TREASURY CORPORATION Newsletter by JohnnyLawless


									                                                         WESTERN AUSTRALIAN

                                                         TREASURY CORPORATION

Newsletter                                                                                                   July 2009

Economic Review - Is the Glass Half Full or Half Empty?
THE GLOBAL ECONOMY                                               quarter, the RBA cut the cash rate by a further 125 basis
                                                                 points to 3.0%, driving residential variable mortgage rates
A     fter a rough start to the year, when it appeared finan-
      cial Armageddon was at hand, things have improved
a little over the past few months, with a global financial
                                                                 to 40 year lows.

                                                                 The Commonwealth government has taken decisive ac-
meltdown appearing to have been averted and the global           tion to combat the crisis, introducing a huge stimulus
economy showing signs of stabilising.                            package, including some $19.7B in cash hand-outs to
                                                                 households, designed to temporarily stimulate the econ-
Things looked very dark through the first few months of          omy before infrastructure projects come on line later in
the year, with the US economy shrinking at a 5.5% annu-          the year. An unexpected 0.4% rise in March quarter
alised pace in the first quarter following a 6.3% decline in     GDP, a still relatively robust labour market and strong
Q4 2008. The IMF added to the gloom, forecasting the             growth in demand for new home loans has seen some
first outright decline in global GDP since the second world      analysts pencilling in rate rises early next year.
war. Global share markets posted heavy falls, with the
benchmark S&P500 in the US falling to its lowest level           We feel this is optimistic, with national income falling
since September 1996.
                                               After reaching a multi-decade low of 3.9% in February 2008,
Before you can say “green                                the unemployment is now on the way up.
shoots”, however, a string of
improved, though still poor,
economic data had some
commentators hopeful a re-            8

covery was in the wings. With
the outlook brightening a little,     7
global equity markets have
risen strongly to be well off
their March lows. However, in
our opinion, financial markets
may be getting ahead of them-         5

selves, with the global econ-
omy looking headed for a pe-          4
riod of sluggish growth at best
over the next few years.

Huge amounts of government
spending and rapid interest
rate cuts by central banks (to
near zero in some cases)
have been a major contributor to the improved outlook.
This raises questions, however, as to the sustainability of      sharply on the back of a declining terms of trade, it ap-
a recovery should one in fact be underway. There is also         pears only a matter of time before Australia begins to feel
some concern over the longer-term impact on interest             the full impact of the global recession. The impact on
rates and inflation of government spending on such a             Australia will be mitigated somewhat by the huge amount
scale.                                                           of government stimulus and a 50 year low cash rate.

THE AUSTRALIAN ECONOMY                                           With the RBA forecasting inflation to fall below the 2 to 3

T   he Australian economy, of course, is closely tied to         per cent inflation target over the next two years and un-
    conditions overseas and closed 2008 with the first           employment to continue to rise, we would be surprised to
quarterly decline in real GDP in nine years. With the            see any increase in the cash rate before the second half
global economic outlook darkening further in the March           of 2010.

Office Address: Level 12, St. George’s Square, 225 St. George’s Terrace, PERTH WA 6000 Telephone:(08) 9235 9100
Postal Address: PO Box 7282, Perth Cloisters Square, WA 6850                            Facsimile:(08) 9235 9199                              FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS
                                                          WESTERN AUSTRALIAN

                                                          TREASURY CORPORATION

Newsletter                                                                                                         July 2009

From the CEO’s Desk Passive or Active Management?
                                              A   ctive management refers to a
                                                  portfolio management strategy
                                              where the manager takes active day
                                                                                        maintained a passive management
                                                                                        strategy and this has influenced trad-
                                                                                        ing enterprises too.
                                              to day decisions on the structure of
                                              the portfolio to take advantage of        Considering active management?
                                              perceived pricing opportunities. The      You need to consider the following:
                                              performance of the portfolio is meas-
                                              ured against a passive benchmark.              What is the source of compara-
                                                                                             tive advantage for an organisa-
                                              Passive management refers to a                 tion pursuing such a strategy –
                                              portfolio management strategy where            particularly in a highly liquid and
                                              the manager uses a predetermined               competitive market?
                                              strategy or a system of rules that

W       elcome to the start of a New Finan-
        cial Year. There is no doubt that
2008/09 brought some of the most vola-
                                              maintain the structure of the portfolio
                                              through all market conditions. The
                                                                                             Treasury function becomes a
                                                                                             profit centre, not a cost centre.
                                              advantages of passive management
tile financial market conditions since the    include lower     administration and
1930s but I am pleased to report that         transaction costs, operational sim-            Performance needs to be meas-
Treasury Corporation has met all its          plicity and an identified course of ac-        ured via an appropriate neutral
2008/09 lending commitments and is well       tion (overcomes cognitive biases1).            benchmark to monitor value
positioned to do so again in 2009/10.                                                        added by such a strategy.
                                              Passive management is built on the
As some of you may be aware, change is                                                  Once active decisions are taken, out-
upon us with Michael Webb’s resignation       premise that, over the long-run, re-
                                              turns from active management trend        side an established strategy, this will
as CEO. Michael would be well known to
                                              towards the return of the passive         require further arbitrary decisions,
many of you and I am sure you would like
to join me in taking this opportunity to      benchmark (the market return) but         whether to revert back to the prior
thank him for his contribution to Treasury    with higher administration and trans-     strategy or to pursue further active
Corporation in particular and the WA pub-     action costs.                             decisions.
lic sector more generally, and to wish him
every success in his future endeavours.       Proponents of passive management          The principles associated with active
                                              don’t deny that active management         and passive portfolio management
Michael joined Treasury Corporation as a      can add value, but question whether       apply equally to investment portfolios
bright, young graduate in 1991 and his        it can consistently, over time, outper-   as well as to debt portfolios.
contributions over the last 18 years have     form the market such that active
made Treasury Corporation a much              management fees are recouped.             If you would like to discuss your in-
stronger and more dynamic organisation.       Given that each market transaction        vestment or debt portfolio manage-
                                              has a counterparty with a similar ob-     ment requirements, please contact
Looking forward to the challenges that        jective, both cannot be correct the       Bruce Whyatt (Quantitative Financial
2009/10 will bring, I would like to assure    majority of the time.                     Analyst) on (08) 9235 9119 or email
you of the continuation of the high levels                                     .
of service that you’ve come to expect
                                              Active management has a lot of ap-
from us. We are continually reviewing
our product offerings and I hope that in      peal as it caters to one of our cogni-    1. Cognitive bias is a pattern of deviation in
                                              tive biases – the illusion of control2.   judgment that occurs in particular situations.
the coming months, we will be able to
introduce new products to assist you with     To actively control something feels
                                              as though we are adding value – this,     2. The tendency for humans to believe that
the management of your assets and li-                                                   they can control something that they cannot.
abilities.                                    however, needs to be tested.

I look forward to working with you during     Active management requires specu-
2009/10.                                      lation on the direction of interest                                 Bruce Whyatt
                                              rates and generates a need to profit                                 Quantitative
Cheers,                                       from decision making to justify the                               Financial Analyst
                                              activity.                                                             Treasury
Melvin Nunes                                                                                                       Corporation
                                              Historically, general government has
                                                        WESTERN AUSTRALIAN

                                                        TREASURY CORPORATION

Newsletter                                                                                                      July 2009

Chief Financial Officer of the Year Finalist
T    reasury Corporation’s Chief Financial
     Officer, Steve Luff, was recently short
listed for the Institute of Public Administra-
                                                 The Award recognises the importance of
                                                 being accountable and transparent in a
                                                 succinct and independent way and encour-
tion Australia (“IPAA”) WS Lonnie Awards         ages and celebrates excellence in public
“Chief Financial Officer of the Year 2008”.      sector annual reporting.
Steve made it through to a short list of four
candidates, with the winner announced at a       The CFO of the Year is one of the Insti-
special luncheon on 17 June 2009.                tute’s specialist awards and unfortunately,
                                                 Steve did not win the coveted award, how-
The IPAA award was established to honour         ever, Steve made the top three of the final
Mr WS Lonnie, a distinguished public ser-        four, which is an achievement in itself. The
vant who served as Under Secretary of the        winner of this year’s CFO of the Year
Premier’s Department and Clerk of the Ex-        Award went to Ross Hughes from Water
ecutive Council. The WS Lonnie Memorial          Corporation.
Trophy is given to the agency whose an-                                                                     Steve Luff
nual report tops all the rest.                   Congratulations Steve and keep up the                Chief Financial Officer
                                                 good work!                                           Treasury Corporation

   Remember “Capital Management and Risk Management are two sides
                          of the same coin”

Providing Real Options for Your Organisation
S    tewart Myers first coined the term “real options” in
     1977. Myers made the observation that the break-
through concepts published by Black and Scholes on op-
                                                                money” in the future are not relinquished without compen-

tion pricing could be used to value investment opportuni-       Real options valuation results should be interpreted in
ties in real markets. Since the 1990s, the topic has at-        conjunction with, rather than as a replacement for, tradi-
tracted considerable attention in both academic literature      tional project evaluation tools such as net present value,
and industry, where, starting in the oil and gas industry,      internal rate of return, payback period and return on in-
real option valuation techniques have been applied to a         vestment.
number of corporate investment issues.
                                                                Treasury Corporation currently works with public sector
The appeal of real options, in contrast to traditional valua-   agencies to characterise uncertainty present in capital pro-
tion techniques such as discounted cash flow methods, is        jects through a range of methods, from sensitivity and sce-
that the approach values embedded options in capital in-        nario analyses to probabilistic representations of key pro-
vestment opportunities. An embedded option arises in a          ject risks and resultant metrics such as net present value.
project with uncertain outcomes when new information can        A qualitative real options approach that results in the iden-
be used to modify the outcome of the project.                   tification of real options (or, in other words, the flexibility to
                                                                respond to project uncertainty) complements these tech-
A real options approach provides a richer framework for         niques by providing insights into the link between meas-
the analysis of capital investment decisions than traditional   ured uncertainty and its management.
project evaluation techniques alone. The most valuable
contribution of a real options approach is the intuition        If you would like to discuss the applicability of applying
gained in the recognition of implicit or explicit options       real options or assistance in the assessment of your or-
within a project. This assists in determining the drivers or    ganisation’s capital investment decisions, please feel free
sources of value in a real project, provides guidance to        to contact Rex Sleeman (Business Manager, Asset and
managers in the active management of a project and can          Project Financing) on (08) 9235 9194 or email to
ensure the rights to projects that may become “in-the- .                               FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS
                                                       WESTERN AUSTRALIAN

                                                       TREASURY CORPORATION

Newsletter                                                                                              July 2009

Presentation By Bill Evans
O    n Friday, 15 May 2009, Treasury Corporation staff
     and clients were treated to an economic presenta-
tion by Bill Evans Chief Economist – Global Head of
Economics and Research with Westpac.

Bill provided valuable insights and analysis of the then
recently announced Federal Budget and his forecasts
for the Australian economy.

There was a good turn-out at the presentation with over
50 people attending. The feedback from clients and
Treasury Corporation staff who attended the presenta-
tion was very positive with Bill’s insights, analysis and
economic forecasts greatly appreciated.

Treasury Corporation hosts a visiting economist every
six months. As a client of Treasury Corporation, if you
                                                                Bill Evans Chief Economist – Global Head of Economics
would like to attend the next presentation, please con-
                                                               and Research with Westpac providing an Economic Pres-
tact Chris Rinsma on (08) 9235 9152 or email christo-
                                                                    entation to Treasury Corporation Clients and Staff .

                                                               accessible on Treasury Corporation’s website. Treasury
What’s on the Web?                                             Corporation's   website   can     be    accessed    at

T    reasury Corporation is in the process of planning a
     review of the usability, functionality and relevance of
its website to clients. As part of this process, as a valued
                                                               Your feedback would be greatly appreciated and will pro-
                                                               vide valuable input into this process. Please send your
client, your thoughts are sought as to what information        feedback on Treasury Corporation’s website to Christo-
you would find relevant and useful and believe should be .

For information on any products or services, please contact one of the Business Unit Managers listed below:

Evonne Meath       Lending Services                              (08) 9235 9156
Lisa Brady         Foreign Exchange and Liquidity                (08) 9235 9122
Marco Mottolini    Quantitative Financial Services               (08) 9235 9150
Rex Sleeman        Asset and Project Financing                   (08) 9235 9194

For economic commentary or clarification, please contact:

Mike Peters                           (08) 9235 9110               
Craig McGuinness                      (08) 9235 9104               

 Any forecasts, predictions or estimations contained in this advice are made in reliance on information provided to
 Treasury Corporation which it believes to be reliable. Treasury Corporation, however, cannot guarantee the accuracy
 of that information. Similarly, any recommendations are made in good faith but they must be carefully considered be-
 cause they are provided only to assist you with any decisions which you make. These recommendations are not in-
 tended to be a substitute for professional advice on a particular matter. Before accepting or rejecting those recom-
 mendations you must discuss your particular needs and circumstances with Treasury Corporation.                            FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS

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