAL • $A is the wild card- a lower dollar will 40 support activity 30 Medium term Outlook: • Growth in household income should 20 IRON ORE improve from subdued levels • The investment in mining will start to 10 deliver dividends from 2015 onwards 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Resources “Is it over for mining shares?” Small Caps Tom Richardson Portfolio Manager Resources Industrial Cyclicals Defensives Financials 10
The B Th e Boo oom i m is o over… The last decade has seen unprecedented growth in: Terms of trade TWI Capital expenditure Commodity prices These tailwinds have now peaked and the boom is over. 11
…however not a bust Chinese demand unlikely to collapse. Equilibrium to be re-established with increased volume and lower prices. Low cost miners will still generate strong profits in a lower price environment 12
Not all commodities are the same Individual commodities have different life cycles with the demand profile varying through industrial development. In the early stages, large amounts of steel are required as this has the highest productivity payoff. The growth baton then passes from construction to manufacturing and plant. As a country becomes more developed and living standards improve, growth in bulk commodities slow, and demand for consumer items accelerates. 13
We are cautious on Australia’s bulks IRON ORE Chinese steel demand +8% this year – well ahead of expectations and this has supported the iron ore price. However the low-cost operators are expanding production which will flatten the cost curve. The majors will benefit at the expense of high cost operators. COAL Australia has seen a dramatic shift up the cost curve driven by widening strip ratios, infrastructure tariffs and significant operating inflation. China is relatively self-sufficient in coal and new investment in East-West rail has reduced operating costs. Thermal coal has come under further pressure from the abundance of new shale gas increasing US coal exports. 14
Industrial Metals – Mixed outlook COPPER NICKEL Demand to remain strong as Supply surge driven by new China continues electrification technology – Nickel pig iron. and consumer growth Mine closures due to low Supply impacted by prices is helping balance the Declining grades market, but still a way to go. Production disruptions Mine closures not being replaced by the industry ZINC ALUMINIUM Positive outlook for zinc Demand will continue to rise driven by a number of major as China develops, however mines scheduled to close by structural oversupply of end-2016. smelting capacity. However it is difficult to gain Alumina is now largely priced exposure to zinc through on spot and will benefit from Australian listed companies. any bauxite shortages. 15
Th The e out utlook for or some c ome commo mmodi dities is s strong ng..... Commodity Demand Trajectories Mineral Sands Long term structural demand for titanium dioxide as shown in the chart produced by Rio Tinto. Demand for zircon will continue to be driven by higher urban living standards in China. Highly favourable industry structure in both zircon and titanium dioxide. This was evident in 2012 when Rio and Iluka suspended production keeping the market tight. Lithium Demand for lithium-ion batteries has increased Concentrated Lithium Supply 30% pa over the last decade and now accounts for one third of lithium demand. Smartphones and tablets have driven the growth, with electric vehicles to supercharge this. Highly concentrated industry structure with currently four major producers controlling the market. 16
Resources Synopsis While the mining boom may be over, we are not expecting a mining bust Though commodity markets are well off their highs, they are still above historical prices Commodity markets are not as tight as previously as supply has responded to higher prices The economics of investing in mining companies is very much in tact and many remain profitable at trend commodity prices While valuations in most sectors look full, mining shares look okay here given upgrades and low relative multiples 100 Mining vs Industrial P/E 80 Relative P/E 60 40 20 0 -20 -40 -60 Current NTM P/E: Miners vs Industrials=-29.7%, -20.4% below 20-yr average -80 Aug-92 Dec-93 Apr-95 Aug-96 Dec-97 Apr-99 Aug-00 Dec-01 Apr-03 Aug-04 Dec-05 Apr-07 Aug-08 Dec-09 Apr-11 Aug-12 17
Financials “Is this as good as it gets Small Caps for Australian Banks?” Industrial Resources Cyclicals Omkar Joshi Investment Analyst Defensives Financials 18
Australian banks are in a ‘sweet spot’… Global Banks' Total Returns by Region Australian banks are in a position of strength 50% and have outperformed both the broader 45% 40% Australian market and most global banks in the 35% 30% last 12 months 25% 20% 15% 10% Profitability has been strong due to disciplined 5% 0% margin management, deployment of cost-cutting initiatives and improving bad debt charges Relative Price Performance of Australian Banks 190 Historically low interest rates and tightening of 180 170 mortgage lending standards after 2008 have led 160 150 to improved asset quality 140 130 120 110 100 Strong levels of organic capital generation 90 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 have meant banks were among the first globally to adhere to new Basel III capital requirements ASX 200 Banks Acc. Index ASX 200 Acc. Index Source for both charts: Reuters, Watermark Funds Management estimates 19
Recommend
More recommend
