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Australian Budget 2013/14 Global outlook update Stephen Halmarick Head of Economic and Market Research Prepared 15 May 2013 Disclaimer Product Disclosure Statements (PDS) and Information Memoranda (IM) for the funds issued by Colonial First State Investments Limited ABN 98 002 348 352, Commonwealth Managed Investments Limited ABN 33 084 098 180, and CFS Managed Property Limited ABN 13 006 464 428 (collectively CFS) are available from Colonial First State Global Asset Management.Investors should consider the relevant PDS or IM before making an investment decision. Past performance should not be taken as an indication of future performance. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of Colonial First State Asset Management (Australia) Limited ABN 89 114 194 311 (CFSAMAL). This material contains or is based upon information that we believe to be accurate and reliable. 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No person should act on the basis of any matter contained in this material without obtaining specific professional advice. Colonial First State Global Asset Management is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. Copyright © Colonial First State Group Limited 2013 All rights reserved. 2 Australian Budget: The path back to surplus? Underlying cash balance Source: Commonwealth Budget 2013/14 • 2012/13 $A19.4bn, 1.3% of GDP • 2013/14 $A18.0bn, 1.1% of GDP • 2014/15 $A10.9bn, 0.6% of GDP • 2015/16 +$A0.8bn, 0.0% of GDP • 2016/17 +$A6.6bn, 0.4% of GDP 3 Key budget policy announcements - spending • Infrastructure: additional funding of $A24bn over 4 years for roads, rail and ports. • Education sector reforms: $A9.8bn over 6 years (only $A3bn feature in the forward estimates for the new school funding model following the Gonski Review). • Health: DisabilityCare the government will provide $A19.3bn over seven years for investment. Over the four year projection period, new funding is estimated to total $A1.9bn) in the National Disability Insurance Scheme, now known as DisabilityCare Australia. This is considered the most significant social policy reform since Medicare. • To be funded by a move in the Medicare levy to 2.0%, from 1.5%, from 1 July 2014 for 10 years. Will raise $A11.6bn over 4 years. • Defence: $A113bn will be spent on defence funding over the forward estimates, up by $A10bn from last year's budget. This includes $A3bn over nine years to obtain twelve EA18G Growler electronic attack aircrafts. Source: Commonwealth Budget 2013/14 4 Key budget policy announcements - savings • Business: Broadening of the corporate tax base to prevent offshore profit shifting, closing of loopholes, removal of deductibility for expenditure on exploration rights totalling $A4.2bn over 4 years. • Families: The Government has announced that from 1 March 2014, the ‘baby bonus’ will be abolished. Instead eligible Family Tax Benefit Part A recipients will get a payment boost of $A2,000 for the first child and $A1,000 for subsequent children. • The Government has announced changes to the age of eligibility criteria for Family Tax Benefit A as well as announcing that it will no longer proceed with the previously announced increase in the Family Tax Benefit Part A announced in the last budget. This will save around $A5.9bn over 4 years. • Individuals: Deferral of the Clean Energy Future personal tax cut subject to the revision of the carbon price. • Foreign Aid deferral saving $A1.9bn over 4 years. Source: Commonwealth Budget 2013/14 5 Revenue and outlays growth path – slightly more realistic Annual revenue and outlays growth (%) Source: Commonwealth Budget 2013/14 6 Government debt levels remain low: AAA looks safe General government net debt to GDP (%) Source: Commonwealth Treasury 2013/14, IMF Fiscal Monitor April 2013 7 Bond supply to rise Current and expected issuance of Commonwealth Bonds Source: AOFM, RBA and CFSGAM 8 Economic forecasts are reasonable Key table of economic forecasts Actual Estimate Forecast Projections 2011/12 2012/13 2013/14 2014/15 GDP %yr 3.4 3.0 2.75 3.0 Nominal GDP %/yr 5.0 3.25 5.0 5.0 GNE %yr 5.2 3.0 2.75 2.25 Net exports % cont. -1.3 0.5 0 1.0 Terms of trade %/yr 0.4 -7.5 -0.75 -1.75 Current account % GDP -2.7 -3.5 -3.75 -3.25 Business investment %yr 20.8 10.5 4.5 1.0 Unemployment rate % at June 5.1 5.5 5.75 5.75 CPI %yr 1.2 2.5 2.25 2.25 Wages %yr 3.7 3.5 3.5 3.5 Source: Commonwealth Treasury 2013/14 9 Economic outlook for Australia GDP growth – actual and forecasts (%) Source: ABS, RBA Statement on Monetary Policy May 2013 10 Mining investment to peak in 2014 Capital expenditure – intentions FY12 Key components - mining Iron Ore 22% Coal 21% Petroleum/LNG 45% Copper Other Source: ABS. Data as at February 2012 1% 11% 11 Exports to grow further Export volumes – forecasts from 2012/13 till 2017/18 Forecasts Source: BREE. Forecasts as at March 2013. Assumes medium market share for Australia 12 Labour market a little softer Unemployment rate (%) Source: ABS. Data to 30 April 2013 Growth in labour input 13 Some signs the consumer is picking up Consumer confidence and retail sales growth % Source: Bloomberg. Retail sales as at 31 March 2013, consumer confidence as at April 2013 Index 14 Australian consumers changing behaviour Retail sales volume - index Source: ABS. RBA, CFSGAM. Savings rate data to 31 December 2012. Retail sales data to 31 March 2013 Household savings rate (%) 15 Residential building yet to respond to rate cuts Private sector residential building approvals 20000 15000 10000 5000 0 1983 1988 Total Source: ABS. Data to 31 March 2013 1993 Detached houses 1998 2003 2008 2013 Higher-density housing 16 Australian business conditions soften Business confidence and business conditions Source: NAB, data to May 2013 17 Low inflation (partly) driven by strong AUD Tradables and non-tradables inflation Source: ABS, Data to 31 March 2013 18 Allows RBA to ease….risks still to the downside Official cash rate (%) Source: RBA, data to 8 May 2013 19 Lower interest rates are helping the household sector Source: RBA Statement on Monetary Policy May 2013 20 Australian bond yields off 60 year lows 3-year and 10-year Australian government bond yields (%) Source: Bloomberg. Data to 13 May 2013 21 AUD has been falling Rising against USD and a basket of currencies Source: RBA. Data as at 15 May 2013 22 Australian equity markets improving US, Australia and world equity markets. Index = 100 December 1994 Source: Bloomberg. Data to 10 May 2013 23 Political risk ahead of 14 September election Opinion polls suggest a change of government…at this stage Source: Newspoll, CFSGAM. Data to 5 April 2013 24 Global economic outlook Global growth outlook looking better IMF Global Growth Forecasts Source: IMF World Economic Outlook April 2013 26 Japan starts an aggressive new QE phase Size of central bank balance sheets % GDP – post QE Source: BoJ, ECB, BoE, Federal Reserve, CFSGAM. Data as at April 2013. Assumes Federal Reserve stops $US85bn/mth purchases in January 2014 27 Global bond yields at generational lows Developed markets 10 year bond yields (%) Source: Bloomberg. Data to 10 May 2013 28 Global equity markets improving Global equity markets. Index = 100 December 1994 Source: Bloomberg. Data to 10 May 2013 29 Fed sets unemployment and inflation “targets” Unemployment rate (%), PCE Inflation (%) and Fed forecasts Source: Bloomberg. Unemployment rate to 31 March 2013. PCE data to 31 March 2013. Fed forecasts as at March 2013 and till 2015 30 Fed policy is clearly helping housing market Housing starts and builders confidence FHFA house price index purchase only Source: Bloomberg. Housing starts to 31 March 2013. NAHB Index to April 2013. FHFA House Price Index to 28 February 2013 31 Natural gas – a long term benefit for the US economy Natural gas prices for manufacturing US Gas Plant Production of LNG $US/MBTU 1000/barrels per day Country Price Japan $15 Korea $13 Germany $11 US $3 Source: ISI. As at January 2013. US Gas plant production of LNG to 28 February 2013 32 “Whatever it takes” has been working 10 year bond yield spread above German 10 year bond yields Source: Bloomberg. Data to 8 May 2013. Note Ireland is nine-year bond yield spread 33 EU economy – recession in H1 13 Annual GDP growth (%) Key issues: Source: Bloomberg. Data to 31 December 2012. Spain and Italy to 31 March 2013 • EU in recession in 2012 and H1 2013 and low growth for next five years • More pressure on budget deficits • Structural reform needed • Political challenges 34 A social disaster in the making Unemployment rate – youth and total Source: Bloomberg. Data to 31 March 2013. Greece to 31 January 2013 35 Japan – Economic growth and inflation (upside risks) Annual GDP and CPI Source: Bloomberg. CPI data to 31 March 2013. GDP data to 31 December 2012. 36 Japan – Weaker Yen part of the plan USDJPY and AUDJPY Source: Bloomberg. Data to 13 May 2013 37 China growth outlook solid Contribution to growth Annual GDP growth (%) Consensus forecasts Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 GDP %/yr 7.90 7.70 7.95 8.05 8.00 8.00 7.90 CPI %/yr 2.10 2.40 2.80 3.25 3.40 3.30 3.35 Source: Bloomberg. GDP data to 31 March 2013. Contribution data and forecasts from EIU. GDP and CPI forecasts are market consensus from Bloomberg as at 8 May 2013 38 Implications for investors 1. Slow growth and lower return environment to persist 2. Quantitative easing forcing down real yields and driving a hunt for yield and income 3. Portfolio diversification critical, to deal with: • ongoing re-assessment of the macro outlook • easy money/tight fiscal policy/currency “wars” • political uncertainties and risks • alternative assets looking more attractive 4. Investing in the structural changes flowing through the global economy remains a medium-term focus. • Invest in countries and companies “facing” the worlds growth 39