1. An economic and markets update
Andrew Seddon
Key Account Manager

2. Disclaimer
This presentation is given by a representative of Colonial First State Investments Limited AFS Licence , ABN (Colonial First State). Colonial First State Investments Limited ABN , AFS Licence (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN and interests in the Colonial First State Pooled Superannuation Trust ABN
The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on
All products are issued by Colonial First State. Product Disclosure Statements (PDSs) describing the products are available from Colonial First State. The relevant PDS should be considered before making a decision about any product.
This presentation does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.
The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation.  
Stocks referred to in this presentation are not a recommendation of any securities.
This presentation cannot be used or copied in whole or part without our express written consent.
© Colonial First State Investments Limited 2008.

3. Origins of a mess
“In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.”
Steven A. Holmes
The New York Times
30 September 1999

4. US house prices… are falling
Index
Los Angeles %
San Francisco %
New York %
The US-sub-prime mortgage problem has had several side effects.
The US housing market was in a boom from 2003 to Low interest rates and relaxed lending standards saw a boom in house construction and house prices. A pick up in default rates and over supply of houses led to a fall in house prices, around 16% over twelve months and about 20% peak to trough.
The result is consumers feel less wealthy, spend less money and the economy slows. Falling house prices also deter people from refinancing loans and reduce earnings for banks. Banks have also had to write off a large amount of US mortgages based on this and has led to losses and share price falls in the large US banks.
10 city decline is 17.5% over 12 months
Source: S&P / Case-Shiller 10 City index, Bloomberg. Data to 31 July 2008

5. US retail sales are slowing
….remember the US consumer makes up 70% of the economy!
yoy%
Source: US Census Bureau. Data to 30 September 2008

6. US job growth – monthly,000s
Job losses
Source: US Bureau of Labor Statistics. 3 month moving average. Data to 30 September 2008

7. The US sharemarket & company earnings
S&P 500
The key as always is earnings. This is the S&P 500 index. Top 500 companies in the US. Earnings went up but rise in SP500 was modest. But now what. Growing economy, oil falling and interest rates on hold. Chance of firmer market. As per Dow Jones.
Earnings of S&P500 companies
Source: Bloomberg. S&P500 index and earnings indexed to 1000 at December Data to 30 September Past performance is no indication of future performance.

8. 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
peak to trough fall
next 12 months
Dec-69
Nov-70 11
May-69
May-70 12
-34.7%
+43.7%
Nov-73
Mar-75 16
Jan-73
Oct-74 21
-48.4%
+38.0%
Jan-80
Jul-80 6
Feb-80
Mar-80 2
-17.1%
+37.1%
Jul-81
Nov-82
Nov-80
Aug-82
-27.1%
+58.3%
Jul-90
Mar-91 8
Jun-90
Oct-90 4
-19.6%
+29.1%
Mar-01
Nov-01
Mar-00
Oct-02 31
-49.1%
+33.7%
Jan-08? ?
Oct-07
Oct-08?
12?
-42.5%?
Source: Datastream, UBS calculations

9. Can China continue to grow?
Post Olympics interest rate cut
Domestic demand is a major driver of growth
Strong economic position
Large Current Account Surplus
Substantial Foreign Exchange Reserves
Strong Fiscal Surplus
Urbanisation & industrialisation
Source: Colonial First State

10. Economic growth, year on year%
Average since 1960 is 3.7%
Given the current climate of higher interest rates to slow economic growth, it is an important to understand where Australia’s growth currently stands.
The economy grew at 2.7% for the 12 months to 30 June 2008 (latest data available). This is below the long-term average of 3.3% (and recent average of 3.4%) but down from its recent peak of 4.5% for the 12 months to 30 September 2007.
Governor of the RBA, Glenn Stevens has acknowledged that growth over the next couple of years will be slower than 3.4%. This coincides with the need to slower economic growth to reduce inflation, as planned by the lift in official interest rates by the RBA. This has started to play out.
“The current decade so far has seen average growth of 3.4 per cent, though the next couple of years will probably see growth noticeably lower than that.” – Glenn Stevens - May 2008
Source: ABS, Colonial First State. Data to 30 June 2008.

11. Jobs are still being created in Australia
Monthly job growth
Source: 3 month moving average of jobs created.
ABS, Colonial First State. Data to 30 September 2008

12. Interest rates... a sharp rise from November 2007, then….
Standard variable mortgage rate
Interest rate, %
One of the major factors in recent months for the falling Australian sharemarket has been rising interest rates. Several years of above trend economic growth led to the economy growing faster than its actual capacity. This has pushed up inflation and when combined with higher energy prices, food prices and strong consumer demand, interest rates were lifted.
Since March the RBA left official interest rates on hold for 6 months. Weaker retail sales figures, falling consumer and business confidence, weak building approvals and slowing credit growth have all indicated that the Australian economy and especially the consumer sector has started to slow.
The RBA has now softened its stand given signs of slowing economic conditions in Australia. The RBA has highlighted that interest rates do not need to be as tight as they currently are. Time will tell. The RBA is trying to find a balance between high inflation and slowing economic growth. In early September the RBA cut official interest rates by 0.25% to 7.00%. The big banks followed suit and reduced mortgage rates in line with the official reduction.
Remember Australia is still receiving a boost to economic growth through strong demand for exports and higher commodity prices especially iron ore and coal.
The other interesting point about this chart is that the standard variable mortgage rate has risen more than the RBA cash rate over the past twelve months. The official cash rate rose 1.0% in the past 12 months while the standard variable mortgage rate rose 1.8%, out of sync. However the recent cut in official rates were passed on.
The RBA has suggested that further rate cuts could be on the way. It is however likely that a cautious period of interest rate cuts will be undertaken by the RBA given the remaining inflation pressured in the economy and boost from the terms of trade shock.
RBA cash rate
Source: RBA. Rates as at 4 November 2008.

13. Profits and the sharemarket
Index based at 10,000 in 1985
Corporate profits
For the June quarter profits rose a strong 14%. This was mainly due to large gains in profits within the mining and construction sectors. The chart now shows profit clearly ahead of the sharemarket, much more when compared to the earlier slide for March.
The question is whether these profits can continue.
All ordinaries share price index
Source: ABS Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June All Ordinaries index to 3 November 2008.
Past performance is no indication of future performance.

14. 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-69
Nov-70
Jan-70
May-70 4
-28.6%
+4.0% no
Nov-73
Mar-75
Jan-73
Sep-74 20
-59.2%
+50.9%
yes
Jan-80
Jul-80
Feb-80
Mar-80 2
-20.3%
+39.0%
Jul-81
Nov-82
Nov-80
Jul-82
-40.6%
+38.7%
Jul-90
Mar-91
Aug-89
Jan-91 17
-32.4%
+38.9%
Mar-01
Nov-01
Jun-01
Mar-03 21
-22.0%
+27.3%
Jun-08? ?
Nov-07
Oct-08?
11?
-42.5%
no?
Source: Datastream, UBS calculations, CFS

15. Time in the market, not timing Australian shares to 31 October 2008
Ten years less 30 best days
-1.63%
Ten years less 20 best days
0.71%
Ten years less 10 best days
4.03%
Ten years less 5 best days
6.12%
Ten year return
8.64%
-5.00%
0.00%
5.00%
10.00%
Source: IRESS, Colonial First State *All Ordinaries Accumulation Index used.
Returns are expressed in per annum terms.
Past performance is no indication of future performance.

16. The current battle…………..who will win?
Hedge fund redemptions
Derivative losses
Equity raisings
Analyst profit downgrades
Global Recession
Lower interest rates
Rescue packages
Fiscal spending
Valuations
Sideline cash
Source: Colonial First State