1
Market volatility and its impact on the Australian share market A presentation prepared by BT Financial Group for the adviser market
31 January 2008
2
Source: BT Financial Group, Datastream
S&P/ASX All Ordinaries Index – six months to 31 January 2008
Rising market volatility has seen the Australian share market fall 11% so far this year…
5,200
5,350
5,500
5,650
5,800
5,950
6,100
6,250
6,400
6,550
6,700
6,850
7,000
31/07/07 31/08/07 30/09/07 31/10/07 30/11/07 31/12/07 31/01/08
3
Source: BT Financial Group, Datastream
S&P/ASX All Ordinaries Index – 10 years to 31 January 2008
…but it remains at elevated levels over the long-term, up 118% over the last 10 years…
2,200
2,600
3,000
3,400
3,800
4,200
4,600
5,000
5,400
5,800
6,200
6,600
7,000
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
4
Source: BT Financial Group, Datastream
S&P/ASX All Ordinaries Index – 15 years to 31 January 2008
…and 265% over the last 15 years
1,400
1,900
2,400
2,900
3,400
3,900
4,400
4,900
5,400
5,900
6,400
6,900
Jan-93 Apr-94 Jul-95 Oct-96 Jan-98 Apr-99 Jul-00 Oct-01 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08
5
Source: BT Financial Group, Datastream
Major international markets – six months to 31 January 2008
It’s worth keeping in mind that market volatility has affected all markets, not just ours
70
75
80
85
90
95
100
105
110
31/07/2007 31/08/2007 30/09/2007 31/10/2007 30/11/2007 31/12/2007 31/01/2008
S&P 500 (US)-16% (9/10 - 22/1)FTSE 100 (UK)-17% (12/10 - 21/1)DJ EuroStoxx 50 (Europe)-17% (12/10 - 21/1)
Nikkei 225 (Japan)-31% (17/7 - 22/1)
US, UK and European stocks hit record highs
6
So what’s been driving the global market volatility we’ve seen lately?
The source of recent market volatility goes back to 2007 and the US housing market
Problems arising from defaults in the sub-prime mortgage component of the US housing market spread to global asset markets in the latter half of last year
The ripple effect of those problems on the US and global economy is what’s behind the market conditions we’ve seen recently, with global share markets falling as much as 25% in January on concerns that we’re headed for a global recession
7
What’s behind the falls we’ve seen lately in the Australian market?
Leveraged investments have played a big role in the run-up in share markets, both here and overseas
Every 10-15 years, when we get this generalised fear of recession, we end up having what we call ‘Leveraged Players’ being forced out of their positions
Recently, we’ve seen some of these leveraged players – both companies and individual investors – forced to sell, pushing the market lower
Individual investors who had over-leveraged have been forced to sell either because of margin calls or, in many cases, because of fear as they react to the impact that current uncertainty is having on their portfolio
8
What does this market volatility mean for the Australian market in the near-term?
Investors need to get used to higher levels of market volatility. From 2002-2006 we had steady returns and few hiccups, but this is unlikely to be repeated in the next 2-3 years
How the Australian market performs in the near-term will rest on the underlying fundamentals, which from BT’s perspective represent the corporate profits and associated dividends paid to shareholders, and whether or not a global slowdown will spill into the local economy and undermine those fundamentals
We think that question is yet to be answered, but we would expect global growth this year to be positive and the Australian economy to remain relatively robust despite this growing volatility
We’ve not actually had an extended down market like we’ve seen recently since 1994/95, but it’s generally after a week or two of forced selling that long-term investors re-enter the market. When this happens, we normally get a reasonable bounce and a period of market stability
9
What steps is BT taking to address the impact of this market volatility?
One of BT’s strengths is that we always focus on the right levels of diversification and risk within our portfolios, whether its Australian shares, listed property or fixed income, so nothing’s really changed from our perspective
This focus on diversification and risk management, as well as our investment insight, is what prevents BT’s portfolios from being damaged excessively in the sorts of down markets we’ve seen recently
We’ve also stepped up our focus on ensuring that we have the right valued stocks in our portfolios. We continue to invest in companies with secure cash flows, limited expectations in their valuations and sound management teams
At BT, we’re happy in our ability to sidestep some of the blow ups that have really triggered the downturn in the last 8-10 weeks
10
What can investors do in this type of market environment to help protect their own portfolio?
Don’t panic – invest for the long-term
Understand risk
Diversify your investments
Avoid chasing returns
Don’t forget – time is on your side
Find hidden value
Employ experts
Seek professional advice
There are a number of investment strategies that investors can employ to help manage and protect their own portfolio
11
Don’t panic – invest for the long-term
12
Source: BT Financial Group, Datastream. Global shares measured by the MSCI World (Price) Index to 31 January 2008
It’s easy to get caught up in short-term market movements. Keep the end goal in sight
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Bond Market Crash
Aug 97
Asian Currency Crisis
Jul 98
Russian Bond Crisis
Jul 01
Tech Wreck
Sep 01
Attack on Twin Towers
Jun 07
US Sub-prime Crisis
Jan 91
Gulf War
Impact of major market events on global shares since 1990
13
Long-term asset class performance
Note: Accumulated returns based on $1,000 invested in December 1984Source: S&P/ASX 300 Accumulation Index, MSCI World ex-Australia (net dividends) Index in A$, S&P/ASX 300 Property Index, UBS Composite 0+ years index, Citigroup World Government Bond, Unhedged in A$
31 January 2008
Australian bonds
Listed property
Australian shares
Cash
Global shares
$0
$1,500
$3,000
$4,500
$6,000
$7,500
$9,000
$10,500
$12,000
$13,500
$15,000
$16,500
$18,000
$19,500
$21,000
$22,500
$24,000
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
14
Understand risk
15
-40%
-20%
0%
20%
40%
60%
80%
100%
All investing involves a trade-off between risk and return
Australian shares, one year returns - Greater volatility over the short-term
Source: Datastream. S&P/ASX 200 Accumulation Index annualised returns to 30 November 2007 shown
Australian shares, five year returns - Reduced volatility over the long-term
-40%
-20%
0%
20%
40%
60%
80%
100%
1985 2005200019951990
16
Diversify your investments
17
The more you spread your investments, the less chance you have of losing money
Cash
Fixed interest
Individual securities
Property
Shares
Investment managers (or styles)
RegionsAsset classes
18
0
10
20
30
40
50
60
0788 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Every asset class has its day in the sun
Source: MSCI World ex-Australia index. Net Dividends reinvested in A$, S&P/ASX 300 Property Trusts Accum. Index, S&P/ASX 300 ex-LPT Accum. Index, UBS Composite Bond Index (all matures), UBS Bank Bill Index. Figures are as at 30 June 2007.
Best performer each year (%)
Australian sharesAustralian bondsInternational sharesCashInternational bondsListed property
19
Diversification also applies to regions
Source: MSCI World Index as at 30 June 2007
World sharemarket values (%)
23
3
52
11
101
US
Europe
U.K.
Australia
Asia (ex-Japan)
Japan
20
Avoid chasing returns
21
Can you pick next year’s winner?
One-year returns to 30 June 2007 (%)
Australian 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Cash 7.78 6.61 5.15 4.96 5.34 5.96 4.62 4.85 5.20 5.49 5.80 6.42
Fixed interest 9.40 16.81 10.88 3.33 6.18 7.44 6.23 9.71 2.43 7.76 6.79 3.99
Property 3.70 29.21 9.74 3.96 15.62 13.91 15.24 12.17 17.21 18.40 17.42 26.32
Shares 14.62 27.16 1.63 15.13 18.49 9.11 -4.54 -1.61 21.73 26.03 23.08 29.21
International 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Fixed interest -9.60 9.13 26.19 -2.57 13.73 14.54 3.14 -2.46 1.71 -1.66 1.52 -9.93
Shares 6.66 28.56 42.16 8.17 23.81 -6.01 -23.50 -18.53 19.37 0.06 20.97 7.77
Best performing asset class for each year is highlighted. Indices: Liquids Index (Cash), UBS Composite 0+ years index
(Australian Fixed Interest), S&P/ASX 300 Property Index (Australian Listed Property), S&P/ASX 300 Accumulation Index
(Australian Shares), Citigroup World Government Bond Index unhedged in $A (International Fixed Interest), MSCI World ex-Aust
(net divs) Index in $A (International Shares)
22
Don’t forget – time is on your side
23
Enrol in a get rich slowly program – the power of compound interest
$153,971
142,566
132,006
122,227
113,174
104,790
97,028
89,841
83,186
77,024
71,319
66,036
61,144
56,615
52,421
48,583
44,943
55
54
53
52
51
50
49
48
47
46
45
44
43
42
41
40
39
Assumptions: 8% p.a. interest, all reinvestedSource: BT Financial Group
$98,471
90,251
82,639
75,592
69,067
63,025
57,430
52,250
47,454
43,013
38,901
35,093
31,568
28,304
25,281
22,483
19,891
41,61438
38,53137
35,67736
33,03435
30,58734
28,32233
26,22432
24,28131
22,48630
19,89129
17,49228
15,27027
13,21326
11,30925
9,54524
7,91223
6,40022
$5,00021
Sally
17,492
15,270
13,213
11,309
9,545
7,912
6,400
$5,000
-
-
-
-
-
-
-
-
-
-
Matt
24
Time, not timing, is important
All ordinaries index, annualised returns (%)
Note: The returns are shown as historical, investment returns are volatile and past performance is not necessarily indicative of future returns
Minus the 10 best days
Minus the 20 best days
Minus the 30 best days
Minus the 40 best days
Minus the 50 best days
Minus the 60 best days
Minus the 70 best days
Full 2,609 trading days
June 1997- June 2007
-1.11
0.42
2.02
3.73
5.59
7.62
9.84
13.07
25
What is dollar cost averaging?
$10010.0$10$100January
Total valueUnits purchased
Unit price InvestmentMonth
$65065.0$500Total
$65010.0$10$100May
$44012.5$8$100April
$21320.0$5$100March
$18012.5$8$100February
Note: No allowance made more inflation, taxation, fees or expensesSource: BT Financial Group
26
Find hidden value
27
Economic trends$
The best investment research processes unlock hidden value
Research analysis Industry trends$
Company analysis$Supplier/competitor environment$
28
Employ experts
29
Even the smartest investors (including many corporate investors) use managed funds
A managed fund provides investors with:
More convenient investing Broader diversification with less investment dollars Professional fund managers who monitor and actively manage your portfolio Economic research and specific company information Assets not available to individual investors Alternative styles of investment strategies
“The methodical, systematic approach taken by most fund managers helps them avoid many of the mistakes individual investors are prone to”
30
Seek professional advice
31
“What is your main information source for making investment decisions?”
Source: BT Investor Poll, October 2004
Financial adviser/accountant
Magazines/newspapers
Other family members
Spouse/partner
Internet
Friends
Other
None/don’t know 10%
7%
4%
5%
10%
12%
13%
38%
32
What you get from your financial adviser
Expertise
Efficiency
1. A holistic approach
2. Asset allocation
3. Security selection
4. An education
33
This presentation has been prepared by BT Financial Group Limited (ABN 63 002 916 458) ‘BT’ and is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. BT does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, BT and its directors, employees and consultants do not accept any liability for any error or omission in this presentation or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise noted, BT is the source of all charts; and all performance figures are calculated using exit to exit prices and assume reinvestment of income, take into account all fees and charges but exclude the entry fee. It is important to note that past performance is not a reliable indicator of future performance.
This document was accompanied by an oral presentation, and is not a complete record of the discussion held.
No part of this presentation should be used elsewhere without prior consent from the author.
For more information, please call BT Customer Relations on 132 135 8:00am to 6:30pm (Sydney time)