Economic and market prospects

Brian Parker CFA

Investment Strategist

MLC Investment Management

Any opinions expressed in this presentation constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this presentation is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this presentation. To the maximum extent permitted by law, we disclaim all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from this presentation.

This presentation contains general information and may constitute general advice. It does not take into account any person’s particular investment objectives, financial situation or individual needs. It should not be relied upon as a substitute for financial or other specialist advice. It has been prepared solely as an information service for financial advisers and should not be distributed to clients.

Before making any decisions on the basis of this presentation, you should consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs.

Opinions expressed constitute our judgement at the time of issue and are subject to change. The presenter is a representative of MLC Investments Limited. MLC Investments Limited ABN 30 002 641 661 105-153 Miller Street, North Sydney NSW 2060 is a member of the National group of companies.

MLC Investments Limited is the issuer of the MLC MasterKey Unit Trust. Information about the MLC MasterKey Unit Trust is contained in the current Product Disclosure Statement (‘PDS’), copies of which are available upon request by phoning MLC on 131 831 or on our website at mlc.com.au.

General advice warning and disclaimer

How to build wealth and sleep soundly at night

1. Supply capital (equity or debt) to businesses (lots of them)

2. Be patient

3. Understand (and be comfortable with) the risks you are taking (you have to be able to sleep at night!)

4. Be realistic, not greedy

In recent years, too many people have made building wealth too complicated too opaque and too risky

John Maynard Keynes•“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

•- Keynes, General Theory 1936

Hyman P. Minsky 1919 - 1996

• “… over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system. In particular, over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight to units engaged in speculative and Ponzi finance. “

• - Minsky 1992

US housing: the state of play

Source: Thomson Financial Datastream

Home sales have plummeted..

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Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08

Total home sales (new + existing)

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..helping to create a huge overhang of unsold homes

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Unsold single-family homes to total sales ratio

Housing starts have fallen in response to sharply weaker demand..

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Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08

Housing starts

..and housing is now much more affordable

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Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08

Index of housing affordability

Source: Thompson Financial Datastream

The US economy is already in recession – just ask consumers

Source: Thomson Financial Datastream

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Jan-79 Jan-83 Jan-87 Jan-91 Jan-95 Jan-99 Jan-03 Jan-07

Expected conditions Current conditions

University of Michigan - Consumer Sentiment Index

GDP growth has slowed a lot and the leading index looks lousy

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Q1 1988 Q1 1993 Q1 1998 Q1 2003 Q1 2008

Conference Board leading index Real GDP

Annual change %

Business surveys are more timely than GDP and look awful.

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ISM Manufacturing index

ISM non-manufacturing index

Index

Bank failures soared even before the recession had really hit!

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No. of US bank failures

Source: FDIC. 2008 figure is at as 5 November.

De-coupling in Europe and Asia? Sharemarkets don’t buy it

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Here comes the cavalry

Global official interest rates

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Jul-08 Aug-08 Sep-08 Oct-08US Eurozone Japan

Canada Australia UK

China India NZ

%

• All the major central banks have cut interest rates, and there is more to come.

• Governments finally ‘get it’

• “We are in very uncertain times. But, for the first time we can now say with confidence that the major developed countries' governments are doing all in their power to deal with this crisis.”

- Bridgewater 13 October 2008

Source: Thomson Financial Datastream

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3mth Treasury bill rates

3mth USD LIBOR

US Federal Funds targetrate

%

Money market conditions are improving

Global economic and investment prospects

• US is in recession now and the other major economies are following..

• ..but the Chinese economy is relatively well-placed to weather the storm

• Not a textbook recession – financial crises take longer to unwind,..

• ..however, the economy and financial markets will recover (every crisis, every recession, every market downturn comes to an end!)..

• Governments finally ‘get it’.

• Opportunities are emerging (the world’s best professional investors are BUYING)

• We are most unlikely to see a repeat of the kind of investment returns seen in recent years.

Australia in summary

• Economy grew at an annual rate of less than 2% during H1 2008 as consumer spending slowed to a crawl..

• ..and this has happened BEFORE the bulk of the impact of past rate hikes could be expected to hit the economy

• Bright spots?• Exports (at least in volume terms)

• Huge pipeline of investment spending

• Housing activity should rebound in 2009

• Authorities (RBA and Govt) have acted aggressively and early

• Sharply lower $A is good news

• RBA’s inflation worries will evaporate as domestic demand eases. RBA has already done a lot, but more rate cuts to come.

The bad news

Retail sales figure for September was a shocker - trend is slowing

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m/m% sadj

m/m% trend

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Consumer sentiment just above levels not seen in seventeen years

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Bad news waiting to happen?

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Q1 1988 Q1 1991 Q1 1994 Q1 1997 Q1 2000 Q1 2003 Q1 2006

US UK Aust

Real (inflation adjusted) house prices. March quarter 1988 equals 100

Sources: Datastream, RBA, MLC Investment Management

Let’s keep the recent weakness in perspective

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ASX300 Index

Source: Thomson Financial Datastream

How will this look in 5 years’ time? 10 years’ time?

1987

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Australian share prices - daily

1987

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Australian share prices - daily

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Australian share prices - daily

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Australian share prices - daily

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Australian share prices - weekly

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Australian share prices - weekly

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Australian share prices - weekly

There’s always things to worry about• The 1929 crash• Great depression• WW II• Korean War• Cuban missile crisis• Vietnam War• OPEC oil crisis I• OPEC oil crisis II• Latin American debt crisis• Australia’s ‘banana republic”

moment• 1987 stockmarket crash

• The fall of the Berlin Wall• Iraq War I• US savings and loan crisis• The recession we had to have• Bond market crash 1994• Mexican debt crisis 1995• Asian crisis 1997• Russian debt/LTCM crisis• Tech wreck• September 11• Afghanistan• Iraq War II

..“Maybe I should head into cash until things settle down?!?”• Need to get 2 calls right – when to get out, AND when to get back in

• Macro indicators are often useless when it comes to timing these things

• Cash returns on offer ain’t what they used to be

• Dalbar (2007) Investor performance 20 years to end 2006:Market return (S&P500) 11.8%Investors return 4.3%The difference? Trying to time markets!

Australian market downturns and their aftermath

1973 - 1974...

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Jan-73May-73 Jul-73 Oct-73 Jan-74 Apr-74 Jul-74

Total return index

…5 years' later

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Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79

Total return index

Australian market downturns and their aftermath

1980 - 1982

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Total return index

…five years' later

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Total return index

Australian market downturns and their aftermath

1994

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Total return index

…five years' later

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Feb-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99

Total return index

Australian market downturns and their aftermath

Emerging mkts/LTCM crises

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Apr-98 Jun-98 Aug-98 Oct-98

Total return index

…five years' later

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Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Mar-03

Total return index

Australian market downturns and their aftermath

Post tech/Sep 11, et. al...

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Total return index

..five (and a bit) years' later

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Total return index

MLC performance update

• No sub-prime mortgage exposure• REIT exposure miles below peers, and..• ..Global REIT exposure has fared better than Australia• Australian equity performance has recovered• Portfolios are extremely well-diversified, but…

…we are in the risk management business, not the risk avoidance business

Some questions…• Do you know your own tolerance for risk (the ‘sleep-at-night’ test)?

• Do you know your financial goals and needs (both near term and longer term)?

• Do you understand what kind of investment returns are achievable and sustainable over time?

• Is all of this embodied in a financial plan produced by an appropriately qualified financial adviser?

If the answer is ‘yes’ to all of the above, then nothing that’s happened in markets recently should cause you to do much at all!