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An Investment Roadmap Key Investment Themes

An Investment Roadmap Key Investment Themes

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An Investment Roadmap Key Investment Themes

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  1. An Investment RoadmapKey Investment Themes Michael Karagianis Investment Strategist MLC Investment Management May 2011

  2. General advice warning and disclaimer Any opinions expressed in this presentation constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this presentation is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this presentation. To the maximum extent permitted by law, we disclaim all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from this presentation. This presentation contains general information and may constitute general advice. It does not take into account any person’s particular investment objectives, financial situation or individual needs. It should not be relied upon as a substitute for financial or other specialist advice. It has been prepared solely as an information service for financial advisers and should not be distributed to clients. Before making any decisions on the basis of this presentation, you should consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs. Opinions expressed constitute our judgement at the time of issue and are subject to change. The presenter is a representative of MLC Investments Limited. MLC Investments Limited ABN 30 002 641 661 105-153 Miller Street, North Sydney NSW 2060 is a member of the National group of companies. MLC Investments Limited is the issuer of the MLC MasterKey Unit Trust. Information about the MLC MasterKey Unit Trust is contained in the current Product Disclosure Statement (‘PDS’), copies of which are available upon request by phoning MLC on 131 831 or on our website at mlc.com.au.

  3. Michael KaragianisInvestment StrategistMLC Investment Management • Michael joined MLC Investment Management as an Investment Strategist in July 2010. Prior to that, he was Head of Asset Allocation at UBS Global Asset Management in Australia and Global Head of Asset Allocation and Investment Strategy at Aberdeen Asset Managers in London. • He graduated with a BEc from the University of Adelaide, and subsequently joined the Department of Treasury in Canberra as a research officer. • At MLC, Michael is part of the capital markets research team, and is responsible for communicating MLC’s Manager of Managers Investment process to the market place as well as involvement in the formulation of the Strategic Overlay for diversified funds including the LTAR and Horizon series of funds. • Michael has written numerous articles, as well as undertaken presentations and training to a wide range of clients and audiences, on topics related to the investment outlook, asset allocation and risk management. He has worked and presented in Asia Pacific, the Middle East, North America and, Europe. • Michael is a member of the Morningstar Regional Expert Panel on Asset Allocation.

  4. MLC Investment Insights & Viewpoints September 2010 – The post-GFC investment environment. What can history tell us? December 2010 – The rise and rise of the Australian dollar – stretching the friendship February 2011 – An Investment Roadmap. Key investment themes for 2011

  5. Proverb: I am an optimist, sure …….. But I am an optimist that carries an umbrella !

  6. Key Investment Themes for 2011 Some of the key themes that may impact over the coming year • The “muddle through” global recovery continues . . . • China - a slowing juggernaut ? • Those sovereign debt blues keep rolling along . . . . • Long live the asset bubble ! • 2011 – the Year of the Rabbit Equity ? • Australia – a two or three speed economy ?

  7. 1. The “muddle through” global recovery … Asia booming – US economy gradually recovering post GFC Two tiered Source: Datastream

  8. US housing market still a problem One in 9 housing mortgages in the US not being serviced – prices still falling Source: Financial Times

  9. Negative equity remains major overhang

  10. Recent bumper stickers in the US

  11. Geopolitical Tensions

  12. Middle East – Fight for Democracy or Jobs? A dangerous combination of high unemployment and young demographics

  13. 2. China – a slowing juggernaut? Source: Datastream

  14. Now “tapping the brakes” to slow things Source: Datastream

  15. 3. Those sovereign debt blues keep rolling along . . . “Zone of Worry” What debt ? Source: IMF

  16. Probability of default at some stage is high European peripheral government & US municipal debt the main concern

  17. 4. Long live the asset bubble ! Are commodities experiencing a bubble ? Bubble ? China super- cycle GFC 1970’s commodity boom Source: Datastream

  18. Australian dollar reflects terms of trade boost Could this also be a bubble? GFC Source: Datastream

  19. Asian housing prices booming – a bubble? Residential prices up 30 - 80% since 2008 on easy credit conditions

  20. An Australian housing price bubble? Australia has one of the most expensive housing markets globally Source: Marc Faber “gloomboomdoom.com”

  21. End of QE2 could produce market volatility

  22. 5. 2011 – the Year of the Rabbit Equity? Bonds are more expensive now – shares are relatively attractive ? Source: Datastream

  23. US corporate profits rebounding strongly Weaker US$, improving profit margins and reduced write-downs all helping Source: Datastream

  24. Australian earnings more muted recovery Negative impact of rising AUD & interest rates and tight labour market Source: Datastream

  25. 6.Australia- catching the “Dutch Disease”? Mining booming but a high AUD hurts retail, tourism, manufacturing

  26. Manufacturing & Retailing big employers Source: Australian Bureau of Statistics

  27. Impact of floods / storms . . . . . . . • Near term - 2011 H1 • Reduce growth & raise inflation • Disrupt mining & agricultural exports • Impact negatively on affected farmers, businesses and households • Interest rates on hold • Longer term - 2011 H2 onwards • Major reconstruction effort - concentrated in certain regions • Qld a major beneciary • Boost economic growth by up to 1-1.5% but not spread evenly • Support construction industry – shortage of skilled workers? • Industry recovery? Agriculture & tourism – wait and see • Tax levy & other spending cuts to pay the bill • Interest rates to rise further

  28. Loan rates are starting to bite – heading up Expect another 1-2 moves by the RBA later in 2011 Source: RBA, Datastream

  29. Housing affordability is poor now Potentially dangerous for households with significant mortgage debt Source: RBA

  30. 2011 Budget – where is the vision? • Deficit >$49.4 bn in 2011 FY, $22.6 bn in 2012 FY, surplus $3.5 bn in 2013 FY • Growth > 2.25% in 2011 FY & 4% in 2012 FY • Inflation> 3.25% in 2011 FY, 2.75% in 2012 • Sources of Growth • booming mining investment and disaster reconstruction • moderate consumption and weak residential construction • Positives> Spending on Labour force training and migration to boost workforce • Concerns> Very slow recovery in budget deficit despite the mining boom > Many of the measures not impacting for 2-3 years > No sovereign wealth fund to bank the benefits of the mining boom > No tax reform

  31. Dividends make up the majority of returns 9.9% pa 4.5% pa Source: Datastream

  32. Dividends offer stable returns Dividends relatively more important in a “muddle through” environment Source: Datastream - All Ordinaries Accumulation Index

  33. What can you do about it? • Equities preferred - valuations fair (not cheap) with reasonable earnings growth • Dividends matter- bigger share of total equity returns vs capital gains - more reliable than capital gains and, - more tax effective than term deposits • Residential Property - beware because of poor affordability and rising interest rates • Diversification - crucial in a highly volatile, uncertain environment • globalisation of portfolios - reduces risk ! • alternative asset classes - for diversification or illiquidity premia • Dollar cost averaging - systematically buying (not selling) cheap assets • Active management - active asset allocation & stock selection • important for risk management not just return enhancement • Risk control- don’t take any more portfolio risk than you really need to ! Get good advice from a financial planner !

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