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Capricorn Investment Partners Limited Client Presentation 8 March 2012

Capricorn Investment Partners Limited Client Presentation 8 March 2012. General advice warning.

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Capricorn Investment Partners Limited Client Presentation 8 March 2012

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  1. Capricorn Investment Partners Limited Client Presentation 8 March 2012

  2. General advice warning This presentation and the associated discussion is general in nature and does not take your individual situation into account. You are advised not to act on anything contained herein, or discussed as a consequence of the contents of this document, without receiving financial advice from a suitably qualified person such as a financial planner, lawyer or accountant.

  3. What will be covered Australia and the Global Economic Environment & Stock Market Performance

  4. A quick look back at 2011... • Characterised by crises, both natural and financial: • Natural • Floods in Queensland (January), Thailand (November), New South Wales (December) • Cyclone Yasi • Earthquakes in Japan and New Zealand • Financial • Ongoing Greek and Euro-zone sovereign debt issue • European austerity measures and public reaction • US government debt ceiling negotiations • USA loses AAA credit rating

  5. The impact of these events on the ASX Greek debt crises Japanese earthquake & tsunami US govt debt ceiling negotiations 2011

  6. The Australian economy remains relatively strong Despite the wide-ranging crises of 2011, the Australian economy is still relatively well-positioned GDP growth has remained positive and is expected to be around trend at 2.5 to 3.0%. Inflation is also under control and expected to be within RBA target

  7. The retail sector continues to struggle Australian retailers are being forced to cut costs and rationalise store numbers, as sales growth disappears And this is why..... ”Paradox of Thrift”

  8. Household debt levels may have peaked Not only are we saving more, we’re also less inclined to take on more debt, be it credit cards, car loans or mortgages The property market has also suffered, with average prices falling by over 5% in 2011

  9. The ‘Two-speed’ economy remains an issue Most growth and the majority of corporate profits are concentrated in the mining sector No growth in profits Banking ASX – Net Profits by Sector Mining

  10. Mining industry dominates investment The majority of business investment now takes place in the mining industry, with less emphasis on traditional sectors such as manufacturing However the mining industry is still a relatively minor employer, with only 2.1% of Australians employed directly in the industry

  11. But reliance on mining poses risks If the current commodities boom should end, economic activity would slow, tax revenues would fall and the government would have few options to stimulate demand What happens if this occurs? ???

  12. Primary concern remains the AUD The continued strength of the AUD presents problems for a range of sectors of the economy: retail, travel, manufacturing and others 110% appreciation of the AUD against the USD over past decade Average since float in 1983: 83c

  13. The Global Economic Environment Continuing concerns over Europe, some signs of growth in the United States

  14. Europe: yet more crises to come 17 summits were held in 2011 to resolve the Euro-zone sovereign debt crisis and still no definitive solution has been found

  15. ‘Austerity’ is the new economic paradigm Faced with high sovereign debt levels, governments in Europe have adopted various austerity measures to lower their debt/GDP ratios However austerity at the time of a recession can be self-defeating where tax revenues fall faster than spending is cut

  16. It’s still possible that Greece will default Even after the most recent $160 billion bailout, Greece will still have a debt/GDP ratio of 120% 90% debt/GDP ratio – commonly viewed as point of no return

  17. Greek economic recovery assumptions are heroic For Greece to avoid default, its economy must exhibit a stunning turn-around over the next few years The reality is very different: 48% youth unemployment, -6.8% GDP growth, $6 billion of annual tax evasion, 13.6% govt deficit

  18. Collapse in Greek Manufacturing A rapid economic recovery in Greece looks unlikely when you consider what is happening to the manufacturing sector Greek Manufacturing PMI

  19. The Greek stock market reflects the gloom The Greek stock market is down 86% from its pre-GFC peak

  20. Why does Greece matter? With an economy the same size as Victoria’s, Greece is a minor economic player, the real issue is the European banking system Greece Owes $400bn to banks in Europe If Greece defaults... The banks write-off their loans Which leads to a credit crisis in Europe as banks pull their funding A number of banks in Europe collapse or are nationalised Italy & Spain Resulting in a European recession And on it goes... Contagion then spreads to other Euro nations such as...

  21. Problems of too much debt are widespread Many countries are close to the 90% government debt/GDP ratio, which usually presages an economic crisis

  22. Recent ECB action has helped avoid a crisis Similar to action taken by the US Federal Reserve, the European Central Bank has taken steps to provide liquidity to the European banking system through a form of quantitative easing LTRO = Long-Term Refinancing Option The ECB agrees to supply unlimited amounts of Euros for 3 years at 1% European banks have so far borrowed €1.018 trillion Which is then invested in sovereign bonds yielding upwards of 6%

  23. LTRO has had a significant impact The costs of funding for highly-indebted European countries has fallen significantly as European banks invested funds from the LTRO in Euro-zone government debt Italian 10-year bond yield LTRO 1 LTRO 2

  24. A similar outcome for Spain LTRO 1 Spanish 10-year bond yield LTRO 2 Primary purpose of LTRO is to buy time for indebted countries to act to reduce their debt/GDP ratios – it is not a permanent solution

  25. United States – signs of recovery Growing signs of a recovery by the US economy may help to offset any fallout from the ongoing European sovereign debt crisis Weak but clear signs of recovery in US rail growth

  26. Manufacturing in the US has also improved The health of the manufacturing sector closely tracks overall GDP and recent readings are positive

  27. Another positive sign – US car sales US consumers are regaining some level of confidence following the GFC, evidenced through their willingness to buy new cars

  28. US unemployment finally recovering... Sustained reduction in the US unemployment rate as the private sector begins to re-hire workers

  29. ...although there is still a long way to go

  30. But...the US Housing market is still weak Despite the pickup in employment and faster economic growth, the US housing market, the source of the GFC, still remains weak. A sustained recovery requires an improvement in the housing market Stabilising but not yet growing

  31. Stock market performance

  32. Fairly cheap by historical standards Pre-GFC high ASX All Ordinaries – 1992 to 2012 Based on the past 20 years, the Australian stock market appears undervalued GFC market low Dotcom bubble collapse 1994 bond market crisis

  33. Similar story over 40 year timeframe ASX All Ordinaries – 1970 to 2012 8.37% compound annual growth rate from 1974/75 to 2009

  34. Yet the ASX has underperformed US market Despite the Australian economy not having a recession during the GFC, and the lack of a housing crash, our stock market has significantly underperformed the US market over the past 2 years All Ords down 7.73% Dow Jones up 24.74% Most likely explanation for the underperformance – the persistently strong AUD

  35. Investment approach • Given the local and global economic situation, our investment approach remains focused on: • generating a high level of portfolio income through fixed-interest investments and fully-franked dividend paying industrials; and • investing in selected cyclical and growth-oriented companies where appropriate • Current opportunities we favour: • selected fixed interest securities (e.g. Origin, recent and existing bank issues) • specific companies where we consider them oversold or underappreciated: NIB, Cromwell (income), Origin, Telstra, Leighton Holdings

  36. Thoughts for the year ahead • 2012 is likely to be dominated by a number of key issues: • ongoing sovereign debt crisis in Europe, and • the resilience or otherwise of the US economic recovery • In regards to Australia: • we expect slowing economic conditions to force the RBA’s hand, with a number of interest rate cuts by the end of the year, and • stock market performance, while volatile, should improve over the -13% experienced over 2011

  37. Questions ? Thank you

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