MLC Investment Management

Investment briefing summary

held on 15 August 2011
The current state of the global market
World financial markets remain in turmoil with share prices around 15% off their 2011 highs. The magnitude of the market moves has been extraordinary. On Tuesday last week, the S&P 500 rose 6.5% in an hour and 15 mins. Moreover, if you look at the top 10 moves on the Dow Jones index since the 1920s, four of them have happened in the last 10 trading days. While weve had a bit of a bounce in the last day or two, the MSCI All Country Index stands just above its lowest level since July last year. In those markets where sovereign risk concerns havent been as paramount, Government bond yields have fallen very sharply and traditional safe havens such as gold and the Swiss franc have risen very strongly. Market participants have become extremely risk averse. The turmoil in world markets comes at a time when economic growth in the major developed economies has slowed to a crawl, raising fears of another globalrecession. feeling the ongoing effects of a stunning rise in our terms of trade. Investment spending plans point to a massive surge in business investment related to the mining boom. The crisis weve seen in world markets has led money markets to price in an imminent series of interest rate cuts from the Reserve Bank. For our part, we are somewhat sceptical, and believe that rate cuts are further away than markets appear to expect. could seriously derail economic growth in the next year or two, and bring about a policy-induced recession. Prospective returns from equity markets, even in a highly uncertain world, are still likely to exceed cash, fixed income, property, and term deposits over the medium term. Ironically, high quality equities may prove to be more of a safe haven over time, in a world dominated by sovereign risk concerns. Corporate debt levels both here in Australia and globally (atleast for non-financial companies) arehistoricallylow. Valuations in world share markets look reasonably attractive. This point has been reinforced in the United States, where 60senior managers bought shares in over 50 Dow Jonescompanies. The only one other time in the last 20or 30 years when weve seen this level of buying was in March 2009, after the worst of the GFC.

Our view on developments

Economic growth in the major developed economies wont stay as weak as its been in the last six months or so, but nor is it going to be spectacular any time soon. Emerging market economies are in far better financial shape than much of the developed world, and are still likely to post solid growth. In Europe, sovereign default in some form is highly likely in Greece, Ireland and perhaps elsewhere. The lack of determination by Europes political leaders to tackle the significant issues can also be attributed to a focus on upcoming elections including: regional elections in Germany, which start in early September a general election in Spain in November, thats been called early because of the weakness of the current government, and a presidential election in France early next year. Its highly unlikely for any politician to make a big decision if they believe its going to cause issues for them at the ballot box. Were sceptical about the ability of the US to achieve meaningful deficitreduction. However, the silver lining is were unlikely to see the kind of fiscal tightening which

What were doing in the current climate

Market volatility and individual equity volatility provides an environment in which active managers can buy shares at very attractive prices relative to their medium-term growth opportunities. This is exactly what our managers aredoing. Just in the last week or so, weve seen those of our managers who were holding quite high cash positions, putthat money to work and invest in high quality companies which are trading at multi-year valuation lows. Shares such as United Health, which is one of the worlds largest medical health insurance providers, Home Depot and tech giant Intel.

On the home front

Our markets have not been immune to these global events: the AUD has fallen and our sharemarket is around 16% off its 2011 highs. If we look at the economic news released in Australia over the course of 2011, we see an economy where consumer spending has been very subdued, house prices and housing activity indictors have weakened, consumer confidence has taken a dive, and consumers appetite for credit haswaned. However, we also see an economy with close to full employment, and one that is

Important information: This information has been provided by MLC Investments, ABN 30 002 641 661 a member of the National Australia Bank group of companies, 105 153 Miller Street, North Sydney 2060. This material was prepared for advisers only. This communication contains general information and may constitute general advice. Any advice in this communication has been prepared without taking account of individual objectives, financial situation or needs. It should not be relied upon as a substitute for financial or other specialist advice. Before making any decisions on the basis of this communication, you should consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs.
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