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

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Ben Devenish Shadforth Financial Group

WA’s Economic Report Card

Economics, markets and WA update

Ben Devenish, WA Manager Advisory Services March 2017

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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

• btain 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. 4

Ceteris paribus

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Expect bouts of volatility

Risks:

• The Trump factor
• Geopolitical: Brexit, General elections in Europe
• Low/negative interest rates

More Risk Less Risk

Source: Bloomberg 2017, IOOF 2017

China U.S. Fed China Brexit Trump

10 14 18 22 26 30 34 Apr 2015 Aug 2015 Dec 2015 Apr 2016 Aug 2016 Dec 2016 Index

Volatility Index

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Political events raise risks in 2017

Source: IOOF 2017

15 March 2017 Netherlands Elections for the Lower House March 2017 United Kingdom Article 50 to be triggered 23 April 2017 France Presidential election (first round) 07 May 2017 France Presidential election (second round) September 2017 Germany General/Parliamentary elections October 2017 Czech Republic Parliamentary election Oct - Nov 2017 China 19th National Congress

• f the Communist Party
• f China

Political developments and the trend toward protectionism could be a source of market volatility

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Global economic growth

But there are some hurdles:

• Unsustainable credit growth

in China

• Brexit will impact growth in

the UK and Eurozone

• European politics

Prospects for 2017 are better with the World Bank forecasting 2.7% GDP growth

Source: Bloomberg 2017, World Bank 2017, IOOF 2017

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Quantitative easing

Almost 10 years since the GFC, money is still being injected into the system

Source: ECB 2016, BOE 2016, BOJ 2016, IOOF 2016

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Fiscal policy will be constrained by high government debt levels

Global indebtedness

Source: BIS 2016, IOOF 2016

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United States

Source: The Odyssey Online 2016

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Markets generally perform well irrespective of who is President

Trump’s bounce?

Source: Bloomberg 2016, IOOF 2016. Returns under Trump have been calculated between election day and 15/02/2017

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Europe

Source: Business Standard 2016

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Brexit has weakened the outlook for Europe

• Economic impact will depend on:
• UK-EU post exit relationship
• Trade barriers
• Labour movement restrictions

Source: Bloomberg 2016, IOOF 2016

1 1.2 1.4 1.6 1.8 2 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

GBP/USD

Referendum

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Consumer and business confidence is higher

Europe is experiencing a steady economic recovery despite Brexit and the upcoming political events

Source: Bloomberg, IOOF

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Inflation has ticked higher

Eurozone: 1.8% YoY in January

Source: Bloomberg 2017, IOOF 2017

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Negative interest rates

Five central banks experimenting with negative interest rates

Source: Bloomberg 2016, IOOF 2016

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China’s GDP growth is wtabilising

GDP growth recorded 6.7% in 2016

• The economy is transitioning

to consumption and services

• But there is a concern that

China is over reliant on credit to meet economic targets

Source: Bloomberg 2017, IOOF 2017

6 7 8 9 10 11 12 13 14 15 16 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

GDP Growth YoY %

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China’s capital outflows are stabilising

PBOC is playing its part:

• Clear communication
• Easing restrictions on capital flow

But, if the USD strengthens:

• Outflows will likely continue
• Foreign investors will be more bearish
• Investors will reduce exposure to
• Chinese equities and renminbi
• denominated deposits

Source: Bloomberg 2017, IOOF 2017

• 200
• 150
• 100
• 50

50 100 2009 2010 2011 2012 2013 2014 2015 2016 USD (Billions)

China's Estimated Capital Flow

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Australia avoids recession

GDP growth rebounded in Q4 to record 1.1%QoQ and 2.4%YoY

Source: ABS 2017, IOOF 2017. The graph does not include a statistical discrepancy adjustment

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The bounce in commodity prices will provide some support to the economy

Economic growth

Source: Bloomberg 2017, IOOF 2017

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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

Source: Bloomberg 2017, IOOF 2017

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• AUD has strengthened as

commodity prices have risen

• This will be partially offset by

rising interest rates in the U.S

• AUD strength may:
• Hamper Australia’s economic

recovery

• Impact growth
• Impact exports

Australian Dollar

Source: Bloomberg 2017, IOOF 2017

AUD remains highly correlated to the price of iron ore

20 40 60 80 100 120 140 160 180 200 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 2008 2009 2010 2011 2012 2013 2014 2015 2016

Australian Dollar vs Iron Ore

AUD/USD (LHS) Iron Ore (RHS) 24

Bond markets

Source: Bloomberg 2017, IOOF 2017

The shift to fiscal stimulus in the U.S. will impact bond yields

1.4 1.6 1.8 2 2.2 2.4 2.6 2.8 2 4 6 8 10 Yield (%) Maturity

Australian Yield Curve

June 2016 February 2017

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Equity market valuations

Equity valuations are expensive on an absolute basis, but they are justified in this macro environment

Source: Bloomberg 2017, IOOF 2017

2 4 6 8 10 12 14 16 18 20 UK Australia U.S. Italy World France ACWI Spain Germany Japan P/E (x)

Developed market equity valuations

Forward P/E 10 year average 26

The WA economic report card…

• Industry
• Investment activity
• Jobs and Wages
• Property
• Cost of living
• Population
• State budget

27 28

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WA industry split – consumer sensitive?

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31 32

Income growth ($$)

Source: ABS

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Wage growth slipping behind

Source: WATC

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So what are the important commodities to WA?

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Where is the investment happening?

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So where are the jobs?

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WA median price

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Relative house price movement last 12 months

Source; Corelogic

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WA rents and vacancy rates

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Cost of living

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Cost of living – Perth hot spot

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WA state budget

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WA state budget

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Iron ore price chart

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The silver lining…

http://www.dsd.wa.gov.au/about-the-state/quality-of-life/stability

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• 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

2017 outlook

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Thank you