MBMG Research Note Australian Outlook May 2013

MBMG Research Note www.mbmg-group.com

June 2013 by Paul Gambles

MBMG Australian Outlook May 2013

Problem

Headline

Paul’s concerns

Australian reliance on commodities

Commodity demand may ease but in a gradual way that won’t be catastrophic.

Australian economic imbalance

Australia’s economy capital markets and capital flows are heavily dependent on commodities but will rebalance in a soft-lending scenario.

Commodity demand is historically very volatile and commodity pricing is very marginal - i.e. a small change in either supply or demand has major consequences for commodity prices and for producers. Australia’s economy and markets have become so heavily dependent on commodities that the slowdown in commodity demand is starting to transmit to very weak non-commodity sectors – there are insufficient positive alternatives for there to be a strongly performing noncommodity driven economy in Aus. The landing will be brutal.

MBMG Disclaimer The asset covered in this report may not be suitable for all investors, and involves the risk of loss. Past performance is no guarantee or indication of the future. Investors should satisfy themselves as to the suitability of any investment in this asset before taking any action. This report is not a solicitation to invest in this or any other asset and neither MBMG (meaning any of the companies that operate as the MBMG Group) nor the officers of any of these companies can accept any responsibility for actions taken or not taken as a consequence of reading this report, which has been compiled by MBMG Group for general purposes only. Investment may not be suitable for all recipients of this report. Detailed specific advice should always be taken. Furthermore any investor must satisfy themselves as to their eligibility for investment into the asset especially with regard to regulations and laws that may apply in particular jurisdictions and such rules should be consulted also concerning contract specifications. Any investor should fully read and understand the prospectus and all available materials and documents relating to the asset. The data and opinions contained in this booklet have been compiled and/or arrived at from sources believed to be reliable and given in good faith but not representation is made as to their accuracy, completeness or correctness. MBMG Group assumes no responsibility for any errors or omissions.

Problem

Headline

Paul’s concerns

China Dependency

Australian has boomed because of Chinese growth so slower Chinese growth will mean slower Australian growth but at 7-8% p.a. Chinese growth is strong enough to have a sufficiently along carry though for Aus.

As commodities are marginal, any fall below historic 10% growth rates will have a massively leveraged impact on Australia. Also Chinese GDP growth figures are notoriously unreliable and seem to be increasingly overstated and because of the rapidly growing cost base in China, Chinese GDP growth is also very marginal – a 20% fall from 10% p.a. to 8% could herald asset price collapses and banking sector implosion in China. The Contagion for Australia would be disastrous.

MBMG Disclaimer The asset covered in this report may not be suitable for all investors, and involves the risk of loss. Past performance is no guarantee or indication of the future. Investors should satisfy themselves as to the suitability of any investment in this asset before taking any action. This report is not a solicitation to invest in this or any other asset and neither MBMG (meaning any of the companies that operate as the MBMG Group) nor the officers of any of these companies can accept any responsibility for actions taken or not taken as a consequence of reading this report, which has been compiled by MBMG Group for general purposes only. Investment may not be suitable for all recipients of this report. Detailed specific advice should always be taken. Furthermore any investor must satisfy themselves as to their eligibility for investment into the asset especially with regard to regulations and laws that may apply in particular jurisdictions and such rules should be consulted also concerning contract specifications. Any investor should fully read and understand the prospectus and all available materials and documents relating to the asset. The data and opinions contained in this booklet have been compiled and/or arrived at from sources believed to be reliable and given in good faith but not representation is made as to their accuracy, completeness or correctness. MBMG Group assumes no responsibility for any errors or omissions.

Problem

Headline

Paul’s concerns

Property Market

It’s expensive but demand is still high so while it might not keep going up stratospherically demand is still robust.

Australian property is not just expensive, it’s probably the most expensive asset relative to valuation metrics in recorded history – to return to fair value it needs to fall by 60% in real (i.e. inflation adjusted) terms. Until this happens the Aus investment property market should be avoided at all costs.

MBMG Disclaimer The asset covered in this report may not be suitable for all investors, and involves the risk of loss. Past performance is no guarantee or indication of the future. Investors should satisfy themselves as to the suitability of any investment in this asset before taking any action. This report is not a solicitation to invest in this or any other asset and neither MBMG (meaning any of the companies that operate as the MBMG Group) nor the officers of any of these companies can accept any responsibility for actions taken or not taken as a consequence of reading this report, which has been compiled by MBMG Group for general purposes only. Investment may not be suitable for all recipients of this report. Detailed specific advice should always be taken. Furthermore any investor must satisfy themselves as to their eligibility for investment into the asset especially with regard to regulations and laws that may apply in particular jurisdictions and such rules should be consulted also concerning contract specifications. Any investor should fully read and understand the prospectus and all available materials and documents relating to the asset. The data and opinions contained in this booklet have been compiled and/or arrived at from sources believed to be reliable and given in good faith but not representation is made as to their accuracy, completeness or correctness. MBMG Group assumes no responsibility for any errors or omissions.

Problem

Headline

Paul’s concerns

Banks

Four pillars are as strong as ever, dividend payout rates make them compelling, their strength is evident from the way they survived the GFC.

Aussie banks weren’t really tested in the GFC so haven’t had to restructure as to change their models – they’re probably the only major banks still operating in a pre-GFC model. The housing market downtown and the weak returns on resource project investments make it highly unlikely that the Big 4 will survive unscathed in their current format.

MBMG Disclaimer The asset covered in this report may not be suitable for all investors, and involves the risk of loss. Past performance is no guarantee or indication of the future. Investors should satisfy themselves as to the suitability of any investment in this asset before taking any action. This report is not a solicitation to invest in this or any other asset and neither MBMG (meaning any of the companies that operate as the MBMG Group) nor the officers of any of these companies can accept any responsibility for actions taken or not taken as a consequence of reading this report, which has been compiled by MBMG Group for general purposes only. Investment may not be suitable for all recipients of this report. Detailed specific advice should always be taken. Furthermore any investor must satisfy themselves as to their eligibility for investment into the asset especially with regard to regulations and laws that may apply in particular jurisdictions and such rules should be consulted also concerning contract specifications. Any investor should fully read and understand the prospectus and all available materials and documents relating to the asset. The data and opinions contained in this booklet have been compiled and/or arrived at from sources believed to be reliable and given in good faith but not representation is made as to their accuracy, completeness or correctness. MBMG Group assumes no responsibility for any errors or omissions.

Problem

Headline

Paul’s concerns

Economy

Facing headwinds, deficits are a concern but these will be addressed by whichever government forms the new administration after the election.

The Australian consumer is too heavily in debt, the resource sector faces a battle for survival, the deficits continue to run out of control and Australia remains dependent on external funding. Tax measures will further slow economic activity potentially trigger major capital (especially property) market corrections but the failure to tackle deficits is starting to bite on economic activity too. Profligate spending for several decades has left Australia’s economy between a rock and a hard place.

Outlook

This have never been better – Australians now enjoy, by many metrics, the greatest per capita wealth of any major nation, and remains rick with resources and is uniquely positioned to benefit from Asia’s century.

The last time Australia was the wealthiest country was that the end of the (mainly gold) boom of the 1880s. The 1890s heralded Australia’s most brutal depression. Australia has experienced an exceptional boom – this has resulted in typically extreme peak overvaluations of assets, misallocations of capital and unsustainable excessive leverage. Such episodes have regularly occurred throughout history and thus far have always been followed by extremely painful corrections.

Australian Depression of 1890s Between 1890 and 1893, a severe economic depression caused the closure and collapse of many Banks. •

The Federal Bank of Australia ran out of money and closed.

•

In April 1893 the Commercial Bank of Australia, one of Australia's largest banks, suspended operations.

•

Twelve other banks soon followed.

•

Those who had put their savings into building societies, as well as those who had borrowed heavily to fund their own speculative investments, found themselves in dire straits.

•

Businessmen, pastoralist farmers and land speculators weren't able to pay their overdrafts, and thousands of small and large investors were ruined.

MBMG Disclaimer The asset covered in this report may not be suitable for all investors, and involves the risk of loss. Past performance is no guarantee or indication of the future. Investors should satisfy themselves as to the suitability of any investment in this asset before taking any action. This report is not a solicitation to invest in this or any other asset and neither MBMG (meaning any of the companies that operate as the MBMG Group) nor the officers of any of these companies can accept any responsibility for actions taken or not taken as a consequence of reading this report, which has been compiled by MBMG Group for general purposes only. Investment may not be suitable for all recipients of this report. Detailed specific advice should always be taken. Furthermore any investor must satisfy themselves as to their eligibility for investment into the asset especially with regard to regulations and laws that may apply in particular jurisdictions and such rules should be consulted also concerning contract specifications. Any investor should fully read and understand the prospectus and all available materials and documents relating to the asset. The data and opinions contained in this booklet have been compiled and/or arrived at from sources believed to be reliable and given in good faith but not representation is made as to their accuracy, completeness or correctness. MBMG Group assumes no responsibility for any errors or omissions.