Transcript Sector/Industry Name

Economic and Investment Review
Breakfast
Thursday 25 November 2010
Opening
Mark Cummings
Regional Manager
-
Good Morning and Welcome
-
28th Fordham Investment Management and Breakfast
Fordham Client Service Framework
Wealth Plan
© 2010 Fordham. All rights reserved.
3
Investment Strategy
Paul Ashworth
Director – Executive Director
Fordham Investment Management Pty Ltd
This morning…
1.
A retrospective of what we said in May 2010
2.
Walking the “Tight Rope”
3.
Investment Framework Implications
© 2010 Fordham. All rights reserved.
5
1. A Retrospective from May 2010…
© 2010 Fordham. All rights reserved.
6
The balance of risks for 2011 – Domestic
Status Concern 2011
level
Likelihood
Domestic
Short sharp surges in growth
Fragile business confidence
Fragile consumer confidence
Higher official interest rates
Govt intervention increases business cycle and
asset price volatility
How to fund Govt expenditure – Henry Review
Banks hoarding capital
Source: Fordham Investment Management
© 2010 Fordham. All rights reserved.
7
The balance of risks for 2010 – Global
Status Concern Ongoing
level
Likelihood
Global
Unstable commodity prices
Inflation rather than deflation
Banks hoarding capital
Sovereign debt concerns (Greece, Italy, Ireland)
adversely impact capital markets
World economy just as troubled as late 2007
Source: Fordham Investment Management
© 2010 Fordham. All rights reserved.
8
1. Walking the “Tight Rope”
© 2010 Fordham. All rights reserved.
9
Consider # 1
…Australia’s public spending is modest
Source: IMF, October 2009 World Economic Report
© 2010 Fordham. All rights reserved.
10
Consider # 1
…but Australia’s private debt is not modest
Gross Debt/GDP (%)
* 2008 Data
500%
450%
$4 trillion of debt refinance
over the next 24 months
400%
350%
300%
250%
200%
150%
100%
50%
0%
India
Brazil
China
Canada Germany Australia
Italy
United
States
France
United
Kingdom
Japan
Source : McKinsey Global Institute, Fordham Investment Management
© 2010 Fordham. All rights reserved.
11
Consider # 2
… terms of trade is shining, but…
• Modest surplus on goods &
services
• Still in current account deficit
© 2010 Fordham. All rights reserved.
12
Consider # 3
…but volatility has moderated
800%
CBOE S&P 500 VIX Index
700%
600%
500%
400%
300%
200%
100%
0%
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
Source: Bloomberg, Fordham Investment Management
© 2010 Fordham. All rights reserved.
13
Consider # 3
… except for currency volatility
© 2010 Fordham. All rights reserved.
14
Consider # 4
… but credit isn’t oiling the wheels
© 2010 Fordham. All rights reserved.
15
Consider # 4
… and private businesses are the losers
$ million
800000
700000
600000
500000
400000
300000
200000
100000
0
Mar-1994
Mar-1997
Mar-2000
Total New Credit
Total Credit Outstanding >$2m
Mar-2003
Mar-2006
Mar-2009
Total Credit Outstanding <$2m
Total Credit Outstanding
Source : Reserve Bank of Australia
© 2010 Fordham. All rights reserved.
16
Consider # 5
… the end of synchronised growth; its now
“them” and “us”
Source : IMF World Report, October 2010
© 2010 Fordham. All rights reserved.
17
3. Investment Framework Implications
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18
Asset allocation
© 2010 Fordham. All rights reserved.
19
Our Portfolio Performance
Wealth to
pre GFC
levels
Source: Fordham Investment Management
© 2010 Fordham. All rights reserved.
20
Australian Equities
Asset Allocation Target
Portfolio Management
Investment Selection
- have reached 40% over the last
18 months.
- need to look beyond (expected)
volatility.
- rebalancing various exposures that
have profited (eg resources).
- execute on our tried - andtested discipline policies.
- balance sheets in good shape
- dividend yield is what “pins the tail on
the donkey”.
- critical of business models which fail
to distribute to shareholders.
- Govt policy impacts broadly –ve.
- business strategy moving beyond cost
reduction to growth.
- banks still at arm’s-length.
© 2010 Fordham. All rights reserved.
21
Our Australian Equity Portfolio Performance
Garnet S/F - Accumulation Domestic Equity Performance
Base = $1,000,000 at 1 July 2000 (to 31 Oct 2010)
$4,500,000
14.8%
CAGR
to Oct 2010
$4,000,000
$3,500,000
$3,000,000
9.1% CAGR
to Oct 2010
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
Garnet Domestic Equity Portfolio (Gross Divs & Pre Fees)
S&P ASX 300 Accum Index - Gross Divs
Source: Fordham Investment Management
© 2010 Fordham. All rights reserved.
22
Our Australian Share Portfolio
Relative to our Policy Requirement
300%
AU
250%
AU
200%
Policy Requirement
150%
AU
AU
100%
50%
0%
Earnings Quality
Earnings Health
Gearing
Capital Management
Source: Fordham Investment Management
© 2010 Fordham. All rights reserved.
23
P/E Ratios
Fordham
Next Year
PE estimate
15.6
Source: RBA & Fordham Investment Management
© 2010 Fordham. All rights reserved.
24
Dividend Yields
Fordham
Next Year
Gross Div
Source: RBA & Fordham Investment Management
6.31%
Please note
MSCI Australia
and MCSI World
ex Aus are net of
imputation
credits. We have
shown Fordham
gross dividends
because this is
the value that
clients
approximately
receive.
© 2010 Fordham. All rights reserved.
25
Labour Productivity
© 2010 Fordham. All rights reserved.
26
Global Equities
Asset Allocation Target
-
up to 10%
Portfolio Management
-
unhedged currency, long term
positions
continued incremental movement
currency considerations
(volatile but provides
opportunities)
-
Investment Selection
-
developed economy exposure
maintain jaundiced view of
Europe
well conducted businesses
- financial discipline
- clear management focus
- prudence
© 2010 Fordham. All rights reserved.
27
Our Global Share Portfolio
350%
UK
Relative to our Policy Requirement
300%
AU
US
US
250%
UK
Policy Requirement
US
AU
200%
150%
AU
UK
AU
US
UK
100%
50%
0%
Earnings Quality
Earnings Health
Gearing
Capital Management
Source: Fordham Investment Management
© 2010 Fordham. All rights reserved.
28
Improving world economic
landscape and outlook
IMF WORLD GDP FORECASTS
October 2009
October 2010
Source: IMF, October 2009 & October 2010 World Economic Reports
© 2010 Fordham. All rights reserved.
29
Property (Listed)
Asset Allocation Target
-
0%
(may increase over review period).
Portfolio Management
-
fundamental changes in listed
property “on foot”.
Investment Selection
-
established commercial property
adjustment not progressed sufficiently.
banks: unreliable, inconsistent
security behaviour.
risk of capital constraint remains a key
negative.
consider the “back-to-the future”
vehicles post listing (Westfield,
Brookfield)
-
© 2010 Fordham. All rights reserved.
30
Interest Bearing Securities
Asset Allocation Target
-
Portfolio Management
-
Policy Investment Selection
-
-
IBS 46% (up from 44% due to property
reduction)
Cash 4%
yield curve flattish and implied inflation low.
fiscal policy and sovereign debt issues
remain.
cash rate normalisation by RBA continues.
moderate duration maintained but not
extended.
inflation/deflation: inflation remains the risk
quality debt instruments that are liquid.
banks continue to re-orientate their funding
base. Investors are the beneficiary compared
to wholesale rates.
bank hybrids likely curtailment under Basel III.
Significant economic adjustments, especially
in world capital markets will continue to
impact IBS asset class : keep it straightforward.
inflation indexed bonds to be used especially
when inflation risk is valued so low.
© 2010 Fordham. All rights reserved.
31
Our Interest-Bearing Portfolio
- Garnet Current Yield as at 30 September 2010
Source: Fordham Investment Management
© 2010 Fordham. All rights reserved.
32
Yield Curve is supportive of growth
…and modest inflationary expectations
9%
AUS Corp BBB
8%
Best TD
Yield (%)
7%
AUS Corp AA
AUS Corp AAA
6%
AUD Swap
NSW Semi-Gov
AUS Sovereign
5%
4%
6 Month
1 Year
2 Year
3 Year
4 Year
5 Year
10 Year
Source: RBA, Fordham Investment Mgt
© 2010 Fordham. All rights reserved.
33
Monetary conditions elevator
… on the way up
8
7
Interest Rate % p.a.
6
5
4
3
2
1
0
-1
Mar-00
Sep-01
Mar-03
Sep-04
RBA Target Cash Rate
Mar-06
Sep-07
Mar-09
Sep-10
Real Cash Rate
Source: RBA, Fordham Investment Mgt
© 2010 Fordham. All rights reserved.
34
Major Countries’ Policy Interest Rates
© 2010 Fordham. All rights reserved.
35
Summary
1.
Australia’s economic risks balance off over the foreseeable future, resulting in
trend growth but with pressure on inflation. Post GFC risks remain and are
largely unresolved, particularly constrained credit to business – risk to economic
growth
2.
“Walking the tight rope” for some time to come and a lot has to go right to
successfully navigate this. Australia has been blessed to date, but it would be
(very) wrong to think of ourselves as bullet proof going forward.
3.
Investment Framework Implications




Asset Allocation is largely normalised with property remaining
Equities - comfortable with settings – engaged but conservatively invested
 Economic growth is supportive
 Financial health check - Anglo corporate world has made tough decisions now for
their governments
 Corporate Strategy to now engage in development & growth of their businesses
Interest Bearing Securities – keep it simple : mindful of ‘black swans’
Commercial property – we are approaching reengagement
© 2010 Fordham. All rights reserved.
36
Gerard Minack
Gerard Minack joined Morgan Stanley in 2005.
He is now the global strategist. Prior to joining
Morgan Stanley he worked at ABN AMRO
Australia for 12 years. At ABN he was market
strategist and chief economist.
Before entering financial markets, Gerard was
head of research at the market forecasting firm,
Syntec Economic Services. He started his
working life in the Department of Premier in
Victoria.
He is a regular commentator on macro-trends
within Australia and offshore, as well as the
outlook for asset markets. His comments appear
in the financial press, and he is a regular
commentator on ABC-TV’s Business Lateline.
© 2010 Fordham. All rights reserved.
29 May 2008
37
MORGAN STANLEY RESEARCH
7 July 2015
2 Dip, Or Not 2 Dip, That Is The Question
Fordham Economic & Investment Breakfast
Melbourne, 25 November, 2010
Morgan Stanley Australia Limited+
Gerard Minack
[email protected]
+61 2 9770-1529
Morgan Stanley does and seeks to do business
with companies covered in Morgan Stanley
Research. As a result, investors should be
aware that the firm may have a conflict of
interest that could affect the objectivity of
Morgan Stanley Research. Investors should
consider Morgan Stanley Research as only a
single factor in making their investment decision.
For analyst certification and other important
disclosures, refer to the Disclosure Section, located
at the end of this report.
+= Analysts employed by non-U.S. affiliates are not
registered with FINRA, may not be associated persons of
the member and may not be subject to NASD/NYSE
restrictions on communications with a subject company,
public appearances and trading securities held by a
research analyst account.
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Outline
Framework

Developed equities have not started a new secular bull market
– Expect range-bound, low returns from risk markets.
 The policy response to the ‘great recession’ was the ‘great swap’
– That points to a weaker recovery than Mr Market has priced
– The big risk has been swapped: it’s now public sector debt, rather than private sector debt
– Developed-economies, not emerging-economies, face the bigger near-term structural stress
Australia has many of the risk factors of other developed economies
– We dodged the GFC because of aggressive and well-time policy

Unless we correct our structural problems, the next downturn will be horrible
– Mining boom gives us some breathing space
– The next downturn is not imminent, but risks will rise if US double-dips
Gerard Minack, +61 2 9770-1529, [email protected]
39
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
The Big Range #1: Markets Often Go Nowhere After Big Declines
Source: Teun Draaisma, The Aftermath of Secular Bear Markets, 10 August
Gerard Minack, +61 2 9770-1529, [email protected]
40
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
The Big Range #2: Valuations Signal Low Returns
VALUATION VS RETURN: PAST 10 YEARS
25
10YR AVERAGE US$ TR
R2 = 0.6536
20
Sri L anka
South A fric a
15
A us tralia
10
C anada
10YR 'REAL' EURO
A xJ
5
US 10YR CPI
0
US
-5
0
10
20
30
40
50
60
G-D PE (10YRS AGO)
Japan
70
Finland
80
90
100
Source: DataStream, MSCI
Gerard Minack, +61 2 9770-1529, [email protected]
41
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
WALL STREET AND ISM INDEX
80
75
70
65
60
55
50
45
40
35
30
25
20
INDEX
1100
1050
1000
950
900
850
800
750
700
650
600
550
500
D J I A (L H S)
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965
I SM (RH S)
INDEX
Range bound #3: Choppy growth makes for choppy markets
Source: ISM, Bloomberg
Gerard Minack, +61 2 9770-1529, [email protected]
42
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Markets do respond, even to temporary growth
JAPAN: PUBLIC STIMULUS AND EQUITY MARKET
9
30000
P U BL I C SE C T O R*
7
25000
N I KKE I (RH S)
5
+48%
+77%
20000
INDEX
4 QTR %
+50%
3
1
15000
+57%
-1
10000
-3
2012
2010
2008
2006
5000
2004
2002
2000
1998
1996
1994
1992
* GROWTH IN PUBLIC SECTOR SPENDING
1990
-5
Source: Cabinet Office, Bloomberg
Gerard Minack, +61 2 9770-1529, [email protected]
43
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
The Debt Super-cycle
US TOTAL DEBT TO GDP
350
% GDP
300
250
200
150
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
100
Source: Federal Reserve
Gerard Minack, +61 2 9770-1529, [email protected]
44
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Great Recession Leaves A Great Debt
DEBT/GDP
% OF GDP
500
* 2008 DATA
450
TO TAL
400
of whic h P U BL I C
350
300
250
200
150
100
50
CANADA
GERM
US
AUST
ITALY
FRANCE
SWITZ
STH KOR
SPAIN
JAPAN
UK (adj)
UK
0
Note: The ‘adjusted’ UK total removes debt associated with UK’s role as a global financial centre. Swiss data are for end-2007; Australian data as at June 2008.
Source: McKinsey Global Institute, ABS; Morgan Stanley research
Gerard Minack, +61 2 9770-1529, [email protected]
45
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Debt Distress Often Leads To Inflation Problems
Source: Reinhart & Rogoff, This Time Is Different
Gerard Minack, +61 2 9770-1529, [email protected]
46
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
The Swap’s So Great Government Is Now ‘Free’
HOUSEHOLDS AND THE GOVERNMENT
14
H O U SH O L D D I RE C T T A XE S P A I D
12
H O U SE H O L D S G O V T BE N E FI T S RE C E I V E D *
% OF GDP
10
8
6
4
2
*BENEFITS LESS SOCIAL INSURANCE CONTRIBUTIONS
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
0
Source: BEA; Morgan Stanley forecasts (Richard Berner & David Greenlaw)
Gerard Minack, +61 2 9770-1529, [email protected]
47
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Great Recession Led To The Great Income Swap
NET SAVING RATES
15
PRIVA TE
5
TOTA L
0
-5
PUBLIC
2010
2006
2002
1998
1990
1986
1982
1978
1974
1970
1966
1962
1958
1950
1954
NBER RECESSIONS SHADED
-10
1994
% OF GDP
10
Source: BEA; NBER
Gerard Minack, +61 2 9770-1529, [email protected]
48
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Great Recession Led To The Great Debt Swap
C HANGE IN US DOMESTIC NON-FINANC IAL DEBT*
3.0
30
P RI V A T E N O N -FI N
2.5
25
FE D G O V E RN M E N T
% O F G D P (RH S)
20
% OF GDP
2.0
15
1.0
10
0.5
5
0.0
0
US$TR
1.5
2012
2008
2004
-5
2000
1996
1992
1988
1980
1984
* DOLLAR CHANGE OVER 4 QUARTERS
-0.5
Source: Federal Reserve
Gerard Minack, +61 2 9770-1529, [email protected]
49
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Business Was The Great Winner From The Great Swap
US INC OME GROWTH
1000
4 QTR US$ CHANGE
800
600
400
200
0
-200
-400
D O M E ST I C P RO FI T S
G D I E X P RO FI T S
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
-600
Source: BEA
Gerard Minack, +61 2 9770-1529, [email protected]
50
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
GDP SHARE %
The Flip-side Of Margin Improvement
72
C ONSUMER SPENDING AND LABOUR INC OME
70
C O N SU M E R SP E N D I N G *
68
L A BO U R I N C O M E * *
66
64
62
60
58
56
54
2010
2006
2002
1998
1994
1990
** WAGES PLUS SUPPLEMENTS
1986
1982
1978
1974
1970
1966
1962
1958
1950
1954
* PERSONAL CONSUMPTION EXPENDITURE
52
Source: BEA
Gerard Minack, +61 2 9770-1529, [email protected]
51
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
The Inventory Contribution
US GDP: THE INVENTORY BOOST
6
5
4 QTR %/% CON
4
3.1
3
2
1
1.9
0
-1
-2
-3
I N V E N T O RI E S
GDP
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
-4
Source: BEA
Gerard Minack, +61 2 9770-1529, [email protected]
52
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Public stimulus
NOMINAL GDP AND BUDGET BALANC E C HANGES
16
12
4QTR%
8
4
0
G D P E X-BU D G E T
BU D G E T *
-6.7
2008
2004
2000
1996
1992
1988
1984
1980
1976
1972
1964
1960
1968
* 4QTR CHANGE IN BUDGET DEFICIT AS % OF GDP
-8
2012
-4
Source: BEA
Gerard Minack, +61 2 9770-1529, [email protected]
53
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Asia’s Already Played A Supporting Role
ASIA EX-JAPAN C URRENT AC C OUNT BALANC E
7%
% OF GDP
6%
5%
4%
3%
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2%
Source: Chetan Ahya, CEIC
Gerard Minack, +61 2 9770-1529, [email protected]
54
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Reached Escape Velocity?
4QTR % CONTRIBUTION
10
C ONTRIBUTIONS TO DISPOSABLE INC OME GROWTH
BASED ON QUARTERLY DATA
8
6
4
2
0
2012
2011
2010
2009
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
D I SP O SA BL E I N C O M E
1995
P U BL I C
1994
N O N - L A BO U R
1993
1991
1990
-6
L A BO U R I N C O M E
1992
-4
2008
-2
Source: BEA
Gerard Minack, +61 2 9770-1529, [email protected]
55
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
The Recession Warning
HOURS WORKED AND GDP GROWTH
10
8
4
6
2
4
0
2
-2
0
-4
-2
P RI V A T E H O U RS
-6
-4
G D P * (RH S)
-8
-6
2012
2010
2008
2006
2004
2002
-8
2000
1998
1992
1990
1994
* LEADING BY 2M
-10
QOQ SAAR
6
1996
3MMA% SAAR
8
Source: BEA, BLS
Gerard Minack, +61 2 9770-1529, [email protected]
56
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Mr. Market Prices A V: Earning Forecasts
DM MSC I C ONSENSUS EPS FOREC ASTS
S&P500 C ONSENSUS EPS FOREC ASTS
125
36
2010
2010
33
115
2009
2012
30
105
2009
2012
27
2011
95
2007
82%
85
2006
US$ PER SHARE
US$ PER SHARE
2008
2008
24
2007
2005
2005
18
2004
65
79%
2006
21
75
2011
2004
15
BASED ON IBES CONSENSUS ESTIMATES
2012
2011
2010
2009
2008
2007
2006
2005
BASED ON IBES CONSENSUS ESTIMATES
2004
12
2003
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
55
Source: IBES, MSCI, DataStream
Gerard Minack, +61 2 9770-1529, [email protected]
57
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Who’s Got The ‘Emerging Market’ Problem Now?
SOVEREIGN DEBT TO GDP*
120
G7
% OF GDP
100
A DV A NC ED EC O NO M IES
E M E RG I N G E C O N O M I E S
80
60
40
20
* AVERAGE USING GDP-PPP WEIGHTS. IMF FORECASTS
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
0
Note: includes IMF forecasts
Source: IMF http://www.imf.org/external/pubs/ft/weo/2010/01/index.htm; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
58
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia’s Saviour: Not China
MINING EXPORTS: VALUE, PRIC E AND VOLUME
Q4 08
80
P RI C E
80
V O LU M E
60
4QRT%
E XP O RT E A RN I N G S
40
20
0
-20
2012
-34
2010
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
2008
Q4
-40
Source: ABS
Gerard Minack, +61 2 9770-1529, [email protected]
59
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia’s Saviour #1: Lower rates
C HANGE IN HOUSEHOLD INTEREST PAYMENTS*
8
8
6
6
A$ BILLION
4.5
4
% OF INCOME
4.5
4
2
2
0
0
-2
-2
-4
-4
% O F I N C O M E (RH S)
-6
-5.4
D O L L A R T E RM S
-6
-8
-8
2012
2010
-10
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1980
1982
* GROSS PAYMENTS. INCLUDES UNINCORPORATED ENTERPRISES.
-10
Source: ABS
Gerard Minack, +61 2 9770-1529, [email protected]
60
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia’s Saviour #2: Fiscal stimulus
OECD - DISTRIBUTION OF FISCAL STIMULUS, 2008-2010
2.5
2008
2009
2010
2.0
% OF GDP
1.5
1.0
0.5
0.0
-0.5
US
Korea
Australia
C anada
OEC D
Average
Germany
Japan
UK
E. Europe
France
Source: OECD
Gerard Minack, +61 2 9770-1529, [email protected]
61
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia’s Saviour #3: Chopping Hours, Not Heads
EMPLOYMENT AND HOURS WORKED
8
6
12M%
4
2
0
-2
-4
E M P LO Y M E NT
H O U RS
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
-6
Source: ABS
Gerard Minack, +61 2 9770-1529, [email protected]
62
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia’s Saviour #4: House Crazy
FIRST HOME BUYERS' FINANC E APPROVALS
5
A$BN
4
3
2
1
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Source: ABS
Gerard Minack, +61 2 9770-1529, [email protected]
63
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia Bottom Line: That’s A GFC?
HOUSEHOLD DISPOSABLE INC OME
* SERIES SMOOTHED PRE-2005
12
4 QRT %
9
6
3
0
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
NO MINA L
2000
1998
1997
1996
1995
1994
1993
1992
1991
1990
-3
1999
RE A L
Source: ABS
Gerard Minack, +61 2 9770-1529, [email protected]
64
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia Vs the US: The Big Difference
NOMINAL RETAIL SALES
12
8.0
8
JUNE 09
12M%
4
0
-4
A U ST RA L I A
-8
U N I T E D ST A T E S
-10.5
-12
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
MAY 09
Source: ABS, US BLS
Gerard Minack, +61 2 9770-1529, [email protected]
65
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia: 2010 Is Payback Time
HOUSEHOLD INC OME
14
D I SP O SA BL E I N C O M E *
12
L A BO U R I N C O M E * *
10
4QRT%
8
6
4
2
0
2012
2010
FC
2008
2006
2004
2002
2000
1998
1996
1994
* EQUALS GROSS INCOME LESS DIRECT TAXES AND OTHER EXPENSES,
INCLUDING INTEREST PAYMENTS ** PRE-TAX COMPENSATION
1990
-4
-0.1
1992
-2
Source: ABS, with Morgan Stanley forecasts
Gerard Minack, +61 2 9770-1529, [email protected]
66
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia: From Consumer Cheques To Classrooms
5.5
5.0
NON-RESIDENTIAL BUILDING APPROVALS
PRIVATE AND PUBLIC SECTORS
TOTAL
4.5
A$BN
4.0
3.5
3.0
2.5
2.0
1.5
EXCLUDING
EDUCATION
1.0
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0.5
Source: ABS
Gerard Minack, +61 2 9770-1529, [email protected]
67
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
A$BN
China Will Drive This
65
60
55
50
45
40
35
30
25
20
15
10
5
0
INVESTMENT SPENDING PLANS BY MINING
61.1
Final data points bas ed on outc ome if ac tual inves tment
s pending fits with 5 year realis ation ratio
38.0
34.8
29.2
23.6
19.7
9.8
1234567
10.8
1234567
123 4567
1234567
1234567
1234 567
1234567
1234567
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Source: ABS
Gerard Minack, +61 2 9770-1529, [email protected]
68
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia: Structural Problems Remain
HOUSEHOLD DEBT RELATIVE TO GROSS INC OME
179.7
180
A U ST RA L I A
% OF INCOME
160
U N I T E D ST A T E S
140
120
122.7
100
80
60
40
2012
2008
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
20
Source: ABS, Federal Reserve
Gerard Minack, +61 2 9770-1529, [email protected]
69
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia: Yes, That’s A Bubble
REAL HOUSE PRIC ES
210
A U ST RA L I A (A BS)
INDEX 1990=100
190
170
U S (O FH E O )
ALL SERIES DEFLATED BY CPI
150
130
110
90
70
1975
1980
1985
1990
1995
2000
2005
2010
Source: ABS, OFHEO, BLS
Gerard Minack, +61 2 9770-1529, [email protected]
70
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia: Yes, That’s A Bubble
HOUSE PRIC E/GDP PER C APITA
10
9
RATIO
8
7
AVERAGE
6
5
4
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
* MEDIAN HOUSE PRICE/NOMINAL GDP PER CAPITA
1900
3
Source: ABS, Nigel Stapleton, RBA
Gerard Minack, +61 2 9770-1529, [email protected]
71
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Australia: Yes, That’s A Bubble
11
MEDIAN MULTIPLE
10
REAL ESTATE MARKETS: MEDIAN MULTIPLE AND POPULATION
TREND LINES ARE LINEAR BEST-FIT (HORIZONTAL AXIS SCALE IS LOGARITHMIC.
2 CITIES OVER 10MN NOT SHOWN (BUT INCORPORATED INTO TREND LINE) FOR
NON-AUS LINES.
9
8
7
AUSTRALIA
6
5
4
EXCLUDING US
UK, US, CANADA, NZ, IRELAND
3
0.01
1.00
0.10
METRO POPULATION (MILLIONS) [LOG SC ALE]
10.00
Source: ABS, Demographia http://www.demographia.com/dhi.pdf, National sources; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
72
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Low Rates Pushed Everything Up
* House prices deflated by trimmed mean CPI, Source: ABS, APB, RBA http://www.rba.gov.au/speeches/2010/sp-so-180510.html; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
73
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Support #2: Population Growth
TREND REAL HOUSE PRIC ES AND TREND POPULATION
3.5
8
3.0
6
2.5
4
2.0
2
1.5
0
1.0
-2
-4
H O U SE P RI C E S*
0.5
P O P U L A T I O N (RH S)
2010
2000
1990
1980
1970
0.0
1960
1950
1940
1920
1910
1930
* DEFLATED BY CPI
-6
10YR ANNUAL AVERAGE %
10YR ANNUAL AVERAGE %
10
Source: ABS, Stapleton, Butlin; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
74
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Support #3: Supply Side Squeeze
POPULATION AND DWELLING GROWTH
RE A L H O U SE P RI C E S* (L H S)
10
P O P U L A T I O N -D WE L L I N G G A P * *
0.5
8
6
0.0
4
2
-0.5
0
-2
-1.0
-4
-1.5
2012
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1961
1958
1955
-6
1967
* 5YR AVERAGE REAL HOUSE PRICE (CPI). ** GAP BETWEEN 5 YR
GROWTH IN POPULATION AND STOCK OF DWELLINGS
1964
5YR AVERAGE %
12
1.0
5 YR AVERAGE % GAP
14
Source: ABS; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
75
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
A Nation Of (Loss-making) Landlords
RENTAL PROPERTY INVESTORS AS A % OF TAX PAYERS
14
P RO P E RT Y O WN E RS
12
and C L A I M I N T E RE ST D E D U C T I O N S
% OF TAX PAYERS
13
1,765,000
taxpayers
and C L A I M RE N T A L L O SS
11
10
9
8
7
6
608,000
5
taxpayers
FY09
FY07
FY05
FY03
FY01
FY99
FY97
FY95
FY93
FY91
FY89
FY87
FY85
FY83
FY81
FY79
4
Source: ATO; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
76
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Support #3: Ponzi Buys A House
RENTAL YIELD AND REAL MORTGAGE RATE
9
7
% YIELD
5
3
1
-1
RE N T A L Y I E L D *
-3
-5
1960
RE A L M O RT G A G E * *
* GROSS RENTAL YIELD ** DEFLATED BY 3YR CPI
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: HIA, Stapleton, ABS, RBA; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
77
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
A Bad Investment
RENT INC OME, C OST AND NET RENT, A$BN
25
20
GROSS RENT
$BN
15
10
less COSTS
5
less INTEREST
0
equals NET RENT
-5
FY09
FY07
FY05
FY03
FY01
FY99
FY97
FY95
FY93
FY91
FY89
FY87
FY85
FY83
FY81
FY79
-10
Source: ATO; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
78
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Property Investors: More Of Them Losing Money
PERC ENTAGE OF PROPERTY OWNERS C LAIMING LOSSES
% OF PROPERTY OWNERS
85
80
C L A I M I N T E RE ST D E D U C T I O N S
75
C L A I M RE N T A L L O SS
70
65
60
55
50
45
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
FY96
FY95
FY94
FY93
40
Source: ATO; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
79
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Loss-making Landlords Are Middle-class
PROPERTY INVESTORS BY INC OME LEVEL, 2007-08
26
% OF INCOME GROUP
30
25
% I N I N C O M E L E V E L C L A I M I N G RE N T A L L O SS
% O F L O SS-M A KI N G P RO P E RT I E S
20
15
17
14
10
10
12
12
7
3
5
0
NT
<20
20-30
30-40
40-50
50-80
INC OME LEVEL ($ '000)
80-200
>200
Source: ATO; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
80
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Tax Losses Take A Reasonable Share Of Income
SIZE OF LOSS FOR LOSS-MAKING RENTALS, 2007-08
0
0
-40
$ '000
-10
-60
-15
A V E RA G E D O L L A R L O SS*
-80
L O SS A S % O F I N C O M E * (RH S)
-20
-25
-100
-120
* ASSUMES PROPERTY OWNERS HAVE SAME AVERAGE
INCOME AS OTHER TAX-PAYERS IN THE INCOME CATEGORY
-30
NT
<20
20-30 30-40 40-50 50-80 80-200
INC OME LEVEL ($ '000)
% OF INCOME
-20
-5
-140
>200
Source: ATO; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
81
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
But Don’t The Rich Hold The Debt?
SHARE OF HOUSEHOLD DEBT, BY INC OME LEVEL
50
% SHARE
40
US (2007)
30
AUSTRALIA
(2006)
20
10
0
< 20
20-<40
40-<60
60-<80
HOUSEHOLD INC OME PERC ENTILE
80-100
Source: HILDA, Federal Reserve; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
82
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
But Aren’t Assets Higher Than Debt?
23
HOUSEHOLD DEBT AS A PERC ENT OF HOUSEHOLD ASSETS
21
19
%
17
15
UNITED STATES
13
11
AUSTRALIA
9
7
5
1960
1965
1970 1975
1980
1985 1990
1995
2000 2005
2010
Source: Federal Reserve, RBA, ABS; Morgan Stanley Research
Gerard Minack, +61 2 9770-1529, [email protected]
83
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Marvellous Melbourne: A Property Boom That Took 100 Years To Beat
REAL MEDIAN MELBOURNE HOUSE PRIC ES
600
500
$ '000
400
300
200
100
2010
2000
1990
1980
1970
1960
1950
1930
1920
1910
1900
1890
1880
1870
1860
0
1940
PRICE BASE IS LATEST NOMINAL PRICE LEVEL
Source: Stapleton, ABS, Butlin
Gerard Minack, +61 2 9770-1529, [email protected]
84
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions
and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes
operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also
emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company
generates earnings.
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Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not
receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Gerard Minack.
Unless otherwise stated, the individuals listed on the cover page of this report are research analysts .
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Important US Regulatory Disclosures on Subject Companies
The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality
of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.
Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized
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instruments discussed in this report.
Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions
Gerard Minack, +61 2 9770-1529, [email protected]
85
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Disclosures (cont.)
STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of
Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions
of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully
read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice.
An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.
Global Stock Ratings Distribution
(as of April 30, 2010)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equalweight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not
the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most
positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
Coverage Universe
Stock Rating Category
Overweight/Buy
Equal-weight/Hold
Not-Rated/Hold
Underweight/Sell
Total
Investment Banking Clients (IBC)
Count
% of
Total
Count
% of
Total IBC
% of Rating
Category
1065
1118
14
366
2,563
42%
44%
1%
14%
328
357
4
88
777
42%
46%
1%
11%
31%
32%
29%
24%
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings)
and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months..
Analyst Stock Ratings
Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.
Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.
Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18
months.
Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months..
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated
below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia relevant MSCI country index.
Gerard Minack, +61 2 9770-1529, [email protected]
86
MORGAN STANLEY RESEARCH
7 July 2015
From Fearing The Worst To Pricing The Best
Disclosures (cont.)
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From Fearing The Worst To Pricing The Best
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