Economic Update
Mark Rider, Head of Investment Strategy
Three themes and their implications
 Global growth: better and worse
 The Transition Twins: China and Australia
 Equities: home, away or just stay away?
 What it all means for your clients
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Global Growth - better as at long run trend …
Source: Thomson Reuters Datastream, ANZ Global Wealth
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… and unemployment has fallen a long way
Source: Thomson Reuters Datastream, ANZ Global Wealth
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But worse as lower trend growth means lower returns
Source: Bloomberg, ANZ Global Wealth
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Growth has disappointed this year…
2015 ANZ Forecast
Dec 14
Source: Thomson Reuters Datastream, ANZ Global Wealth
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Implications
 Weaker potential growth  lower interest rates
 DM avoids home grown deflation  end to negative rates
 Weak EM imparts a deflationary shock  lower rates, commodities,
resources stock and AUD
Bottom line: Interest rates to remain low
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China – slowdown you move to fast
Source: Bloomberg, ANZ Global Wealth
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A slowdown where it hurts Australia
Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth
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It’s not all bad news, just different
Source: China National Bureau of Statistics, ANZ Global Wealth
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The economy may be slower than GDP suggests
Source: China National Bureau of Statistics, ANZ Global Wealth
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Where will it end?
Source: Thomson Reuters Datastream, ANZ Global Wealth
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Where will it end?
?
Source: Thomson Reuters Datastream, ANZ Global Wealth
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As China’s nominal growth collapses…
Source: Thomson Reuters Datastream, ANZ Global Wealth
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As China’s nominal growth collapses…
Source: Thomson Reuters Datastream, ANZ Global Wealth
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A capex cliff looms
Source: Australian Bureau of Statistics, ANZ Global Wealth
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Housing is the only source of growth
-3.0%
-0.5%
Source: Australian Bureau of Statistics, ANZ Global Wealth
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+0.5%
AUD remains under pressure
Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth
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Implications
 China not growing how it used to  lower commodity prices
 Australian capex cliff  sub trend growth and lower rates
 A$ under pressure
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Equities – home, away or just stay away?
Source: Bloomberg, ANZ Global Wealth
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It’s all to do with earnings
Source: Bloomberg, ANZ Global Wealth
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Current versus “mid cycle” earnings
Source: Bloomberg, ANZ Global Wealth
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Equities – reasonable value
Source: Thomson Reuters Datastream, ANZ Global Wealth
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Home or away?
Australia's Terms of Trade and Equity Performance
1.2
Relative Performance (LHS)
4.8
Terms of Trade (RHS)
1.1
4.7
1.0
4.6
0.9
4.5
4.4
0.8
4.3
0.7
4.2
0.6
4.1
0.5
4.0
0.4
0.3
1970
3.9
3.8
1974
1978
1982
1986
1990
1994
1998
Source: Thomson Reuters Datastream, ANZ Global Wealth
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2002
2006
2010
2014
Implications
 Equities – no longer cheap, but not really expensive
 Earnings growth likely issue for Australia and EM
 Falling terms of trade favours DM over Australia
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10 year bond yields – where to now?
Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth
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10 year bond yields – where to now?
Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth
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10 year bond yields – where to now?
Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth
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10 year bond yields – where to now?
Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth
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Lower expected returns in prospect
Source: Mercer, Bloomberg, ANZ Global Wealth
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Conclusions
 Forces continue for low interest rates but now poor returns
 Equity valuations okay, but earnings growth the issue
 Prospective returns have moderated
 Tactically cautious
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Disclaimer
This information is issued by the Australia and New Zealand Banking Group Limited (ABN 11 005 357 522, AFSL 234 527). The information is current as at 20 August 2015 and will be subject to change.
The information is of a general nature and has been prepared without taking account of your or your clients personal needs, financial circumstances or objectives. It is intended for informational purposes only.
Whilst every effort has been taken to ensure the information used is accurate and reliable, no warranty is given as to the accuracy of the information and no liability is accepted for your reliance on the information.
The views expressed are those of the presenters based on their interpretation of current market conditions and data.
Statements made during the presentation do not and are not intended to represent financial advice or a recommendation to hold, acquire or dispose of any investment.
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