Australia Property Institute State of the Market Conference

1
Australia Property InstituteState of the Market
Conference

• Melbourne Dr Don Stammer
• 23 October 2001 Director, ING Australia

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The five things we owe our children / next
generation

• 1. A sense of humour

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The five things we owe our children / next
generation (cont.)
2. A reasonable education
4
The five things we owe our children / next
generation (cont.)
3. An understanding of the magic of compound
interest
A P (1 r)n
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The five things we owe our children / next
generation (cont.)
4. An awareness the cycle lives on
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The five things we owe our children / next
generation (cont.)
5. Some help when its time to buy their first
house/apartment
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The world in eight sentences

• World growth has slowed
• ... and the terrorist attacks add to global
  uncertainties and slowing growth
• but note the policy easings
• Global share markets have underperformed over the
  last year or so
• The next cyclical upswing, when it comes, is
  likely to be a synchronised upswing across the
  major blocs

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The world in eight sentences (cont.)

• Japan has lost its way China is doing well
  elsewhere in Asia, cycles are wider than in
  earlier years
• The US has been exceptionally strong despite
  NASDAQ, slowing growth, big rise in current
  account deficit
• Recurring concerns over coming months of a global
  recession

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Impact from the terrorist attacks

• Short term, many uncertainties
• Short term much gloom and slower growth
• In 2002, stronger growth
• That is, a wider cycle
• Shares usually become oversold after a crisis
• Interest rates down then up

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Australia in seven sentences

• The economy slowed markedly in late 2000 and
  has now begun to strengthen
• Employment lags the cycle
• The main risks are external... and the terrorist
  attacks will harm world growth

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Australia in seven sentences (cont.)

• Core inflation has been very low and is likely
  to peak a little higher next cycle
• The A has been exceptionally weak
• The Australian economy and investment markets are
  more stable than in earlier years and than in
  most other countries
• Talk of recession but recession here isunlikley

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Core Inflation
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Inflation the next 5/10 years

• Trend inflation to remain low (globalisation
  targeted monetary policy changes in wage fixing)
• But somewhat wider cycle than in 1990s

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Investment themes in the 1990s

• Collapse of inflation and interest rates
• Privatisations  
• Banks were unpopular but profitable  
• Tech boom/bust

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Investment themes the next 5/10 years

• A synchronised global cycle?  
• A slightly higher peak in inflation  
• Lots of sector rotation  
• Emphasis on companies' sustainable earnings   
• Harder to obtain double digit rates of return

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All Ordinaries Accumulation Index (yoy change)
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Listed Property Trusts Accumulation Index (yoy
change)
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Average returns on shares by decades

• 1980-1991 17
• 1991-2000 13
• 2001-2010 8 ????
• Long-term growth 3.5
• Trend inflation 2.5
• Other 2.0

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Average returns from investments the next 5/10
years

• Cash 4.5
• Bonds 6.0
• Shares 8.0
• LPTS 9.0
• ?Need for greater care in investing to achieve
  attractive returns

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90 Day Bank bill yields
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Interest rates

• Shorter-term interest rates are strongly
  influenced by monetary policy
• And monetary policy is  more powerful and
  proactive
• Long-term interest rates are influenced by
  growth, inflation and US rates

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The share market

• Australias share market is now a low beta one
• Powerful themes of 1990s have run their course
• Lots of sector and stock rotation
• Importance of sustainable earnings of companies
• ? Adds to case for managed equity funds

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Property

• Low inflation and low immigration change the
  property market
• The cycle is milder
• Its more selective and uneven
• It's more tiered
• But it still responds to lower interest rates!
• And there's still a cycle
• Listed property trusts have additional appeal
• Gearing
• No stamp duty
• Income yields high relative to bonds

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Listed property trust yields vs10 year bond
yields
Source DBAG estimates, Datastream
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Valuing property

• Growing emphasis on DCF/NPV relative to use of
  cap rates
• DCF/NPV look further ahead
• Parallel changes have occurred in the share
  market
• The question is - what is the appropriate
  discount rate?

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The Australian dollar

• Has been very weak
• This saved the Australian economy
• Influenced by
• commodity prices
• competitiveness
• comparative rates of growth
• comparative interest rates
• confidence
• central bank action
• crappy concepts such as old economy/new economy

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A US RBA Commodity price index
Source DBAG estimates, Datastream
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A/US purchasing power parity
Source DBAG estimates, Datastream
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The tax changes

• GST
• Cuts in income taxes
• Cuts in company taxes
• Cuts in capital gains taxes
• Full value from franked dividends
• Negative gearing retained

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Implications from tax changes

• Increase in demand for franked dividends
• Reduction in supply of franked dividends
• Over time, more return from shares will come from
  capital growth
• Slightly favour shares over property

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Global investments

• Have underperformed over the last year or so
• Will come back into performance
• Note benefits of diversification

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The Australian economy investment markets

• The economy has a milder cycle than before
• We now take global hits on the currency and less
  on the economy, shares, interest rates or
  property
• Low inflation is again the norm
• Australian share market is low beta
• Demise of cost-plus pricing
• Weak A boosts competitiveness not inflation
• Tax changes are very important

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The golden and eternal rules of investing

• 1. Invest for the medium and long-term - not the
  next few months

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The golden and eternal rules of investing (cont.)
2. Reasonable diversification
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The golden and eternal rules of investing (cont.)
3. Emphasise quality
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The golden and eternal rules of investing (cont.)
4. Take good advice
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The golden and eternal rules of investing (cont.)
5. Remember that the cycle lives on
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The golden and eternal rules of investing (cont.)
6. Hold a selection of growth assets
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The golden and eternal rules of investing (cont.)

• 7. Avoid fads

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The golden and eternal rules of investing (cont.)

• 8. The magic of compound interest