Global equity markets fell sharply in the second quarter as slowing economic growth and the European debt crisis
reversed the gains made in the first quarter. There was a large disparity of performance across equity markets with
the US equities outperforming while equities in Europe and Asia underperformed. Locally, the S&P ASX200 Index
fell by 5.6%. The telecommunications and property sectors performed strongly while the industrials and energy
sectors were the poorest performing sectors.

The US economy lost some momentum in the second quarter as economic data disappointed. Early-year strength in
employment and consumer spending slowed as employers extended working hours instead of adding new jobs.
Manufacturing activity unexpectedly contracted in June for the first time since July 2009. Non-manufacturing activity
continued to expand, but at a slower rate than earlier months of the year. The Fed Reserve dashed hopes of a third
round of quantitative easing, instead opting to extend its ‘operation twist’ program. On the outlook, the US faces a
few challenges as the ‘fiscal cliff’ is fast approaching. If the political parties cannot come to a compromise, a number
of tax increases and spending cuts will automatically begin early next year, which will put significant strain on the
economy.

In Europe, there was real concern that Greece would leave the euro as political parties were unable to form a
coalition after the first election. Greek voters were required cast their votes again on June 17, which resulted in probailout
New Democracy forming a coalition with the socialist Pasok and Democratic Left. The coalition government
is now negotiating with European leaders for more lenient austerity measures. Attention then quickly shifted to Italy
and Spain where government bond yields again rose to the elevated levels reached late last year. In June, Spain
formally requested aid of up to €100 billion from the European Union to inject capital in its troubled banks which
suffered from a property bust in the financial crisis.

In China, recent data suggested that growth in the economy had slowed further. GDP expanded at an annual rate of
8.1% in the March quarter, after expanding at an annual rate of 8.9% in the fourth quarter. With growth slowing and
inflationary pressures receding, the People’s Bank of China reduced interest rates by 25 basis points twice in the
quarter in an attempt to stimulate economic growth.

The Australian economy is currently benefitting from an investment boom in the mining industry. However, the
economy is not immune to a global slowdown, especially in China, as we have already witnessed a fall in the terms
of trade. Going forward, this will be a drag on national income and profit margins of mining and mining services
companies are likely to contract. Miners are reviewing capital expenditure plans in light of slower Chinese growth
and commodity demand. We also expect weakness in economic activity outside the mining sector to persist driving
up unemployment. With the rising terms of trade now starting to reverse, we expect economic growth will slow in the
near to medium term.

To read more, click here for a PDF version of this report: Quarterly Economic and Market Commentary

Wayne R Morgan B.Sc. (Hons), Grad. Dip. App. Fin & Invest, F Fin, FPA(Aff)

Managing Director and Representative

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