The Good, the Bad and the UglyWhat lies ahead for investment markets?

29th May 2013

Dr Colin McLeod,
Chairman, Matthews Steer Chartered Accountants

Operations Response Unit, Victoria Police

Inspector Nigel Howard

Anthony Flapper,
Partner, Matthews Steer Chartered Accountants

Disclaimer This update is not financial product advice and is intended to provide information only. It does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

The information is taken from sources which are believed to be accurate but Matthews Steer Chartered Accountants accepts no liability of any kind to any person who relies on the information contained in the presentation. Unless expressly stated none of the information should be taken to be a recommendation. Information in this presentation is believed to be accurate as at 29 May 2013.

Tax Planning
Of course I am minimising my tax and if anybody in this country doesnt minimise their tax, they want their heads read, because as a government, I can tell you youre not spending it that well that we should be donating extra!
- Kerry Packer 1991 Senate Inquiry

Tax Planning
Businesses plan their affairs around the realities of competition and tax liability. Subject to the law that is the tax payers right.
- Justice of the High Court Michael Kirby
Structuring your financial affairs whether business or personal affairs in a manner so that you do not pay more than what is required under the law.

Tax Planning
Not something just done before the end of the financial year Ongoing process Changes in legislation Personal circumstances

Budget Announcements - Personal

Carbon price fall projected = Deferral of income tax cuts
From 1 July 2013 30 June 2015 Taxable Income $ 0 18,200 18,201 37,000 37,001 80,000 80,001 180,000 180,000 + Rate % 0 19 32.5 37 45 From 1 July 2015 Taxable Income $ 0 19,400 19,401 37,000 37,001 80,000 80,001 180,000 180,000 + Rate % 0 19 33 37 45

Budget Announcements - Personal

Net medical expenses tax offset to be phased out

From 1/7/2013

claim in 2012/13 to claim in 2013/14 claim in 2013/14 to claim in 2014/15 (all medical expenses)

All other taxpayers, restricted out of pocket expenses

Budget Announcements - Personal

Replacement of the baby bonus with new family payment arrangements (from 1/3/14)

Discounts on HELP repayments to end (from 1/1/14) Cap on tax deduction for Self Education Expenses (1/7/14) Medicare levy increases 0.5% (from 1/7/14)

Budget Announcements - Corporate

Prevention of Profit Shifting using Australian Debt

Withholding Tax on Capital Gains for foreign residents

Removing dividend washing opportunities

Monthly PAYG Installments for large tax payers (turnover exceeding $20m) from 1/1/17
Tax Office Trust Taskforce

Budget Announcements - Super

Tax exemption cap for pension accounts (from 1/7/14) Increase in Concessional Contributions Cap
less than 50 years old 2012/13 2013/14 2014/15 $25,000 $25,000 $30,000 50 years and over $25,000 $25,000 $35,000 60 years and over $25,000 $35,000 $35,000

Excess Contribution Tax assessed at marginal tax rates (from 1/7/13)

Budget Announcements - Super

No change to the taxing of superannuation benefits

Tax free pension stream withdrawal post age 60

Planning Opportunities - Personal

Claim all work-related deductions

Maximise motor vehicle deductions

Consider tax effective superannuation contributions Consider the superannuation co-contribution

Planning Opportunities - Personal

Review Insurance Life, TPD, Income Protection
Consider Private Health Insurance Bring Forward Medical Expenses

Prepay Interest Expense

Planning Opportunities - Business

Make and document trust resolutions by 30 June Compliance with Division 7A Write off bad debts

Planning Opportunities - Business

Maximise Depreciation Deductions
100% immediate on write off assets less than $6,500

Timing of Superannuation Payments

Planning Opportunities - Structuring

Capped Tax Rate Income / Capital Distribution Flexibility Easily Access Tax Losses 50% CGT Discount CGT Small Business Concessions R&D

Sole Trader Partnership Company Discretionary Trust Fixed Trust

No No Yes No No

No No No Yes No

Yes Yes No No NO

Yes Yes No Yes Yes

Yes Yes Yes Yes Yes

No No Yes No No

Planning Opportunities - Structuring

Stamp Duty Used to minimise Land Tax Used to minimise Asset Protection If personal claims. Protection? Asset Protection If business claims. Protection? Succession Assets to be bequeathed Succession Simple to transfer

Sole Trader
Partnership Company Discretionary Trust Fixed Trust

No
No No Yes No

No
Yes No Yes No

No
No No Yes NO

No
No Yes Yes Yes

Yes
Yes Yes No Yes

Yes
Yes Yes No Yes

Mike Hawkins, Chief Investment Officer

The Business Climate

May 2013

GENERAL RESEARCH DISCLAIMER, WARNINGS & DISCLOSURES

GENERAL RESEARCH DISCLAIMER, WARNING & DISCLOSURES This document is provided by Evans and Partners ABN 85 125 338 785, holder of AFSL 318075. The information is general advice only and does not take into consideration an investors objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investors objectives, financial situation and needs. If the advice relates to a financial product that is the subject of a Product Disclosure Statement (e.g. unlisted managed funds) investors should obtain the PDS and consider it before making any decision about whether to acquire the product. The material contained in this document is for information purposes only and does not constitute an offer, solicitation or re commendation with respect to the purchase or sale of securities. It should not be regarded by recipients as a substitute for the exercise of their own judgment. Investors should be aware that past performance is not an infallible indicator of future performance and future returns are not guaranteed. Any opinions and/or recommendations expressed in this material are subject to change without notice and Evans and Partners is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Eva ns and Partners. EVANS AND PARTNERS DISCLOSURE OF INTERESTS Evans and Partners and its respective officers and associates may have an interest in the securities or derivatives of any entities referred to in this material. Evans and Partners does, and seeks to do, business with companies that are the subject of its research reports. EVANS AND PARTNERS CORPORATE RELATIONSHIP DISCLOSURE AJD: Evans and Partners acted as Joint Lead manager to the IPO of the Asia Pacific Data Centre Group and received fees for ac ting in this capacity. AQHHA: Evans and Partners have arranged, managed or co-managed a public offering of the company or its affiliates in the past 12 months. AUI: Evans and Partners has been appointed by the Issuer as Broker to an on-market buy-back. Accordingly, Evans and Partners is unable to give Sellers advice in respect to a sale of this security. Evans and Partners acted as financial adviser to the off-market buy back of units in AUI and received fees for acting in this capacity. BEN: Evans and Partners managed or co-managed a public offering of securities of the company or its affiliates in the past 12 months. BHP: A director of Evans and Partners Pty Ltd Advisory Board is a director of BHP Billiton Ltd. BSL: A director of Evans and Partners Pty Ltd Advisory Board is a director of Blue Scope Steel Limited. CBA: Evans and Partners have arranged, managed or co-managed a public offering of the company or its affiliates in the past 12 months. DUI: Evans and Partners has been appointed by the Issuer as Broker to an on-market buy-back. Accordingly, Evans and Partners is unable to give Sellers advice in respect to a sale of this security. Evans and Partners acted as financial adviser to the off-market buy back of units in DUI and received fees for acting in this capacity. HBSHB: Evans and Partners managed or co-managed a public offering of securities of the company or its affiliates in the past 12 months. HHY: Evans and Partners has been appointed by the Issuer as Broker to an on-market buy-back. Accordingly, Evans and Partners is unable to give Sellers advice in respect to a sale of this security. Evans and Partners acted as financial adviser to the off-market buy back of units in HHY and received fees for acting in this capacity. LLC: A director of Evans and Partners Pty Ltd Advisory Board is a director of Lend Lease Corporation Ltd. MGR: A director of Evans and Partners Pty Ltd Advisory Board is a director of Mirvac Group. MQG, MQCPA: A director of Evans and Partners Pty Ltd Advisory Board is a director of Macquarie Group Ltd. MQG: Evans and Partners managed a public offering of securities of the company or its affiliates in the past 12 months. NAB: Evans and Partners have arranged, managed or co-managed a public offering of the company or its affiliates in the past 12 months. NXT: Evans and Partners was a Lead Manager to the IPO of the Asia Pacific Data Centre Trust by NXT and received fees for acting in this capacity. ORG: A director of Evans and Partners Pty Ltd Advisory Board is a director of Origin Energy Ltd. SWM: A director of Evans and Partners Pty Ltd is a director of Seven West Media Limited TOX: Evans and Partners have arranged, managed or co-managed a public offering of the company or its affiliates in the past 12 months. TTS: Evans and Partners managed or co-managed a public offering of securities of the company or its affiliates in the past 12 months. WHF: Evans and Partners managed or co-managed a public offering of securities of the company or its affiliates in the past 12 months. RESEARCH ANALYST CERTIFICATION I, Michael Hawkins, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject investment theme and/or company securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. RESEARCH ANALYST DISCLOSURE OF INTEREST I, Michael Hawkins, and/or entities in which I have a pecuniary interest, have an exposure to the following securities and/or managed products: AGK, AIX, ARI, AZJ, BHP, BPT, BXB, CBAHA, COH, CPU, HIG, MQG, NABPA, NHF, NWSLV, ORI, RHC, SAR, TTSHA, USD, WBC, WBCPA, WES, WOW, XHB, Evans & Partners International Focus Portfolio, Vanguard International Shares Index Fund. DISCLAIMER Except for any liability which cannot be excluded, Evans and Partners, its directors, employees and agents accept no liability or responsibility whatsoever for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. All information is correct at the time of publication; additional information may be available upon request.

23

Global Economic Outlook: Subdued

6.0 5.5 5.0
4.5 4.0
90

Global Production Growth (GDP)

%

% Share 100

The World Economy

80

Other Emerging Economies Japan USA Germany UK European Union (less UK & Germany)
Source: IMF, Evans & Partners

3.5 3.0 2.5 2.0 1.5 1.0

0.5

70

60

50

40

30

0.0 -0.5 -1.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (f) 2014 (f)
Source: IMF

20

10

Annual GDP Growth

Average since 1990

0 Jan-92

Jan-96

Jan-00

Jan-04

Jan-08

Jan-12

24

Global Economic Outlook: Subdued

Relative Economic Performance (GDP)
126 Real Index 1Q2005 = 100
124 122

% 11 10 9
8

Unemployment Rates

120 118
116 114

7 6 5 4 3 2
Source: Datastream; Evans & Partners

112 110
108 106

104 102
100 98

Source: Datastream, Evans & Partners

1
Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013

96
Q1 2005 Q1 2006 Q1 2007

Jan-98

Jul-99

Jan-01

Jul-02

Jan-04

Jul-05

Jan-07

Jul-08

Jan-10

Jul-11

Jan-13

USA

Euroland

Japan

UK

Australia

EMU

USA

25

US: Private sector thriving. Politicians the greatest risk.

US: Private Sector Spending
1.25%
1.00% 0.75% 0.50% 0.25%
Contribution to trend Qtr % Change

0.3 0.2
0.1

US : Private Sector Payrolls

Trend Monthly %

0.0 -0.1 -0.2 -0.3 -0.4

0.00%
Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13

-0.25% -0.50% -0.75% -1.00%

-1.25% -1.50% -1.75%
Source: Datastream, Evans & Partners

-0.5
-0.6

-2.00%

Forecast

-0.7 -0.8
Jan-00

Source : US Labor Dept, Evans & Partners

Household Consumption

Residential Construction

Business Investment

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

26

US Interest Rates: When will the zero cash rate anchor slip?
1). A positive data shock or,

2). A combination of Policy traction the economy is responding to the generous monetary conditions. A steadily falling unemployment rate. A limited inflation buffer. Core inflation remains ~2%. Overheating credit markets. Distortions can develop quickly.
Putting it all together, my reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield
behaviour emerging in corporate credit. However, even if this conjecture is correct, and even if it does not bode well for the expected returns to junk bond and leveraged-loan investors, it need not follow that this risk-taking has ominous systemic implications.

... I have mentioned the junk bond market several times, but not because this market is necessarily the most important venue for the sort of risk-taking that is likely to raise systemic concerns. Rather, because it offers a relatively long history on price and nonprice terms, it is arguably a useful barometer. Thus, overheating in the junk bond market might not be a major systemic concern in or of itself, but it might indicate that similar overheating forces are at play in other parts of the credit markets, out of our range of vision. Jeremy C. Stein. Board of Governors of the Federal Reserve System. February 2013.

The Fed will need to tighten policy well before 2015. Expect rhetoric to shift 2H13

27

China: Resilient, but still plenty of challenges

China: Purchasing Managers Index - Manufacturing
70

China: Construction Activity - Net Marginal Floor Space Started

20,000 120000

Index: >50 = expansion

65

15,000

105000

60

10,000
55

90000

5,000
50

75000

45

0 Jan-07

60000

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

40

-5,000

45000

35

-10,000

30000

30

Source: Datastream
25
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

-15,000
Source: Datastream,Evans & Partners

15000

-20,000

Overall Index

Export Orders

Monthly

Rolling YTD (RHS)

28

Europe: A self-inflicted mess

Europe: EMU Business & Consumer Confidence
10

A fiscal union requires political courage, a popular mandate, German cash & time
EMU: Economic Growth (GDP)
1.25%
1.00%

0.75%
0 Jan-90 -5

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

0.50% 0.25%
0.00%

-10

Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013

-0.25% -0.50%
-0.75%

-15

-20

-1.00%
-25

-1.25%
-1.50% -1.75%

-30

-35
Source: Datastream

-2.00%
Source: Datastream

-40

-2.25%

Industrial Confidence

Consumer Confidence

Qtr % Change

29

OECD: Public sector deficits which this time are too big to ignore
Advanced Economies: General Government Net Borrowing
(% of GDP)
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (f) 2014 (f)

Gross Government Debt

250 % of GDP

(Source: IMF)

-1

200
-2

-3

France
150

Germany Italy
Japan

-4

-5

100

Spain UK USA

-6

-7

50

-8 Source: IMF -9

0 2006 2007 2008 2009 2010 2011 2012 2013(f) 2014(f)

30

Australia: 3 Big Problems 1). We are chronically uncompetitive a problem that has been steadily unfolding for over a decade. 2). The mining-related capex boom will peak in 2014 what will take its place in 2015-17? 3). Supply has caught-up with demand. Commodity prices notably bulk commodities are trending down.

31

Australia: Medium term exposed to steadily fading competiveness.

Service sector industries now at risk.
Australia: Exports of Goods & Services
25%

Australia: Private Sector Capital Expenditure

8.0% % of nominal GDP

Trend: % of nominal GDP

7.0%
20%

6.0%

15%

5.0%

4.0%

10%

3.0%

2.0%
5%
Source: ABS, Evans & Partners

1.0%
Source: ABS, Evans & Partners

0% Mar-80

Mar-83

Mar-86

Mar-89

Mar-92

Mar-95

Mar-98

Mar-01

Mar-04

Mar-07

Mar-10

Mar-13

0.0%
Mar-1988 Mar-1990 Mar-1992 Mar-1994 Mar-1996 Mar-1998 Mar-2000 Mar-2002 Mar-2004 Mar-2006 Mar-2008 Mar-2010 Mar-2012

Total

Total ex-Mining

Mining & Construction

Other Industries

Australia: Pre-Tax Profits

60000

Monthly Level
700,000

Australia: Tourism Flows

$mn
650,000
50000

600,000 550,000

500,000
40000

450,000 400,000

30000

350,000 300,000

20000

250,000 200,000 150,000

10000
Source: ABS, Evans & Partners

100,000
50,000
Source: ABS

0 Mar-2001

Sep-2002

Mar-2004

Sep-2005

Mar-2007

Sep-2008

Mar-2010

Sep-2011

Mar-2013

0 Jan-90

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

Total

Total ex-mining

Short Term Departures

Short term Arrivals

32

Australia: In an unproductive & high cost economy the only option open to business is to cut labour costs.
000's

Australia: Employment Trends

000's

8210 8105 8000 7895 7790 7685 7580 7475 7370 7265 7160 7055 6950
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source : ABS

3604 3520 3436 3352 3268 3184 3100 3016 2932 2848 2764 2680 2596

Full-Time (LHS)

Part Time (RHS)

33

Australia: Private sector spending has been dominated by business investment (i.e. mining related infrastructure)
Australia: Private Sector Spending
8 smoothed % 7 6 5 4 3 2 1 0 (1)
Source : ABS, Evans & Partners

% of GDP
12%

Australia: Business Investment

A$ billion
$200

11%

$180

10%

$160

8%

$140

7%

$120

6%

$100

5%
Source: ABS, Evans & Partners

$80

4%

$60

2%

$40

Forecast
1% $20

(2) Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

$0

QTR %

Annual %

Business Investment Nominal Value (RHS)

Business Investment % of GDP (LHS)

34

Australia: Mining/Energy sector to deliver solid volume growth but at what price?
Iron Ore Spot Price
200 190
180

US$/mt

China: Steel Production

70,000
Million Metric Tonnes

170
160 150

65,000 60,000 55,000 50,000 45,000

40,000 35,000 30,000 25,000 20,000

140
130

120 110
100

90
80

Source: Datastream, Evans & Partners

1/01/2010

1/05/2010

1/09/2010

1/01/2011

1/05/2011

1/09/2011

1/01/2012

1/05/2012

1/09/2012

1/01/2013

1/05/2013

Daily Spot Price

US$/MT
330 320
310

Rolling Qrtly Average

Prime Coking Coal Australia (US$/MT)

300
290

280

15,000 10,000 5,000 0 Jan-03

Source: International Iron & Steel Institute

270

260 250
240

230
220

210

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

200

190 180
170

Monthly

3mth moving average

160
150

Source: Datastream

140 130 1/10/2010

1/02/2011 1/06/2011 1/10/2011 1/02/2012 1/06/2012 1/10/2012 1/02/2013

35

Australia: As the terms of trade fade the structural reality is revealed subdued growth both real & nominal.
Australia: Terms of Trade
110
Index
10%

Australia: Economic Growth (GDP)

Smoothed Annual % Change

105 100

9%
8%

Forecast

95

90
85

7%
6%

80 75 70

5% 4% 3%

65
60

Forecast
Source: ABS, Evans & Partners

2% 1% 0% Mar-02

55 50

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Terms of Trade

Source: ABS, Evans & Partners

Nominal GDP

Real GDP

36

The Australian Dollar: To be tested as the current account deficit heads back to ~6% of GDP in FY14.
Net International Investment Postion (2010)
(Gross Foreign Assets less Gross Foreign Liabilities)
40% 30% 20% 10% 0%
-10% -20% -30% -40%

A$bn 2400

Australia: Gross Foreign Liabilities (Debt + Equity)

% of GDP 155 145 135

125

% of GDP

2100

1800

1500

115 1200 105

900 95
Source: ABS

-50% -60% -70% -80%

Source: IMF, Evans & Partners

600

85 75 65
Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

300

-90%
-100%

0
Mar-90

Level - Rolling 4qtr Average (LHS)

% of GDP (RHS)

37

Interest Rates: The RBA is targeting the A$.

Australia: Interest Rates
7.5

% 7.0 6.5 6.0 5.5 5.0 4.5

4.0

3.5 3.0 2.5 2.0

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Source: RBA

10 Year Bond

Cash Rate

3 Year Bond

38

The Australian Dollar: Go forth & plunder!

Over the coming year, the A$ will be challenged by;
Australian Dollar: Interest Rate Differential vs US
8.0 1.12

Interest Rate Ratio: Parity = 1.0

US$/A$

o o o

7.5 7.0
6.5 6.0

1.09 1.05
1.02 0.98

5.5 5.0
4.5 4.0

0.95 0.91
0.88 0.84

A growing structural capital outflow (Australian assets are expensive). An ongoing cyclical recovery in the US$. A widening current account deficit which will draw attention to Australias heavy dependence on foreign capital. Narrowing interest rate differentials - driven by further RBA easing & Fed tightening (2014). An ongoing decline in the terms of trade.

3.5 3.0
2.5

0.81 0.77
0.74

2.0 1.5
1.0
Source: Datastream, IRESS

0.70 0.67
0.63 0.60

The A$ is priced by global markets & speculators as a growth asset. As such, if China and/or the global economy was to falter it would quickly retest US$0.60. In this way, it acts as a natural hedge for investors with offshore exposure. We believe the A$ will settle in the mid ~US$0.90 range during 2H13. Offshore investments should now be partially hedged (i.e. ~10%).

0.5

0.0
1-Jun-07 1-Dec-07 1-Jun-08 1-Dec-08 1-Jun-09 1-Dec-09 1-Jun-10 1-Dec-10 1-Jun-11 1-Dec-11 1-Jun-12 1-Dec-12

0.56

1yr British Banker Rate Differential as a ratio (LHS)

A$/US$ (RHS)

39

Victoria: Struggling
Victoria: Job Creation
3,000

Victoria vs. The Rest

Past Year Victoria The Rest Job Growth
0.6% 1.7% -12% 1.5% 3.9% 13%

Trend 000's
2,800

Past 2 Years Victoria The Rest

0.9% 3.7% -25% 2.8% 7.4% 5%

2,600

Retail Sales
2,400

Building Approvals
2,200

Source: ABS

2,000

1,800
Source: ABS, Evans & Partners

1,600 Jan-2006

Jan-2007

Jan-2008

Jan-2009

Jan-2010

Jan-2011

Jan-2012

Jan-2013

Full Time Employment

Total Employment

40

An equity investor ultimately derives performance from the quality of the businesses they own, not from a particular equity market or economy.
Equities: The value of a good defense!
350
Index: 1999 = 100

300

FACT: If we had the foresight to only invest in the top 80% of performers in the S&P500 each year since 1999, we would have enjoyed an average annual gain of ~10%.

250

200

150

There are two critical messages that equity investors should take from this.
1). Economies do not matter! What matters is quality businesses at the right price.
Price only i.e. excludes dividends; Source: FactSet

100

50

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

S&P 500

S&P 500 ex worst 20%

2). We are far better-off looking for points of potential weakness/capital destruction within our existing portfolio than focusing on finding the next big thing!

41

Portfolio Design: Asset Allocation

Evans & Partners: Asset Allocation Strategy
Benchmark Allocation CASH FIXED INTEREST Government Debt Corporate Debt EQUITIES - Australia Industrials Resources REITs EQUITIES - Global Currency Hedged Currency Unhedged
8.0% 38% 29% 10% 36% 29% 7% 0% 18% 9% 9% 100%

Current Allocation
12% 24% 4% 20% 30% 25% 5% 0.0% 34% 3% 31% 100%

Tactical Tilt
4% -14% -25% 11% -6% -4% -2% 0.0% 16% -6% 22%

75% 25%

15% 85%

80% 20% 0%

82% 18% 0%

50% 50%

10% 90%

Note: This is a generic portfolio. Please consult your Adviser for a benchmark appropriate to your individual circumstances. Source: Evans & Partners

42

EQUITIES - International: Too hard is not an excuse

1) Australia is a relatively high risk investment chronically uncompetitive & declining industry diversity. Escalating medium term risks.
2) The ASX300 is a low quality investment capital intensive, high industry concentration & broadening structural challenges for many sectors. 3) Relative valuations favour offshore, particularly when adjusted for quality & capital intensity. 4) Superior cyclical earnings leverage vs. the ASX300 Industrials. The developed economies have been cleansed the corporate survivors are thriving. 5) Corporate quality & strategic opportunity is far superior offshore. Access to the returns flowing from the rise of the consumer in emerging economies. 6) What the ASX delivers in terms of a higher dividend yield it has lost over the past five years from inferior dividend per share growth (portfolio specific). 7) You will never be wealthier! Buy undervalued assets with an overvalued A$.

43

Australian Equities: Profit outlook remains soft. Industrials expensive.

ASX200: Earnings Revisions
550

ASX Industrials: Rolling Forward PE Multiple

20 19

A$ EPS

PEx

500

18 17

450
16

400

15 14

350

13 12

300
11
Source: IBES, Evans & Partners

250

10 9
8 Jan-04

Source: IBES, Evans & Partners

200
5/01/2007 5/01/2008 5/01/2009 5/01/2010 5/01/2011 5/01/2012 5/01/2013

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

less Utilities & REITs

less Utilities, REITs & Banks

44

Key Messages
Australia is not prosperous. We are a small, increasingly narrow, high cost, high debt economy that remains dependent on foreign capital inflows. Our global competitors are getting bigger (economies of scale) and smarter and more & more industries are being exposed to the global price. Technology continues to erode/redefine barriers to entry. Our structural vulnerability will be revealed as the terms of trade declines. o Ideally a catalyst for A$ weakness a big plus. o Becomes a big problem if China/commodities continue to struggle in 2013.

The risk of a genuine recession at some point in the next 1-3 years is high. It will take a crisis environment for government & business to take the hard decisions.

45

have you started to think about

exiting your business or

formalising your

succession plan?
7/06/2013 47

Matthews Steer Our Mantras

Peace of Mind Confidence to Grow Banker Confidence Cashflow to Wealth