1. Asset Allocation Review Aug 2016
Tim Farrelly

2. 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

3. Forecasts and assumptions

4. 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

5. 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

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

7. Cash rates to stay low

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

9. Australian equities

10. 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

11. Do we have to worry about bank resi loans?

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

13. Long-term commodity prices fall in real terms

14. Iron ore prices still historically high

15. Oil ok, gold high in real terms

16. Resources need much higher prices

17. Developed markets good value

18. World ex US the pick of the bunch…

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

20. Australian dollar around PPP

21. Direct property rather than REITs…

22. TD rates to stay low

23. Credit spreads including hybrids

24. 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

25. 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

26. 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.