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Market volatility and its impact on the Australian share market A presentation prepared by BT Financial Group for the adviser market 31 March 2008 Rising market volatility has seen the Australian share market fall nearly 16% so far this year

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Market volatility and its impact on the Australian share market

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Market volatility and its impact on the Australian share market

A presentation prepared by BT Financial Group for the adviser market

31 March 2008


Rising market volatility has seen the Australian share market fall nearly 16% so far this year

S&P/ASX All Ordinaries Index – three months to 31 March 2008

Source: BT Financial Group, Datastream


…but it remains at elevated levels over the long-term, up 101% over the last 10 years

S&P/ASX All Ordinaries Index – 10 years to 31 March 2008

Source: BT Financial Group, Datastream


…and 218% over the last 15 years

S&P/ASX All Ordinaries Index – 15 years to 31 March 2008

Source: BT Financial Group, Datastream


It’s worth keeping in mind that market volatility has affected all markets, not just ours

Major international markets – six months to 31 March 2008

US, UK and European stocks hit record highs

FTSE 100 (UK)

-20% (12/10 – 17/3)

S&P 500 (US)

-18% (9/10 – 17/3)

DJ EuroStoxx 50 (Europe)

-23% (12/10 – 17/3)

Nikkei 225 (Japan)

-35% (9/7 – 17/3)

Source: BT Financial Group, Datastream


So what’s been driving the global market volatility we’ve seen lately?

  • The source of recent market volatility goes back to 2007 and the collapse of the US housing market

  • Problems arising from defaults in the sub-prime mortgage component of the US housing market spread to global asset markets in the latter half of 2007 and this has continued into 2008

  • The ripple effect of those problems on the US and global economy is what’s behind the market conditions we’re seeing at the moment, with some global share markets having fallen as much as 35% from last year’s record highs


What’s behind the falls we’re seeing in the Australian market?

  • Leveraged investments have played a big role in the run-up in share markets in recent years, both here and overseas

  • Earlier this year we saw a number of highly leveraged players forced out of positions amid deteriorating global credit conditions and fears of a US recession

  • Some of these leveraged players – both companies and individual investors – were forced to sell, pushing the Australian share market lower

  • Individual investors who had over-leveraged were forced to sell because of margin calls or, in many cases, plain fear as they reacted to the impact that falling markets were having on their portfolio

  • The Reserve Bank of Australia has also raised interest rates twice so far this year – in February and in March – in a bid to bring inflation under control and this has exacerbated the downtrend


What does this market volatility mean for the Australian market?

  • Investors need to get used to higher levels of market volatility. In recent years, Australian investors have benefited from high double-digit returns and relatively

    few hiccups, but this is unlikely to be repeated in 2008

  • However, there are a number of positives for investors over the long-term:

    1.We’ve seen a lot of short-selling in the local market which will have to be undone if market conditions improve, leading to a potential bounce in share prices

    2.Australia will continue to benefit from the continuing urbanisation in China and India. That’s driving productivity increases throughout the region, boosting the performance of our big miners, such as BHP Billiton and Rio Tinto, and underpinning Australia’s growth rates

    3.The income return from Australian shares is now much more attractive than that from bonds, which should provide an additional boost for share prices


What steps is BT taking to address the impact of this market volatility?

  • 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, so nothing’s really changed from our perspective

  • This focus on diversification and risk management, as well as our investment insight, is what prevents BT’s portfolios from being damaged excessively in the sort of down market we’re seeing now

  • We’ll also continue to ensure that 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 months or so


What can investors do in this type of market environment to help protect their own portfolio?

There are a number of investment strategies that investors can employ to help manage and protect their own portfolio

  • Don’t panic – invest for the long-term

  • Understand risk

  • Diversify your investments

  • Avoid chasing returns

  • Don’t forget – time is on your side

  • Find hidden value

  • Employ experts

  • Seek professional advice


Don’t panic – invest for the long-term


It’s easy to get caught up in short-term market movements. Keep the end goal in sight

Impact of major market events on global shares since 1990

Jun 07

US Sub-prime Crisis

Jul 98

Russian Bond Crisis

Jul 01

Tech Wreck

Aug 97

Asian Currency Crisis

Sep 01

Attack on Twin Towers

Feb 94

Bond Market Crash

Jan 91

Gulf War

Source: BT Financial Group, Datastream. Global shares measured by the MSCI World (Price) Index to 31 January 2008


Long-term asset class performance

31 March 2008

Australian shares

Listed property

Global shares

Australian bonds

Cash

Note: Accumulated returns based on $1,000 invested in December 1984

Source: S&P/ASX 300 Accumulation Index, MSCI World ex-Australia (net dividends) Index in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years index, Citigroup World Government Bond, Unhedged in A$


Understand risk


All investing involves a trade-off between risk and return

Australian shares, one year returns - Greater volatility over the short-term

Australian shares, five year returns - Reduced volatility over the long-term

1985

1990

1995

2000

2005

Source: Datastream. S&P/ASX 200 Accumulation Index annualised returns to 30 November 2007 shown


Diversify your investments


Asset classes

Regions

Investment managers (or styles)

The more you spread your investments, the less chance you have of losing money

Shares

Property

Cash

Fixed interest

Individual securities


Every asset class has its day in the sun

Best performer each year (%)

Australian shares

Australian bonds

International shares

Cash

International bonds

Listed property

60

50

40

30

20

10

0

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

Source: MSCI World ex-Australia index. Net Dividends reinvested in A$, S&P/ASX 300 Property Trusts Accum. Index, S&P/ASX 300 ex-LPT Accum. Index, UBS Composite Bond Index (all matures), UBS Bank Bill Index. Figures are as at 30 June 2007.


Diversification also applies to regions

World sharemarket values (%)

Japan

Asia (ex-Japan)

Australia

U.K.

US

Europe

Source: MSCI World Index as at 30 June 2007


Avoid chasing returns


Can you pick next year’s winner?

Best performing asset class for each year is highlighted.Indices: Liquids Index (Cash), UBS Composite 0+ years index (Australian Fixed Interest), S&P/ASX 300 Property Index(Australian Listed Property), S&P/ASX 300 Accumulation Index (Australian Shares), Citigroup World Government BondIndex unhedged in $A (International Fixed Interest), MSCI World ex-Aust (net divs) Index in $A(International Shares)


Don’t forget – time is on your side


Sally

Matt

21

$5,000

-

39

44,943

19,891

22

6,400

-

40

48,583

22,483

23

7,912

-

41

52,421

25,281

24

9,545

-

42

56,615

28,304

25

11,309

-

43

61,144

31,568

26

13,213

-

44

66,036

35,093

27

15,270

-

45

71,319

38,901

28

17,492

-

46

77,024

43,013

29

19,891

-

47

83,186

47,454

30

22,486

-

48

89,841

52,250

31

24,281

$5,000

49

97,028

57,430

32

26,224

6,400

50

104,790

63,025

33

28,322

7,912

51

113,174

69,067

34

30,587

9,545

52

122,227

75,592

35

33,034

11,309

53

132,006

82,639

36

35,677

13,213

54

142,566

90,251

37

38,531

15,270

55

$153,971

$98,471

38

41,614

17,492

Enrol in a get rich slowly program – the power of compound interest

Assumptions: 8% p.a. interest, all reinvested

Source: BT Financial Group


Time, not timing, is important

June 1997- June 2007

Full 2,609 trading days

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


February

$100

$8

12.5

$180

March

$100

$5

20.0

$213

April

$100

$8

12.5

$440

May

$100

$10

10.0

$650

Total

$500

65.0

$650

What is dollar cost averaging?

Month

Investment

Unit

price

Units purchased

Total value

January

$100

$10

10.0

$100

Note: No allowance made more inflation, taxation, fees or expenses

Source: BT Financial Group


Find hidden value


$

Industry trends

$

Economic trends

$

Company analysis

$

Supplier/competitor environment

The best investment research processes unlock hidden value

Research analysis


Employ experts


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

“The methodical, systematic approach taken by most fund managers helps them avoid many of the mistakes individual investors are prone to”


Seek professional advice


38%

Financial adviser/accountant

13%

Magazines/newspapers

12%

Other family members

Spouse/partner

10%

5%

Internet

Friends

4%

Other

7%

None/don’t know

10%

“What is your main information source for making investment decisions?”

Source: BT Investor Poll, October 2004


1. A holistic approach

Expertise

2. Asset allocation

Efficiency

3. Security selection

4. An education

What you get from your financial adviser


This presentation has been prepared by BT Financial Group Limited (ABN 63 002 916 458) ‘BT’ and is for general information only.  Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described.  The presentation has been prepared without taking into account any personal objectives, financial situation or needs.  It does not contain and is not to be taken as containing any securities advice or securities recommendation.  Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice.  BT 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, BT and its directors, employees and consultants do not accept any liability for any error or omission in this presentation or for any resulting loss or damage suffered by the recipient or any other person.  Unless otherwise noted, BT is the source of all charts; and all performance figures are calculated using exit to exit prices and assume reinvestment of income, take into account all fees and charges but exclude the entry fee.  It is important to note that past performance is not a reliable indicator of future performance.

This document was accompanied by an oral presentation, and is not a complete record of the discussion held.

No part of this presentation should be used elsewhere without prior consent from the author.

For more information, please call BT Customer Relations on 132 135 8:00am to 6:30pm (Sydney time)


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