Evaluating the Australian Outlook through a Global Lens

Transcription

1 Evaluating the Australian Outlook through a Global Lens International Bond Yields 4.% 2- Year Government Yields as at 15 January % 2.% 1.%.% -1.% -2.% Source: Bloomberg, UBS, Franklin Templeton Investments 1

2 Central Bank Interest Rates: Advanced & Developing Economies 2 Main Central Bank Policy Rate 12/29/2 to 1/8/ '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 United Kingdom We expect rates to rise in 215. United States 1 Source: FactSet, Bank of England, Federal Reserve System. 2 Source: FactSet, Eurostat, Bank of Japan, People Bank of China. Main Central Bank Policy Rate 12/29/2 to 1/8/ '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 China (Right) Japan (Left) We expect policy to remain accommodative. Eurozone (Left) No Apparent Shortage of Global Liquidity Central Bank Assets January 1, 28 September 3, 214 $8 US$ Trillions $6 $4 $2 $ e Total BOJ Fed Sources: Federal Reserve and Bank of Japan, as of September 3, 214. Shaded area indicates projections starting October 214. Federal Reserve projections assume Quantitative Easing program is reduced by $1 billion at each subsequent meeting. Bank of Japan projections assume that the balance sheet is increased to $2.9 trillion by the end of 214 in equal increments each month. There is no assurance that any projection, estimate or forecast will be realized. 3

3 Consumer Prices Globally Change in CPI (YoY %) From 31-DEC-96 to 3-SEP-14 1% 8% 6% YoY % change in CPI 4% 2% % -2% -4% Jan-97 Jan-99 Jan-1 Jan-3 Jan-5 Jan-7 Jan-9 Jan-11 Jan-13 United States China Euro Area Source: FactSet, U.S. Department of Labor, National Bureau of Statistics of China, International Monetary Fund. 4 General Government Gross Debt / GDP General Government Gross Debt / GDP From 1998 to Japan % Italy % US 14.52% France 93.88% UK 9.1% Canada 89.12% Germany 78.6% Canada France Germany Italy Japan United Kingdom United States Source: FactSet, International Monetary Fund. 5

4 Leading Economic Indicators OECD Composite Leading Indicators (YoY % change) From 31-DEC-63 to 29-AUG-14 8% 6% 4% 2% % % -4% -6% amplitude-adjusted -8% G7 area Euro area OECD area Major Five Asia area Source: FactSet, OECD. *G7 area covers Canada, France, Germany, Italy, Japan, United Kingdom and United States. Euro area covers Austria, Belgium, Finland, France, Germany, Greece, Italy, Ireland, Luxembourg, the Netherlands, Portugal, Slovak Republic and Spain. OECD area covers Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. Major Five Asia area covers China, India, Indonesia, Japan and Korea. 6 Real Effective Exchange Rate: Developed Countries Developed Market: JP Morgan Trade Weighted Broad Real Effective Exchange Rate 1/1994=1 Jan-94 to Sep-14 (Monthly) United States Eurozone Japan United Kingdom Canada Australia Source: FactSet, JP Morgan. 7

5 GDP of Major Economies 214 Nominal GDP ($USD) 2, Nominal GDP ($USD, Billions) 18, 16, 14, 12, 1, 8, 6, United States China 1355 Two of the big engines of global growth the United States and China are tracking well Japan 477 Germany 382 4, France United Kingdom 2, Brazil 2244 Italy 2129 Russi a 257 India 248 Canada 1794 Australia 1483 Source: FactSet, International Monetary Fund. See for additional data provider information. 8 China is Now a Significant Driver of Global GDP Growth and Appeared to be Relatively Unscathed During the Great Recession 2 to 213 Source: FactSet, International Monetary Fund,

6 China Appears to Be Just Midway Through Urbanization Rural Population: % 8% % of Total 6% 4% 2% % US (lower scale) China (upper scale) Sources: U.S. Census Bureau, CEIC, HSBC, as of December 213. Upper scale refers to the Chinese time period (195-21). The US time period is at the bottom axis ( ). This chart is designed to show that China is midway through its urbanization path compared to the U.S. 1 China Still Needs Infrastructure Investment Railway Density As of December 3, Meters/Square Meters London Paris Sources: OECD, HSBC, as of December 213. Seoul Tokyo Shanghai Guangzh ou Shenzhen Beijing Nanjing Dalian 11

7 Still ample room for increased investment in infrastructure Chengdu Subway Tokyo Subway Sources: HSBC, as of December 213 Charts are for illustrative and discussion purposes only. 12 Australia Terms of Trade 14 Australia Terms of Trade Australia Terms of Trade Source: Australian Bureau of Statistics 13

8 Australia GDP Source: Australian Bureau of Statistics 14 Australian Bond Market has Experienced Substantial Growth Growth of the Australian Domestic Bond Market As at 31 December 214 ($ billion) Size of UBS Australia Composite Bond Index Source: UBS Australia, Franklin Templeton Investments 15

9 Dramatic Shift in Market Composition Securities Outstanding Market Value % in the UBS Australia Non-Govt. Bond Index As at Financial Year End 1% 36% 42.3% 61.5% 68.6% 5% 64% 57.7% 38.5% 31.% Australia International Source: UBS Australia, Franklin Templeton Investments 214 % 16 Australian Bond Market Changing Landscape The spread of countries represented in the Australian debt market is broad and includes Developed & Emerging nations Source: UBS Australia, Franklin Templeton Investments. As at 3 June

10 Local Investment Returns Driven by International Markets Australian and US 1-Year Government Bond Yields June 1979 December Has the structural decline in global bond yields run its course? Yield % Australia 1yr bond US Source: Bloomberg, Franklin Templeton Investments 18 Strong Relationship Between Australian and Global Credit Markets Global Investment Grade Credit Spreads As at 31 December Credit spread (in basis points) Australia itraxx US CDX Europe itraxx Source: Bloomberg, Franklin Templeton Investments 19

11 How Much Risk Is Your Portfolio Really Taking? Rolling 12 month returns highlight strong correlation between credit and equity markets June 1984 December 214 6% Rolling 12 month index returns 3% % -3% -6% 29/6/1984 3/6/1994 3/6/24 3/6/214 S&P Index Barclays US High Yield Index Source: Bloomberg, Franklin Templeton Investments 2 Traditional Approaches May Lead To Unintended Consequences Credit Spreads Returning Towards pre-gfc Levels February 1994 to December Barclays US High Yield Credit Spread % Source: Barclays, Franklin Templeton Investments 21

12 Traditional Benchmarks Return Free Risk? Australia Composite Bond Index - breaking all the wrong records Price Sensitivity to rising interest rates is at record highs Yields at record lows Source: Bloomberg. As of 24 October Very Little Cushion Against Rising Yields Australian Bond Yield Sensitivity September 1979 December Australia 1 Year Bond Yield % bp 15bp 275bp 4bp 225bp s 18bp s 115bp s Source: Bloomberg, Franklin Templeton Investments 23

13 Franklin Australian Absolute Return Bond Fund Adopting a truly absolute return approach Seeks to deliver the traditional characteristics of fixed income (defensive real returns with low correlation to growth assets) whilst providing protection from rising interest rates Combines the best domestic and global fixed income opportunities in one integrated portfolio Aims to provide capital stability through the cycle Diverse sources of return 24 Intentional Investing, Opportunities A portfolio construction approach that intentionally targets the best investment decisions to meet investor needs regardless of benchmark representation Identifying the best investment opportunities from both local and global fixed income markets Australian Bonds Intentional investing International opportunity 25

14 Conclusions Global macro forces have compressed yields and return prospects to near record lows Traditional bonds offer little prospects for continued attractive returns and considerable risks if interest rates increase 26 Biographies CHRIS SINIAKOV Managing Director, Fixed income Chris Siniakov is Managing Director, Fixed Income at Franklin Templeton Investments. He has over 2 years experience in domestic and global fixed income funds management and has worked closely with large institutional clients with distinct preferences in the design and management of their fixed income portfolios. Prior to joining Franklin Templeton, Mr. Siniakov was Head of Fixed Income Asia Pacific at Deutsche Asset & Wealth Management where he had responsibility for $7 billion in Fixed Income client portfolios. He has also held various portfolio management roles at Invesco and County Investment Management. Mr. Siniakov holds a BSc (Hons) in Mathematics & Statistics from Monash University and a Graduate Diploma in Banking and Finance from the Financial Services Institute of Australia. ANDREW CANOBI, CFA Director, Fixed income Andrew Canobi is Director, Fixed Income at Franklin Templeton Investments. He has over 2 years industry experience in fixed income portfolio management, including macro strategy formulation, credit research and portfolio construction. Prior to joining Franklin Templeton, Mr. Canobi was Director and Senior Portfolio Manager, Global Fixed Income at Deutsche Asset & Wealth Management where he was head of the Australian investment team responsible for the management of institutional investment portfolios within the fixed income asset class. He was also Co-portfolio manager for global absolute return fixed income strategies investing across global developed markets. Prior to this, Andrew has held several other senior investment roles in Melbourne and London. Mr. Canobi holds a BA from University of Melbourne; a Graduate Diploma in Commerce & Industrial Relations from the University of Melbourne School of Business and a Graduate Diploma in Applied Finance and Investment from the Securities Institute of Australia. He is a Member of the Melbourne Society of Financial Analysts, a Senior Fellow of the Financial Services Institute of Australia (FINSIA) and a Chartered Financial Analyst (CFA) Charterholder. 27

15 Biography STUART DEVLIN Southern Region Manager Stuart Devlin joined Franklin Templeton Investments in April 212 with responsibility for Key Accounts across Victoria, South Australia, Tasmania and Western Australia. Mr. Devlin has 16 years experience in the financial services industry having previously held roles in the areas of business development, training, research, investment management, compliance, financial planning and accounting. Prior to joining Franklin Templeton, Mr. Devlin worked with ING Investment Management, AXA, Zurich, the Lonsdale Group, Grant Thornton and the Victorian Superannuation Board. Mr. Devlin holds a bachelor's degree in business accounting from RMIT University and a diploma of financial planning from the University of South Queensland, as well as having completed a Certificate IV in Superannuation with the Association of Superannuation Funds of Australia. 28 Important Information Franklin Templeton Investments Australia Limited (ABN ) (Australian Financial Services Licence Holder No ) issues this publication for the benefit of the category of person described below for information purposes only and not investment or financial product advice. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation, or needs of any recipient. A disclosure document for any Franklin Templeton funds referred to in this document is available from Franklin Templeton at Level 19, 11 Collins Street, Melbourne, Victoria, 3 or or by calling The disclosure document should be considered before making an investment decision. This document has been prepared for circulation to persons who are wholesale investors within the meaning of the Corporations Act 21 (Cth) or to whom this document may otherwise lawfully be communicated to give preliminary information about the investment propositions described herein. It is confidential communication to, and solely for the use of, and may only be acted on by, such persons. This publication is for wholesale/institutional investors, institutional investment consultants, and eligible counterparties only. It is not directed at private individuals and in no way does it constitute investment advice. Any research and analysis contained in this presentation has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Any views expressed are the views of the fund manager and do not constitute investment advice. The underlying assumptions and these views are subject to change. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of this commentary or any information, opinion or estimate herein. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not an indicator nor a guarantee of future performance. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. Copyright Franklin Templeton Investments. You may only reproduce, circulate and use this document (or any part of it) with the consent of Franklin Templeton Investments. 29