Asset Allocation Review Aug 2016 Tim Farrelly

Summary Forecast returns Australian economy still facing headwinds But can rates really stay this low? Equities attractive Listed property vs direct? Hybrids still a standout

Forecasts and assumptions

Economic growth to remain sluggish Another 20% fall in Capex expected Low wage increases means lower than usual consumption growth Resources production likely to grow some more Swing factor is residential construction Keeps going apace : 2.5% GDP growth Screaming halt : 1.2% GDP growth

Can resi construction keep going? Banks have pulled back on non-resident home loans Anecdotally, most of the new units have been bought by foreign investors If they can’t get finance the developers end up holding the units

Much of the work hasn’t started yet… Development planned and under construction in central Melbourne n Under construction n Approvals n Applications. 

Cash rates to stay low

Cash rates to stay low for 10 years???????

Australian equities

Higher capital requirements & return to normal loan loss ratios Banks still good value Consistent with ROE 14%, 6.5% grossed up yield, 75% payout ratio, 3%pa EPS growth =9.5%pa fair value return. Higher capital requirements & return to normal loan loss ratios

Do we have to worry about bank resi loans?

Banks have tiny exposure to residential lending The Dutch resi bust Double Dutch

Long-term commodity prices fall in real terms

Iron ore prices still historically high

Oil ok, gold high in real terms

Resources need much higher prices

Developed markets good value

World ex US the pick of the bunch…

EPS : US vs the rest Source: JP Morgan Asset Management

Australian dollar around PPP

Direct property rather than REITs…

TD rates to stay low

Credit spreads including hybrids

Hybrids self insuring 5 year time horizon Cash + 5% yield Excess return =25% after five years If one in four majors breaks, back to cash returns

Summary Forecast returns Australian economy still facing headwinds But can rates really stay this low? Equities attractive Listed property vs direct? Hybrids still a standout

Disclaimer This presentation has been prepared on the basis that it is only for the exclusive use of the person for whom it was provided. Although information is derived from sources considered and believed to be reliable and accurate, farrelly’s, it’s employees, consultants, advisers and officers are not liable for any opinion expressed or for any error or omission that may have occurred in this presentation. Any forecasts included are reasonably believed to be reliable based on current information but due to our inability to predict future events with certainty, they cannot be guaranteed. This presentation is of a general nature only and has been prepared without taking into account any persons particular investment objectives, financial situation or particular needs.