Market volatility and its impact on the Australian share market

1
Market volatility and its impact on the
Australian share market
A presentation prepared by BT Financial Group for
the adviser market
31 March 2008
2
Rising market volatility has seen the Australian
share market fall nearly 16 so far this year
SP/ASX All Ordinaries Index three months to 31
March 2008
Source BT Financial Group, Datastream
3
but it remains at elevated levels over the
long-term, up 101 over the last 10 years
SP/ASX All Ordinaries Index 10 years to 31
March 2008
Source BT Financial Group, Datastream
4
and 218 over the last 15 years
SP/ASX All Ordinaries Index 15 years to 31
March 2008
Source BT Financial Group, Datastream
5
Its worth keeping in mind that market volatility
has affected all markets, not just ours
Major international markets six months to 31
March 2008
US, UK and European stocks hit record highs
FTSE 100 (UK) -20 (12/10 17/3)
SP 500 (US) -18 (9/10 17/3)
DJ EuroStoxx 50 (Europe) -23 (12/10 17/3)
Nikkei 225 (Japan) -35 (9/7 17/3)
Source BT Financial Group, Datastream
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So whats been driving the global market
volatility weve seen lately?

• The source of recent market volatility goes back
  to 2007 and the collapse of the US housing market
• Problems arising from defaults in the sub-prime
  mortgage component of the US housing market
  spread to global asset markets in the latter half
  of 2007 and this has continued into 2008
• The ripple effect of those problems on the US and
  global economy is whats behind the market
  conditions were seeing at the moment, with some
  global share markets having fallen as much as 35
  from last years record highs

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Whats behind the falls were seeing in the
Australian market?

• Leveraged investments have played a big role in
  the run-up in share markets in recent years, both
  here and overseas
• Earlier this year we saw a number of highly
  leveraged players forced out of positions amid
  deteriorating global credit conditions and fears
  of a US recession
• Some of these leveraged players both companies
  and individual investors were forced to sell,
  pushing the Australian share market lower
• Individual investors who had over-leveraged were
  forced to sell because of margin calls or, in
  many cases, plain fear as they reacted to the
  impact that falling markets were having on their
  portfolio
• The Reserve Bank of Australia has also raised
  interest rates twice so far this year in
  February and in March in a bid to bring
  inflation under control and this has exacerbated
  the downtrend

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What does this market volatility mean for the
Australian market?

• Investors need to get used to higher levels of
  market volatility. In recent years, Australian
  investors have benefited from high double-digit
  returns and relatively
• few hiccups, but this is unlikely to be repeated
  in 2008
• However, there are a number of positives for
  investors over the long-term
• 1. Weve seen a lot of short-selling in the
  local market which will have to be undone if
  market conditions improve, leading to a potential
  bounce in share prices
• 2. Australia will continue to benefit from the
  continuing urbanisation in China and India.
  Thats driving productivity increases throughout
  the region, boosting the performance of our big
  miners, such as BHP Billiton and Rio Tinto, and
  underpinning Australias growth rates
• 3. The income return from Australian shares is
  now much more attractive than that from bonds,
  which should provide an additional boost for
  share prices

9
What steps is BT taking to address the impact of
this market volatility?

• One of BTs strengths is that we always focus on
  the right levels of diversification and risk
  within our portfolios, whether its Australian
  shares, listed property or fixed income, so
  nothings really changed from our perspective
• This focus on diversification and risk
  management, as well as our investment insight, is
  what prevents BTs portfolios from being damaged
  excessively in the sort of down market were
  seeing now
• Well also continue to ensure that we have the
  right valued stocks in our portfolios by
  investing in companies with secure cash flows,
  limited expectations in their valuations and
  sound management teams
• At BT, were happy in our ability to sidestep
  some of the blow ups that have really triggered
  the downturn in the last six months or so

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What can investors do in this type of market
environment to help protect their own portfolio?
There are a number of investment strategies that
investors can employ to help manage and protect
their own portfolio

• Dont panic invest for the long-term
• Understand risk
• Diversify your investments
• Avoid chasing returns
• Dont forget time is on your side
• Find hidden value
• Employ experts
• Seek professional advice

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Dont panic invest for the long-term
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Its easy to get caught up in short-term market
movements. Keep the end goal in sight
Impact of major market events on global shares
since 1990
Jun 07 US Sub-prime Crisis
Jul 98 Russian Bond Crisis
Jul 01 Tech Wreck
Aug 97 Asian Currency Crisis
Sep 01 Attack on Twin Towers
Feb 94 Bond Market Crash
Jan 91 Gulf War
Source BT Financial Group, Datastream. Global
shares measured by the MSCI World (Price) Index
to 31 January 2008
13
Long-term asset class performance
31 March 2008
Australian shares
Listed property
Global shares
Australian bonds
Cash
Note Accumulated returns based on 1,000
invested in December 1984 Source SP/ASX 300
Accumulation Index, MSCI World ex-Australia (net
dividends) Index in A, SP/ASX 300 Property
Index, UBS Composite 0 years index, Citigroup
World Government Bond, Unhedged in A
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Understand risk
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All investing involves a trade-off between risk
and return
Australian shares, one year returns - Greater
volatility over the short-term
Australian shares, five year returns - Reduced
volatility over the long-term
1985
2005
2000
1995
1990
Source Datastream. SP/ASX 200 Accumulation
Index annualised returns to 30 November 2007 shown
16
Diversify your investments
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The more you spread your investments, the less
chance you have of losing money
Shares
Property
Cash
Fixed interest
Individual securities
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Every asset class has its day in the sun
Best performer each year ()
Australian shares Australian bonds International
shares Cash International bonds Listed property
60
50
40
30
20
10
0
07
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Source MSCI World ex-Australia index. Net
Dividends reinvested in A, SP/ASX 300 Property
Trusts Accum. Index, SP/ASX 300 ex-LPT Accum.
Index, UBS Composite Bond Index (all matures),
UBS Bank Bill Index. Figures are as at 30 June
2007.
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Diversification also applies to regions
World sharemarket values ()
Japan
Asia (ex-Japan)
Australia
U.K.
US
Europe
Source MSCI World Index as at 30 June 2007
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Avoid chasing returns
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Can you pick next years winner?
One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 () One-year returns to 30 June 2007 ()
Australian 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Cash 7.78 6.61 5.15 4.96 5.34 5.96 4.62 4.85 5.20 5.49 5.80 6.42
Fixed interest 9.40 16.81 10.88 3.33 6.18 7.44 6.23 9.71 2.43 7.76 6.79 3.99
Property 3.70 29.21 9.74 3.96 15.62 13.91 15.24 12.17 17.21 18.40 17.42 26.32
Shares 14.62 27.16 1.63 15.13 18.49 9.11 -4.54 -1.61 21.73 26.03 23.08 29.21
International 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Fixed interest -9.60 9.13 26.19 -2.57 13.73 14.54 3.14 -2.46 1.71 -1.66 1.52 -9.93
Shares 6.66 28.56 42.16 8.17 23.81 -6.01 -23.50 -18.53 19.37 0.06 20.97 7.77
Best performing asset class for each year is
highlighted. Indices Liquids Index (Cash), UBS
Composite 0 years index (Australian Fixed
Interest), SP/ASX 300 Property Index (Australian
Listed Property), SP/ASX 300 Accumulation Index
(Australian Shares), Citigroup World Government
Bond Index unhedged in A (International Fixed
Interest), MSCI World ex-Aust (net divs) Index in
A (International Shares)
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Dont forget time is on your side
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Enrol in a get rich slowly program the power of
compound interest
Assumptions 8 p.a. interest, all
reinvested Source BT Financial Group
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Time, not timing, is important
All ordinaries index, annualised returns ()
June 1997- June 2007
Full 2,609 trading days
Minus the 10 best days
Minus the 20 best days
Minus the 30 best days
Minus the 40 best days
Minus the 50 best days
Minus the 60 best days
Minus the 70 best days
Note The returns are shown as historical, investment returns are volatile and past performance is not necessarily indicative of future returns
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What is dollar cost averaging?
Total value
Units purchased
Unit price
Investment
Month
100
10.0
10
100
January
Note No allowance made more inflation, taxation,
fees or expenses Source BT Financial Group
26
Find hidden value
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The best investment research processes unlock
hidden value
Research analysis
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Employ experts
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Even the smartest investors (including many
corporate investors) use managed funds

• A managed fund provides investors with
• More convenient investing
• Broader diversification with less investment
  dollars
• Professional fund managers who monitor and
  actively manage your portfolio
• Economic research and specific company
  information
• Assets not available to individual investors
• Alternative styles of investment strategies

The methodical, systematic approach taken by
most fund managers helps them avoid many of the
mistakes individual investors are prone to
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Seek professional advice
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What is your main information source for making
investment decisions?
Source BT Investor Poll, October 2004
32
What you get from your financial adviser
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• This presentation has been prepared by BT
  Financial Group Limited (ABN 63 002 916 458) BT
  and is for general information only.  Every
  effort has been made to ensure that it is
  accurate, however it is not intended to be a
  complete description of the matters described. 
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  calculated using exit to exit prices and assume
  reinvestment of income, take into account all
  fees and charges but exclude the entry fee.  It
  is important to note that past performance is not
  a reliable indicator of future performance.
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