Economic Update Mark Rider, Head of Investment Strategy

 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 Three themes and their implications 1

Global Growth - better as at long run trend … 2 Source: Thomson Reuters Datastream, ANZ Global Wealth

… and unemployment has fallen a long way 3 Source: Thomson Reuters Datastream, ANZ Global Wealth

But worse as lower trend growth means lower returns 4 Source: Bloomberg, ANZ Global Wealth

Growth has disappointed this year… ANZ Forecast Dec 14 Source: Thomson Reuters Datastream, ANZ Global Wealth

 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 Implications 6

China – slowdown you move to fast 7 Source: Bloomberg, ANZ Global Wealth

A slowdown where it hurts Australia 8 Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

It’s not all bad news, just different 9 Source: China National Bureau of Statistics, ANZ Global Wealth

The economy may be slower than GDP suggests 10 Source: China National Bureau of Statistics, ANZ Global Wealth

Where will it end? 11 Source: Thomson Reuters Datastream, ANZ Global Wealth

Where will it end? 12 Source: Thomson Reuters Datastream, ANZ Global Wealth

As China’s nominal growth collapses… 13 Source: Thomson Reuters Datastream, ANZ Global Wealth

As China’s nominal growth collapses… 14 Source: Thomson Reuters Datastream, ANZ Global Wealth

A capex cliff looms 15 Source: Australian Bureau of Statistics, ANZ Global Wealth

Housing is the only source of growth %-0.5%+0.5% Source: Australian Bureau of Statistics, ANZ Global Wealth

AUD remains under pressure 17 Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

 China not growing how it used to  lower commodity prices  Australian capex cliff  sub trend growth and lower rates  A$ under pressure Implications 18

Equities – home, away or just stay away? 19 Source: Bloomberg, ANZ Global Wealth

It’s all to do with earnings 20 Source: Bloomberg, ANZ Global Wealth

Current versus “mid cycle” earnings 21 Source: Bloomberg, ANZ Global Wealth

Equities – reasonable value 22 Source: Thomson Reuters Datastream, ANZ Global Wealth

Home or away? 23 Source: Thomson Reuters Datastream, ANZ Global Wealth

 Equities – no longer cheap, but not really expensive  Earnings growth likely issue for Australia and EM  Falling terms of trade favours DM over Australia Implications 24

10 year bond yields – where to now? 25 Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

10 year bond yields – where to now? 26 Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

10 year bond yields – where to now? 27 Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

10 year bond yields – where to now? 28 Source: Bloomberg, Thomson Reuters Datastream, ANZ Global Wealth

Lower expected returns in prospect 29 Source: Mercer, Bloomberg, ANZ Global Wealth

 Forces continue for low interest rates but now poor returns  Equity valuations okay, but earnings growth the issue  Prospective returns have moderated  Tactically cautious Conclusions 30

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