Investment Markets Outlook “Outlook 2005 – dealing with the China syndrome”

1. Investment Markets Outlook“Outlook 2005 – dealing with the China syndrome” Brigette Leckie Head of Investment Markets Research December 2004

2. Key points • Global growth downturn well advanced – US led the way • The day of reckoning comes for US imbalances • The “best” outcome = unexciting growth + low interest rates • Positioning for investment markets • Equities well placed – easy valuations, trend-line growth • Fixed income – limited interest rate rises • Foreign exchange – modest US$ weakness Source: Perpetual Investments

3. “Lower everyday prices” Commodity price rises Positive global impact Negative global impact - Low inflation - Low interest rates - Increased energy / mining capex Changing global dynamics China “Syndrome” - Weaker synchronised growth Source: Perpetual Investments

4. US grappling with imbalances Europe modest restructuring gains Japan shows renewed life Non-Japan Asia re-rates Australia booms Is the globe on a sustainable path? Global economic environment Source: Perpetual Investments

5. Is the globe on a sustainable path? US grappling with imbalances Europe modest restructuring gains Global economic environment Japan shows renewed life Non-Japan Asia re-rates Australia booms Source: Perpetual Investments

6. US grappling with imbalances Falling interest rates Consumption and housing Growth Government spending / tax cuts But Deficit Government sector Deficit Household sector = ballooning current account deficit Source: Perpetual Investments

7. Outcome Bearish for investment markets Bullish for investment markets Addressing the US savings imbalance Least preferrable Most preferrable Inflation US$ slides Solid productivity growth US fiscal consolidation PE compression PE sideways / up Source: Perpetual Investments

8. Stimulus economy Bubble economy “Post Stimulus” economy Post “Bubble” or “Bust” economy The “Post Stimulus” US economy US GDP growth % ch qtr, annualised 8 7 6 5 4 3 2 1 0 -1 -2 97 98 99 00 01 02 03 04 05 Source: Datastream

9. Is the globe on a sustainable path? US grappling with imbalances Europe modest restructuring gains Global economic environment Japan shows renewed life Non-Japan Asia re-rates Australia booms Source: Perpetual Investments

10. Is the globe on a sustainable path? US grappling with imbalances Europe modest restructuring gains Global economic environment Japan shows renewed life Non-Japan Asia re-rates Australia booms Source: Perpetual Investments

11. Increased corporate profits Increased investment spending Household spending Job growth Japan shows renewed life Corporate sector restructuring Government policy changes Source: Perpetual Investments

12. Is the globe on a sustainable path? US grappling with imbalances Europe modest restructuring gains Global economic environment Japan shows renewed life Non-Japan Asia re-rates Australia booms Source: Perpetual Investments

13. Forecast Trend growth Weaker synchronised growth Global GDP growth % ch yr 6 5 4 3 2 1 0 -1 94 95 96 97 98 99 00 01 02 03 04 05 Source: Datastream, JP Morgan

14. Investment Markets

15. Global equity markets Markets end 2004 on a positive note • Earnings estimates less demanding Source: Perpetual Investments

16. US Upgrades > downgrades Japan Euro Area Upgrades < downgrades Earnings estimates are no longer unobtainable Earnings revisions Ratio 3.0 2.5 2.0 1.5 1.0 0.5 0.0 96 97 98 99 00 01 02 03 04 Source: IBES, Merrill Lynch

17. Global equity markets Markets end 2004 on a positive note • Earnings estimates less demanding • Improved growth data, lower oil prices • Less fear of higher interest rates, political stability • Valuations more favourable Source: Perpetual Investments

18. Long run average Valuations back at historical averages S&P 500 Price Earnings Ratio Ratio 26 24 22 20 18 16 14 12 10 92 93 94 95 96 97 98 99 00 01 02 03 04 Source: Datastream, IBES

19. Global equity markets Markets end 2004 on a positive note • Earnings estimates less demanding • Improved growth data, lower oil prices • Less fear of higher interest rates, political stability • Valuations more favourable • Seasonal flows – Christmas rally Equities modest gains in 2004 Source: Perpetual Investments

20. Global equity markets 2005 looks reasonable • Unexciting but non-threatening growth • Valuations undemanding • Achievable earnings expectations • Falling energy prices High single digit returns Source: Perpetual Investments

21. Improved valuation • New products • Consumer staples • Attractive valuation • Improved advertising market • Media • Hotels, cruising • Retailing • Pricing power • Patchy Sector opportunities Source: Perpetual Investments

22. Hermes Richemont Neiman Marcus David Jones Burberry, Coach Oroton Colorado Walmart, Kmart Retailing – luxury is back • 1990s – generic products boom • Now – moving on up!! Luxury 1 Luxury 2 Aspirational Generics Source: Perpetual Investments

23. “Over the top” luxury Neiman Marcus 2004 Christmas book • Zeppelin Airship US$10m • Underwater Aviator US$1.7m • 2005 Maserati Quattroporte Cars US$125,000 • Bejewelled Mr & Mrs Potato Heads US$8,000 • His & Hers bowling centre from US$1.5m Source: Perpetual Investments

24. Improved valuation • New products • Consumer staples • Attractive valuation • Improved advertising market • Media • Hotels, cruising • Retailing • Pricing power • Patchy • Higher for longer oil prices • Easy valuations • Energy Sector opportunities Large caps Dividend focus Source: Perpetual Investments

25. Australia

26. Is the globe on a sustainable path? US grappling with imbalances Europe modest restructuring gains Global economic environment Japan shows renewed life Non-Japan Asia re-rates Australia booms Source: Perpetual Investments

27. Australian equities Near term – more new record highs? • Strong earnings estimates • Increased M&A activity • Surging inflows, NCP delisting Medium term – some caution • Full valuations • Weaker earnings revisions • A$ strength Source: Perpetual Investments

28. Summary • Global growth downturn well advanced – US led the way • The day of reckoning comes for US imbalances • The “best” outcome = unexciting growth + low interest rates • Positioning for investment markets • Equities well placed – easy valuations, trend-line growth • Fixed income – limited interest rate rises • Foreign exchange – modest US$ weakness Source: Perpetual Investments

29. 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Companies need to start spending their cash S&P 500 ex Financials Net Debt to Capital 47% 45% 43% 41% 39% 37% 35% 33% Source: US Factset, Citigroup

30. General advice IMPORTANT NOTE: This presentation has been prepared by Perpetual Investment Management Limited ABN 18 000 866 535, an Australian Financial Services Licensee, Licence Number 234426, a subsidiary of Perpetual Trustees Australia Limited. While Perpetual strives to provide accurate information, this presentation should not be treated as a comprehensive statement of any law or practice. This presentation is not intended to provide you with personal advice and in providing this information, we have not taken into account your particular investment objectives, financial situation or needs. You should assess whether this information is appropriate for your particular needs, either by yourself or with your adviser. Perpetual expressly disclaims any responsibility or liability to anyone who acts or relies upon anything contained in, or omitted from, this presentation.