Investing in interesting times Brian Parker CFA Chief Economist

Main messages Global growth: as good as it gets? Australia: hope springs eternal on business investment, but consumer spending likely to remain very subdued Value is difficult to find in publicly traded markets Unlisted assets still offer attractive returns, diversification benefits.. ..but even here, prospective returns have been compressed Geopolitics: as good as it gets (and it can get worse!)

World economy: little reason to expect a recession soon Source: IMF Fiscal Monitor. *Change in the cyclically adjusted primary budget balance from year ago for G20 economies. Source: Bloomberg. #No of standard deviations from pre-GFC average.

Credit is still flowing Source: Datastream, Sunsuper

Credit is still flowing Source: Datastream, Sunsuper

But debt levels are still a constraint on world growth.. Source: Sunsuper, Datastream, Bank for International Settlements, IMF world Economic Outlook Database

..and demographic trends point to lower long-run potential growth Labour force growth slowing almost everywhere 2001-2016 2016-2036 Change Australia 1.8 1.0 -0.8 US 0.6 0.5 -0.1 Eurozone -0.2 Japan -0.6 -0.4 UK 0.9 0.4 -0.5 Canada 1.3 -0.7 Switzerland 0.2 -1.1 Korea 1.1 China -0.3 India 1.4 0.0 Indonesia 1.6 Brazil -1.0 Mexico 2.3 South Africa Total Source: Datastream, Sunsuper, International Labour Organisation

Growth has been strong enough to lower unemployment rates Source: Datastream, Sunsuper

Excess capacity is being used up: US UK facing greatest inflation risks? Source: Datastream, IMF World Economic Outlook. *Difference between actual and potential GDP as estimated by the IMF.

G4 Inflation Source: Datastream, Sunsuper

..but wage pressures are hard to spot Source: Datastream, Sunsuper

Just how fast is China growing? Source: Sunsuper, Datastream #Based on electricity production & consumption, total freight volumes, and loan growth.

What about Australia? Plenty of positives.. Strong export volumes Signs of recovery in non-mining investment Credit is growing – interest rates aren’t holding anyone back! Housing construction activity very strong Stronger export commodity prices but… Depends on where you sit: NSW/Vic vs WA/Qld? Housing activity might have already peaked Labour market – reasonable jobs growth, but plenty of underemployment Very weak wages growth Household debt too high? Housing affordability – just how overvalued is Australian residential property?

Australia: still plenty of slack in the labour market? Source: Sunsuper, Datastream. *Unemployment plus employed persons involuntarily working less than their desired hours.

Australia: how long can consumers hang in there? Source: Datastream, Sunsuper

Australia: another mining construction boom highly unlikely Source: Datastream, Sunsuper

Iron ore: heaps of the stuff sitting on Chinese ports? Source: Bloomberg, Sunsuper

Has housing activity already peaked? Source: Datastream, Sunsuper

Australian property overvalued? Depends on where you sit! Source: Demographia International Housing Affordability Survey 2017. Data as at Q3 2016.

Investment prospects: where are returns going to come from? Equities aren’t cheap.. Our managers prefer Europe and Asia over the US Emerging share markets still relatively attractive Sovereign bond returns likely to be disappointing.. But still opportunities in investment grade credit Still opportunities in alternatives – carefully selected hedge funds, unlisted assets.. ..but even here return potential has been compressed

Global bond yields still close to historic lows Source: Datastream

Global fixed income – credit opportunities? Source: Datastream, BofA Merrill Lynch, Barclays

Equity market valuations Source: Sunsuper, Datastream, MSCI

Australian banks among the most expensive in the world? Source: Sunsuper, Datastream

The geopolitical thermometer? 1950s - 1989 1990- 2001 Now

What the world should have been more worried about in the 1990s? Post Cold-War Russian resentment The fundamental fragility of the European experiment The rise of Islamic extremism Climate change Income inequality Financial stability and regulation

Income inequality Income share of the top 1% has risen almost everywhere Source: http://topincomes.g-mond.parisschoolofeconomics.eu

Wealth inequality Personal wealth share of the top 1% Source: http://topincomes.g-mond.parisschoolofeconomics.eu

Brexit Implications

Main messages Global growth: as good as it gets? Australia: hope springs eternal on business investment, but consumer spending likely to remain very subdued Value is difficult to find in publicly traded markets Unlisted assets still offer attractive returns, diversification benefits.. ..but even here, prospective returns have been compressed Geopolitics: as good as it gets (and it can get worse!)