Evaluating the Australian Outlook through a Global Lens Chris Siniakov Managing Director, Fixed Income
International Bond Yields 4.00% 2-Year Government Yields as at 15 January 2015 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% Source: Bloomberg, UBS, Franklin Templeton Investments 1
International Bond Yields Emerging Markets 15.00% 2-Year Emerging Market Yields as at 21 April 2015 12.00% 9.00% 6.00% 3.00% 0.00% -3.00% Source: Bloomberg, UBS, Franklin Templeton Investments 2
Central Bank Interest Rates: Advanced & Developing Economies 3 Main Central Bank Policy Rate 12/29/2000 to 01/08/2015 7 6 5 4 3 2 1 We expect rates to rise in 2015. Main Central Bank Policy Rate 12/29/2000 to 01/08/2015 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 We expect policy to remain accommodative. 8.0 7.5 7.0 6.5 6.0 5.5 0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 United Kingdom United States 0.0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 China (Right) Eurozone (Left) Japan (Left) 5.0 1 Source: FactSet, Bank of England, Federal Reserve System. 2 Source: FactSet, Eurostat, Bank of Japan, People Bank of China. 3
Consumer Prices Globally CPI, All Items, YoY%¹ 12/29/1995 to 12/31/2014 12 CPI, All Items, YoY%² 12/29/1995 to 12/31/2014 12 10 8 6 4 10 8 6 4 2 0-2 -4 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 Euro Area China United States 2 0-2 -4 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 Japan United Kingdom World 1 Source: FactSet, U.S. Department of Labor, National Bureau of Statistics of China, Eurostat.. 2 Source: FactSet, International Monetary Fund, Ministry of Internal Affairs & Communications, UK Office for National Statistics. 4
US$ Trillions No Apparent Shortage of Global Liquidity Central Bank Assets January 1, 2008 September 30, 2014 $8 $6 $4 $2 $0 2008 2009 2010 2011 2012 2013 2013 2014 e Total BOJ Fed Sources: Federal Reserve and Bank of Japan, as of September 30, 2014. Shaded area indicates projections starting October 2014. Federal Reserve projections assume Quantitative Easing program is reduced by $10 billion at each subsequent meeting. Bank of Japan projections assume that the balance sheet is increased to $2.9 trillion by the end of 2014 in equal increments each month. There is no assurance that any projection, estimate or forecast will be realized. 5
General Government Gross Debt / GDP General Government Gross Debt / GDP From 1998 to 2013 300 250 Japan 243.22% 200 150 100 Italy 132.53% US 104.52% France 93.88% UK 90.10% Canada 89.12% Germany 78.06% 50 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 Canada France Germany Italy Japan United Kingdom United States Source: FactSet, International Monetary Fund. 6
Real Effective Exchange Rate: Developed Countries Developed Market: JP Morgan Trade Weighted Broad Real Effective Exchange Rate 01/1994=100 Jan-94 to Sep-14 (Monthly) 160 150 140 144.61 130 120 110 100 106.77 100.91 97.92 90 80 78.60 70 62.86 60 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 United States Eurozone Japan United Kingdom Canada Australia Source: FactSet, JP Morgan. 7
Value of Trade-Weighted U.S. Dollar Currency Trends Have Historically Lasted Several Years U.S. Nominal Trade-Weighted Exchange Rate Index From Jan-73 to Dec-14 (Monthly) 150 140 6 Years 6 Years 10 Years 7 Years 10 Years Index 130 120 110 100 90 80 70 60 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: FactSet, Federal Reserve System. 8
GDP of Major Economies 2014 Nominal GDP ($USD) 20,000 Nominal GDP ($USD, Billions) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 United States 17416 China 10355 Japan 4770 Two of the big engines of global growth the United States and China are tracking well Germany 3820 France 2902 United Kingdom 2848 Brazil 2244 Italy 2129 Russia 2057 India 2048 Canada 1794 Australia 1483 0 Source: FactSet, International Monetary Fund. See www.franklintempletondatasources.com for additional data provider information. 9
Y/Y % Change China is Now a Significant Driver of Global GDP Growth and Appeared to be Relatively Unscathed During the Great Recession 2000 to 2013 10% 8% 6% 4% 2% 0% -2% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 China Rest of the World Source: FactSet, International Monetary Fund, 2014. 10
% of Total China Appears to Be Just Midway Through Urbanization Rural Population: 1840-1990 100% 80% 60% 1950 1970 1990 2010 40% 20% 0% 1840 1860 1880 1910 1930 1950 1970 1990 2010 US (lower scale) China (upper scale) Sources: U.S. Census Bureau, CEIC, HSBC, as of December 2013. Upper scale refers to the Chinese time period (1950-2010). The US time period is at the bottom axis (1840-1990). This chart is designed to show that China is midway through its urbanization path compared to the U.S. 11
London Paris Seoul Tokyo Shanghai Guangzh ou Shenzhen Beijing Nanjing Dalian Meters/Square Meters China Still Needs Infrastructure Investment Railway Density As of December 30, 2013 600 500 400 300 200 100 0 Sources: OECD, HSBC, as of December 2013. 12
Still ample room for increased investment in infrastructure Chengdu Subway Tokyo Subway Sources: www.cdmetro.cn, www.tokyometro.jp, HSBC, as of December 2013 Charts are for illustrative and discussion purposes only. 13
Australia Terms of Trade 140 Australia Terms of Trade 120 100 80 60 40 20 0 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 Australia Terms of Trade Source: Australian Bureau of Statistics 14
Australia GDP Source: Australian Bureau of Statistics 15
Size of UBS Australia Composite Bond Index Australian Bond Market has Experienced Substantial Growth Growth of the Australian Domestic Bond Market As at 31 December 2014 ($ billion) 900 600 300 0 1992 1999 2006 2013 Source: UBS Australia, Franklin Templeton Investments 16
Dramatic Shift in Market Composition Securities Outstanding Market Value % in the UBS Australia Non-Govt. Bond Index As at Financial Year End 100% 36% 42.3% 61.5% 68.6% 50% 64% 57.7% 38.5% 31.0% 2001 2005 2008 Australia International Source: UBS Australia, Franklin Templeton Investments 2014 0% 17
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 30 June 2014. 18
Yield % Local Investment Returns Driven by International Markets Australian and US 10-Year Government Bond Yields June 1979 December 2014 18 12 Has the structural decline in global bond yields run its course? 6 0 1979 1984 1989 1994 1999 2004 2009 2014 Australia 10yr bond US Source: Bloomberg, Franklin Templeton Investments 19
Credit spread (in basis points) Strong Relationship Between Australian and Global Credit Markets Global Investment Grade Credit Spreads As at 31 December 2014 500 250 0 2005 2008 2011 2014 Australia itraxx US CDX Europe itraxx Source: Bloomberg, Franklin Templeton Investments 20
Rolling 12 month index returns How Much Risk Is Your Portfolio Really Taking? Rolling 12 month returns highlight strong correlation between credit and equity markets June 1984 December 2014 60% 30% 0% -30% -60% 29/06/1984 30/06/1994 30/06/2004 30/06/2014 S&P Index Barclays US High Yield Index Source: Bloomberg, Franklin Templeton Investments 21
Barclays US High Yield Credit Spread % Traditional Approaches May Lead To Unintended Consequences Credit Spreads Returning Towards pre-gfc Levels February 1994 to December 2014 21.0 14.0 7.0 0.0 1994 1999 2004 2009 2014 Source: Barclays, Franklin Templeton Investments 22
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 2014. 23
Australia 10 Year Bond Yield % Very Little Cushion Against Rising Yields Australian Bond Yield Sensitivity September 1979 December 2014 18 12 200bp 150bp 275bp 6 400bp 0 s 1979 1984 1989 1994 1999 2004 2009 2014 Source: Bloomberg, Franklin Templeton Investments 225bp s 180bp s 115bp 24
Conclusions Global macro environment for 2015 is somewhat encouraging with reasonable growth in the world s two largest economies USA & China and a cyclical upswing in Europe Global 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 25
Biographies CHRIS SINIAKOV Managing Director, Fixed income Chris Siniakov is Managing Director, Fixed Income at Franklin Templeton Investments. He has over 20 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. 26
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