Centuria Life The shift to income investing Alex Clamen Division Director - Macquarie Investment Management, Fixed Income and Currency
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Important notice This presentation has been prepared by Macquarie Investment Management Limited ABN 66 002 867 003 AFS Licence 237492 (MIML). MIML is not an authorised deposit-taking institution for the purposes of the Banking Act (Cth) 1959, and MIML’s obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 or of any Macquarie Group entity. Neither Macquarie Bank Limited nor any member of the Macquarie Group guarantees or otherwise provides assurance in respect of the obligations of MIML. The information in this presentation is provided for general information purposes only and does not take into account the investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in a Fund. In deciding whether to acquire or continue to hold an investment in a Fund, an investor should consider the Fund’s product disclosure statement. The product disclosure statement for the funds named in this presentation are available from the issuer of the Centuria Life Investment Bonds: Capital Guaranteed Bond and Income Accumulation Bond. We believe the information provided herein is reliable, as of the date hereof, but do not warrant its accuracy or completeness. Certain parts of this presentation may have been obtained or are based upon information obtained from third parties which may not have been checked or verified. Future results are impossible to predict. This report includes opinions, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. Forward-looking statements constitute our judgement as at the date of preparation of this presentation and are subject to change without notice.
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01
Current market outlook
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Structural investment themes The policy levers we have all analysed for the past 25 years have changed
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Too much debt
Massive central bank intervention
Too little growth
Shift to Income
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Central banks have become the focus of financial markets Historically central banks have managed the interest rates of their respective countries
l Conducts monetary
policy with a dual mandate of full employment and stable prices
l Aims to maintain price
stability, preserve the value of the Euro
l Conducts monetary
policy with a view to maintain stable prices
l Stable currency and full
employment l Inflation target of 2-3%
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The role of central banks has changed Quantitative Easing (or QE): It is an unconventional monetary tool used by central banks to stimulate the economy
l The central bank creates money and buys bonds from financial institutions l The central bank buying program makes bonds expensive and less attractive
l The financial institutions receive the money and use it for more attractive investments and loans l With an increase in money supply, interest rates should go down boosting the economy l Positive sentiment, confidence and wealth effect perpetuate the cycle CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Unconventional monetary policies Unprecedented quantitative easing policies
l This easing cycle began in Sept 2007 with the Fed cutting rates from 5% all the way to 0% to 0.25% l Other major central banks have also implemented zero-bound policies l All major central banks have initiated unconventional policies l The Fed is printing $85 billion a month and the Bank of Japan $70 billion
To create economic growth
• Through wealth effect
“
If people feel that their financial situation is better because their 401(k) looks better or for whatever reason their house is worth more - they're more willing to go out and spend.... That's going to provide the demand that firms need in order to be willing to hire and to invest
“
Enormous monetary stimulus
Ben Bernanke
l The Bank of Japan launched its first of many quantitative easing programs in March 2001 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
l The economy has grown at 0.79% annually since 2001 and deflationary pressures have never disappeared PAGE 7
Unconventional monetary policies Tail risks have receded but what about growth? Reduction in risk aversion
But no economic growth
Index 8
QE1
1.5
QE2
Japan
1.3 GDP index
7 6
1.1 US _Depression
US GFC
0.9
5 0.7 4
0.5
Default Risk
1 3
5
7
9
11
13
15
17
Years
2 1
3
l This excess liquidity has boosted asset prices
Other risk (liquidity, credit spread term premia...)
0 Nov 08 Mar 09 Aug 09 Dec 09 May 10 Oct 10
l Leverage keeps rising (G4) Feb 11
Jul 11
l What about the consequences?
Source: Macquarie, US Bureau Economic Analysis and Ministry of Finance, Japan CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Strong support for risk asset prices ‘Tapering’ mentioned
1800
S&P 500 Operation Twist extended
1600 QE2 ends
1400
QE1 ends QE3 announced
1200
1000 QE2 news (Jackson Hole)
Operation Twist announced
800 QE1 announced
600 Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Jan 13
Source: Bloomberg June 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Economic growth remains modest Each and every step of ‘easing’ is heralded as a cure for the ailments, but economic growth is not responding like many have expected
Quarterly GDP - OECD countries 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0
Q1
Q2
Q3
Q4
-2.5 2007
2008
2009
2010
2011
2012
2013
Source: OECD October 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Inflation threat ... no evidence of upside risks 10 8 6
%
4 2
QE2
QE3
0 -2 -4 Jan-00
Jan-02
Jan-04 US CPI yoy
Jan-06
Jan-08
China CPI yoy
Jan-10
Jan-12
EU CPI yoy
Source: Bloomberg September 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Tapering Are costs beginning to outweigh the benefits of quantitative easing?
l Despite the lack of the QE
wealth effect, Bernanke introduced the concept of altering the pace of QE
The Federal Reserve’s real GDP Forecasts 4.5% 2013
4.0%
2014
3.5%
l However communication has
been very poor increasing volatility
2015
3.0%
2010 2011
2.5%
2012
l With economic growth still
very slow, why is the Fed about to reduce its unprecedented stimulus?
2.0%
Actual GDP
1.5% Mar 10
Dec 10
Sep 11
Jun 12
Mar 13
Source: FOMC & Bloomberg October 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Government debt at record highs Difficult for fiscal policies to support economic growth 250 200
% NGDP
150 100 50 0 1971-75 -50
US
1981-1985 UK
1991-1995
Germany
Aust
2001-2005 Japan
2012 France
Source: Macquarie & IMF, June 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Australian economy Still going strong in a benign world l GDP growth continues to look healthy
l While inflation is well contained Australian CPI %YoY
Australian Real GDP % YoY 10%
12%
8%
10%
6%
8%
4%
6%
2%
4%
0% -2%
2%
-4% Dec 79
0% Mar 83
Dec 89
Dec 99
Dec 09
Mar 93
Mar 03
Mar 13
Source: Bloomberg & Macquarie, September 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Australia – Mining boom fading What will drive the domestic economy? l Business confidence has stabilised, but no evidence non-mining investment is taking up the slack from the peak in mining investment.
l While private sector credit also seems to have troughed, but growth suggests consumption won’t be a driver of economic growth
Australian Business Confidence
Private Sector Credit %YoY
30
30%
20
25%
10
20%
-
15%
-10
10%
-20
5%
-30
0%
-40 Mar 97
Mar 00
Mar 03
Mar 06
Mar 09
Mar 12
-5% Sep 77
Sep 84
Sep 91
Sep 98
Sep 05
Sep 12
Source: Bloomberg & Macquarie, June 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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02
The shift to income investing
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It’s a low yield world Similar to the aftermath of other financial crises 10 year bond yields through history
l Similarities with Japan appear
evident — US bond yields following similar pattern to 1930s and Japan 1990s l Sovereign indebtedness very high l Bond yields likely to surprise by
remaining low for longer l Volatility likely to remain l Environment of low return
9% US: 2000 - Present
8%
US: 1925 - 1941 Japan: 1990 - Present
7%
UK: 2000 - present
6%
Germany: 2000 - present
5% 4% 3% 2% 1% 0% 2000 1990 1925
2005 1995 1930
2013 2000 1935
2005
2013
1941
Source: Bloomberg September 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Credit fundamentals are sound $1,200
$120
Net debt per share (LHS) Free cash flow per share (RHS) $1,000
$100
$800
$80
$600
$60
$400
$40
$200
$20
$0 Jul 98
$0 Jul 00
Jul 02
Jul 04
Jul 06
Jul 08
Jul 10
Jul 12
Source: Bloomberg & Macquarie. Data to 30 June 2013 and is based on S&P500 companies. CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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Default rates continue to be low 12% Investment Grade High Yield
10%
8%
6%
4%
2%
0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg & Macquarie September 2013 CONFIDENTIAL FOR USE BY RECIPIENT ONLY
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The shift to income What is ‘income’ focussed investing? The growth investor
The income investor
Buys for $1, on belief it will rise to say $1.20
Buys a stable priced asset for its yield/dividend/rent
Yield unimportant, it’s all about the capital gain
Yield is paramount, asset is a store of wealth
Works better when leverage increasing and growth strong
Works better when growth environment uncertain
l Growth investing was favoured during the ‘leverage revolution’ prior to the Global Financial Crisis
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The shift to income-based assets l Global deleveraging has a long way to run l This constrains global growth - producing lower return environment l Many periods throughout history where ‘income’ focussed approach is more
prudent and rewarding l An income-based approach is, at least, a good place to start
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Centuria Life Investment Bonds The Macquarie Investment Management Fixed Income team has a defensive and conservative philosophy l Both the Macquarie allocations in the Income Accumulation Bond and the Capital Guaranteed Bond invest in high quality assets l High quality credit is generally more resilient l First port of call: seeking to preserve capital l In this environment we can also protect the funds by increasing our cash levels
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