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A world of uncertainty or a world of opportunity?. Economic and Market Perspectives Simon Doyle – Head of Fixed Income and Multi-Asset. Why? Seeds sown early this decade. Financial engineering. Sub-prime. Leverage. US monetary policy. Financial market failures. Bring out your dead!.

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Economic and Market Perspectives Simon Doyle – Head of Fixed Income and Multi-Asset

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Economic and market perspectives simon doyle head of fixed income and multi asset

A world of uncertainty or a world of opportunity?

Economic and Market PerspectivesSimon Doyle – Head of Fixed Income and Multi-Asset


Why seeds sown early this decade

Why?Seeds sown early this decade

Financial engineering

Sub-prime

Leverage

US monetary policy


Financial market failures

Financial market failures

Bring out your dead!

Wounded

  • Re-incarnated

Dead!


Risky assets have suffered

Risky assets have suffered

Gross 12 month returns by asset class as at 31 October 2008

Growth Assets

Balanced Assets

Defensive Assets

1

2

3

4

5

6

7

8

Big losses in equities, REITs and higher yielding credit

Source: Schroders/Datastream. 1. S&P ASX 200; 2. MSCI World; 3. S&P ASX300 Property Trusts; 4. Merrill Lynch Global High Yield Index;

5. Schroder Hybrid Securities Fund; 6. UBS Credit Index; 7. UBS Bank Bill Index 8. UBS Treasury Index


The pointy end

The pointy end…

2007 AAA structured product and mortgage backed security prices

Chinese stock market

Indicative market US residential mortgage backed

Shanghai SE Composite Index

Indicative market CDO

Excesses coming home to roost

Source: CBA, Schroders


Economic and market perspectives simon doyle head of fixed income and multi asset

US recession is inevitable

US GDP and Conference Board Leading Index

It will be an extended slump

Source: Datastream


Recession is also likely in europe and japan

Recession is also likely in Europe and Japan

Eurozone GDP and Whole Economy PM

Japanese GDP and Econ Watchers Outlook

Eurozone GDP – yoy%

Japanese GDP – yoy%

Weighted ISM (RHS)

Eco Watchers Outlook – Lead 2 months (RHS)

Surveys indicate sharp slowdown


Economic and market perspectives simon doyle head of fixed income and multi asset

Inflation is no longer an issue

G7 economic activity and change in inflation

G7 annual change in inflation

G7 GDP – yoy% change, lead 2q (RHS)

Inflation follows economic growth down

Source: Datastream


Terms of trade are reversing

Terms of Trade are reversing

Terms of Trade and Base Metal Prices

MG Base Metal Index (RHS)

Australian terms of trade

Tailwind to headwind

Source: UBS, Datastream


Australia will flirt with recession

Australia will flirt with recession

Australian non-farm product and leading index

%

Weak sentiment is flowing through to activity

Source: Datastream


Economic and market perspectives simon doyle head of fixed income and multi asset

We have high household debt levels like the US

Household sector debt as % of GDP

USA

UK

Australia

Aggressive household credit build up across most western economies

Source: GSJBW Research Estimates, Goldman Sachs Research Estimates


Economic and market perspectives simon doyle head of fixed income and multi asset

Global Equities are looking attractive

Trailing PE MSCI World vs 25 year historical average

P/E ratio

+1 std deviation

average

-1 std deviation

Global market is cheap

Source: Schroders, Datastream


Bhp billiton

BHP Billiton

Increased volume offset by increased costs

Commodity prices have driven profits

Underlying EBIT analysis: FY08 vs FY02

Increased prices

This is illustrative only and does not represent Schroders’ recommendation on these stocks

Earnings driven by increased prices - volume increase offset by higher costs

Source: Merrill Lynch 31 August 2008


Economic and market perspectives simon doyle head of fixed income and multi asset

Something positive from the credit crisis…

US high yield

%

Spread (RHS)

Return

Credit markets will provide attractive returns

Source: Schroders, Datastream


Economic and market perspectives simon doyle head of fixed income and multi asset

Corporate gearing is low

US debt as a percentage of GDP

Total*

Financials

Households

Corporates

Source: Morgan Stanley, * Includes public sector


Economic and market perspectives simon doyle head of fixed income and multi asset

Yields from Hybrids are looking attractive

Australian hybrid yield and cash rate

Hybrid option adjusted yield

Cash rate

Hybrids are cheap now!

Source: Schroders, Datastream


Cash looks good now

Cash looks good now…

Australian cash rate vs US federal funds rate: 1997 - 2008

Australian cash rate

?

US federal funds rate

…but look what happened in the US

Source: Schroders/Datastream


Economic and market perspectives simon doyle head of fixed income and multi asset

Too much cash – too little bonds

Returns of Australian Cash, Government Bond

High cash rates + fear = poor long term portfolio construction decisions

Source: Schroders/Datastream


Economic and market perspectives simon doyle head of fixed income and multi asset

Cycle vs. asset class performance

Recovery

Slow down

Recession

Expansion

Asia

Australia

Europe Japan

Commodities

Cash

Property

Govt bonds

US

Equities

High Yields Bonds

Equities

High Yields Bonds

Equities

Preferred asset class and the economic cycle

Source: Schroders


Economic and market perspectives simon doyle head of fixed income and multi asset

Our approach hasn’t changed

  • We like;

  • Transparency

  • Liquidity

  • Value for money

  • True economic diversification

  • Appropriate leverage

  • Unlisted assets and hedge funds do not provide this!


Economic and market perspectives simon doyle head of fixed income and multi asset

What have we been doing?

June 2007

Remove risk in 2007


Economic and market perspectives simon doyle head of fixed income and multi asset

What have we been doing?

December 2007

Remove risk in 2007


Economic and market perspectives simon doyle head of fixed income and multi asset

October 2008

What are we doing?

Selectively adding risk


Conclusions

Conclusions

Economic concerns warrant caution

“Risky” assets now have a risk premium

Its not the time to sell risk

Like higher yielding assets - hybrids

Cash was king – but being too defensive could be costly

A world of uncertainty…but with selective opportunity


Important

Important

  • General Disclaimer

  • This presentation is intended solely for the information of the person to whom it was provided by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). Investment in the [Insert Fund Name] may be made on an application form in the Product Disclosure Statement (PDS) dated 1 July 2008 which is available from Schroders. The information contained in this Presentation is general information only and does not take into account your objectives, financial situation or needs. Before acting on the information contained in this Presentation you should obtain a copy of the PDS and consider the appropriateness of the information in regard to your objective, financial situation and needs before making any decision about whether to invest, or continue to hold.

  • Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person. Returns shown are before tax and fees and all income is reinvested.

  • You should note that past performance is not a reliable indicator of future performance. Investment guidelines represented are internal only and are subject to change without notice. Opinions constitute our judgement at the time of issue and are subject to change. For security reasons telephone calls may be taped.


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