Global Financial Crisis

17 November 2008

Agenda
Overview Australian Share Market Performance Credit Crisis Early Stages Crisis Deepens From Credit Crisis to Economic Crisis What are Governments Doing? Next Steps Outlook for Global Economy Implications for Australian Equity Market
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Overview
We are experiencing a wrenching financial crisis Actions have been taken to address the seizing up of credit markets. These measures will work but it will take time for conditions to normalise Global growth is declining sharply. Further fiscal stimulus will be forthcoming from the US, Europe, China, Australia, etc The global economy is going through a severe cyclical slowdown but talk of a depression is unfounded

Australian Share Market Performance: 1900 to 2008

2007 2003 2001 1999 1997 1996 1989 1988 1969 1966 1961 1957 1956 1955 1953 1947 1946 1945 1943 1936 1935 1931 1928 1927 1926 1925 1924 2000 1998 1992 1976 2002 1994 1987 1984 1965 1960 1951 1990 1982 1974 1981 1970 1952 -20 to -10 1973 1930 -30 to -20 1941 1929 1916 1915 1901 -10 to - 0 1971 1964 1962 1949 1948 1944 1940 1939 1938 1937 1910 1904 0 to 10 1923 1920 1919 1918 1917 1914 1913 1912 1911 1909 1908 1907 1906 1905 1902 1900 10 to 20 2006 2005 2004 1995 1978 1977 1972 1963 1958 1954 1942 1934 1933 1932 1922 1921 1903 20 to 30 1991 1950 30 to 40 1993 1985 1980 1979 1968 1967 1959 40 to 50 1986 50 to 60 1983 1975 60 to 70

2008 YTD
-40 to -30

Percentage Total Return

Credit Crisis Early Stages

By late 2006, risk was being systematically underpriced in global markets. This led to excessive growth in credit and distortions in asset prices particularly in sub-prime mortgages The signs of stress first appeared in the global REIT market in March 2007 then in global equities in August 2007 The Australian market recovered to end the year 16.2% higher Further large write downs by global banks, combined with a weakening growth outlook for developed economies, dragged markets lower in the March quarter The bailout of Bear Stearns in March 2008 boosted confidence and markets rallied through to mid May The optimism was soon overwhelmed by inflation fears as oil and food prices surged
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Crisis Deepens
July marked a key phase in the financial crisis: oil prices peaking on expectations of a much sharper global slowdown. Commodity markets weakened significantly over the September quarter Despite the clear signs of a marked deterioration in the global outlook, the Fed persisted with its anti-inflation rhetoric at its September meeting and allowed Lehman Brothers to seek bankruptcy protection Until this point we had believed that the US authorities would take the necessary action to ensure the continued functioning of global credit markets The collapse of Lehman Brothers sent shock waves through the markets and seriously undermined confidence By mid September global credit markets came close to seizing up with major banks refusing to lend to one another

From Credit Crisis to Economic Crisis

As financial institutions came under stress, they reduced the amount of credit that was made available to businesses and to households The tightening was greatest in areas with the highest gearing. This included lending for property, lending for shares (margin lending) and lending to hedge funds Financial institutions also started to restrict credit to businesses for their day to day operations including funding to buy raw materials In addition, there was a sharp contraction in the availability of funding for mortgages, particularly in the US and the UK

What are Governments Doing?

All banks are leveraged. A loss of confidence in the system meant that solvency could become an issue even for very large global institutions Governments stepped in to prevent destabilising runs on banks and other financial institutions Measures included injections of capital, guarantees of bank borrowings and acquisition of toxic assets from bank balance sheets Fear is a very powerful motivator. The interbank market is starting to recover but the adjustment is slow and has much further to go Importantly, the key indicators are trending the right direction banks are lending to one another and non-banks are raising funds in the commercial paper market
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Next Steps
Credit markets remain tight and expensive which is undermining growth Interest rates have declined in Australia and elsewhere. Further declines will occur over coming months but the burden of adjustment must now shift to fiscal policy Developed economies are in recession and growth is slowing in emerging economies The Australian and Chinese governments have announced major spending packages. The US and European governments will also introduce programs to stimulate growth
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Outlook for Global Economy

Until mid year we were expecting the slowdown in the US and Europe to be partially offset by continuing strength in China and other emerging economies As credit markets seized up, economic activity slowed sharply and emerging markets were sucked into the global crisis The deterioration in the outlook for emerging economies has put heavy downward pressure on commodity prices and resource stocks We expect global growth to continue to weaken into 2009 The factors that will drive the recovery include:
Tax cuts and increased government spending A sharp drop in input prices leading to better margins for businesses and higher disposable income for consumers An improvement in business and consumer confidence Low interest rates
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Implications for Australian Equity Market

Equity markets anticipate future recoveries so we can expect markets to rally while the global economy is continuing to weaken The Australian equity market has declined sharply since the peak in November 2007 Economic growth will continue to weaken in the face of the global slowdown. This will have a negative impact on profits Valuations are now looking attractive but confidence is very low As we move into 2009, markets will have a clearer idea of the outlook for global growth and will start to recover The timing is uncertain, major equity market downturns are typically followed by very strong rallies

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Disclaimer
This presentation had been prepared specifically for shareholders of Contango Capital Partners Limited (CCQ). Forecasts in this presentation are predictive in character, based on numerous assumptions including the forecast outlook for key variables and may be affected by various factors including inaccurate assumptions, risks and unforeseen events. Accordingly, actual results may differ materially from those forecasted. CCQ and its investment manager, Contango Asset Management Limited (CAML), its officers, employees and agents, believe that the information in this document is correct at the time of compilation but do not warrant the accuracy of that information. CAML holds an Australian Financial Services Licence (AFSL #237119) restricting it to providing financial products and services to wholesale clients only CCQ is a wholesale client of CAML. Performance information is historical. Performance returns may vary. Past performance is not indicative of future performance. Performance has been calculated based on cumulative daily returns excluding any allowance for fees, expenses and taxes. Save for statutory liability which cannot be excluded, CCQ disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, forecast, conclusion or recommendation in this document whether the loss or damage is caused by any fault or negligence on the part of CCQ or otherwise.

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