Superannuation Update and The Share Market - Where to from here?
February 2008
Disclaimer
This presentation (and any private discussions with the presenter) is not personal securities advice and does not take into account any person's investment objectives, financial situation or particular needs. Before making an investment decision you need to consider, whether any investment is appropriate in light of your particular investment needs, objectives and financial circumstances and you should consider obtaining expert financial, legal and taxation advice. This presentation does not constitute taxation advice.
Information and opinions presented in this report have been obtained or derived from sources believed by Wilson HTM Ltd to be reliable, but Wilson HTM Ltd makes no representation as to their accuracy or completeness. Past performance should not be taken as an indication or guarantee of future performance. The price, value of and income from financial products may fluctuate and any product may become worthless.
Wilson HTM Investment Group
Company Name and ASX Ticker Wilson HTM Investment Group – WIG
History 1895 – over 110 years of experience in investment
Philosophy
Aim to achieve out-performance through:
Concentrated portfolios
Specialisation in mid cap stocks and direct investments
Access to quality IPO’s and corporate deals in equities and fixed interest
Overview
Investment management for private clients & institutions
Focus on Self Managed Superannuation
Active corporate finance team
Relationship with Deutsche Bank (19.9% shareholder)
Queensland based business
10 offices and over 300 staff
Market Cap $272m @ $2.85 share price
Share price performance 43% return since listing in June 07
Superannuation:Further Change
Contribution Limits
Removal of Reasonable Benefit Limits (RBL’s)
Limits on concessional contributions Over 50: $100,000 per annum (FY 2012) Under 50: $50,000 per annum
Limits on non-concessional contributions $150,000 per annum $450,000 over three years
Effective penalty tax rate of 46.5% - 93.0%
Government Co-Contribution
Withdrawals
Removal of compulsory cashing rules
Under 60 – same rules apply.
Over 60 Tax free pensions Tax free lump sums
Application of preservation rules
Transition to retirement pension
Pensions
Super Fund
$100,000Employment
Tax Man
Individual
$92,000 $8,000
$42,780 $1,250
Pensions
Super Fund
$100,000Employment
Tax Man
Individual
$0 $100,000
$0 $15,000 ?
$50,000
Borrowing inside super
Section 67 SIS Act Prohibits borrowing (limited exceptions)
Reg 13.14 SIS Act Prohibits super fund giving charge over asset
Section 71 (1) SIS Act Defines related trusts as In-house Assets
Section 273 ITAA 1936 Special Income Provisions
Amendments made to SIS Act, to allow instalment warrants: Section 67 (4a) Allow borrowing (in specific circumstances) Section 71 (8) Exemption to in-house asset rules
The basic structure
5 Basic Conditions
The lender has limited recourse against the super fund
The borrowed funds are used to purchase an asset the super fund could otherwise acquire
The asset is held on trust, so that only the super fund has a beneficial interest
The super fund can acquire the asset by paying one or more instalments
The asset (or replacement asset) must be the only asset held by the trust
Super Fund
Property
Trust
Lender
Limited Recourse
Loan
Acquisition through
instalment(s)
Investment
Borrowing to Invest
Investment strategy must allow for: Borrowing to take place Specific asset to be purchased
Sole purpose test must be considered
In house asset rules should be considered
New legislation is wider than intended / necessary
Clearly not what was intended
Australian Equity Market
Another year of strong returns in 2007
What a Year!
24%+ returns in 2006
Low CPI and strong corporate earnings
Shanghai correction
Earnings growth and strong economic forecasts
US economic fears
AUD hits high – US$0.93
Fed drops interest rates
Sub prime crisis begins
Superannuation inflows - $1m each
Shanghai composite up 50% for 2007
S&P/ASX 200 Accumulation Index - 2007
Fed drops interest rates
Source: IRESS, Wilson HTM
What of the Heavy Weights?
Listed PropertyListed Property
Resources
Energy
Financials ex prop
XKO ASX 300XKR 300 ResourcesXXK 300 Financials ex Property TrustsXEK 300 EnergyXPK 300 Property Trusts
Source: IRESS, Wilson HTM
Earnings growth may have downside risk
Similar sector performance again in 2007
Mining sector valuations have risen
US Economy and its impact upon
Australia
US Sub Prime Crisis
Causes
Excessive lending to borrowers lacking the capacity to pay over the last 2-3 years
Repackaging debts into Collateralised Debt Obligations (CDO’s)
Selling CDO’s with inflated credit ratings
Effects
Write downs on CDO’s on hedge fund and investment bank balance sheets
Write-downs exceed US$125Bn.
Bond Insurers under pressure US $200Bn to restore AAA Credit Rating
Poor housing market and falling property values
Increased occurrence of defaults
Increased credit spreads due to risk aversion in credit markets
Higher cost of borrowing
Reduced corporate/private deal flow
Volatility on US stock market
US New housing starts -38.2% yoy growth following rates of -25.0% for Nov and -13.3% for Oct. Levels back to June 1991.
Source: USA Bureau of Census, WilsonHTM
USA New Housing Starts
seasonally adj
-50%
-30%
-10%
10%
30%
50%
70%
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Gro
wth
yea
r-o
n-y
ear
(%)
-
500
1,000
1,500
2,000
2,500
To
tal
(000
un
its)
yr-on-yr%
000 units
US Industrial Production – slight improvement however is a trailing indicator
Source: USA FRB, Wilson HTM
USA Industrial Production1997=100
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
IP Y
r-o
n-Y
r G
row
th
50
60
70
80
90
100
110
120
US
IP
(20
02 =
100
)
IP Y-o-Y%
Industrial Production
US Potential Housing Loan Defaults
Source: CBA
US Mortgage Rate Re-Sets
Source: CBA
US Housing Balance Sheet
Source: CBA
US Employment
Source: CBA
US Consumer Confidence
Source: CBA
What of China?
What of China? – RIO have identified 4 themes
1. Rapid growth
2. Decoupling
3. Commodity intensive growth
4. Increasing domestic resource production costs
Rapid Growth - Chinese growth accelerated in 2007
Source: Global Insight
Growth Forecasts – China forecast to grow 10.5% 2008 and 9% in medium term
GDP Growth - Asian Tiger Economies
Country Time Span Duration GDP Growth p.a.
China 1978 -2003 25 yrs 6.10%
Japan 1950 - 1973 23 yrs 8.20%
Korea 1962 - 1990 38 yrs 7.60%
Taiwan 1958 - 1987 31yrs 7.10%
Source: Financial Times
Increasing FX reserves provide buffer against external shocks
Source: State Administration of Foreign Exchange
Decoupling - Direct trade effects from a US slow down are anticipated to be small
Source: Centre for International Studies
Commodity Intensive Growth - Rapid Industralisation/Urbanisation = China as the world’s largest consumer of commodities
Source: WBMS, Barlow Jonker,IEA, PB
Key targets for China’s economic & social development - The 11th 5 year plan
Source: Chinese government and provincial levels 5 year plans 2006 to 2010
Increasing Domestic Resource Production Costs -Chinese currency likely to strengthen further (increasing long term commodity prices)
Source: Centre for International Economics
Strong demand from economic and demographic development favours major base metals
Sources: Global Insight – for population distribution, RIO Tinto for commodity expenditure profiles
China – Is it really that good?
Ernst and Young conducted a study of the Non Performing Loans in China in 2006
The big 4 banks (which control approx. 70% of financial assets) US$358Bn “Official” figures for China’s NPL’s = US$150Bn for the big 4 banks Total financial system US$911Bn = 40% of GDP In 2005 comparative numbers in the region where:
India’s NPL 5% GDP Indonesia NPL < 5% GDP and Japan NPL < 3% GDP.
S + P and Fitch estimates are US$320 to 330Bn
Source: Financial Times
Where to from here?
World Economic Growth
Market valuation had been above average
Sector PE ratings vary across industrials
Sectors have re-rated others have de-rated
Aust Housing Loan Arrears
Repricing of Default Risk
Source: Bloomberg
The Way Forward - Summary
US Economy
Affects of credit crisis likely to take several months to un-wind
Asset de-valuation likely to be more wide spread than residential real estate
Government cutting rates short term to stimulate the econ
US slowdown expected to continue?
Medium to long term possible export lead recovery
Watch inflation pressures
Chinese industrialisation
Growth likely to remain above 8-9%pa for medium term
US slowdown exp to reduce growth by circa 1%?
Demand and pricing of commodities likely to remain high
Australia
Fundamentals of economy intact
Volatility likely to remain (opportunities?)
Focus on fundamentals CF, Margins, Dividends and strong management
PE compression expected to consolidate
Concern over emerging inflation i.e. wages growth??