Economic & Market Overview
Malcolm Palmer
Managing Partner
Joseph Palmer & Sons
‘General Advice’ Warning
On behalf of Joseph Palmer & Sons:
Any advice contained in this presentation has been prepared without taking
account of your objectives, financial situation or needs; and
…because of that, you should, before acting on any advice, consider the
appropriateness of the advice, having regard to your objectives, financial
situation and needs; and
…if any advice relates to the acquisition, or possible acquisition of a
particular financial product - you should obtain a Product Disclosure
Statement relating to the product and consider the Statement before
making any decision about whether to acquire the product.
Topics - What’s happening?
Economics
 Quantitative Easing & Global Interest Rates
 China
 European banking
 Commodities
Markets
 Australian shares
 Global shares
 Australian Interest rates & Currency
Sterling Managed Account
 Equity portfolios
 Fixed Interest portfolios
 Performance
 Reporting
What’s happening with QE and Global Interest
Rates?
 QE is working, but……
 The US Federal Reserve is walking the taper tightrope, reducing the
monetary stimulus ahead of interest rate rises
 QE will end in inflation….unless the Federal Reserve can (by luck?)
coincide money supply contraction (net bond maturities) with
consumer price rises
 Some degree of market dislocation will accompany the end of QE
What’s happening with US Interest rates?
What’s happening with European interest rates ?
What’s happening in China’s economy?
China’s debt to GDP is now considerably higher than its peers
Source: Morningstar
What’s happening to Chinese real estate?
Real estate prices are now falling in 55 of China’s largest 70 cities.
Source: Morningstar
What’s happening with the European banking
system?
 European Central Bank (ECB) takes regulatory control of
128 European banks on 4th November 2014
 A ‘Stress Test’ of European banks is being conducted,
with a report due in late of October
 The stress test is likely to reveal some further asset
problems and represents a short-term market risk
 Bank shares prices in Europe are falling
European bank share prices have fallen
considerably in 2014
What’s happening with commodity prices?
Metal prices have slumped due to weakening Chinese demand and
higher stockpiles
Investment Market Outlook
What’s happening with Australian shares?
The Australian Stock Market – priced to
perfection!!!
Forecast Capital Return
3.16%
Forecast Dividend
3.81%
Market Return
6.97%
Risk Free Rate
3.49%
Required Market Return
6.98%
Current Excess/Deficit
-0.02%
What’s happening with global shares?
What’s happening with interest rates?
What’s happening with credit spreads?
What’s happening with the Australian dollar?
The Sterling Managed Account
Sterling Portfolio Options
 Diversified portfolios
– Growth
– Balanced
– Conservative
 Asset Class Portfolios
– Australian Equities
– Diversified Yield
– Listed Property
What’s happening with the shares in the
Sterling Managed Account?
Shares removed
 Leighton
 APA Group
 Sims Metal Management
Shares added
 Santos
 Sydney Airport
 Westfield Corporation
Corporate actions aplenty!!
 Telstra – tax effective share buyback, most valuable for
zero tax paying entities such as pension funds
 QBE Insurance – Share Purchase Plan offer at a large
discount to market price
 Brambles – Recall division separated and sold from the
Sterling models
 Westfield – Scentre (Australian & NZ assets) separated
from overseas assets
 Commonwealth Bank – new offer or PERLS VII hybrid
Investment Process – how assets are selected
 Relative Value Analysis explained
 Market timing – yield based analysis
 Asset allocation
– Growth Assets (Shares & Property)
– Defensive Assets (Interest bearing investments)
Primary Process Methodologies
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Equity Risk Premium
Relative PE Ratios
Price to Earnings Growth
Portfolio construction is neutral, not biased to growth or value styles
Portfolio not indexed weighted
Fairly concentrated portfolio – typically 15 to 25 stocks
ASX 100 constituent universe
Relative yield on corporate earnings is at
highest level in recent history
Equity Risk Premium
ASX200 Earnings Yield vs Australian Government Bonds
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Jul-81
Dec-84
May-88
Oct-91
Mar-95
Aug-98
Jan-02
Jun-05
Nov-08
Apr-12
Dividend yield considerably higher than the
long-term average
7
6.5
6
5.5
5
4.5
4
3.5
3
2.5
How the Sterling Portfolios are Managed
Approach to Managing Sterling Client Portfolios:
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“In the short term, the market is a voting machine.
In the long term, it is a weighing machine.” – Warren Buffet
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We take a long- term value growth approach to investments
We will hold tactical positions where our experience enables us to foresee an
opportunity
Volatility (on the upside and downside) can bring wealth creation opportunities.
Our main focus is on building wealth and preserving it
Portfolio management requires sophisticated research in order to identify those
securities which, at any one time, are either undervalued or overvalued
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How new money is invested
 We identify the investments to be held within each asset
class, to comprise a model portfolio
 We will selectively and progressively
purchase/undertake investments targeted within the
respective model portfolio, as market opportunities arise
- We consider risk v. reward.
- Where are interest rates heading? Short term v. long term.
- Which are the best companies to invest in, and why?
Transition Portfolio assets
Managing Transitioned Assets/Assets in the Transition Portfolio:
 We will identify assets held within a Transition Portfolio, that are not
held within our model portfolio
 We will research the asset and consider any corporate
activity/corporate actions/income payments that may be pending
 We will form an exit strategy, based on the market circumstances of
the asset to be sold and the asset/s we seek to buy within our model
portfolio
 Risk assessment is a key decision criteria
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We will identify assets held within a Transition Portfolio, that are held within
our model portfolio
- We will check the current weighting of the asset relative to the
respective asset weighting in our model portfolio
- We will consider other stocks held within the same industry and
determine whether we should reduce or add to the identified asset
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We will selectively and progressively exit/purchase/undertake investments
with a view to move towards our respective model portfolio
Corporate Actions
Corporate actions are assessed an acted upon based on their investment
merit
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IAS will notify our Investment Managers of a corporate action relating to an
investment held within the beneficiaries account.

The Investment Managers are to respond to IAS with an investment
decision, before an applicable cut-off date.

IAS will process the paperwork and arrange any required funds transfer.
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The Corporate Action is reflected in each of the respective beneficiaries
account.
Questions please
Thank you,
Malcolm Palmer
Joseph Palmer & Sons