Investment Cl i mate Comm ents

The Evolving Global Financial Crisis Our ongoing global financial crisis: Started with problems with residential sub-prime mortgages Then impacted on the banking sector And has now impacted on Sovereign balance sheets It would be reasonable to expect investors to increasingly re-examine their pricing of risk: o With increased differentiation between differing sovereign and corporate credit risks o And the credit rating agencies are playing more of a role in this differentiation in credit quality. China & Australia There is much discussion about whether there is a bubble building up in China which could impact on the Australian resource sector. Chinas one-child policy is expected to give China a very rapidly aging population with economic consequences.

Inflation / Deflation The opposing deflationary and inflationary forces are gargantuan and portend a clash between these two opposing forces of unprecedented magnitude. The deflationary forces are a result of previous excessive debt levels being gradually unwound with the ongoing deleveraging cycle in the corporate and household sectors. The risk of deflation has resulted in a massive fiscal (ie increased Government spending) and monetary policy (eg central banks lowering cash rates) response. This fiscal and monetary response has been so huge that it seems quite reasonable to expect that it will ultimately succeed. For example, UBS are predicting that inflation in the USA could be running at 5% p.a. from 2013 for a number of years. Politics & Geopolitics It would be reasonable to expect geopolitics and politics in general to play an increasingly important role in the evolving global financial crisis. For example: In Europe logically Germany should let Greece and possibly others default. But such defaults would weaken the unified Europe and so Germanys own position. But any bailout from Germany would come at a huge financial cost to Germany and with conditions and many strings. There is the risk that any future tax-payer funded bailouts of banks may result in voter back-lash at the ballot box. One could wonder about the position in Ireland and whether such a political mood once developed could spread around the world. Andrew Ott 3 August 2011
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