VALUATION DASHBOARD

Prices as at Australian Open Tuesday, 17 September 2013 damien.klassen@wilsonhtm.com.au +612 8247 3101
The RBA minutes out this morning continue to point to a slow Australian economy, with retail spend, capex plans and employment being weak. The only (domestic) positive the RBA could see was nascent signs of growth in housing construction. One of the concerns over the next year has to be housing prices which continue to increase without sparking a construction boom. At that point the RBA will need to consider which is more important - keeping rates low to encourage growth in a weak Australian economy or restrain interest rates to avoid a (bigger) housing bubble... more to come on this theme over the next few months I fear. The second thing I note this week is the increasing P/Es in the mid caps and at the bargain end of the market (see chart below) - the hunt for value is getting increasingly difficult. Interactive charts are at http://bit.ly/oecTbW Chart of the Week: The ASX 100 "Bargain Bin" - 12m forward P/E
PE 13 12 11 11.3

1 Week Price Changes in Major Asset Classes

Equities Eur US China ASX 200 Small Ords Japan

Fixed Interest US 10y+Gov't US BBBCorp US Junk FX AUD / EUR AUD / Yen Residential Property -5% -4% -3% -2% -1%

Au BBBCorp Au 10y+Gov't Au 3-5yGov't Au 1-3yGov't US 1-3yGov't

This shows the P/E of the stock at the 10th percentile P/E in the ASX 100 - i.e. the cheapest stocks

AUD / USD AUD / Yuan Aust. Resi 0% 1% 2% 3% 4% 5% 6% 7%

Current Market Theme - Sovereign Risk

320

10 9
8 7 6 Aug-94

300 280 260 240

Italy opening up a risk premium over Spain recently

Italy 250 236

Only twice in 20 years has its been harder to find a bargain - pre financial crisis and pre-tech boom
Aug-96 Aug-98 Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10 Aug-12

220 200 Feb-13 Spain

Mar-13

Apr-13

May-13

Jun-13

Jul-13

Aug-13

Sovereign risk was the theme for 2012 holding prices back. Going into 2013 sovereign debt has the potential to come to a head but has faded as a market key theme.
Source: Bloomberg

Source: Wilson HTM, Bloomberg

Quantitative Strategy - Valuation Dashboard

Issued by Wilson HTM Ltd ABN 68 010 529 665 - Australian Financial Services Licence No 238375, a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.

Table of Contents
1. Valuation Stats Australian Equities
15.0 14.5 ASX 200 12m Fwd PE 400 4.5 14.5 4.0

2. Valuation Stats Australian Bonds

Bond Yield Curve (%)

3. Valuation Stats International Equities

EPS Growth FY1 to FY2 21% India 19% Italy Norway 17% Finland

14.0
13.5 13.0 12.5 12.0 11.5

390

4.0

Yields falling across the curve this week

3.3 Last Week 2.9 2.5 2.6 2.6 2.6 2.5 2.6

EPS edging lower in recent weeks,

380

3.5

15%

Spain

370

3.0

13%

China Euro Stoxx Germany France Holland World X Aust UK

Sth Africa Japan Switz'd US Nasdaq US S&P 500 Canada Australia NZ

11%

11.0 10.5 10.0 24-Jun ASX 200 12m Fwd EPS (RH)

360

2.5

60d range
19-Aug 02-Sep 350 16-Sep 2.0 Bank Bills O/Night 1m 3m 6m Gov't bonds 12m 2Y 3Y -2bp

9% Hong Kong

Singapore

08-Jul

22-Jul

05-Aug

5Y

10Y
-8bp

7% 9 11 13 15 FY1 P/E Ratio 17 19

1 Week Chg:

ASX 200

+1% Small Ords

-0%

1 Week Chg:

90d

2yr

-8bp

10yr

1 Week AUD Chg:

US +1% Jpn +5% Eur

+3% China +1%

4. Valn Stats Corporate Bonds

5. Valuation Stats Aust. Residential Prop.

4.5%

6. Valuation Stats Risk Measures

Implied Vol. (%) 24 Vix Indices

6.0 5.9 5.8 5y $A Corp. CDS (RH) 5.7 5.65 5.6 5.5 5.4 5.3 5.2 5y BBB Bond Yield (LH)

150

Daily prices continue their recent upward trend

Median 5 City House Price (RH)

$595k

140

4.4% $590k

22
20 18

US Vix and Australian Vix both edge lower over the week

130

4.3%

120 4.2% 110 110 $585k Est. Unit Net Yield (LH) 4.1% 100

16 14

Aust 14.3
US 14.4

Yields and CDS both falling over the week

12
4.0%

19-Aug

26-Aug

2-Sep

9-Sep

16-Sep

90

16-Aug

23-Aug

30-Aug

6-Sep

13-Sep

$580k

10 19-Jul

02-Aug

16-Aug

30-Aug

13-Sep

1 Week Chg:

BBB Yield

-7bp CDS

-1bp

1 Week Chg:

5 Capital City

+0.3%

1 Week Chg:

US -15bp

Aust. -34bp

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters, RP Data

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17/09/2013

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Section 1: Valuation Stats - Australian Equities

12m Forward P/E Distributions
30
25th to 75th PE Percentiles Median 10th 90th Wtd Av.

ASX 100 Distribution

25

The top end of the market as "frothy" as its been at any time in the last four years
24.1

20

19.0
15.1 14.5

15

12.9 11.3
10

5 30

Small Ords Distribution

25

Interesting to see the weighted average above the median - i.e. "larger" small caps are looking more expensive

22.4

20

17.7
15

13.4 13.0
10

9.5 6.9

15% 10% 5% 0% Aug-94

% of index with P/E > 50 (which are excluded from the above charts)
Aug-95 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01

ASX 100

Small Ords

Aug-02

Aug-03

Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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17/09/2013

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Section 1: Valuation Stats - Australian Equities

Shiller PE (Price / 10 year average inflation adjusted earnings)
P/E 30 6 25 5 4 3 14.8 2 2.9

12m Forward Earnings Yield (E / P) less 10Y Govt. Bond Yield

7

Equities cheap rel. to bonds

Over the last year equities have gone from extremely cheap vs bonds to more normally priced

20

15

10
1 5 0 -1 Dec-05

0 69 73 77 81 85 89 93 97 01 05 09 13

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Long Term Trailing P/E Ratio (ASX 200)

P/E 21

Long Term Trailing Earnings Yield (E / P) less 10Y Govt. Bond Yield
8 6

18 15.9 15

4 2 2.3

0
12

Trailing P/E roughly at "preEuropean crisis" levels

-2 -4 -6

6 69 73 77 81 85 89 93 97 01 05 09 13 -8 77
Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

81

85

89

93

97

01

05

09

13

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Section 1: Valuation Stats - Australian Equities

2013 EPS Growth how analyst forecasts have changed
25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% Mar-12 -23% 35% 30%

2014 EPS Growth how analyst forecasts have changed

Downgrades to industrial earnings in recent weeks.
Resources
30%

Industrials

7% 7%

25% 20% 15% -11% 10% 5%

Financials Small Industrials

Small Industrials Industrials Financials

10% 8% 6%

Resources

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13
P/Book

Sep-13

0% Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13 EV/EBIT (x)

Mar-13

May-13

Jul-13

Sep-13

Key Sector Stats

Size Indices S&P/ASX 20 S&P/ASX 50 S&P/ASX 100 S&P/ASX 200 S&P/ASX 300 Other Indices Resources Adjusted Industrials* Mining excluding BHP & RIO S&P/ASX Small Ordinaries S&P/ASX Small Resources S&P/ASX Small Industrials Adjusted Small Industrials* GICS Sectors S&P/ASX 300 Energy S&P/ASX 300 Materials S&P/ASX 300 Industrial S&P/ASX 300 Consumer Discretionary S&P/ASX 300 Consumer Staples S&P/ASX 300 HealthCare S&P/ASX 300 Information Technology S&P/ASX 300 Utilities S&P/ASX 300 Telecommunication Services S&P/ASX 300 A-REIT S&P/ASX 300 Financials-x-A-REIT Quantitative Strategy - Valuation Dashboard

Price/Earn. (x) Jun-13 Jun-14 Jun-15 16.2 16.0 16.1 16.1 16.0 15.8 18.0 15.8 15.1 11.4 15.9 16.1 18.0 15.6 15.9 18.1 19.0 24.8 20.6 16.4 16.1 15.3 14.7 14.7 14.7 14.7 14.7 14.7 13.4 16.5 14.3 13.6 9.7 14.8 15.0 17.1 12.7 16.2 16.5 18.1 20.3 18.2 15.7 15.2 14.4 13.8 13.5 13.5 13.5 13.5 13.4 11.5 14.9 11.8 12.0 7.9 13.4 13.5 14.0 11.0 15.2 14.8 16.6 18.1 16.2 14.4 14.4 13.8 13.0 12m Fwd 14.4 14.4 14.5 14.5 14.4 12.9 16.4 13.6 13.4 9.0 14.8 15.0 15.6 12.4 16.0 16.4 18.0 20.2 17.9 15.5 15.2 14.3 13.6

EPS Growth (%)

Yield (%) 12m Fwd 4.8 4.7 4.6 4.6 4.5 3.2 4.1 2.7 3.5 0.9 4.2 3.9 3.3 3.3 3.9 3.4 4.5 2.4 3.3 5.7 5.8 5.8 5.4

EV/EBITDA (x) 12m Fwd 10.8 11.2 11.2 11.2 11.2 9.5 12.1 10.4 10.4 6.5 11.4 10.9 11.9 9.2 13.1 11.7 12.8 15.9 13.7 12.1 11.0 15.4 9.6 Jun-13 Jun-14 Jun-15 9.0 9.5 9.4 9.4 9.4 7.9 9.1 8.9 8.6 6.1 9.1 8.4 10.3 7.6 8.2 9.7 10.4 15.5 11.6 9.5 7.0 16.8 9.6 8.8 9.1 9.0 8.9 8.9 7.1 8.6 7.5 7.9 4.5 8.8 8.1 9.1 6.8 7.9 9.3 10.0 13.6 12.5 9.2 6.7 15.7 9.9 8.1 8.3 8.2 8.2 8.1 6.2 8.0 6.3 7.0 3.5 8.2 7.6 7.4 6.1 7.3 8.6 9.3 12.2 11.2 8.6 6.6 14.8 9.3 12m Fwd 8.6 8.9 8.8 8.8 8.7 6.9 8.6 7.2 7.9 4.8 8.7 8.1 8.4 6.7 7.8 9.3 10.0 13.5 12.4 9.2 6.7 15.4 9.8 Page 5

FY0

Jun-13 Jun-14 Jun-15 Jun-13 Jun-14 Jun-15 -3 -1 -1 -2 -1 -23 4 -14 -8 -27 -6 -11 -2 -25 13 -8 4 19 19 7 12 -3 7 10 10 11 11 12 30 9 39 28 256 10 8 23 30 5 10 6 24 11 6 6 6 6 8 9 10 10 11 20 11 30 22 54 14 16 26 18 17 12 9 13 16 10 6 4 6 4.5 4.4 4.4 4.3 4.3 2.9 3.8 2.4 3.1 0.7 3.8 3.5 2.9 3.0 3.6 3.2 4.2 2.1 3.6 5.6 5.5 5.5 5.2 4.7 4.6 4.6 4.5 4.5 3.2 4.1 2.7 3.5 0.9 4.2 3.9 3.3 3.3 3.9 3.3 4.5 2.4 3.3 5.7 5.8 5.7 5.4 5.0 4.9 4.9 4.8 4.8 3.5 4.4 3.2 4.0 1.3 4.7 4.4 3.5 3.7 4.4 3.7 4.8 2.7 3.6 6.0 6.0 5.9 5.7

Jun-13 Jun-14 Jun-15 11.8 12.5 12.5 12.5 12.5 11.2 13.0 13.5 11.9 10.4 12.2 11.3 15.2 10.5 14.0 12.4 13.3 18.3 18.5 12.8 11.5 16.9 9.2 11.0 11.5 11.5 11.5 11.4 10.0 12.2 11.3 10.6 6.9 11.5 11.0 13.4 9.4 13.3 11.8 12.8 16.0 13.8 12.2 11.0 15.7 9.7 10.1 10.4 10.5 10.5 10.4 8.6 11.1 9.2 9.4 5.3 10.7 9.9 10.7 8.3 12.0 10.8 11.8 14.3 12.5 11.5 10.6 14.8 9.3

2.3 2.1 2.1 2.0 2.0 1.7 2.5 1.3 1.4 0.8 1.8 1.9 1.5 1.9 1.9 2.0 2.5 4.8 4.6 1.4 5.0 1.1 2.1

17/09/2013

Section 1: Valuation Stats - Australian Equities

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, * Industrials Less Banks, Insurers, REITs, Infrastructure, Utilities

ASX 100: P/E vs Dividend Yield

Cheap on both measures

For interactive version of these charts http://bit.ly/nbPZim

Expensive on both measures

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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17/09/2013

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Section 1: Valuation Stats - Australian Equities

Distribution of 12m Forward P/E (ASX100)
Energy Mining Industrials Financials Property Utilities SGM BSL OSH AGO TCL SYD ILU BLD JHX CRZ DUE SUN SEK RHC CSL RMD COH APA

Small Cap discount P/E vs Market Cap (measured by median P/E in market cap deciles)
PE Rel (x) 1.3

Not many stocks left at this end

1.2 1.1 1.0

P/E higher within group -->

AGK TOL BOQ RRL SPN NAB SKI IOF IAG CTX BEN DOW BPT ORI ARI LEI DXS MTS AUT MIN ANZ FMG CGF LLC MND MYR RIO 1112x 1213x 1314x

2003 - Risk on, very little relationship

WRT PNA CPA GMG WBC ALQ IPL GPT FDC 1415x

DJS QBE MGR CFX CBA ABC AMP UGL 1516x

AZJ TAH NCM WPL WES TTS AMC ANN AIO FOX FLT BHP SHL BXB PRY WOW QAN WDC WOR HVN MQG GNC CCL CPU EGP TLS SGP ASX ORG 1617x 1718x 1820x 2022x

0.9 0.8 0.7 0.6 0.5 0 200

2008 - Risk off, steep line and strong relationship

Latest

STO CWN ALL HGG TWE 2225x

AWC WHC OZL LYC

The relationship between size and market cap is quite weak at the moment

<6x

106-7x 7-8x 8-9x 9-10x 11x

-ve >25x EPS

400

600

800 1,000 Market Cap ($m)

1,200

1,400

1,600

Distribution of 12m Forward P/E (Small Ords)

Energy Mining Industrials Financials Property Utilities MCR MCE MBN LNC KAR IVA IFN IAU HGO GRY GGG GBG FMS FML ERA ELM DTE DML CPL COK CFE BTR BSE BRU BRL BND BLY AQA AMX ABU AAC -ve EPS

ASX 100 12m Forward P/E less Small Ords 12m Forward P/E
4.0 3.5 3.0 2.5 2.0 1.5 1.0 target range 0.5 average vs average 0.0 -0.5 Aug-94 1.1

The gap between small and large caps has closed sharply
median vs median

The small ords distribution is back to being incredibly flat

SLR NWH NFE APN EHL TGZ RSG MAH <6x

MLD PRU AJA BCI SVW FGE CNU CAB BDR SAR ASL CDA

ANG TRY SDM APZ MML SFR

TGS SBM MGX PBG IMD

6-7x 7-8x 8-9x 9-10x

MIO COE TEL ROC FXJ BKN DCG FKP PRG 1011x

CDD DLS TGA GUD ORL 1112x

RCR SWM SGN NST ABP CQR CDI 1213x

TSE SGT SKE ALZ CMW EVN GRR AHE FWD KMD 1314x

CHC OGC MMS AAD MRM SIP SXL 1415x

RIC CCP CLO SMX AAX 1516x

FXL ENV RFG IIN GFF CCV BWP 1617x

MPO UXC PMV FBU NUF TOX JBH AQG MTU 1718x

SEA SXY IMF IFL CSV WTF 1820x

SUL KCN DLX ARP SAI TPM WEB PPT TME 2022x

HIL GWA PTM QUB TRS AMM TPI SCP BRG 2225x >25x

HZN WSA KRM ACR ALK MQA EVR MDL REA MAD IGO SRX AWE MFG CSR OMH DMP BBG NVT IVC AGI GEM IRE

2.1

P/E higher within group -->

Aug-96

Aug-98

Aug-00

Aug-02

Aug-04

Aug-06

Aug-08

Aug-10

Aug-12

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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Section 1: Valuation Stats - Australian Equities

2013 EPS Growth Distribution (ASX 100) 2014 EPS Growth (ASX 100)
WES HVN AIO SKI ANN AMP ABC COH AGK GMG ORG CFX ANZ FDC WDC CGF DOW CCL IOF SGP WOW RRL WBC BXB WRT TCL GPT NAB ASX TLS CBA DXS LEI CPU 5: 0: 5% 10%

NCM TAH ILU SGM AGO OZL WHC <50%

BHP PNA LYC UGL -50: 30%

DUE SGP IPL TTS GNC SUN SYD -30: 20%

ORG COH QAN -20: 15%

ORI BEN ARI -15: 10%

AMP WOR MYR WPL -10: 5%

STO ABC RIO MTS DJS HVN SPN CCL -5: 0%

NAB GPT ANN EGP SHL CPA WDC BXB LLC ASX MGR MIN TWE DXS JHX BLD

CTX AGK AMC SEK CBA WOW ANZ DOW BPT OSH WES SKI WRT CPU CFX TLS WBC IOF APA FMG CGF TOL 5: 10: 0: 5% 10% 15%

FLT GMG QBE RHC HGG RMD CRZ CWN 15: 20%

MND MQG LEI 20: 25%

FOX PRY CSL AZJ 25: 35%

BOQ ALQ TCL BSL RRL AWC AIO IAG AUT 35: 50: 75: >100 50% 75% 100% - to + %

IAG MND QAN ALQ NCM <-50: - -30: - -20: 50% 30% 20% 15%

MTS GNC -15: 10%

HGG TAH TOL SPN LLC TTS MYR DJS APA -10: - -5: 5% 0%

WOR STO RMD PNA RHC SEK BPT PRY CSL FLT CPA AZJ ORI BEN BOQ CTX MGR 10: 15%

EPS Growth higher within group -->

QBE WPL TWE CRZ ALL RIO BHP DUE SHL 15: 20%

MQG IPL FOX AMC 20: 25%

EGP CWN JHX UGL 25: 35%

AWC SGM BSL LYC AGO AUT ARI ILU SYD BLD WHC OZL MIN FMG OSH SUN 35: 50: 75: >100 50% 75% 100% - to + %

2013 EPS Growth Distribution (Small Ords)

SBM KCN BBG WSA EVR KRM ALK TEN AAC PDN KAR PEM NXS WDR RMS BLY CFE VAH COK BND TAP RXM FML RED BSE GBG MCR AQA <50% Energy Mining Industrials Financials Property Utilities

2014 EPS Growth Distribution (Small Ords)

Energy Mining Industrials Financials Property Utilities ELM HZN KRM BSE ACR PEM TAP NFE CFE MAD WDR MCE ALK RED WSA HGO IGO AAC GBG MDL LNC TGS ABU IMF PDN SEA SCP VAH CSR BRU FMS COK BRL 75: >100 100% - to + %

There is about to be a big cleanout of many of the stocks in this category next week with the recent index changes
PTM UXC CQR ALZ BTR PBG FBU AAD SIP NVT CDI PRG CMW MML WEB PXS TGA IVC TPI RFG ABU

SMX FMS ROC PIR FXJ EVN EHL -50: 30%

ASL SAR NWH NUF HIL SWM AGI COE MAH AQG -30: 20%

GWA GUD RSG TEL GFF ORE MIO RIC AJA -20: 15%

CDD TRS IRE APN -15: 10%

CAB QUB SAI SLR CCV PRU WTF PAN SXL -10: 5%

SGT BKN DCG ABP ORL ANG ACR -5: 0% 0: 5%

ARP PMV BRG TME SRX BWP SGN 5: 10%

AWE BCI AHE IFL FXL CCP CHC JBH DLX SUL MMS SKE DMP MBN 10: 15%

KMD PPT TOX MSB MRM 15: 20%

MTU OGC SVW GRY 20: 25%

GEM ENV IIN ERA NST BRL FGE PRR REA MLD TPM SDL AMM 25: 35%

CLO DTE IFN RCR 35: 50%

SPL AMX LNC CDA HGO 50: 75%

TGS IGO SFR SLX BDR ELM SXY DML MFG GGG NFE IAU OMH NXT CSV IVA DLS MCE RFE MQA 75: >100 100% - to + %

MAH SBM SLR PRU TGZ EHL ORE BBG RMS EVR NXT SYR BTR OMH SLX <50%

MCR KAR KCN SVW CDA RSG ORL -50: 30%

IMD APZ NWH GRY SDM MQA GGG ASL -30: - -20: - -15: 20% 15% 10%

CNU FKP FXJ MMS SMX SPL -10: 5%

BRG PBG NST GUD CAB ANG BKN CPL SFR SIP TEL -5: 0% 0: 5%

AQA WTF ALZ PRG APN FGE CHC MLD CCV CQR ABP RFG MSB AJA IAU

SAR AQG IIN MRM SKE TME ARP CLO TGA AHE CDI PMV JBH AAD BWP SGN SGT CDD 5: 10%

ERA TOX QUB SWM IFL IVC DCG TPM FXL PAN CCP CMW KMD SXL 10: 15%

ENV RIC GEM AMX DLX UXC TPI SUL GFF AMM 15: 20%

DMP IRE NVT RCR AGI PPT WEB TRS MIO PIR FBU PTM 20: 25%

SDL MPO GRR MGX TSE FWD BND CSV BDR REA IFN SXY COE SAI GWA 25: 35%

EVN MBN MFG NUF OGC PXS SRX AAX MTU TRY HIL 35: 50%

AWE BLY NEN FML MML RXM ROC SIR BCI DLS IVA NXS 50: 75%

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

Quantitative Strategy - Valuation Dashboard

17/09/2013

Page 8

EPS Growth higher within group -->

About half the companies in the ASX 100 are forecast to grow faster than 10%

Section 1: Valuation Stats - Australian Equities

Change in 2014 Consensus EPS ASX 100 over last 1 week
For interactive version of these charts http://bit.ly/nbPZim

Quiet week overall

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

For interactive version of these charts

Quantitative Strategy - Valuation Dashboard 17/09/2013 Page 9

Section 1: Valuation Stats - Australian Equities

Change in 2014 Consensus EPS ASX 100 over last 1 month
For interactive version of these charts http://bit.ly/nbPZim

The last month is dominated by downgrades for large caps

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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Section 1: Valuation Stats - Australian Equities

Change in 2014 Consensus EPS Small Ordinaries Index over last 1 week
For interactive version of these charts http://bit.ly/nbPZim

A mixed week - a fair few upgrades small resource stocks this week in iresources

Lots of changes to forecasts for

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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17/09/2013

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Section 1: Valuation Stats - Australian Equities

Change in 2014 Consensus EPS Small Ordinaries Index over last 1 month
For interactive version of these charts http://bit.ly/nbPZim

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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17/09/2013

Page 12

Section 2: Valuation Stats - Australian Government Bonds

Bank Bill / Australian Government Bond Yield Curve
5.0 4.5 4.0 4.0 3.5 3.0 2.5 2.5 2.0 O/Night 1m 3m 6m 12m 2Y 3Y 5Y 10Y 2.00 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 2.6 2.6 2.6 2.5 2.6 2.25 This Week 12m ago 2 years ago Latest 3.3 2.75 Last Week

RBA Cash Rate implied by SFE Interbank Futures (%)

3.00 Current RBA Rate

6m ago

2.50

2.9

Rate hikes in 2014 as mining capex really begins to slow? Not likely in my view

International Yield Curve Steepness (10 Year Yield less 2 Year Yield %)
India Brazil China Japan Sweden Australia Canada Germany France Mexico UK US Italy Spain
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0

Australian Yield Curve Steepness (10 Year Yield less 2 Year Yield %)

Yield curve steepening has been the big 3 trend. I don't have a problem with this conceptually, but I think it should have come from short term rates falling rather than long term rates rising. I expect a reversal. 2 at the long end.

0 10y-2y Bonds

-1 1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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Section 2: Valuation Stats - Australian Government Bonds

International - Real Return on 10Y Bonds
4
Inflation Implied by inflation linked bonds (%) Negative real yields

Implied Inflation
Inflation implied by Inflation linked bond pricing (10Y or closest) 4.5
4.0 3.5

UK Australia US Canada France Sweden Italy

2 Germany 1

Inflation expectations bounce back to the middle of the band

3.0
2.5

2.4

Real yields have increased substantially over the past few months, all these countries had negative real yields four months ago
0 1 2 3 4 5 6 7

2.0 1.5 1.0 Sep-02 Sep-03 Aug-04 Aug-05 Sep-06 Sep-07 Aug-08 Aug-09 Sep-10 Sep-11 Aug-12 Aug-13

-1 10y Bond Rate (%)

International Risk / Return

200 Low Yield High Risk 180 160 140 5y CDS 120 100 80 Japan 60 40 20 0 1 US 2 3 4 5y Bond Rate (%)
Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

Australian Government Bond CDS

Values on edge scaled to fit graph Brazil 180 160 140 Austr. 5 Yr CDS Mexico

Spain Italy

120
100 80

Decent sized increase recently from recent lows

France China

Highest yield of the "low risk" countries

60 51.8 40 20 8 0 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13

Germany

UK

Australia High Yield Low Risk 5 6 7

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Section 3: Valuation Stats - International Equities

AUD / USD
1.10 1.05 1.10

Australian 12m Fwd P/E relative to World ex Australia

AUD USD
1.15

1.00
0.95 0.90 0.85 0.80 0.75 0.70 Aug-10 0.90 Jan-06 Consensus Dec-13 F'cast 0.932 1.05 1.03 1.00

The recent bounce in the AUD is partly improving China, partly US taper. My medium term expectation is for further weakness

0.890

0.95

Feb-11

Aug-11

Feb-12

Aug-12

Feb-13

Aug-13

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Purchasing Power Parity - OECD

Turkey Hungary Mexico Poland S.Korea Euro Britain Japan

6m equities performance vs 1m price performance

Brazil Singapore China Russia India Canada

1M Performance 6M Performance
UK Switzerland Australia Some divergent Hong Kong Spain performance from Norway emerging markets Euro Stoxx NZ Germany Holland World X Aust South Africa France US S&P 500 Italy Finland US Nasdaq Japan 5% 10% 15% 20%

Overvalued

Iceland NZ Canada Sweden

Australia

Australia moves down into 4th place

Denmark Norway Switzerland -100 -80 -60 -40 -20 0 20 40 60 80 100 -10% -5% 0%

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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Section 3: Valuation Stats - International Equities

Bloomberg FY 1 P/E
12m Fwd P/E (x) 5 World X Aust US US S&P 500 US Nasdaq Europe Germany Stoxx UK France Holland Italy Spain Switzerland Developed Asia Hong Kong Singapore Japan Commodity Producers Norway South Africa Australia Canada NZ Finland Emerging Markets Russia China India Brazil 9.8 14.2 Russia Brazil China India 1.7 3.3 3.2 6.2 12.4 Australia 14.7 NZ 15.3 15.3 17.2 18.2 Norway Finland South Africa Canada Emerging Markets 3.2 3.1 3.9 4.1 4.4 4.5 11.1 14.7 18.1 13.0 13.0 13.0 13.2 13.5 14.6 14.8 15.4 18.8 Europe Spain Euro Stoxx UK France Italy Switzerland 3.3 3.2 3.1 2.8 4.0 3.7 3.6 5.4 7 9 11 13 15 15.0 US US S&P 500 US Nasdaq 1.3 2.1 17 19 World X Aust 0 1

Bloomberg FY 1 Yield
12m Fwd Yield (%) 2 2.5 3 4 5 6 7

In 15.4

the middle of the commodity producers band.

Germany Holland Developed Asia Hong Kong Singapore Japan Commodity Producers 1.6

3.5 3.3

Australian yield at the top

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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Section 4: Valuation Stats - Corporate Bonds

US BBB bond yield less 10Y Government bond yield
% Spread 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 1.7 '87 stock market crash 85 88 91 94 Bay of Pigs Invasion Intensification of Vietnam war Market crash / Great Depression Recession / WWII Outbreak
US Recessions BBB Credit Spreads

End of tech boom / Sept 11 / accounting scandals / 2nd Oil Crisis Oil Crisis (OPEC) Junk Bonds collapse / Gulf war Mexican Peso crisis Russian Bonds

Credit Crisis

BBB bond value worsening vs gov't bonds

Asian crisis 97 00 03 06 09 12

Australian Corporate CDS spreads

400 350 300 250 Markit iTraxx Austr. 5 Yr Corporate CDS 200 150 100 50 110

ASX 200 Dividend Yield vs BBB bond yield

10 9

Vs gov't bonds, corporate bonds are about average, but expensive vs equities

CDS spreads falling back recently

8 7

Austr. 5 Yr BBB Yield

6
ASX 200 12m Fwd Dividend Yield 5

5.7 4.6

4 3 Difference 2 1.1

1
0 Dec-01

0 Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Dec-03

Dec-05

Dec-07

Dec-09

Dec-11

Source (all charts): Wilson HTM, Thomson Reuters, Bloomberg, Thomson Reuters

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Section 5: Valuation Stats - Australian Residential Property

Recent Price Performance
20% Annual Price Change 16% 8%

Net Rental Yield* vs Equity Dividends vs Borrowing Costs

10% The lower the value, the cheaper property is relative to other assets Standard variable rate less units net yield

12%

6%

8%

4%

Net yield
4% 2% 1.6%

0%

Annual prices (apartments) back to increasing

Feb-83 Feb-87 Feb-91 Feb-95 Feb-99 Feb-03 Feb-07 Feb-11

0% ASX 200 Div Yield less units net yield -2% Feb-79 Feb-83 Feb-87 Feb-91

-4% Feb-79

Given falling mortgage rates, the spread between mortgage rates and yield is below financial crisis lows
Feb-95 Feb-99 Feb-03 Feb-07 Feb-11

1.1%

HIA New Home Sales

6,500

5,500

4,500

The interest rate cuts to date have increased house prices, but the effect has not yet flowed through to new construction

20,000 18,000 16,000 14,000 12,000

3,500

New Home Sales (RH)

10,000

RBA seems to have the view that house construction boom will start soon. While we can see housing construction "normalising" from its currently low levels, we think it will take decisive government action / incentives to get the housing construction market to make up for the drop off in mining capex.

8,000 2,500
6,000 4,000 New Unit Sales (LH) 2,000 500 Feb-00 0

1,500

Feb-02

Feb-04

Feb-06

Feb-08

Feb-10

Feb-12

* Houses and units are adjusted for estimated stamp duty, rental management costs, capital spend, maintenance and other typical costs. Values are adjusted for the profile of typical rental stock. Source (all charts): Wilson HTM, Bloomberg, RBA, RP Data, Rismark, ABS

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Section 6: Valuation Stats - Risk / Sentiment Measures

VIX Indices
Implied Vol. (%) 30

Bloomberg Financial Conditions Indices

z-scores 2 1.5 1 0.5 Eur 0.0 0 -0.5 Easier Conditions

28 Risk / protection expensive 26

24 22 20 18 16 14 12 10 Dec-91 Dec-95

US 1.2

Risk / protection cheap

Aust 14.3 US 14.4

-1
-1.5

Tighter Conditions

Dec-99

Dec-03

Dec-07

Dec-11

OECD Leading Economic Indicators

103

Leading indicators more Dec-91 negative in Australia and China than elsewhere

-2

Dec-94

Dec-97

Dec-00

Dec-03

Dec-06

Dec-09

Dec-12

Citigroup Economic Surprise

Economic surprise rolling over in Australia, Japan

Australia

100 97 94 103

China

100 97 94 Feb-70 Feb-74 Feb-78 Feb-82 Feb-86 Feb-90 Feb-94 Feb-98 Feb-02 Feb-06 Feb-10 Feb-14 103

100 50 0 -50 -100 100 50 0 -50 -100 Dec-02 100 50 0 -50 -100 100 50 0 -50 -100 100 50 0 -50 -100

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

US

100 97 94 103

Improving in China, US, Europe

Europe

100 97 94 103

Japan

100 97 94

Source (all charts): Wilson HTM, Bloomberg, ABS, OECD Quantitative Strategy - Valuation Dashboard 17/09/2013 Page 19

17 September 2013 Quantitative Strategy Valuation Dashboard

Head of Research Jacqueline Fernley Industrials James Ferrier Andrew Dalziel Stewart Oldfield Daniel Wan Healthcare and Biotechnology Shane Storey Resources Cameron Judd Phillip Chippindale Liam Schofield Nathan Szeitli Quantitative Strategy/TAA Damien Klassen

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