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Market volatility and its impact on Australian and international share markets
Prepared by BT Financial Group for the adviser marketUpdated to 30 June 2008
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5. What this means for Australian investors
3. A quick look at international markets
1. What’s contributing to current market volatility?
6. BT’s approach to managing volatility
7. And insights for investors
2. How has volatility affected the Australian market?
4. Volatility in perspective
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Many factors contributing to ongoing volatility
Seven consecutive interest rate rises in two years, over geared investors de-leverage
Strength of $Aus and fears of US recession
Market volatility
Rising price of oil
US sub-prime crisis and resulting global ‘credit-crunch’ slowing growth
3
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4
Inflation now a key contributor
Early in 2008, there was concern the ‘credit crunch’ and weakening US economy would lead to a significant slowdown in global growth.
Outlook for global growth now appears better than anticipated, helped by continued strong commodities demand from emerging markets.
However, strong demand for commodities (particularly oil) means strong commodity prices – a key contributor to upward inflationary pressures.
Combating rising inflation has now become a key concern for the worlds’ central banks.
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5. What this means for Australian investors
3. A quick look at international markets
1. What’s contributing to current market volatility?
6. BT’s approach to managing volatility
7. And insights for investors
2. How has volatility affected the Australian market?
4. Volatility in perspective
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6
Source: BT Financial Group, Bloomberg
S&P/ASX300 Accumulation Index – 12 months to 30 June 2008
Rising market volatility has seen the Australian share market fall 13% in the 12 months to 30 June 2008
Series Rebased: 30th June 2007 = 100
80
85
90
95
100
105
110
115
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08
80
85
90
95
100
105
110
115
Jun-08
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7
Source: BT Financial Group, Bloomberg
S&P/ASX300 Accumulation Index – 10 years to 30 June 2008
…but it remains at elevated levels over the long-term, up 197% over the last 10 years!
Series Rebased: 30th Jun 1998 = 100
0
50
100
150
200
250
300
350
400
Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08
0
50
100
150
200
250
300
350
400
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5. What this means for Australian investors
3. A quick look at international markets
1. What’s contributing to current market volatility?
6. BT’s approach to managing volatility
7. And insights for investors
2. How has volatility affected the Australian market?
4. Volatility in perspective
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9
Source: BT Financial Group, Bloomberg
Major international markets – 12 months to 30 June 2008
Market volatility has affected all markets, not just our domestic market….
Series Rebased: 30th June 2007 = 100
DJ Euro Stoxx 50 (Europe)(-25.3%)
Nikkei 225 (Japan) (-25.6%)
S&P500 (US) (-14.9%)
FTSE 100 (UK) (-14.9%)
60
65
70
75
80
85
90
95
100
105
110
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08
60
65
70
75
80
85
90
95
100
105
110
Jun-08
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10
Source: BT Financial Group, Bloomberg
Global share markets – 12 months to 30 June 2008
And the global share market has fallen over 21% in the 12 months to 30 June 2008….
Series Rebased: 30th June 2007 = 100
75
80
85
90
95
100
105
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08
75
80
85
90
95
100
105
MSCI World ex Aust $A
Jun-08
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5. What this means for Australian investors
3. A quick look at international markets
1. What’s contributing to current market volatility?
6. BT’s approach to managing volatility
7. And insights for investors
2. How has volatility affected the Australian market?
4. Volatility in perspective
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1-year returns (%)
Growth assets delivered strong returns last year, however, most affected by volatility this year…
Source: Bloomberg market benchmark returns
29.2
7.8
23.7
4.0
5.7
26.3
17.7
6.4
-13.7
-21.3
-13.7
4.4
7.9
-37.7
-20.3
7.3
-50.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0
Australian shares
International shares
International shares (H)
Australian bonds
International bonds (H)
Australian property
International property (H)
Cash
to 30 June 2007
to 30 June 2008
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Annual returns of Australian shares (%) – All Ords / ASX S&P Accumulation Index (since 1956)
Source: Standard & Poor’s
-30
-20
-10
0
10
20
30
40
50
60
70
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
Volatility can hurt returns in the short term…
13
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Rolling 5 year returns of Australian shares (% annualised) – All Ords / ASX S&P Accumulation Index (since 1960)
Source: Standard & Poor’s
-10
-5
0
5
10
15
20
25
30
35
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
… but it’s a different picture over the longer term
14
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Rolling 10 year returns of Australian shares (% annualised) – All Ords / S&P Accumulation Index (since 1965)
Source: Standard & Poor’s
And the longer the better!
-10
-5
0
5
10
15
20
25
30
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
15
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5. What this means for Australian investors
3. A quick look at international markets
1. What’s contributing to current market volatility?
6. BT’s approach to managing volatility
7. And insights for investors
2. How has volatility affected the Australian market?
4. Volatility in perspective
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17
What does this mean for Australian investors?
Economy still robust with low unemployment, high commodity prices - we expect the Australian economy will hold its own in the near-term.
Investors concerned the RBA may raise interest rates in the second half of 2008, which could impact on the Australian consumer.
Weaker consumption could offset the growth we’re seeing in the stronger resources and infrastructure sectors.
Interest rate rises also mean an increase in cost of capital. Re-evaluating and repricing the outlook for funding is contributing to short-term market movements.
Short-term volatility to continue. The Australian market should start to recover when RBA is satisfied inflation has been contained, and commodity prices have stabilised.
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18
And what is the longer-term outlook?
The threat of rising inflation and subsequent higher interest rates will remain a concern for central banks, and this will probably limit global growth over the next year or so.
Australia continues to be influenced by global markets battling inflationary pressures, a slowdown in global economic growth, and a view that emerging markets growth may be unsustainable.
However, we will continue to benefit from the continuing urbanisation in China and India, boosting the performance of our big miners and underpinning Australia’s growth rates.
The income return from Australian shares is now much more attractive than that from bonds, which should provide an additional boost for share prices.
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5. What this means for Australian investors
3. A quick look at international markets
1. What’s contributing to current market volatility?
6. BT’s approach to managing volatility
7. And insights for investors
2. How has volatility affected the Australian market?
4. Volatility in perspective
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20
Diversify, focus on risk, invest in quality
One of BT’s strengths is that we always focus on the right levels of diversification and risk within our portfolios, whether its Australian shares, listed property or fixed income.
Our focus on diversification, risk management and investment insight is what prevents BT’s portfolios from being damaged excessively in the sort of down market we’re seeing now.
We continue to ensure we have the right valued stocks in our portfolios by investing in companies with secure cash flows, limited expectations in their valuations and sound management teams.
At BT, we’re happy in our ability to sidestep some of the blow ups that have really triggered the downturn in the last six - nine months.
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5. What this means for Australian investors
3. A quick look at international markets
1. What’s contributing to current market volatility?
6. BT’s approach to managing volatility
7. And insights for investors
2. How has volatility affected the Australian market?
4. Volatility in perspective
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Ten investing truthsInsights into successful investing
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Don’t panic – invest for the long-term
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Global shares measured by the MSCI World ex-Australia (net dividends) Index in A$ to 30 June 2008.Source: BT Financial Group, MSCI
Impact of major market events on global shares since 1986
Maintain your composure and always keep the end goal in sight
700
1,200
1,700
2,200
2,700
3,200
3,700
4,200
4,700
5,200
5,700
6,200
Jun-86 Jun-88 Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08
Jan 91Gulf War
Feb 94Bond Market Crash
Aug 97Asian Currency Crisis
Jul 98Russian Bond Crisis
Jul 01Tech Wreck
Sep 01Attack on Twin Towers
Jun 07US Sub-prime Crisis
Oct 87Wall Streetcrash
Nov 89Fall of the Berlin Wall Mar 03
Troops enter Iraq
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Understand risk
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-40%
-20%
0%
20%
40%
60%
80%
100%
All investing involves a trade-off between risk
and return
Australian shares, one year returns - Greater volatility over the short-term
Source: Datastream. S&P/ASX 300 Accumulation Index annualised returns to 30 June 2008 shown
Australian shares, five year returns - Reduced volatility over the long-term
-40%
-20%
0%
20%
40%
60%
80%
100%
1985 2005200019951990
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Diversify your investments
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The more you spread your investments, the less chance you have of losing money
Cash
Fixed interest
Individual securities
Property
Shares
Investment managers (or styles)
RegionsAsset classes
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Source: Australian Bank Bill 0+ Index, S&P/ASX 300 Accumulation Index, MSCI World ex-Australia (net dividends) Index in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years index, Citigroup World Government Bond, Unhedged in A$
Every asset class has time in the sun
Best performer each year (%)
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Diversification also applies to regions
Source: MSCI World Index as at 30 June 2008
World share market values (%)
23.1
3.3
47.010.5
10.31.6
US
Europe
UK
Australia
Asia (ex-Japan)Japan
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Avoid chasing returns
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Can you pick next year’s winner?
Best performing asset class for each year is highlighted. Source: Australian Bank Bill 0+ Index, S&P/ASX 300 Accumulation Index, MSCI World ex-Australia (net dividends) Index in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years index, Citigroup World Government Bond, Unhedged in A$
One-year returns to 30 June (%)
Australian 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Cash6.77 5.11 5.04 5.58 6.08 4.66 4.97 5.30 5.64 5.76 6.42 7.34
Fixed Interest16.76 10.88 3.28 6.17 7.42 6.21 9.78 2.33 7.79 3.41 3.99 4.42
Listed Property29.21 9.74 3.96 15.62 13.91 15.24 12.17 17.21 18.40 18.09 26.32 -37.74
Shares27.16 1.63 15.13 18.49 9.11 -4.54 -1.61 21.73 26.03 24.02 29.21 -13.67
International 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Fixed Interest9.13 26.19 -2.57 13.73 14.54 3.14 -2.46 1.71 -1.66 2.23 -9.93 3.44
Shares28.56 42.16 8.17 23.81 -6.01 -23.50 -18.53 19.37 0.06 19.88 7.77 -21.26
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Don’t forget – time is on your side
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Enrol in a get rich slowly program – the power of compound interest
$153,971
142,566
132,006
122,227
113,174
104,790
97,028
89,841
83,186
77,024
71,319
66,036
61,144
56,615
52,421
48,583
44,943
55
54
53
52
51
50
49
48
47
46
45
44
43
42
41
40
39
Assumptions: 8% p.a. interest, all reinvestedSource: BT Financial Group
$98,471
90,251
82,639
75,592
69,067
63,025
57,430
52,250
47,454
43,013
38,901
35,093
31,568
28,304
25,281
22,483
19,891
41,61438
38,53137
35,67736
33,03435
30,58734
28,32233
26,22432
24,28131
22,48630
19,89129
17,49228
15,27027
13,21326
11,30925
9,54524
7,91223
6,40022
$5,00021
Sally
17,492
15,270
13,213
11,309
9,545
7,912
6,400
$5,000
-
-
-
-
-
-
-
-
-
-
Matt
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Time, not timing, is important
All Ordinaries Index, annualised returns (%)
Note: The returns are shown as historical, investment returns are volatile and past performance is not necessarily indicative of future returns
Minus the 10 best days
Minus the 20 best days
Minus the 30 best days
Minus the 40 best days
Minus the 50 best days
Minus the 60 best days
Minus the 70 best days
Full 2,609 trading days
June 1998- June 2008
0.96
2.89
-2.44
-0.81
11.52
7.60
5.03
-3.98
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What is dollar cost averaging?
$10010.0$10$100January
Total valueUnits purchased
Unit price InvestmentMonth
$65065.0$500Total
$65010.0$10$100May
$44012.5$8$100April
$21320.0$5$100March
$18012.5$8$100February
Note: No allowance made for inflation, taxation, fees or expenseSource: BT Financial Group
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Find hidden value
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Economic trends$
The best investment research processes unlock hidden value
Research analysis Industry trends$
Company analysis$Supplier/competitor environment$
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Employ experts
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Even the smartest investors (including many corporate investors) use managed funds
A managed fund provides investors with: More convenient investing Broader diversification with less investment dollars Professional fund managers who monitor and actively manage your portfolio Economic research and specific company information Assets not available to individual investors Alternative styles of investment strategies
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Seek professional advice
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“What is your main information source for making investment decisions?”
Source: BT Investor Poll, October 2004
Financial adviser/accountant
Magazines/newspapers
Other family members
Spouse/partner
Internet
Friends
Other
None/don’t know
Why do senior executives, sports stars, politicians and entertainers all get expert help to manage their money?
10.0
7.0
4.0
5.0
10.0
12.0
13.0
38.0
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Expertise
Efficiency
What you get from your financial adviser
1. A holistic approach
2. Asset allocation
3. Security selection
4. An education
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Tax-effective investing
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Tax-effective investing
Focus on the after-tax return, not the tax Prepay your interest – it may be tax-effective Hold on to your investment for more than a
year Invest through superannuation Invest in companies that offer franking credits
… and seek tax advice!
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Benefits of dividend imputation
Individual (marginal tax
rate 46.5%)
Individual (marginal tax
rate 16.5%)
Franked dividend received (cash) $500.00 $500.00
Gross up (imputation credit) $214.29 $214.29
Taxable income $714.29 $714.29
Tax payable $332.14 $117.86
Franking credit offset $(214.29) $(214.29)
Tax payable/(refundable) $117.86 $(96.43)
Effective Tax Rate 16.5% -13.5%
After tax cash received $382.14 $596.43
Note: Tax rates current as at 1 July 2007Source: BT Financial Group
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It’s all about income
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What defines asset value?
What defines asset value? The present value of both current and future (expected) income
Investing in value Asset prices move toward income-based value in the long-term Investors profit from buying assets priced below value and selling
when prices rise above it
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49
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