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<date>
<addressee details>
Dear <insert name>
Market Volatility – A further update of recent sharemarket
developments
I would like to provide you with an update on some recent developments in global
sharemarkets. Significant volatility that commenced in 2007 has continued to occur in more
recent times. However, it is very important at times like this to remain focussed on the long
term, the achievement of your goals and objectives and to understand that volatility is a
natural characteristic of the sharemarket. History shows us two key learnings - the
sharemarket does recover after experiencing declines and it is important to “ride out” the
volatility.
Times like this also remind us of the importance of having a diversified portfolio with exposure
to all the main asset classes.
Diversification and a focus on the long term remain vital ingredients in the achievement of
your goals and objectives.
Key events, past declines & recovery
I have enclosed for your information a chart titled “History of the Australian Sharemarket
January 1900 - August 2008”. The chart illustrates how the Australian sharemarket has
historically experienced, and will continue to experience, declines and volatile periods.
Events occur which will impact the sharemarket in the short term, however the sharemarket
has historically recovered and delivered solid returns over the longer term. Timing of this
recovery is uncertain and this is why investing for the longer term is important.
Looking at longer term data, it is interesting to look back at the Australian sharemarket in the
1970s, which was a very volatile and depressed period. In August 1979, the Australian
sharemarket was at the same level as at January 1970, and in September 1974 the
Australian sharemarket had dropped over 50% from January 1970. Key market events during
this time included the OPEC (Organisation of the Petroleum Exporting Countries) oil crisis
and rising inflation.
The table below highlights the best and worst months for the Australian sharemarket
(S&P/ASX 300 index) for the period from January 1983 to August 2008 (over 25 years). It
shows the volatility of markets, both positive and negative, and reinforces long term investing.
Best Months
% Return
Worst Months
% Return
April 1983
16.16%
October 1987
-42.13%
July 1987
15.28%
May 1984
-13.26%
March 1988
13.58%
January 2008
-10.99%
July 1983
11.26%
October 1997
-10.55%
October 1986
11.19%
August 1998
-7.97%
Source: Mercer, ThreeSixty.
An update on recent economic and market developments
Below are some key events that have occurred over recent months. While there were some
indications that the rate of decline had at least started to slow and in some cases even started
to recover, further surprises and corporate disasters have continued to emerge.

The 2008 calendar year to date has been one of the worst in recent history with most
major global sharemarkets experiencing declines. In early April, the market was
positive and saw a slight recovery, with global markets rebounding between 4.5% in
the US to 12.7% in China. Since then, however, most markets have continued to fall
each month. On September 15th the US market lost 4.7% in one day. However, this
was followed by an increase of 1.75% the next day. For the calendar year to date the
Australian sharemarket (S&P/ASX 200) has declined by 25% while the US
sharemarket (S&P500) has fallen 17%. For the Australian sharemarket, the peak for
the calendar year to date was 1 January 2008, whilst September 16th has represented
the lowest point this year to date.

Following on from the near collapse of US investment bank Bear Sterns a few months
ago, within the last week some key developments have occurred:
-
Lehman Brothers Holdings Inc - the fourth largest US investment bank filed
for bankruptcy on September 15th as rescue talks over the weekend were
abandoned. The 158 year old investment bank has collapsed as a result of
the credit crisis and falling real estate values in the US and has filed the
biggest bankruptcy ever.
-
Freddy Mac and Fannie Mae - are participants in the secondary mortgage
market in the US. They were involved in buying mortgages from the banks,
guaranteeing the repayments and selling this as mortgaged backed securities
to the market. In 2008 Fannie Mae and Freddie Mac effectively owned or
guaranteed about half of the US$12 trillion dollar mortgage market.
Essentially, Freddy Mac and Fannie Mae were both highly exposed to the US
sub-prime mortgage crisis. It required unprecedented US government
intervention to prevent the collapse of both corporations. Some economists
held the view that both companies should be allowed to fail but the US
government believed intervention was necessary for the stability of the US
financial system.
-
Merrill Lynch - Bank of America is buying the Wall Street investment banking
icon for about $US50 billion in an all stock deal that creates the world’s
largest financial services company, rivalling Citibank. Bank of America has
the most deposits of any US bank, while Merrill Lynch is the world's largest
and most widely recognised brokerage.
-
American Insurance Group (AIG) - is the largest international insurance
organisation. On the same day as the Lehman Brothers and Merrill Lynch
announcements, AIG advised they were in trouble and were seeking
emergency capital injection. AIG was seeking a loan for approx $US75 billion
to keep it from declaring bankruptcy. At the time, the US Federal Reserve
declined to assist and asked other well known investment banks to help.
However, on September 16th, the Fed finally stepped in to assist AIG with an
emergency loan, allowing AIG to avoid bankruptcy.

Daily sharemarket fluctuations as much as (+/-) 3% have been a common
occurrence.

Relative to the US, the Australian economy appears to remain in a better economic
position on the back of a strong resources sector. However there have been signs of
growth slowing in the first half of 2008. The Australian economy grew at an
annualised rate of 2.3%, which is down from 3.7% in the second half of 2007.
Commodity prices have deteriorated of late and resource stocks have retreated. One
key driver will be whether demand from China continues.

Since the beginning of 2008, US sharemarkets have continued to fall as crude oil
prices hit another high of US$147.27 per barrel on July 11th but have since receded
as reports of reduced demand and encouraging statements from OPEC took hold. As
at midday September 17th, the oil price was US$91.49 per barrel.

In January, Ben Bernanke (Chairman of the US Federal Reserve) acknowledged the
outlook for economic growth had worsened and that the economy was weak enough
to need stimulus, with interest cuts ensuing. The Federal Reserve slashed key
interest rates by 0.75%, bringing the Federal Fund rate to 2.25%. The Federal
Reserve has since remained on hold and GDP growth grew by 0.6% in the first
quarter and 3.3% in the second quarter, revised up from 1.9%. While these figures
are encouraging there is still the belief that GDP growth will again fall in the coming
quarters. Despite this, the Federal Reserve left rates on hold at their September 16th
meeting.

The financial sector globally continues to bear the brunt of the “credit crunch” as
major banks such as Lehman Brothers and Merrill Lynch continue to announce the
news of sub-prime related write-downs to their financial statements.
US
Whilst the rest of the world is still faring better than the US, the downturn continues to
impact growth around the world.
Australia

Australian economic conditions remain relatively positive but are continuing to be
influenced by events occurring globally, particularly in the US. Most of the Australian
economic slowdown is concentrated in the household sector, with consumption falling
for the first time since the September quarter of 1993. Put simply, people aren’t
spending as much as they used to.

The early 2008 interest rate rises in Australia have slowed economic growth markedly
in recent months.

Economic data for Quarter 1 2008 and Quarter 2 2008 has been mixed but overall
economic growth has still been expanding, albeit at a slightly reduced rate.
Employment has remained relatively buoyant although there are early signs that
some weakness may be occurring. The Consumer Price Index (CPI) has remained
above the Reserve Bank of Australia’s (RBA) target range, primarily due to higher
fuel and food prices. However, the RBA is expecting the CPI to move back into the 2 3% target range by late 2009 - early 2010 and recent data supports this view.
Business confidence has taken a hit and business conditions have dropped below
their long-term average level. Business conditions and business confidence measure
how businesses have been and how they think they will perform in the future. As a
result of this evidence of weaker economic growth induced by the previous increase
in interest rates, the RBA cut rates by 25 basis points in early September, 2008.
Given the extent of the slowdown, further rate cuts are anticipated by mid 2009 with a
reduction before the end of this calendar year.

The Australian sharemarket has been in a bear market since November 1, 2007,
declining 30%. There most severe declines have been felt in the more highly
leveraged Property, Infrastructure and Financial Services sectors. Through this year,
the global credit crisis has placed extraordinary pressure on the financial sector,
impacting the cost of funds for all major Australian banks as well other finance
groups. The Australian banking sector has been impacted by the fallout from the subprime issues with write-downs on their sub-prime exposure impacting the broader
financial sector. While we have seen some cuts to variable home loan rates, medium
and long-term credit rates are still high, which means it is still expensive for banks to
find funding and further rate cuts from banks remain an uncertainty in the near term.

Over the last 15 years ending August 2008, the Australian sharemarket
(S&P/ASX300 index) has delivered approximately 11%p.a. returns for investors.
The expected forecast return over the next 5 years for the Australian sharemarket is
around 9%p.a. This does not mean that each year investors will get 9% - there will be
volatility and negative returns over this period and 9% is the expected average
annualised return. The Financial Year 2008 Australian company reporting season
results were largely in line with expectations, and reflected the divergent results of
companies across the Australian economy. However, company management outlook
statements have generally been cautious although largely reflected or “priced in” by
the market.

The Australian dollar has been extremely volatile over the past few months. Having
almost reached parity with the US dollar (US98.49 cents), the A$ has fallen
approximately 20% to the US79 - 80 cent level in the 8 weeks since mid July 2008.

In my previous communication to you a few months ago, it was highlighted that the
performance for the Australian sharemarket had been driven mainly by the Financials
and Resources sectors. These sectors make up over half of the Australian
sharemarket. With the recent significant declines in Financial stocks (mainly due to
uncertainty caused by the US sub-prime crisis), it is no surprise that the Australian
market has declined given that Financials make up a large proportion of the
Australian sharemarket. This has continued and year to date (as at September 16th)
the Financials sector had declined by 33%. In addition, the Listed Property market
(S&P/ASX 200 A-REIT Index) has fallen 33% while the Resource sector has declined
by 19%.
Market outlook
Since our last correspondence the market outlook has changed little if at all. By observing the
continuing negative performance of the global sharemarkets (generally a leading indicator for
global growth), there is little doubt the global economy will continue slowing in the short-term.
Much of the negativity has and continues to be largely attributed to the tightening of global
liquidity in response to the sub-prime issues, higher inflation via rising oil and food prices, and
a slowdown in housing, which has worsened in the US and UK. The current market turmoil
has stemmed from the US market and any recovery will depend largely on their recovery. As
financial markets are increasingly ‘globalised’, Australia has not been immune.
The US stock market has exhibited its highest level of volatility since World War II and this
high volatility continues.
It is not the first time global markets have experienced high volatility and it won’t be the last.
The world’s financial market problems are clearly apparent, however central banks around the
world are fully aware of the challenges the global markets are facing. History has
demonstrated that markets do recover and, with the benefit of hindsight, central banks and
governments are by far in a better position to tackle the problems at hand and this has been
evidenced with Fannie Mae and Freddie Mac for example.
We are still of the belief that the bottoming process is likely to take several more months as
the prospects of a US recession will continue to restrain any sharemarket rallies in the short
term. While domestic growth and strong demand from China may support earnings, weaker
global growth may continue to weigh the market down.
While the outlook for the Australian sharemarket will remain challenging, it is
important to remember that investors in Australian shares (S&P/ASX 300 index) have
received returns of 9.42% p.a, 14.62% p.a and 11.16% p.a. for the 3, 5 and 7 years
ending August 2008 respectively despite some of the worst returns in recent market
history.
While the short term outlook for Australian and global sharemarkets may be uncertain, they
have historically been solid investments, delivering strong long term returns. It is important for
investors to focus on the long term and “ride out” any market volatility.
Remain focused on your long term goals
We understand your concerns in this time of heightened market volatility. Whilst the risks and
volatility inherent in investing may seem to be prevailing, losing track of your objectives by
focusing on the short term poses a far greater risk to achieving your longer term goals than
any past or present economic event.
It can be difficult to comprehend how this is true and times like these may cause you to
question your investment strategy and consider increasing your investments in cash and short
term money-market products. However, this course of action may result in you being worse
off in the long run than staying with your plan and riding out the volatility. History has
demonstrated that a large proportion of investors invest near market peaks and sell near
market lows. While investing at market peaks is not the most favourable entry point, as
markets grow over the long term, timing becomes less relevant. Exiting the market in favour
of cash now will entail selling out of the market at its lowest point in over two years and
investing in cash when it is at its highest rate in 12 years and potentially at the start of a
downward trend.
It is important you notify me of any material changes to your situation, needs or objectives so I
can ensure my advice continues to remain appropriate.
Please contact me if you would like to arrange an appointment to discuss your situation or if
you require any further information.
Yours sincerely,
<Adviser Name>
<Authorised Representative>
<Licensee Name>
ThreeSixty, in the compilation of this letter has sourced factual and statistical data from the following providers:
Mercer, Morningstar, nab Capital and IRESS.
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal
circumstances. Please contact me prior to acting on this information.
Past performance is not a reliable indicator of future performance. This information is based on information
considered to be reliable. Opinions constitute our judgement at the time of issue and are subject to change. No
representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the
information presented in this document. Except for liability which cannot be excluded, all of National Australia Bank
Limited, related subsidiaries, its directors, employees, agents and related bodies corporate disclaim all liability in
respect of any error or inaccuracy in, or omission from, this document and any person’s reliance on it.
History of the Australian Sharemarket
January 1900 - August 2008
September 11
Terror Attacks
CGT
introduce
d
10,000
Australian
troops leave
Vietnam
Cuban Missile
Crisis
Ash
Wednesday
WTC
Bombing
Asian
Tsunami
Gulf
War
Decimial
Currency
introduced
Tech
Wreck
1,000
Korean
War Melbourne
Olympic Games
First Qantas
regular
service flight
Pearl Habour
Bombing
Log Scale
Dollar Value
Great
Depression
Australian
troops
sent to
Vietnam
Queen
Victoria
suceeded by
Wall Street
Stock Market
Crash
10
World War II
Starts
World War II
ends
World War
I ends
Saddam
Hussein
captured
Australian
dollar
floated
Australian
troops land in
Gallipoli
100
'87 Stock
market
crash
Reserve Bank of
Australia
established
OPEC oil
embargo
starts
US bombs
Cambodia
Hilton
Bombing
US
Subprime
Crisis
Asian
Crisis
"Recession we
had to have"
Whitlam dismissal Fraser caretaker
Source: MLC Investments /ThreeSixty / Reuters
Commercial & Industrial Index Monthly Averages ( 1900 - 1936)
Sydney All Ordinaries Index Monthly Averages (1936 - 1979)
All Ordinaries Share Price Index (1980 - 2008)
Boer War
1
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
Time
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005