An eventful week – domestically and globally. Australian banks have been a major cause of the 3% decline in markets during the past two weeks, as many overseas investors exit Australian banks in favour of European and US bank stocks, says Instreet Investment’s managing director George Lucas. “Australia’s stronger GDP number released last week has reduced expectations that interest rates will be cut again by the RBA,” he added. “This did not help the yield-sensitive banking sector, which was subsequently sold off. In fact, the US banking sector is becoming more attractive as US long bond yields have backed up significantly during the past two weeks. This is supporting overseas bank margins and makes them more attractive from a valuation perspective.” “ This ties in with a clear resurgence in economic momentum in the US with vehicle sales hitting a nine-year high and employment increasing by 280,000 in May. There was also a decline in imports, suggesting that net exports will

boost second-quarter GDP growth.” “We are looking closely at the US May retail sales which might show a significant increase – adding to a story of growing momentum in the country.” The other significant development impacting global economies was when Greece defaulted on its payment to the IMF on Friday. “But global markets didn’t seem to care. However the risk of a disorderly default and exit for Greece in the near future has increased,” said Lucas. Greece has put forward a debt restructuring plan incorporating a number of measures that it estimates would bring its public debt-to-GDP ratio down immediately from 180% to less than 120%. “But whilst discussions continue, it seems very unlikely that all elements of the plan would be accepted by Greece’s creditors – not least the write-down of half of the European Financial Stability Facility (EFSF) loan.” Against all this, bond yields rose. “Bond funds that track long-dated government bonds could have lost more than 5% since the beginning of the

year. This loss, and the asymmetric risk associated with long bonds, could cause further outflows from bonds into cash and equities.” “Despite the recent increase in yield, the rates on government bonds in the US, Japan and Europe remain artificially low due to their QE programs. This is because the QE programs have purchased significant amounts of bonds leading to reduced supply.” “Take the US, for example, where 10-year bonds should be yielding closer to 4% based on nominal GDP growth rather than their current 2%.” “Bond yields in other parts of the world have followed suit and also become artificially low. Based on nominal GDP, Australian long bonds should be trading above 5% but are currently at 3%. This artificial reduction in yields has also increased the risk associated with bonds, which will rise further if inflation begins to accelerate.” About Instreet Instreet is an independent investment house that works closely with the financial adviser community to conceive and distribute retail investment products. After identifying adviser needs and market trends, Instreet builds customised investments sourcing quality wholesale providers. By doing so, Instreet makes institutional assets available to individual investors. The end result is a range of investment solutions designed to better achieve the goals of clients and advisers. For more information: www.instreet.com.au Contacts: George Lucas, Instreet Email: glucas@instreet.com.au Phone: 0418 202 228 Simrita Virk, Shed Media Email: svirk@shedmedia.com.au Phone: 043 4531 172

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