“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria”. Origins of a mess The late Sir John Templeton Australian Financial Review 2 July 2008
All Ords – Past Year to 10 th Nov 08 6853.6 3755.4 -45.2%
A Previous Episode 1987 Stock Market Crash 1985 1,820.0 to 2,621.9+44.1% 1986 2,621.9 to 3,991.0+52.2% 19873,991.0 to 6,197.2+55.3% to 30 Sept 1987 1 st October 1987 to 31 st October 1987 6197.2 to 3586.1- 42.1%
All Ords – Past Five Yrs to 10 th Nov 08 10/11 4060
MSCI World Ex Aus in AUD 0 200 400 600 800 1000 1200 1400 1600 1800 1985198619871988198919901991 1992 199319941995199619971998199920002001 2002 2003 20042005 200620072008 Crash of ‘87 Tech wreck Credit crunch Source: Bloomberg. Data from 1 January 1985 to 1 October 2008 (weekly). Global Sharemarkets 1986 - 2008
The sub-prime hospital list Absorbed RAMS Bear Stearns Countrywide Financial Merrill Lynch Lehman Brothers HBOS Washington Mutual Wachovia Bradford & Bingley Other small US banks Losses Citigroup JP Morgan Morgan Stanley UBS Deutsche Bank Other fallout Fannie Mae Freddie Mac Northern Rock AIG Fortis Dexia Centro Properties ABC Learning Allco Finance Babcock & Brown Hypo Real Estate Glitnir (Iceland) Source: Colonial First State
US house prices… are falling Source: S&P / Case-Shiller 10 City index, Bloomberg. Data to 31 July 2008 Index Los Angeles -26.2% San Francisco -24.8% New York -7.4% 10 city decline is 17.5% over 12 months
US house prices falls are slowing Source: Bloomberg. Case-Shiller Composite 20 Home Price Index. Data to 30 June 2008 Case-Shiller Composite 20 Home Price Index Month on month %
US Sub-prime delinquencies by vintage Percentage of issuance by loan tranche Source: RBA, BIS Not all have gone bad!
Oil Prices – Some relief Source: Iress. Data to 31 October 2008 $US
US financial crisis management 1.Reduce the Fed Funds rate 2.Grant more financial institutions access to the Fed’s lending facilities 3.Step in to rescue individual institutions 4.Ban on short selling of financial institutions 5.Establishment of a Troubled Asset Relief Program (TARP) to purchase illiquid assets 6.Further Fed Fund rate cuts Source: Colonial First State Federal Reserve Lowers Rates to 1%
Can China continue to grow? Post Olympics interest rate cut Domestic demand is a major driver of growth Strong economic position 1.Large Current Account Surplus 2.Substantial Foreign Exchange Reserves 3.Strong Fiscal Surplus 4.Inflation is retreating Source: Colonial First State
Australia – heading for recession? Strong terms of trade – resources boom Scope to cut official interest rates Scope to spend fiscal surplus Current infrastructure investment plans Banks still profitable Improved rural outlook The population is growing Source: Colonial First State
The Australian dollar Source: Bloomberg. To 31 October 2008 Against the US dollar
Inflation… has ticked up Source: ABS 6401.0. Data to 30 June 2008 GST ‘blip’ % Annual rate of inflation
Co-ordinated Rate Cuts Globally Source: CBA Economics Team
Source: IRESS, Colonial First State. Data shown is the S&P/ASX 200 Property Accumulation Index (ASX Property Trusts Accumulation Index pre April 2000). *Data from 30 September 1988 to 30 June 2008. Percentage return over rolling one year. Past performance is no indication of future performance. Returns of Australian property securities 30 September 2008 -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 199019921994 1996199820002002 2004 20062008 Annualised return: 9.85%*
New supply conditions differ from prior recession Source: Deutsche Bank, Note FY209 and beyond are based on JLL estimates Sydney Office Construction as per cent of Total Stock Now 1990 recession
A-REITs significantly better value Source: Deutsche Bank 5yr avg spread Trust yield differential relative to real bonds
Financial risk management Refinancing risk is being managed A-REIT debt profile is transparent- improved disclosure A-REITs with higher gearing have underperformed, and are restructuring Repaying debt Distribution cuts - but should grow from here Reduced financial engineering Valuations likely to fall, but focus is on cash flows
Debt Refinancing Risk now under control Source: Credit Suisse, Company Information, IRESS, CFS Very little debt to refinance in next 1-2 years
Comparison of gearing across the sector Distribution yield (RHS) Gearing- Debt to Total Assets (LHS) Higher debt reflected in price vs yield
Outlook for A-REIT market REIT Profit Results Triggered major restructuring Drive to- reduce debt - simplify business structure Lower distributions but steady growth is expected over medium term Property Valuations Very few transactions Buyers waiting for absolute bargains Banks lending to “quality” clients only Sector rationalisation likely given steep discount to NTA
Australian share prices.. the All Ordinaries Index Source: Bloomberg. Data to 3 November 2008. Past performance is no indication of future performance.
Sector returns since November 2007 Source: Iress. Data from 1 November 2007 to 7 October 2008. Nowhere to hide!
All Ordinaries PE ratio Low inflation period average is 16.5 Source: Iress. Data to 30 September 2008 As at 4 th November – Market at 9.18 PE
Company profits……..going up Source: ABS 5676.0 Gross operating profits converted to an index started in September 1985 at 10000. Data to 30 June 2008.
Reporting Season Wrap Profit growth up 12.4% for 2H 2008 Non-resource earnings rose 6.0% Resource earnings rose 38.5% (19.8% ex Rio and BHP) PositivesNegatives Source: GSJBW, Bloomberg
Profits and the sharemarket Index based at 10,000 in 1985 Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June 2008. All Ordinaries index to 10 October 2008. Past performance is no indication of future performance. Corporate profits All ordinaries share price index
Profits and the sharemarket - possibilities 10% 25% 40% 42% fall over 2 years Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June 2008. All Ordinaries index to 3 November 2008. Past performance is no indication of future performance. Decline in profits over next 12 months 10%
US recessions: always trigger bear markets in US stocks Performance of S&P500 around US recessions recession start recession end duration (months) S&P500 peak S&P500 trough duration (months) peak to trough fall next 12 months Dec-69Nov-7011May-69May-7012-34.7%+43.7% Nov-73Mar-7516Jan-73Oct-7421-48.4%+38.0% Jan-80Jul-806Feb-80Mar-802-17.1%+37.1% Jul-81Nov-8216Nov-80Aug-8221-27.1%+58.3% Jul-90Mar-918Jun-90Oct-904-19.6%+29.1% Mar-01Nov-018Mar-00Oct-0231-49.1%+33.7% Jun-08???Oct-07Oct-08?12?-45.8%?? Source: Datastream, UBS calculations, Colonial First State
Australian sharemarkets and US Recessions Performance of All Ordinaries around US recessions US recession start US recession end All Ords peak date All Ords trough date Duration (months) size of peak to trough fall subsequent 12 months performance Australian recession Dec-69Nov-70Jan-70May-704-28.6%+4.0%no Nov-73Mar-75Jan-73Sep-7420-59.2%+50.9%yes Jan-80Jul-80Feb-80Mar-802-20.3%+39.0%yes Jul-81Nov-82Nov-80Jul-8220-40.6%+38.7%yes Jul-90Mar-91Aug-89Jan-9117-32.4%+38.9%yes Mar-01Nov-01Jun-01Mar-0321-22.0%+27.3%no Jun-08??Nov-07Oct-08?11?-45.2%?no? Source: Datastream, UBS calculations, Colonial First State
Summary Australia is not immune from US financial problems High interest rates are hurting the Australian economy Australia still has many drivers of growth 2008-09 will continue to be a bumpy ride The sharemarket grows with earnings over time Source: Colonial First State