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Economic & Investment UpdateGK Wealth Management Limited
Jim Power
Chief Economist, Friends First
April 30th 2008
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The Global Background
US in recession UK has slowed sharply Euro Zone still robust, but signs of slowing China & the Emerging World doing well Balance of economic power continues to shift Sub-Prime still casting dark shadow & legacy
will last
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Sub-Prime Crisis
‘Bankers Behaving Badly’ Losses still unfolding $1 tn estimate Undermining economic confidence Serious impact on credit availability &
financial market liquidity Legacy will last A major financial crisis!
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US Economy
Consumer confidence very weak Manufacturing & Service activity contracting 232’000 jobs lost in Q1 Housing market in strong decline Equity market falling since beginning of year Economy in recession US at eye of sub-prime crisis
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US Unemployment Rate
3
3.5
4
4.5
5
5.5
6
6.5Ja
n-0
0
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
%
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US House Prices (Case-Shiller)
100
150
200
250
300Ja
n-0
0
Ja
n-0
1
Ja
n-0
2
Ja
n-0
3
Ja
n-0
4
Ja
n-0
5
Ja
n-0
6
Ja
n-0
7
Ja
n-0
8
MIAMI NEW YORK TOTAL
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UK Economy
Housing market under serious pressure;RICS-78.5%
Tighter mortgage credit Labour market strong, but incomes being
squeezed Low levels of saving Economy now very vulnerable
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UK Halifax House Price Index
200250300350400450500550600650700
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
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Euro Zone
Economic background solid Good consumer dynamics Strong Euro/US/Interest Rates/Oil risk factors France & Germany good but Italy & Spain
very vulnerable Households do not have imbalances that US
& UK have
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Global Growth Forecast
2006 2007e 2008f
US 2.9% 2.2% 0.5%
Euro Zone 2.9% 2.6% 1.5%
Germany 2.9% 2.5% 1.8%
UK 2.9% 3.1% 1.6%
Japan 2.4% 2.1% 1.4%
Global 5.0% 4.9% 3.5%
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Economic Risks
Sub Prime legacy Record oil prices & still rising Weakening housing markets -UK, US, Ireland,
Spain Currency volatility Equity market turmoil Significantly slower global growth in 2008 Much more challenging climate
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Interest Rate Outlook
Global background has altered significantly over past year
BoE -0.75% & Federal Reserve -3% since Sept. ‘07 - both will ease further
ECB monitoring situation, worried about inflation, but economic arguments should eventually win out - but not for the moment
Global bias will remain downwards Interest rate activities reflect the dangerous global
financial situation
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Exchange Rates
Dollar under considerable pressure Interest rates, growth, finnacial
imbalances,sub-prime lending, structural shifts etc
Not a lot of reasons to buy $ Sterling under pressure also - not too many
reasons to buy £ $ & £ likely to weaken further
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USD/Euro Exchange Rate
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
01/0
1/20
04
01/0
4/20
04
01/0
7/20
04
01/1
0/20
04
01/0
1/20
05
01/0
4/20
05
01/0
7/20
05
01/1
0/20
05
01/0
1/20
06
01/0
4/20
06
01/0
7/20
06
01/1
0/20
06
01/0
1/20
07
01/0
4/20
07
01/0
7/20
07
01/1
0/20
07
01/0
1/20
08
01/0
4/20
08
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Sterling/Euro Exchange Rate
0.6
0.65
0.7
0.75
0.8
0.85
02/0
1/20
04
02/0
4/20
04
02/0
7/20
04
02/1
0/20
04
02/0
1/20
05
02/0
4/20
05
02/0
7/20
05
02/1
0/20
05
02/0
1/20
06
02/0
4/20
06
02/0
7/20
06
02/1
0/20
06
02/0
1/20
07
02/0
4/20
07
02/0
7/20
07
02/1
0/20
07
02/0
1/20
08
02/0
4/20
08
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Equity Markets Jan 1st-April 28th 2008
NASDAQ -14.9%
S&P 500 -11.4%
FTSE 100 -11.5%
GERMAN DAX -14.0%
FRENCH CAC -10.7%
NIKKEI -9.5%
IRISH ISEQ -9.8%
HANG SENG -11.9%
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Equity Markets
Market sentiment has deteriorated sharply Sub-prime problems the key issue More uncertain global economic outlook International volatility & uncertainty to continue Irish market has gone through a crisis of
confidence - recovery will be difficult Turmoil symptomatic of economic & financial
strain - will require further official action
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FTSE 100
3000
3500
4000
4500
5000
5500
6000
6500
7000
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Dow Jones Industrial Average
6000
7000
80009000
10000
11000
1200013000
14000
15000
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ISEQ
0
2000
4000
6000
8000
10000
12000
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The Irish Economy in 2007
Consumer sentiment weakened,spending held up well, but weaker in Q4
Business confidence reasonable, but some warning signs
Retail sales, exports & manufacturing robust Housing the key area of weakness Higher level of uncertainty than for some time
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The Irish Economy in 2008
Consumer spending easing sharply Construction contribution will ease due to lower housing
starts Export sector will be challenged by exchange rates & cost
competitiveness Less certain employment outlook Inflation pushed by food, energy & mortgage rates Easing of growth inevitable GDP 2.0% in 2008 An economy in transition-adjustment painful, but
worthwhile
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The Irish Housing Market Outlook
Affordability improving Demand fundamentals still solid & industry
supply response positive 78,027 completions in 2007, 48,000 in 2008 &
2009, 50,000 medium-term demand? Prices could fall 10% in 2008 Challenging environment 2008 & 2009 Market adjustment has further to run as ‘stand-off’
not yet over
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What are the Pressure Points for Ireland?
Globalisation Lost competitiveness External economics Exchange rate developments Over-reliance on construction Wage agreement - has to be low Taxation v Spending Serious shortcomings in economy Greater focus on regional balance
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Investment Summary
Global background difficult Lots of bad news built into equity markets Strong policy response will eventually work Mixed outlook for global property Global balance of power shifting to emerging
markets Economic & investment cycles are called
cycles because they cycle
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ANY QUESTIONS?