Market Update

30 June 2017
Welcome!

In this update we:

Review the year that was

Amazon. Its coming! What to expect for retail and related commercial property

The year that was:

Another year without the ASX 200 going above 6000! For the ASX 200, it was a gentle incline as the
CommSec ASX 200 performance chart shows:

Source: CommSec 2017, Financial Year Wrap. ASX 200 Index Performance

In review, the 2016/17 year was remarkable for being unremarkable, according to Commsec's James
and Sebastian in their 2016/17 Economic and Financial Perspectives. Below are excerpts from that
yearend report.

Good year for shares:

Total returns on Australian shares (All Ordinaries Accumulation index) are currently up 12.7 per cent
over 2016/17 the best gain in three years.

Low volatility:
The Australian dollar has tracked a US6.25 cent range against the greenback over the year the least
volatile year in 27 years. The Australian sharemarket has had the least volatile year in 16 years.
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What does it all mean?

Overall, the year was remarkable for being unremarkable. At least as far as the economy and
financial markets performed. The year started with the fall-out from Brexit. There was a domestic
election and the US Presidential election. In 2017 there has been a raft of elections in Europe. And
there was the OPEC production agreement.

But despite the challenges, returns on shares, residential property and bonds have all lifted over
the past year while interest rates are lower and the Aussie dollar is little changed from a year ago.
In fact the Aussie dollar has tracked a range of US6.25 cents the least volatile year in 27 years.
The sharemarket has had the least volatile year in 16 years. And the record (and world-leading)
Australian economic expansion continues.

The economy has grown by around 1.75-2.00 per cent in 2016/17 and we expect growth of
around 3.0 per cent in 2017/18. Infrastructure will be a key driver of growth in 2017/18 with
exports, while home building continues, especially in Sydney, Melbourne & Brisbane. Underlying
inflation may lift from 1.7 per cent to 2.0 per cent over the coming financial year while
unemployment may ease modestly from 4-year lows of 5.5 per cent currently to the 5.0-5.5 per
cent range. Official interest rates may remain on hold for another year.

It is clear that Australia is well placed. Inflation is under control; interest rates are at record lows,
the Aussie dollar is supportive and the record expansion continues.

What does the data show?

The cash rate stands at a record low of 1.50 percent, down from 1.75 percent in June 2016, and
courtesy of a quarter percent rate cut in August 2016.
The Aussie dollar has risen around 3.6 percent over 2016/17. The Aussie started the year around
US74.26 cents and ended the year at US76.92 cents.
In the six months of 2017, the Aussie dollar rose just over 6 percent against the US dollar, making
it the 25th strongest of 117 currencies tracked.
The high for the Aussie dollar in 2016/17 was US77.77 cents in November 2016 and the low was
US71.52 cents in December 2016.
Commodity prices have been decidedly mixed over 2016/17. The Commodity Research Bureau
futures index has fallen 9 percent over the year.
The price of oil is down almost 5 percent, gold is down 6 percent and sugar is lower by 32 percent.
But iron ore prices have lifted 15 percent, thermal coal has risen by 36 percent, beef is up 10
percent and base metal prices have generally firmed over the period with lead, zinc and copper up
between 22-31 percent.
The Australian sharemarket started 2016/17 with the All Ordinaries at 5,327.0 and the ASX200 at
5,246.6. The All Ords ended the financial year at 5,764.0 points (up 8.5 percent) with the ASX at
5,721.5 (up 9.3 percent).
Total returns on Australian Shares (All Ordinaries Accumulation Index) rose 13.1 percent over
2016/17. Returns on dwellings are up 13.2 percent while returns on government bonds have
fallen below by 0.8 percent. The returns on bonds, was the weakest result in 23 years.
Of the 21 identified industry sub-sectors, only five recorded declines in 2016/17

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What are the implications for investors?

Returns on shares are set to record the best gain in three years. This means that the sharemarket
returns have only fallen once in the past seven years.
The economic and financial metrics remain encouraging Australia has underlying inflation below
the Reserve Banks 2-3 percent target band at 1.7 percent. Economic growth is low at 1.7 percent
but that reflects the raft of elections in 2016/17 as well as bad weather. Business conditions are
near 9-year highs.
Housing is providing the momentum for the economy with home building and purchase especially
driving the NSW, Victorian and ACT economies.
Supply and demand for homes are likely to prove more balanced in 2017/18, restraining growth in
home prices.
Over the coming year Commsec expects the All Ordinaries index to be near 5,900-6,100 points at
end December 2017 and 6,000-6,200 points in June 2018.
Home prices nationally are likely to grow by 5-7 percent in 2017/18 with inflation around 2.0
percent.
The low inflation/low interest rate environment is entrenched, meaning that lower nominal
investment returns are also here to stay.
The issues to watch over the coming year include Donald Trump; Oil prices; Australian home
prices; Wages & Jobs; & Geopolitics.

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 A soft landing for Australian housing is possible. But there is also the risk of indigestion if too much
supply comes onto the market at one time. Overall, regulators and banks have done well in
restraining buyer effervescence.
We assume that Aussie households will gradually get used to the new reality of 2 percent wage
growth, especially as wages are still out-pacing prices and the job market is lifting in line with
strong business conditions.
As always investors need to be alert, not alarmed.

Amazon is coming.

Global e-commerce giant Amazon has confirmed its retail operations will be launching in Australia.
The company founded by entrepreneur Jeff Bezos announced its plans to expand into Australia in a brief
statement.

"Amazon Web Services launched an Australian region in 2012, we launched a Kindle Store on
Amazon.com.au in 2013, and we now have almost 1,000 employees in the country," the company said
in its statement.

"The next step is to bring a retail offering to Australia, and we are making those plans now."
Amazon has not confirmed a launch date, but speculation suggests it will be in September 2017.
The company will reportedly set up a fulfilment warehouse close in size to its original Seattle facility. The
93,000 square metre warehouse is expected to be located along Australia's east coast.

Amazon will place a focus on "low prices, vast selection, and fast delivery" to earn the business of
Australian shoppers.

It is unknown if the company's 'Prime Now' service known for fulfilling deliveries in major cities within
an hour will launch locally.

Amazon Marketplace is currently available in 11 countries located across North America, Europe and
Asia.

What is the likely impact on Australian Retail

Australias population density is not like the UK, USA, Europe or Asia, so is fast delivery capable of being
a differential competitive advantage? Logistics work differently in lower population density and
accordingly if there is going to be an Australian Amazon Effect, analysis are predicting that Australian
Retailers should take notice of the effect Amazon has had on Canadas retail and its retail bricks and
mortar.

Canada has a 36 million population spread mainly along its southern border. This compares to the
Australian population of 24 million primarily located on the south/eastern seaboard.

A report by Blooomberg in May 2017 indicates that the e-commerce impact of Amazon on Canadian
markets had the following effects:

1. Due to the lower population density of Canada, the ability of quick delivery by Amazon a major
competitive advantage of Amazon was greatly diminished
2. Canadian retailers are getting serious about selling stuff over the internet - competing directly
with Amazon
3. Retail bricks and mortar is suffering no matter who wins the e-commerce war.

After years in which e-commerce seemed like an afterthought for many Canadian stores, more and
more retailers are making the pricey investments in online shopping platforms that are needed to attend
to a vast and sparely populated country. As Amazon steadily ramps up its own operations in Canada,
local rivals are scrambling to avoid the same sort of fate that doomed many of their counterparts south
of the border.

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They can look at whats happening in the U.S., they can look at whats happening in other markets, and
almost get a road map of realizing, This is going to happen to me too if I dont change my practices,
said Robin Sherk, a Toronto-based director of digital and retail insights at consulting firm Kantar Retail.

Amazon is pushing a lot of traditional retail in Canada to 'up their game' and offer better online
shopping, said Paul Briggs, an analyst with eMarketer.

While Amazons big push into Canada definitely has retailers rattled, it doesnt necessarily portend the
same sort of bloodbath that swept through the U.S. retail industry. For one thing, Canadas shopping-
mall square footage per capita is about 30 percent less than in the U.S., suggesting theres not as much
excess capacity.

Its easy to see why e-commerce has been slower to catch on in Canada. The nations 36 million people
are spread out over 3.9 million square miles, including hard-to-get-to and frigid regions, making
logistics in the country considerably more costly and complicated than in the U.S. or U.K. Thats one
reason why some retailers with large networks of brick-and-mortar stores, like Canadian Tire and grocer
Loblaw Cos., have clients drop by to collect their online orders. Montreal-based Aldo Group Inc., which
sells shoes in more than 100 countries, goes a step further. Customers can order and receive goods
anywhere, switching between online and in-store shopping as they wish as data on their tastes and
habits make the two increasingly connected.

The growth in online shopping is changing Metro Vancouvers commercial real estate landscape as
demand for suburban industrial space continues to grow in contrast to bricks-and-mortar retail.

In a December report, credit union Vancity warned that municipalities will have to think about reworking
zoning rules to address empty storefronts.

Were not quite there yet, said Amy Robinson, executive director of Loco BC, an advocate for
independent businesses. But online shopping is a model tilted in favour of larger retailers.

It will continue to eat away at property tax and income tax, Robinson said.

A Chicago-based economic analysis group, calculated that in the United States in 2014, Amazon
(Nasdaq:AMZN) sales had resulted in lost property taxes of US$420 million and lost sales tax of US$625
million.

Vancity has also warned that real estate investors should take stock of online shoppings effect on their
portfolios.

Meanwhile, demand for industrial distribution space in Metro Vancouver has been growing, and Amazon
is just one player among many.

What does this mean for Amazon in Australia?

As Jemma Parsons recently wrote in the Australian Financial Review Retailers must move fast to avoid
the Amazon Trainwreck

E-commerce customer experience in Australia is relatively poor, but it is about to be turbo-charged with
Amazon's entry.

KPMG's 2017 Global Online Consumer Report found only 35 per cent of Australians made their last
online purchase from an online-only retailer compared to 50 per cent globally.

We're clearly yet to experience the type of slick e-commerce that makes consumers think online
shopping is as reliable as offline.

By contrast, significant parts of the rest of the world have grown accustomed to the giant digital
department store where you never see a face, never enter physical premises, and are guaranteed
delivery at your doorstep before the sun sets.

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Amazon now accounts for one quarter of total retail sales growth in the US, and half of all US online
sales.

Amazon's Prime retail label now offers one and two-hour deliveries in key markets.

Last Month, Amazon delivered its first package by drone (popcorn!) that arrived 13 minutes after being
ordered!

Aussie retailers are right to be anxious. Industry expert and former top US retail executive Steve Odland
sums it up nicely: "Bricks and mortar retailers are heading for a slow-moving train wreck."
And he doesn't mean just Australian retailers. In the US, leading department stores Macy's, Sears and
Kmart have all announced widespread job cuts and store closures after poor Christmas sales. Iconic
Macy's will slash 10,000 jobs and close 100 stores.

Let's not downplay the significance of this trend and its imminent impact on our $222 billion Australian
retail market.

We are in the fastest-moving period of human progress in history driven in large part by rapid
technological change.

The thinking and approaches that got us to where we are today won't solve the problems of tomorrow.

Globally, leading companies intrinsically understand this. They are relentlessly proactive about staying
ahead of their customers' expectations. They act before the distant disruptive threats become imminent
ones (think about what happened to Kodak) and so Australian retailers would do well to look at the
Canadian experience as a road map. Pre-warned is pre-armed for retailers and bricks & mortar
investors.

So the message is: the time to invest or diversify is now.

Daryl Emmerson - Director Debra Hann - Director

Disclaimer: While every care has been taken in the preparation of this document, Chancellor Group makes no representation or
warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is
not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information,
without taking into account of any particular investors objectives, financial situation or needs. An investor should, before making any
investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having
regarding to the investors objectives, financial situation and needs. This document is solely for the use of the party to whom it is
provided.

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