Investing in Volatile TimesPanic or Opportunity?

Steve MaccoraSenior Business Development Manager

DisclaimerThis presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled Superannuation Trust ABN 51 982 884 624. The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on 13 13 36.

All products are issued by Colonial First State. Product Disclosure Statements (PDSs) describing the products are available from Colonial First State. The relevant PDS should be considered before making a decision about any product.

This presentation does not take into account your individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation.  

Stocks referred to in this presentation are not a recommendation of any securities.

This presentation cannot be used or copied in whole or part without our express written consent.

© Colonial First State Investments Limited 2008.

“Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on

euphoria”.

Origins of a mess

The late Sir John TempletonAustralian Financial Review

2 July 2008

All Ords – Past Year to 10th Nov 08

6853.6

3755.4

-45.2%

A Previous Episode

1987 Stock Market Crash

1985 1,820.0 to 2,621.9 +44.1%

1986 2,621.9 to 3,991.0 +52.2%

1987 3,991.0 to 6,197.2 +55.3% to 30 Sept 1987

1st October 1987 to 31st October 1987

6197.2 to 3586.1 - 42.1%

All Ords – Past Five Yrs to 10th Nov 08

10/11 4060

Down from$157.45 to $61.83

-60.7%

Down from$44.84 to $18.60

-58.5%

Down from$44.16 to $18.23

-58.7%

MSCI World Ex Aus in AUD

0

200

400

600

800

1000

1200

1400

1600

1800

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Crash of ‘87

Tech wreck

Credit crunch

Source: Bloomberg. Data from 1 January 1985 to 1 October 2008 (weekly).

Global Sharemarkets 1986 - 2008

To the rescue!?

Source: BBC World Service

The cost of distress

The sub-prime hospital list

Absorbed RAMS Bear Stearns Countrywide Financial Merrill Lynch Lehman Brothers HBOS Washington Mutual Wachovia Bradford & Bingley Other small US banks

Losses Citigroup JP Morgan Morgan Stanley UBS Deutsche Bank

Other fallout Fannie Mae Freddie Mac Northern Rock AIG Fortis Dexia Centro Properties ABC Learning Allco Finance Babcock & Brown Hypo Real Estate Glitnir (Iceland)

Source: Colonial First State

50

100

150

200

250

J an-87 J an-92 J an-97 J an-02 J an-07 J an-12

US house prices… are falling

Source: S&P / Case-Shiller 10 City index, Bloomberg. Data to 31 July 2008

Index

Los Angeles -26.2%

San Francisco -24.8%

New York -7.4%

10 city decline is 17.5% over 12 months

US house prices falls are slowing

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10

Source: Bloomberg. Case-Shiller Composite 20 Home Price Index. Data to 30 June 2008

Case-Shiller Composite 20 Home Price IndexMonth on month %

US Sub-prime delinquencies by vintagePercentage of issuance by loan tranche

Source: RBA, BIS

Not all have gone bad!

Oil Prices – Some relief

0

20

40

60

80

100

120

140

160

J an-72 J an-82 J an-92 J an-02 J an-12

Source: Iress. Data to 31 October 2008

$US

US financial crisis management

1. Reduce the Fed Funds rate

2. Grant more financial institutions access to the Fed’s lending facilities

3. Step in to rescue individual institutions

4. Ban on short selling of financial institutions

5. Establishment of a Troubled Asset Relief Program (TARP) to purchase illiquid assets

6. Further Fed Fund rate cuts

Source: Colonial First State

Federal Reserve Lowers Rates to 1%

CHINA

Can China continue to grow?

Post Olympics interest rate cut

Domestic demand is a major driver of growth

Strong economic position

1. Large Current Account Surplus

2. Substantial Foreign Exchange Reserves

3. Strong Fiscal Surplus

4. Inflation is retreating

Source: Colonial First State

Australia – heading for recession?

Strong terms of trade – resources boom

Scope to cut official interest rates

Scope to spend fiscal surplus

Current infrastructure investment plans

Banks still profitable

Improved rural outlook

The population is growing

Source: Colonial First State

The Australian dollar

Source: Bloomberg. To 31 October 2008

Against the US dollar

0.4

0.6

0.8

1.0

1.2

J an-80 J an-90 J an-00 J an-10

-3

0

3

6

9

12

Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

Inflation… has ticked up

Source: ABS 6401.0. Data to 30 June 2008

GST ‘blip’

%Annual rate of inflation

Co-ordinated Rate Cuts Globally

OFFICIAL INTEREST RATES

0

2

4

6

8

J an-00 J an-02 J an-04 J an-06 J an-08

0

2

4

6

8

% %

US

UK

Euro

J apan

Australia

Source: CBA Economics Team

Focus on Listed Australian Property Trusts

Source: IRESS, Colonial First State. Data shown is the S&P/ASX 200 Property Accumulation Index (ASX Property Trusts Accumulation Index pre April 2000). *Data from 30 September 1988 to 30 June 2008. Percentage return over rolling one year. Past performance is no indication of future performance.

Returns of Australian property securities 30 September 2008

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Annualised return: 9.85%*

New supply conditions differ from prior recession

Source: Deutsche Bank, Note FY209 and beyond are based on JLL estimates

Sydney Office Construction as per cent of Total Stock

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Now

1990 recession

A-REITs significantly better value

Source: Deutsche Bank

0%

1%

2%

3%

4%

5%

6%

7%

8%

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

5yr avg spread

Trust yield differential relative to real bonds

Financial risk management

Refinancing risk is being managed

A-REIT debt profile is transparent- improved disclosure

A-REITs with higher gearing have underperformed, and are restructuring

Repaying debt Distribution cuts - but should grow from here Reduced financial engineering

Valuations likely to fall, but focus is on cash flows

Debt Refinancing Risk now under control

Source: Credit Suisse, Company Information, IRESS, CFS

2008 2009 2010 2011 2008-2011Westfield 4% 6% 11% 17% 38%Macquarie Countrywide 0% 0% 31% 38% 69%CFS Retail 0% 5% 19% 34% 58%Stockland 0% 17% 5% 21% 43%Mirvac Group 6% 0% 23% 50% 79%Dexus Property group 0% 16% 16% 25% 57%ING Office 0% 0% 41% 3% 44%Goodman Group 0% 12% 12% 12% 36%Commonwealth Property Office 0% 0% 24% 42% 66%ING Industrial 0% 1% 9% 62% 72%

A_ REIT Debt Rollover Profile

Very little debt to refinance in next 1-2 years

Comparison of gearing across the sector

0%

10%

20%

30%

40%

50%

60%

CFS Ret

ail

Wes

tfiel

d

Comm

onwealth

Pro

perty

Offi

ce

Mirv

ac G

roup

ING O

ffice

Dexus

Proper

ty g

roup

Stock

land

Goodman

Gro

up

ING In

dustria

l

Mac

quarie

Country

wide

0%

2%

4%

6%

8%

10%

12%

14%

16%

Distribution yield (RHS)

Gearing- Debt to Total Assets (LHS)

Higher debt reflected in price vs yield

Outlook for A-REIT market

REIT Profit Results Triggered major restructuring Drive to - reduce debt

- simplify business structure Lower distributions but steady growth is expected over medium

term

Property Valuations Very few transactions Buyers waiting for absolute bargains Banks lending to “quality” clients only

Sector rationalisation likely given steep discount to NTA

AUSTRALIAN

MARKETS

Markets

Australian share prices ..the All Ordinaries Index

Source: Bloomberg. Data to 3 November 2008. Past performance is no indication of future performance.

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

J an-05 J an-06 J an-07 J an-08 J an-09

March 2005Down 8.0%

October 2005Down 6.0%

May 2006Down 9.1%

March 2007Down 4.9%

August 2007Down 12.2%

November 2007 to October 2008Down 45.2%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

ConsumerDiscretionary

PropertyTrusts

Materials Fin x Prop All Ords ConsumerStaples

Energy

Sector returns since November 2007

Source: Iress. Data from 1 November 2007 to 7 October 2008.

Nowhere to hide!

All Ordinaries PE ratio

Low inflation period average is 16.5

Source: Iress. Data to 30 September 2008

8

12

16

20

24

J an-90 J an-95 J an-00 J an-05 J an-10

As at 4th November – Market at 9.18 PE

Company profits……..going up

Source: ABS 5676.0 Gross operating profits converted to an index started in September 1985 at 10000. Data to 30 June 2008.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Dec-85 Dec-91 Dec-97 Dec-03 Dec-09

Reporting Season Wrap

Profit growth up 12.4% for 2H 2008Non-resource earnings rose 6.0%Resource earnings rose 38.5% (19.8% ex Rio and BHP)

Positives Negatives

Source: GSJBW, Bloomberg

Profits and the sharemarket

Index based at 10,000 in 1985

Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June 2008. All Ordinaries index to 10 October 2008.Past performance is no indication of future performance.

Corporate profits

All ordinaries share price index

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Dec-85 Dec-91 Dec-97 Dec-03 Dec-09

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Sep-85 Sep-90 Sep-95 Sep-00 Sep-05 Sep-10

Profits and the sharemarket - possibilities

10%

25%

40%

42% fall over 2 years

Source: ABS 5676.0 Gross operating earnings, All Ordinaries index, Bloomberg. Earnings to 30 June 2008. All Ordinaries index to 3 November 2008.Past performance is no indication of future performance.

Decline in profits

over next 12 months

10%

US recessions: always trigger bear markets in US stocks

Performance of S&P500 around US recessions

recession start

recession end

duration (months)

S&P500 peak

S&P500 trough

duration (months)

peak to trough fall

next 12 months

Dec-69 Nov-70 11 May-69 May-70 12 -34.7% +43.7%

Nov-73 Mar-75 16 Jan-73 Oct-74 21 -48.4% +38.0%

Jan-80 Jul-80 6 Feb-80 Mar-80 2 -17.1% +37.1%

Jul-81 Nov-82 16 Nov-80 Aug-82 21 -27.1% +58.3%

Jul-90 Mar-91 8 Jun-90 Oct-90 4 -19.6% +29.1%

Mar-01 Nov-01 8 Mar-00 Oct-02 31 -49.1% +33.7%

Jun-08? ? ? Oct-07 Oct-08? 12? -45.8%? ?

Source: Datastream, UBS calculations, Colonial First State

Australian sharemarkets and US Recessions

Performance of All Ordinaries around US recessions

US recession

start

US recession

end

All Ords peak date

All Ords trough date

Duration(months)

size of peak to trough fall

subsequent 12 months

performance

Australian recession

Dec-69 Nov-70 Jan-70 May-70 4 -28.6% +4.0% no

Nov-73 Mar-75 Jan-73 Sep-74 20 -59.2% +50.9% yes

Jan-80 Jul-80 Feb-80 Mar-80 2 -20.3% +39.0% yes

Jul-81 Nov-82 Nov-80 Jul-82 20 -40.6% +38.7% yes

Jul-90 Mar-91 Aug-89 Jan-91 17 -32.4% +38.9% yes

Mar-01 Nov-01 Jun-01 Mar-03 21 -22.0% +27.3% no

Jun-08? ? Nov-07 Oct-08? 11? -45.2% ? no?

Source: Datastream, UBS calculations, Colonial First State

Summary

Australia is not immune from US financial problems

High interest rates are hurting the Australian economy

Australia still has many drivers of growth

2008-09 will continue to be a bumpy ride

The sharemarket grows with earnings over time

Source: Colonial First State