Presenter - Brian Nash Director/Authorised RepresentativeMerlea Investments Pty LtdAustralian Financial Services Licensee No. 226415

Global economy: hopes and fears for 2014

D i s c l a i m e r This presentation has been prepared for the general information of investors and not having regard to any particular person’s investment objectives, financial situation and particular needs. Accordingly, no recipient should rely on any recommendations (whether expressed or implied) contained in this document without having obtained specific advice from their adviser. Brian W. Nash & Merlea Investments make no representation, give no warranty and do not accept responsibility for the accuracy or completeness of any recommendation, information or advice contained herein and Brian W. Nash & Merlea Investments will not be liable to the recipient or any other persons in contract, in tort for negligence or otherwise for any loss or damage arising as a result of the recipient or any other person acting or refraining from acting in reliance on any recommendation, information or advice herein except insofar as any statutory liability cannot be excluded.

Global economy: hopes and fears for 2014Is the global economy heading for another crash?Many problems, including too-big-to-fail banks and the growth of a largely unregulated shadow banking system, have not been adequately addressed. Central banks are unclear about how and when to remove the colossal stimulus they have provided for their economies over the past five years. These core weaknesses mean it would be unwise to rule out another financial crisis in 2014.

How will Janet Yellen fare as Federal Reserve chairman?If inflationary pressure rises as the economy picks up, Yellen will face growing calls to move faster. As a serious economist and Fed veteran, she has as good a chance as anyone of walking the fine line between scuppering recovery and letting inflation run out of control. But unwinding QE on this scale is an unprecedented challenge: it seems all but certain that more turmoil lies ahead

Which of the emerging markets looks risky in 2014?Now that the Federal Reserve has started to reduce the amount of stimulus it is providing each month, the fear is that the hot money will leave emerging markets as quickly as it arrived, leaving countries facing runs on their currencies.

The most vulnerable emerging markets look to be those with big current-account deficits, because they are likely to be the first targets for currency speculators. High on the list would be Brazil, South Africa, Turkey and India.The biggest risk of all, however, is China. China is slowing down after its debt-fuelled recovery from the last recession. A hard landing in China would have severe global ramifications.

Global economy: hopes and fears for 2014 continuedIs the Eurozone over the worst of its tribulations?Unlike the US and, latterly, the UK, the Eurozone has yet to recover from the recession of 2008-09.A double-dip recession ended in 2013 but growth is still barely positive and not nearly strong enough to bring down a joblessness rate of more than 12%. Deflation is already a reality in Greece and Cyprus, while in Portugal, inflation is only just above zero. Falling prices increase the real value of debt, making it harder for countries to repay what they owe. The two potential flashpoints for 2014 are the ECB's asset quality review of Europe's banks, and the need for fresh bailouts for the two most vulnerable countries: Greece and Portuga.

Will Abenomics succeed in fixing Japanese economy?The burning question for 2014 is whether the first two of his three policy “arrows”, spending surge and quantitative easing on a massive scale – will be followed by the promised third arrow: economic reform. Among other things, the Abe administration is creating hundreds of thousands of childcare places, in a bid to tempt more mothers into the workplace and harness the power of what he calls womenomics. A series of overseas trade deals, including the ambitious Trans-Pacific Partnership, are also likely to lead to the opening-up of new sectors of Japanese industry to competition. There's a clear risk markets will lose faith with the debt-burdened Japanese government in the meantime (ratio of debt to GDP: 246%). By the end of 2014, we will have a much clearer idea of whether Abe's gamble has paid off.

Will Oil prices surge It will begin quietly, and will bring together many of the same factors that led to the previous repricing, which began in 2003. Spare capacity, the cost of the marginal barrel, and the continued decline of the cheap barrel will all confront a new upswing in global demand. The upswing in demand will largely be led by a return to global growth, even as renewables and the power grid will become the main avenue for global GDP. Oil's next repricing will not be as dramatic in percentage terms. But the road to $150 oil begins in late 2014.

Top 10 Economic Predictions for 2014

Top 10 Economic Predictions for 2014

1. US growth will slowly speed up. 2. The European recovery will proceed, but at a

very sluggish pace. 3. China’s growth rate will be sustained.4. Other emerging markets will also perform a little

better.5. Unemployment rates in the developed world will

remain high. 6. Commodity prices will go nowhere and inflation

will remain a low-level threat. 7. The Federal Reserve will start scaling back its

stimulus, while other central banks will likely wait or provide more stimulus.

8. Fiscal headwinds will ease. 9. The US dollar will strengthen against most

currencies. 10. There will be more upside risks than downside

risks facing the global economy.

Outlook for non oil commodities

• Demand was relatively subdued in 2013, constrained by weak OECD growth and slower Chinese growth.

• Rising incomes and ongoing urbanisation in the developing world will underpin medium-term demand growth in industrial raw materials.

• The current price of many foodstuffs does not accurately reflect the future demands on this industry. Particularly as the world moves towards 9 billion and continues to increase at a totally unsustainable rate of 3 million people a week.

• Expect the price of many commodities to increase in 2014

Inflation receding worldwide, but still a concern in somedeveloping countries

In the near term, monetary policies designed to achieve a desirable level of inflation will continue to counteract the deflationary pressures of a high-debt world still recovering from a deep financial crisis.

Key drivers of U.S. consumer inflation generally point to higher-but-modest core inflation in the 1.5%–3% range over the next several years. In parts of Europe and in Japan, deflation remains a greater risk.

The potential for higher inflation may force a number of countries – including Brazil, Turkey, India, and Indonesia – to raise interest rates in 2014. At a time in which growth is already slow, monetary tightening would represent insult to injury for financial assets

Central bank near-term bias

With economic momentum picking up in 12/13 but inflationremaining below target, we expect the BoC will maintain aneutral policy stance in the near term.

The Fed will continue to taper asset purchases in 2014, althoughstronger forward guidance points to the fed funds ratebeing held at its current level until late 2015.

With unemployment continuing to fall toward the BoE’s 7%threshold, we expect forward guidance will be strengthened toassure markets that the Bank Rate will not be raised in 2014.

Weak inflation continues to highlight the need for exceptionalmonetary stimulus, and we expect rates will be held at currentlevels. The ECB continues to emphasize its willingness to actfurther if the economy fails to improve.

The RBA maintained a mild easing bias in December, butGovernor Stevens has noted that the effect of further stimuluswould be limited.

Continued exchange-rate volatilityGlobal growth differentials between emerging and developed countries, normalization of monetary policy in high-income economies, ongoing guided official intervention and leadership transition in core emerging market jurisdictions are some of the primary near-term drivers of foreign exchange flows.

Attractive interest rates and earnings potential will trigger repatriation flows into USD assets. Top-tier currencies (CAD, MXN & BRL) will suffer a soft tone in the first quarter of the New Year.

Europe is in a nascent economic recovery. However, we project a weakening tone for the core currencies (EUR, GBP) and top-tier regional emerging-market currencies (RUB, TRY) as US economic and market strength drives capital flows back into the USD and interest rate differentials weigh on the EUR.

The Asian currency landscape will be dominated by resurging CNY appreciating forces and JPY weakness versus the USD. Competitive realignment forces may weaken those regional currencies aligned to the JPY. The THB will retain a negative tone until political risks and uncertainties dissipate.

America

The consumer is key to the economic outlook

Stronger growth in 2014The US economy is expected to gain momentum

We have upped our 2013 GDP estimate to 1.9%. Momentum in late 2013 supports our view of stronger growth in 2014. We maintain our forecast at 2.6% with risks to the upside.

Government spending will support economic growth in 2014 for the first time since 2010.

The US Fed started scaling back its bond buying programme in January 2014. This will lead to a rise in government bond yields and mortgage rates.

The Fed will employ forward guidance in order to exert downward pressure on short-term interest rates.

The US will probably not be as much of an engine for world growth as in previous global upswings, but amongst the advanced economies, the US will look strongest with growth averaging around 3.0% in 2014.

Three main drivers of household spending:

Household wealth. Have Americans seen their wealth increase? Yes!

Are Consumers Upbeat and Spending?

• Conference Board: Latest consumer confidence near 5½yr high.

• University of Michigan: Consumer sentiment is just below a 6 yr. peak.

• Are households spending more on big-ticket items? Yes! Purchases of consumer durable goods accelerated in the last quarter.

The Fed on a Tight Rope

Incoming Fed chair-woman Yellen will be tasked with finding the appropriate pace of monetary tightening that continues to support the economy but prevents surging inflation.

A further complication might arise from the fact that long term interest rates will start creeping up early while the economy is still trying to walk on its own. In particular, stronger mortgage rates could prove to be a thorny issue. Indeed, higher rates would slow the housing recovery, but it is uncertain the Fed would want to ramp up purchases of mortgage-backed securities to offset the increase once tapering is underway.

PMI at one-year low, as output growth eases sharply PMI rises to 11-month high, indicating solid improvement in business conditions:• Output supported by strong increase in new orders• Employment growth quickens to nine-month high• Input price pressures intensify

Equities and CommoditiesAfter big gains in equities in 2013, the onset of US tapering will result in much more modest equity

market increases in 2014

By the end of the year, annual increases in equity prices will have fallen to around 5-6% in the US.

On the commodities front, we expect increased oil supply (helped by reduced disruption in key producers) plus modest demand growth to push Brent oil prices down to US$104 per barrel in 2014 from US$109 per barrel in 2013.

The picture for most other commodities should be similar with gradually firmer demand being balanced by stronger supply and inventories.

Bottom Line for the US EconomyPositives

• Higher home values and stock prices are driving gains in household wealth.• More hiring would help lift Americans’ spirits and underpin the consumer purchases that make up

about 70 percent of the economy.• Households are confident that the increase in overall economic activity are sustainable and expect

gains in 2014.• Manufacturing also showed signs of making strides in the new year. The Federal Reserve Bank of

Philadelphia’s factory index increased to a three-month high in January as sales and employment improved.

Negatives• National debt: USD$16.5tn and rising; debt to GDP: 106% and rising. This is absurdly unsustainable.• QE to infinity promises currency debasement, rising prices and lower discretionary spending.• Foreigners are buying fewer, and selling more US Treasury bonds.• America’s future economic growth will depend on its ability to innovate, create, and reinvent the

way it does business. And it will need to meet the growing and evolving untapped demands of an increasingly challenging global environment

• Tapering will be easier said than done, and the stock market is often badly surprised.

Western Europe

Western Europe

• Euro zone growth fell back to only 0.1% in the third quarter from 0.3% in the second.

• But the region has emerged from recession and we have raised our 2014 growth forecast to 1.1%.

• The ECB’s decision to cut its main policy rate by 25 basis points to 0.25% in November was a response to a decline in the euro zone’s inflation rate to 0.7%, well below its 2% target.

• Deflationary pressures are building in Greece and Spain as they undergo “internal devaluations”.

• We expect growth in the euro zone to average 1.4% a year in 2015-18.

• Balance sheet obstacles to sustained demand.

Europe gets stressed

Europe will begin 2014 with its economy slowly starting to recover from the recession of the last few years - but make no mistake, the Euro Zone crisis is percolating away in the background and threatening to erupt at the slightest provocation.

Portugal’s ability to exist - the bailout looks shaky and Greece can no more pay back its enormous dent this year than it could last year.

A new Greek debt write off will be needed at some stage.

This will likely follow some sort of Slovenian banking bailout. It is perilously close to that stage now.

Europe Looks Like Pre-Abenomics Japan

The threat of deflation will hang over much of Europe for the year ahead and if this starts to threaten the German economic heartland we may see the ECB start to engage in more unconventional monetary activity (basically QE) to boost inflation. Expect stiff resistance to this in Germany.

2014 could also be the year the bond market finally gives up on France, as it becomes clear that the country will not deal with its budget deficit (it hasn’t balanced a budget in nearly 40 years) and the bond market may take fright.

Europe’s latest unemployment statistics are a horror story

Unemployment rate – youth and total

Europe’s unemployment rate is showing some signs of peaking at last — but at 12.2% overall it’s horrifically high, and youth unemployment in Southern Europe is higher still. Unemployment will remain scandalously high across the fringes of the continent and the Euro will spend the year overvalued as ever – largely due to China selling its US investments and putting the proceeds into Euros.

Tempers at home are increasingly frayed and next year will see more middle class protests as this section of French society is absolutely taxed to the hilt (to a higher extent than even in Sweden).

Europe ConclusionsPositives• There are signs that the European economy is emerging from recession, but the recovery will be slow and

uneven. PMIs they have shown a turn-up in recent months. Also, the positivity enlightened by a rising EUR relative to the USD has been indicated by some as a 'good' thing - though obviously (as Mr. Hollande recently noted) not for all as exports hurt

• All-in-all, it seems, as we have seen elsewhere, that equity markets are pricing in a miracle as fundamentals reflect anything but. Though perhaps, the fact that European stocks and credit are now down in price on the year reflects an awakening to the solemn realities...

• But the disparity between southern European cities and those elsewhere will widen.

Negatives• The price of energy (in EUR) is high, very high, and wearing on spending and margins. This margin pressure

is even more intensified as the region gets close to deflation in asset prices - not good... and sure enough, the EUR strength (that was apparently a good thing) is crushing export growth

• Domestic Demand and GDP growth is decidedly negative and while second derivatives are heralded as green shoots, they are most certainly not taking the euro-area out of recession any time soon. This is weighing increasingly on the population as consumers see their general economic situation and household financial situation as very weak over the next 12 months...

• Credit is still tight, which will constrain business investment, and while consumer spending has picked up a bit, French and German shoppers can’t make up for a lack of demand in countries like Spain, Italy and the Netherlands, which are still in recession. Meanwhile, some 20 million people in the euro zone are still out of a job — a record 12.1%. That’s unlikely to change anytime so.

Japan, China and the Emerging markets

Japan

• What is Abenomics?

• Will Abenomics restore Japans growth?

• Will it succeed?

Everything You Need To Know About ‘Abenomics’The 3 Arrows

Expansionary monetary policy

Large scale QE

Flexible fiscal policy:

Japan has increased its debt

Growth strategy

No sign of wage growth has emerged

Abenomics key for Japan's economy in 2014

The catalyst for the change has been prime minister Shinzo Abe and his recovery programme, dubbed ‘Abenomics’.

On some measures, Abenomics has already been a huge success: while the Nikkei has rallied, the yen has devalued sharply, helping Japanese exports, which reached a three-year high last autumn.

GDP growth has been less dramatic and the trade deficit has widened, partly due to the costs of importing energy following the Fukishima nuclear crisis.

Will Abenomics work?

• The first arrow is flying towards the target.

• The second arrow is in the wrong direction. – Macroeconomic policy alone may help end deflation in the narrow sense but cannot

restore growth.

• The third arrow is important but has not been shot. – It is not clear where the third arrow is aiming. Need to focus on fewer reforms e.g:

Promote business realignment of companies and create an environment that encourages innovative start-up companies and new businesses in order to improve productivity and enhance corporate earnings.

– Support companies that shift to making proactive moves through decreasing the burden on corporations by, for instance, providing tax incentives.

Fed Tapering and its Implications for EmergingMarkets

• Why the slowdown of growth in EM and financial pressures?

• Which EM will suffer the most?

• Will some EM’s experience a severe financial crisis?

Why slowdown now

• Move away from market oriented policies towards state capitalism

• Some laxity in monetary and fiscal policy as liquidity was abundant, interest rates too low and credit excesses

• End of luck as: China is slowing and becoming less resource oriented

• The commodity super-cycle is over

• However slowly the Fed will taper and exit 0% rates. US bond yields up from 1.6% to 2.9% since May 2013

Traffic stands clogged near Connaught Place, a central commercial area in the heart of New Delhi, India. India’s auto sales surged 71.9 percent in November, according to data the Society of Indian Automobile Manufacturers

Some EM’s have stronger macro, financial and policy fundamentals and some have weaker ones

• Weaker ones include countries with large current account deficits, large fiscal deficits, falling growth, rising inflation, socio-political protest and upcoming elections

• Weaker group includes: India, Indonesia, Brazil, Turkey, South Africa, Ukraine

The INR depreciated by around 25% during the ‘taper tantrum’ reflecting concerns around India’s twin deficits problem, weak growth and high inflation. However, the trade balance has improved sharply by about one-third over the past 3 months. Negative real policy rates in Indonesia. Deteriorating current account deficit reflects both an adverse terms of trade and monetary stimulus. Inflation risks and strong credit growth putting pressure on the IDR despite policy rate rises.

Will some EM experience a severe financial crisis?But the weaker EM have some negative risks

Ugly policy dilemma:• If you tighten monetary policy to avoid

currency free fall and inflation, you kill growth and damage banks/corporations. So tight money is not credible.

• If you loosen monetary policy to boost growth, there is the risk of an inflationary free fall of the currency and risk that foreigners will not finance your external deficit.

• If you thus loosen monetary policy you may lose the nominal anchor of the economy and thus cause a free fall

• So damned if you do and damned if you don’t!

We expect capital inflows to gradually recover starting in the current quarter, albeit on a lower trajectory

This markdown in projected capital flows reflects both pull and push factors. The fundamental underpinnings of EM growth have deteriorated, making them somewhat less attractive to foreign investors. Moreover, rising global interest rates in anticipation of a Fed exit have compounded domestic weaknesses in EMs.

Increased country differentiation by investors should reward economies with strong fundamentals, but continue to put pressure on vulnerable economies.

Private capital in-flows to EM economies are forecast to fall in 2013 and 2014.

Developing nation stock markets have only been this cheap five times in the past 20 years, analysis suggests

China, hard landing or soft landing?

• Will China experience a soft landing or hard landing?

• China’s growth is unbalanced and unsustainable.

• Reforms will be slower than optimal and desirable as leadership is divided.

Local governments 'need to refinance debt'

• Chinese local governments will issue new debt in 2014 to repay old loans, since a large amount of local government debts will mature in the near term, said analysts in Hong Kong.

• Based on National Audit Office data, this year and early 2015 will be the peak repayment period for local government debt.

• This could be done through bank financing or issuing corporate bonds.

• Hopefully, they will choose bonds, because liquidity is tight on the mainland and that's expected to continue..

• Banks will have to issue preferred shares first to prop up their capital bases, if they are financing these rollovers.

In the past years, local governments have borrowed heavily to finance infrastructure projects. If defaults on debt repayments occur, experts say it could cause a confidence crisis.

China’s growth is unbalanced and unsustainable

China's economy still faces many difficulties, such as high local government debt, increasing reliance on "land finance" and inadequate liquidity risk controls. Meanwhile, shadow banking products are rising fast, and there is severely unbalanced supply and demand in some regions' real estate market.

New loans denominated in foreign currencies hit 584.8 billion yuan in 2013, representing a year-on-year decrease of 331.5 billion yuan.

First-tier cities continued to lead rises last month, with the prices of new homes in Beijing and Shanghai surging over 20 percent from a year ago, but Liu said the trend has been losing momentum.

Economic growth rebounds, but outlook softer

After years of very high growth, the government is managing a controlled deceleration.

The country is now in the spotlight because a crisis in China would probably send the world into a new crisis.

China’s growth is unbalanced and unsustainable: too much savings, investment and exports; too little private consumption

The key question at this stage is whether China would be able to manage a gradual deceleration of its economy, a soft landing, or, fall into a sharper slowdown, a hard landing.

The latest set of macroeconomic indicators show that Chinese authorities are succeeding at managing a soft landing. Many analysts have expressed doubts about the reliability of Chinese data, but overall it is accepted that they can be taken as a proxy of the direction of the economy

Reforms will be slower than optimal and desirable as leadership is divided

• China's leadership is serious about reigning in credit and will probably allow a sharper growth slowdown.

• Having re-accelerated over the summer of 2013, growth momentum declined again in the fourth quarter of 2013 as the withdrawal of stimulus measures began. Industrial output growth eased and so did investment and government spending. Exports also decelerated. Business sentiment indexes for manufacturing and services softened.

• Risk of a harder landing than the consensus expects (7.5% to 8% growth). Growth may slow down to 7% in 2014 and below 6% by 2015.

Will the reforms be strong enough to rebalance growthThe new leadership appears to be aiming for that. Major reforms that are rumoured to be

on their wish list include:

• Relaxing price caps on natural resources: then electricity rates and other production input costs would increase. That would shift investment incentives away from low-wage, resource-intensive sectors such as steel and cement manufacturing and toward higher-wage, resource-efficient sectors such as high-end technology manufacturing and financial services.

• Relaxing interest-rate controls and increasing financial market competition: Current regulations cap the interest rates that China’s state-owned banks pay on consumer savings and lock competing alternatives out of the market. Chinese citizens deposit their money in state banks at very low returns, and that gives the banks access to cheap capital, which they then loan out to state-owned enterprises at very low interest rates.

• Relaxing the household registration system: Under the current system, Chinese families have a permit to live in a certain district. If the best job opportunities are elsewhere, people can certainly move, but they will have to do so as illegal migrants. They will not have official residency permits or access to social services in the new location. Freeing up this system would allow for more labour mobility, particular rural-to-urban labour mobility.

• Levelling the playing field for private capital: Under the current system, state-owned enterprises enjoy preferential access to bank financing, government contracts, and so-called “strategic” market sectors such as rail, telecommunications services, electricity, and natural resource development, such as oil and gas development.

International market summary: The most important forces that will shape the global economy

Global monetary easing is drawing to a close:: • More than 500 interest rate cuts have occurred worldwide since June 2007. • The payoff: Faster growth in 2014 – 2015

Who is the newest emerging country? It is the United States!Energy revolution = It will have a profound impact on aviation, travel, tourism, manufacturing and the dollar. OPEC and Russia to be losers. • U.S. to regain competitive advantage. Outsourcing becomes much less attractive. • Capital of innovation = iPhone, Google Glass, Tesla, 3-D printing, Robotics, Genomics.

Emerging countries now dealing with “growth pains”:• 3.5 BILLION PEOPLE will move from rural areas to cities in the next 5 to 10 years;• $20 TRILLION to be spent on infrastructure to support this massive migration.• MORE THAN 50% of global GDP growth in the next 10 years will STILL come from emerging economies.

Brace for more serious exogenous shocks:• Middle East, Asia, global terrorism, cyber-war – all pose great threats to business.• Yet few firms perform stress tests to evaluate their vulnerabilities.

Australia's Economic outlook for 2014 is sobering, but that shouldn't lead to pessimism

Australian Performance of Manufacturing Index improved by 1.5 points in October, rising to 53.2

Key FindingsThe latest Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI) was broadly unchanged in December, at 47.6 points (seasonally adjusted). This marks the second consecutive month of contraction in the Australian PMI (50 points marks the separation between expansion and contraction), following a short-lived period of expansion (September and October) immediately after the Federal election.

The latest seasonally adjusted Australian Industry Group Australian Performance of Services Index (Australian PSI®) moved 2.8 points lower to 46.1 points in December.

RBA lowers 2014 GDP forecast

• As the global economy continues to recover, next year Australia will be left behind.

• With 22 years of consecutive growth Australia was the envy of the developed world, however many analysts have turned bearish on the economy amid a number of worrying headwinds.

• The most prominent concern has centered on the slowdown in the country’s once booming mining sector, caused by declining demand from its major trading partner China.

• Many worry that Australia’s non-mining sectors will not be able to ‘pick up the slack’.

Tourism arrivals from China are surging

November contained more sombre news for Australia’s tourism industry, when the ratio of annual arrivals to departures fell to its lowest level since November 1985, driven in part by a slump in inbound tourists from China .

The year to November 2013 was a record for outbound and inbound tourism. A record 8.65 million Australians holidayed overseas over the year – a 159% increase on 10 years ago (3.34 million). However, this was partly offset by a record 6.44 million inbound tourists arriving in Australia over the year – a 37% increase on a decade ago (4.71 million). As always, South East Asia (particularly Indonesia and Thailand) remains by far Australia’s favourite holiday destination, receiving 228,000 visitors in November, or 31% of Australia’s total departures over the month

Inflation behaving as expected - Allowed RBA to put rates on hold

• Inflation well within target at 2.2%.

• Traded inflation is beginning to rise.

• Domestically generated inflation pressures are easing.

• Slower wages growth on the back of softer labour market.

• RBA very comfortable with inflation outlook.

• The central bank says the impact of those rate cuts are being observed in rising asset prices.

Australian companies and consumers may finally be throwing off the shackles of doubt and fear

• Survey of business by Dun & Bradstreet for the first quarter of 2014, published Tuesday, has returned some of the best readings on business activity for over a year.

• Some two-thirds of Australian businesses say they’re more

optimistic about growth this year than last, the survey showed. Expectations for sales, employment, selling prices, capital investment and profits have all turned up at the same moment.

• That suggests the flow-through effects of cheap credit are

finally starting to emerge, months after the Reserve Bank of Australia cut interest rates to a record low of 2.5% last August.

• Add recent data showing racing housing prices and faster

credit growth, and there’s room to rethink the outlook for 2014. If business is feeling better about the future, consumers may soon follow. Spending and hiring make for a stronger economy.

The housing market – an improving story?

As the market enters 2014 and as values rise across each capital city, the rate of growth will vary greatly.

The main challenges in 2014 are likely to be the impact of a forecasted higher unemployment rate, affordability constraints for the more price sensitive sectors of the market (particularly in Sydney, Melbourne and Perth) and whether any regulatory changes will be implemented by APRA and the RBA to cool the near-record high levels of investment activity.

Where are we in the economic and stock market cycle?

We are in the expansion phase

Sector Rotation Model

Stage: Full Recession Early Recovery Full Recovery Early Recession

Consumer Expectations: Reviving Rising Declining Falling Sharply

Industrial Production: Bottoming Out Rising Flat Falling

Interest Rates: Falling Bottoming Out Rising Rapidly Peaking

Yield Curve: Normal Normal (Steep) Flattening Out Flat/Inverted

Where to Invest in 1st Quarter 2014

Financial (reduce property trust and bank stocks as they are becoming expensive)

Consumer cyclical (reduce exposure durable – non durables)

Energy

Transport

Capital goods

Mining

Infrastructure

Consumer Staples

Australia faces the challenge of managing prosperity

What could derail the American recovery? We believe the most significant threat to U.S. economic growth is inflation, which would cause long-term rates to spike. Wage inflation is not a problem, as unemployment is still relatively high. At 1.5%, core inflation is well contained today and looks to be so for the foreseeable future, while the velocity of money, a primary driver of asset inflation, remains subdued.

More broadly, structural issues across the euro zone continue to create considerable headwinds to more robust growth: money growth is slow, bank loans have declined, and unemployment remains at more than 10% for the region, with youth unemployment even higher at 23%.

For some time we have been saying that the Australian economy sits in a soft patch and is likely to remain there over the next 18 months at least. The economy is transitioning from a post-GFC stimulus and the second round of mining investment boom led growth to one of a more broadly-based growth

The non-mining-related industries are still suffering from the aftermath of the GFC. The overriding logic has been to cut costs. Nonetheless, by being financially conservative and deleveraging following the GFC, many businesses have rebuilt their balance sheets. But they will not invest significantly until capacity constraints emerge, and that is 18 months to 2 years away.

Thank you for your time…