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Deutsche Bank Markets Research
Australasia
Australia
Strategy
Date
Australian Equity Strategy
3 April 2012
Strategy Update
Tim Baker
It's a PE re-rating, not earnings, that drives market recoveries

Australian market performance has disappointed, but should improve The Australian equity market has struggled to make ground in recent years. The ASX200 is 10% lower than its level both 1yr & 2yrs ago, and is at its August 2009 level. We expect improvement, and continue to target 4700 by end 2012. PE re-ratings drive recoveries, not earnings Our expectations may appear overly bullish, given earnings still appear under pressure in Australia. We make two points: - A lack of earnings momentum hasnt been a problem for equity markets globally. The rise in MSCI AC World over the past 6 months has been entirely driven by a PE re-rating, with forward earnings falling. What has set Australia apart is not worse earnings, but much less of a PE re-rate. - Equity market rallies driven by PE re-rates have been the norm for Australia historically. Looking at the recoveries in 1993, 2003 & 2009, a rising PE has delivered 75%+ of the market gains over the first 6 months of the rally. PE re-ratings do require some confidence that the earnings cycle will turn While the PE can drive rallies on its own, this ultimately relies on investor confidence that the earnings cycle will begin to improve at some point. This likely explains Australias underperformance a lack of conviction that earnings growth will be seen anytime soon. This concern is understandable, given: (i) industrials have not grown earnings since FY07 (ii) mining earnings look flattish in FY12 and a lack of clarity around China remains. There are reasons to expect earnings to grow We have confidence that the cycle will improve in Australia, for both industrials and miners, and thus the PE can re-rate further in line with global peers. - Earnings for industrials have been held back by some factors that should pass, such as natural disasters, IR, and falling financial markets. Further, a stabilization of the AUD will assist translation of companies USD earnings. - A range of indicators (PMIs, steel production, IP) point to acceleration, not deceleration, in the Chinese and global economies in recent months. As this becomes more entrenched commodity prices should edge higher. Figure 1: PE re-rate has been the driver of the recovery
40 30 20 10 0 -10 -20 % Drivers of equity market gains since September 2011 Forward earnings PE Price
Strategist (+61) 2 8258-1376 tim.baker@db.com David Jennings, CFA Strategist (+61) 2 8258-1630 david.jennings@db.com
DB forecasts
3-Apr Jun-12 Dec-12 ASX200 index RBA cash rate 10-year bond yield 4337 4.25 4.06 4500 4.00 4.00 4700 3.75 4.50
US
Brazil
Korea
China
Switzerland
Germany
Source: IBES, Datastream, Deutsche Bank
________________________________________________________________________________________________________________ Deutsche Bank AG/Sydney All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 146/04/2011.
South Africa
Australia
Canada
France
Taiwan
Russia
Mexico
HK
UK
3 April 2012 Australian Equity Strategy
Australian market performance has been subdued, partly due to relative weakness in earnings
Australian equities have struggled in recent years in both absolute and relative terms. The market didnt rally in line with global markets in the second half of 2010 following the announcement of QE2, and has lagged behind other markets over the past 6 months. The ASX200 currently sits at levels reached first in July 2005, and again in mid-2009. In comparison, the S&P500 is only ~10% below its pre-crisis peak. Figure 2: Australia has been a big underperformer over the past two years
130 120 110 100 90 80 70 60
Equity market performance since Mar 2009 Index
130 120 110 100 90 80
Australia Asia ex Japan
Europe US
70 60 50 Feb-12
50 Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Source: Datastream, Deutsche Bank
Earnings downgrades in Australia have certainly played a large role in this underperformance. The market has seen net downgrades since April 2010, while other markets only started to see downgrades as European sovereign debt concerns started to ramp up in mid 2011. Still, this experience has not been hugely different over the past six months other markets have been seeing downgrades as well. Figure 3: The downgrade cycle has been worse, but not hugely so in the past 6 months
0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8
Ratio
Earnings revision ratios MSCI AC World Australia
0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8
00
01
02
03
04
05
06
07
08
09
10
11
12
Page 2
Deutsche Bank AG/Sydney
But the bigger problem has been the lack of PE re-rate in Australia compared to offshore
The bigger problem for our market over the past six months has been the lack of a PE re-rate. Looking at the MSCI AC World index, the forward PE is up almost 20% since September, which has driven global equities considerably higher despite forward earnings being downgraded. The re-rate in Australia has only been half as much over the same period. Figure 4: Global equities have rallied 15%, completely driven by a PE re-rate
20 15 10 5 0 -5
MSCI AC World - contributions from PE vs earnings since Sept 11 Cumulative contribution from fwd earnings Cumulative contribution from PE Market performance
20 15 10 5 0 -5
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Figure 5: Australia has risen by less, despite earnings performance being no worse
20 15 10 5 0 -5
ASX200 - contributions from PE vs earnings since Sept 11 Cumulative contribution from fwd earnings Cumulative contribution from PE Market performance
20 15 10 5 0 -5
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Page 3
The re-rate in Australia has been one of the smallest globally, despite several other countries with worse earnings momentum
Looking across the major regions, it is clear that a rise in the PE ratio has been the dominant driver of the rally in equities over the past six months. In contrast, earnings have made a marginal contribution at best. Unfortunately, Australia has experienced the smallest re-rate, despite earnings been under less pressure than in regions like Europe. Figure 6: It has been PE re-rating, not earnings, that have driven markets higher
25 20 15 10 5 0 -5 -10
Drivers of equity market gains since since September 2011
Forward earnings contribution PE contribution Price US Asia ex Japan EM ex Asia Japan Euro area Australia
Focusing on a group of 15 large markets which cover the major regions, only South Africa and Mexico have re-rated less than Australia. This is despite the fact that 6 countries have had a worse earnings performance over the past six months (Brazil, Canada, France, Germany, Taiwan and the UK). Figure 7: Only 2 countries have re-rated less than Australia 35 Drivers of equity market gains since September 2011 % 30 Forward earnings PE Price 25
20 15 10 5 0 -5 -10 -15
France
US
Brazil
Switzerland
Australia
Taiwan
Korea
China
Germany
Page 4
South Africa
Canada
HK
Russia
Mexico
UK
Looking at Australias major recoveries, PE re-rates have tended to be the key driver over the first 6 months
The current experience of PE re-ratings driving the market recovery does not look at all unusual by historical standards. Looking at the first year of market recoveries in 1993, 2003 and 2009, a rising PE has delivered at least 75% of the market gains over the first 6 months. Figure 8: We look at the 1993, 2003 and 2009 recoveries
9.0
All Ordinaries, logged
9.0
8.5
1st year of recovery shaded
8.5
8.0
8.0
7.5
7.5
7.0 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: IRESS, Deutsche Bank
7.0
Figure 9: PE re-rating tends to drive the first 6m of a recovery
150
Market recoveries - contribution of forward PE vs earnings First 6 months 13 Second 6 months 246
150
100
25 142 59 108 75 41
100
50
87
50
0 -42 -50 1993

Source: IBES, Datastream. Deutsche Bank
-8 Earnings 1993 PE -146
-50 2003 2009 2003 2009
Page 5
Markets tend to rally for some time in anticipation of future earnings growth
So it appears that the Australian market has tended to rally for some time almost purely due to a rising PE. However, for a recovery to be sustained beyond ~6 months, earnings have had to rise. Thus it seems that the initial PE-driven rally is driven by expectations that the earnings cycle will improve in the not-too-distant future. Australias underperformance may thus result from investor skepticism that Australia will post meaningful growth later in the year. This is understandable given ongoing net downgrades, and the lack of earnings growth thus far in 2012. However, we are more optimistic, and expect growth to manifest in time. On page 8 we outline our reasons. Figure 10: A re-rate drives the first 6 months of a recovery, earnings drive the next 6m
50 40 30 20 10 0 -10 Nov-92 Jan-93 Mar-93 May-93 Jul-93 Sep-93 % 1993 equity market recovery - contributions from PE vs earnings Cumulative contribution from fwd earnings Cumulative contribution from PE Market performance 50 40 30 20 10 0 -10
25 20 15 10 5 0 -5
2003 equity market recovery - contributions from PE vs earnings Cumulative contribution from fwd earnings Cumulative contribution from PE Market performance
25 20 15 10 5 0 -5
Apr-03
80 60 40 20 0 -20 Mar-09 %
Jun-03
Aug-03
Oct-03
Dec-03
Feb-04
80 60 40 20 0 -20
2009 equity market recovery - contributions from PE vs earnings Cumulative contribution from fwd earnings Cumulative contribution from PE Market performance
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Page 6
This holds across the major sectors, particularly in resources

Before turning to our reasons for expecting decent earnings growth from Australia, it is worth pointing out that the pattern of a PE re-rating driving the early stages of a recovery holds across the major sectors of the market. This is particularly the case for resources, where a rising PE has delivered ~95%+ of the market gains over the first six months of the rally. Figure 11: PE has been the key driver of the 1st 6 months of a recovery for all sectors
200 150 100 50 0 -50 -100
Resource sector recoveries - contribution of forward PE vs earnings First 6 months Second 6 months 217 49 51 -7 Earnings 1993 PE 2003 -72 -117 1993 2003 -333 433
200 150 100 50 0 -50 -100
7 93 107
172
2009
2009
150
Industrials sector recoveries - contribution of forward PE vs earnings First 6 months 10 31 Second 6 months
150
100
100 139 57 52 84 48 16 Earnings 1993 PE -50 2009

150
50
90
50
69
43 -39
-50 1993
150 %
2003
2009
2003
Bank sector recoveries - contribution of forward PE vs earnings First 6 months Second 6 months 249
100 119 63 124 57 37
100
50
50 43 63 0 Earnings 1993 PE -149 -50 2009
37 0 -19 -24
-50 1993
2003
2009
2003
Page 7
Key indicators of commodities demand are stronger than they appear

While mining earnings are not currently growing, we expect to see growth in FY13, as we think concerns around momentum in China are overdone. It is true that steel production in China (and globally) in Jan/Feb did not show any growth year-on-year. However, year-on-year comparisons always lag at turning points, and when we seasonally adjust the data and look at levels, we find a different picture. Chinese steel production troughed in November 2011, while in the rest of the world a bottom was reached in September. Steel production has actually been rising the past few months. Figure 12: Steel production growth is weak year-on-year, but the levels data show the worst is already past
40 30 20 10 0 -10 -20 -30 -40 00 02 04 06 08 10 12 World ex China China yoy% Global steel production 40 30 20 10 0 -10 -20 -30 -40
80 70 60 50 40 30 08
Global steel production Mt China World ex China
80 70 60 50 40 30
09
10
11
12
Note: Data are seasonally adjusted by DB Source: Datastream, Deutsche Bank
It is a similar story with Chinese industrial production. The year-on-year rate is the lowest it has been in some time (excluding the global recession) at 11.4%. However, when we estimate two series that comparing the average production of the past 3 months to the 3 months prior to that, we find that worst has past. Both 3m/3m measures (similar to a rolling quarterly growth series) troughed in late 2011, and have since improved. Figure 13: Our estimates of Chinese IP on a 3m/3m basis (rather than yoy) show a strengthening in recent months
30 24 18 12 6 0 -6 01 02 03 04 05 06 07 08 09 10 11 12 China industrial production % 3m/3m annualised yoy% 30 24 18 12 6 0 -6
30 24 18 12 6 0 -6 01
China industrial production % 3m/3m annualised yoy%
30 24 18 12 6 0 -6
02
03
04
05
06
07
08
09
10
11
12
Note: data series on the LHS chart incorporate the Jan-Feb data we have and attempts to seasonally adjust the series once it is converted to index form. Data series on the RHS chart ignore Jan-Feb data through history (given volatility and changes in reporting methods), and interpolates instead. The most recent observation tacks on the recently reported 11.4% growth rate for Jan-Feb 2012. Source: Datastream, Deutsche Bank
Page 8
PMIs have already bottomed, so commodity prices should get support from strengthening global growth
This is consistent with the manufacturing PMI surveys, which showed a trough in activity in late 2011, and a firming since. While there was concern around the China PMI constructed by HSBC, the NBS measure is considerably stronger. Further, while the euro area PMI is not that much stronger than November, other business surveys in Europe, particularly the German Ifo, paint a more upbeat picture. Overall, our global economists still think the recovery is on track, and recently upgraded their 2012 global GDP forecast to 3%, up from 3% in December. The primary drivers will be pent-up demand associated with a gradual recovery of spending on durables and structures after the Great Recession and stimulatory monetary policy. Figure 14: PMIs also bottomed in late 2011, and have improved since
60 Manufacturing PMIs Index 60
115 110
Germany Business Sentiment Index Ifo-expectations (lhs) PMI (rhs) Index
65 60 55 50 45 40 35 30
55
55
105 100
50 US Euro area China 45 Jan-10
50
95 90 85
45 Jul-10 Jan-11 Jul-11 Jan-12
80 09 10 11 12
Note: China PMI is seasonally adjusted by DB.
Source: Bloomberg Finance LP, Deutsche Bank
Indeed, iron ore and copper prices have been fairly resilient in recent weeks, despite investor concerns about the sustainability of the global recovery. Given our outlook for solid growth in 2H12, this bodes well for commodity prices for the rest of the year. Figure 15: Commodity prices have been resilient in recent weeks
200 180 160 140 120 100 80 60 40 20
US$/t
Commodity prices Iron ore (lhs) Copper (rhs) US$/lb
1 07 08 09 10 11 12
Source: Bloomberg Finance LP, IRESS, Deutsche Bank
Page 9
Amongst industrials, good growth in some sectors is being weighed down by one-offs in others
Industrials have not posted meaningful growth in FY07, and with earnings still being downgraded many investors struggle to see when growth will be achieved. We are more upbeat, not because we see a change in broad macro conditions (high currency, sub-trend economy outside resources), but because we can identify other factors that have weighed that should pass or lessen. The chart below shows that a number of sectors are posting good growth at the moment, but are being offset by large falls in earnings for airlines, general insurance and steel. A pick up in these areas should be straightforward as natural disasters and IR issues pass. And while the domestic steel sector is likely to remain under pressure, further large falls in earnings should at least be avoided given measures already underway. Figure 16: Earnings dragged down by large falls in airlines, gen insurance & steel
% pcp 30 20 10 0 -10 -20 -30 -40 -50 -60 -48 -58 -60 Cyclicals Defensives 25 16 15 13 8 6 4 2 2 2 Industrials ex banks - December half 2011 NPAT on pcp
0 -5 -8 -10 -18 -23
Utilities
Contractors
Chemicals
Gaming
Telcos
Health
Packaging
Media
Beverages
Disc retail
Property
Wealth mgr
Food retail
Bldg mat
Div fins
Airlines
Source: Company data, IRESS, Deutsche Bank
The rising AUD has also dampened earnings for companies with offshore operations, but this should abate as strong year-on-year growth in the AUD is unlikely to continue. This is no comfort for domestic-focused companies where the level of the AUD hurts, but will allow better translation of USD earnings for offshore-based companies. Also, we think that analyst forecasts have become more realistic, so less scope for downgrades. Through last year the forecasts were for previous peak margins to be achieved, but this has been scaled back substantially. Figure 17: The AUD will be less of a drag in coming quarters, while margin forecasts look more reasonable
25 20 15 10 5 0 -5 -10 -15 -20 -25 02 03 04 05 06 07 08 09 10 11 12 13 14 AUD goes to 1.20 AUD goes to 1.15 AUD goes to 1.10 AUD goes to 1.05 %, pcp AUD/USD half-yearly
25 16 11 8 9
Transport
25 20 15 10 5 0 -5 -10 -15 -20 -25
10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 91
Gen ins
Industrials ex financials EBIT margins % Current f'cast As at 30th Nov 11 As at 31 Jul 11 As at 31 Mar 11 f/c 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 93 95 97 99 01 03 05 07 09 11 13
Source: IRESS, RBA, Company data, Deutsche Bank
Page 10
Steel
While challenges remain for many sectors, others are seeing decent growth
Figure 18: Mining investment has begun to ramp up, driving enough overall strength in the economy for job ads to rise
120 100 80 60 40 20 0 -20 -40 -60 90 92 94 96 98 00 02 04 06 08 10 12
Source: ABS, Datastream, Deutsche Bank
%, yoy
Mining investment
120 100 80 60 40 20 0 -20 -40 -60
300 250 200 150 100 50 0 00
Internet Job Advertisements 000s Number (lhs) Growth on pcp (rhs) %
80 60 40 20 0 -20 -40 -60
02
04
06
08
10
12
Figure 19: Consumers arent increasing their retail spend much, but air travel and gambling are doing well
15 12 9 6 3 0 -3 -6 05 06 07 08 09 10 11 12
Source: Company data, IRESS, ABS, Deutsche Bank
Domestic airline activity (revenue passenger kilometres) 15 % yoy Qantas (incl. Jetstar) Virgin 12 9 6 3 0 -3 -6
12 8 4 0 -4 -8 02
yoy%
Consumer spending
12 8 4 0 -4
Total non-discretionary Gambling 03 04 05 06 07 08 09 10 11 12
-8
Figure 20: In the US, both freight volumes (BXB) and cable TV spending (NWS) are growing solidly
12 8 4 0 -4 -8 -12 -16 99 01 03 05 07 09 11
% yoy
US freight & ISM Freight volumes (lhs) ISM (rhs)
16
Index 65 60 55 50 45 40 35 30
% yoy
US cable TV spending
16 14 12 10 8 6 4 2 0
14 12 10 8 6 4 2 0 96 98 00 02 04 06 08 10 12
Page 11
Compression of sector PEs means everythings on the cheap side we dont need the cheapest (challenged) sectors to do the work
If further PE re-rating for the Australian market is set to come, where could it come from? When we look at the dispersion of sector valuations, we find it to be quite compressed by historical standards. So while sectors that have underperformed in recent years are amongst the cheapest (eg, discretionary retail), the compression of PE ratios would say that sectors that are actually growing earnings arent that much more expensive, compared to history. What that means is that a re-rating of the market can occur through investors attaching higher valuations to sectors with good growth prospects, rather than the cheapest, most challenged sectors having to do the work. Figure 21: The spread amongst sector PE ratios is around 10-year lows
Spread of ASX200 sector forward PE ratios % PE pts
6 5
4 4 3 3 Standard deviation (lhs) Difference between top and bottom quartile (rhs) 2 03 04 05 06 07 08 09 10 11 12
2 1
Figure 22: Valuations across sectors are quite compressed

20 16 12 8 4 0 x 12 month forward PE ratios
14.5 14.5 14.3 19.3 16.2
13.5 13.4 13.4 13.4 13.4 13.0 12.8
12.6 12.0
11.8 11.6
11.0 10.8
10.0 10.0 9.5
Utilities
Contractors
Wealth managers
Chemicals
Energy
Healthcare
Building materials
Food retail
Gaming
Div financials
Food&bev
Packaging
Property
Telcos
Media
Banks
Steel
Disc retail
Transport
Note: on consensus earnings.
Page 12
General insurance
Mining
Model portfolio
Figure 23:
Stocks
Santos OilSearch BHP Billiton Rio Tinto PanAust Newcrest
P'folio Wgt %
Index Wgt %
Industry
Energy Mining
P'folio Wgt %
Index Wgt %
Sector
Energy Materials
P'folio Wgt %
Index Wgt %
5.0 4.5 14.0 6.0 2.5 3.0
1.3 0.7 10.7 2.7 0.1 2.1
9.5 22.5
6.8 17.8
9.5 28.0
6.8 24.6
Gold Steel Paper & packaging Building materials
3.0 0.0 0.0 0.0 2.5 6.5
2.9 0.5 0.8 1.0 1.6 3.0
O/W resources & resource capex exposure
Orica WorleyParsons NRW Boart Longyear Seek Brambles Qantas Crown News Corp Woolworths Primary ANZ NAB Westpac Goodman Group Stockland Suncorp AMP Computershare
2.5 2.5 2.0 2.0 1.5 2.5 2.0 2.5 2.5 4.5 2.0 9.5 7.5 9.5 2.0 2.0 2.0 3.0 3.0
0.9 0.6 0.1 0.2
Chemicals Contractors
Industrials
12.5
7.9
Exposure to US, and solid spend
Infrastructure 0.2 1.0 0.4 0.3 0.6 3.0 0.1 5.8 5.2 6.3 0.5 0.6 1.0 1.2 0.4 General insurance Diversified financials Wealth managers Info. technology Telecom services Utilities Property Gaming Media Discretionary retailing Food retailing Food & beverages Healthcare Banks Commercial services Transport
0.0 1.5 4.5 2.5 2.5 0.0 4.5 0.0 2.0 26.5
1.4 0.2 3.0 1.6 1.1 0.9 6.7 1.2 3.6 25.8
on services in Australia
Cons. discretionary
5.0
3.5
Consumer staples Healthcare Financials
4.5 2.0 35.5
7.9 3.6 39.3
4.0 2.0 0.0 3.0 3.0 0.0 0.0
6.8 3.3 2.1 1.2 0.7 4.1 1.6 Info. technology Telecom services Utilities 3.0 0.0 0.0 0.7 4.1 1.6
O/W financial market leverage
100.0
Source: Deutsche Bank
100.0 100.0
100.0 100.0
Page 13
Sector positioning
Figure 24
Portfolio Weightings vs Benchmark

Energy Mining Gold Steel Packaging Chemicals Building Materials Contractors Comm. serv. Airlines Gaming Overseas media Domestic media Logistics Discretionary retailing Div fins/WM Banks General Insurance Property Food retailing Food & Beverages Infrastructure Utilities Telecoms Healthcare
% pt
-5 -4 -3 -2 -1 0 1 2 3
Banks
Resources
Cyclical ind.
Defensive ind.
Page 14
COMPANIES MENTIONED LIST

Code AMP ANZ BHP BLY BXB CPU CWN GMG NAB NCM NWH NWS ORI Stock n am e Amp Ltd Australia and New Zealand Banking Group BHP Billiton Ltd Boart Longyear Ltd Brambles Ltd Computershare Ltd Crown Ltd Goodman Group National Australia Bank Ltd Newcrest Mining Ltd Nrw Holdings Ltd News Corporation Orica Ltd L ast pri ce 4.29 22.99 35.18 4.20 6.95 8.76 8.80 0.70 24.61 29.19 4.17 19.37 27.00 Code OSH PNA PRY QAN RIO SEK SGP STO SUN WBC WOR WOW Stock n am e Oil Search Ltd PanAust Ltd Primary Health Care Ltd Qantas Airways Ltd Rio Tinto Ltd Seek Ltd Stockland Santos Ltd Suncorp Group Ltd Westpac Banking Corporation WorleyParsons Ltd Woolworths Ltd L ast pri ce 7.06 3.22 2.78 1.72 66.79 7.14 2.95 14.42 8.26 21.82 29.43 25.70
Page 15
Appendix 1
Important Disclosures Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Tim Baker Equity rating key Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period Equity rating dispersion and banking relationships
120 100 80 60 40 20 0
50 %
47 %
23 %
25 % 3 %1 4 %
Buy
Companies Covered
Hold
Sell
Cos. w/ Banking Relationship
Australia Universe
Page 16
Regulatory Disclosures 1. Important Additional Conflict Disclosures

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2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.
Page 17

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Deutsche Bank Markets Research

Australian Equity Strategy

It's a PE re-rating, not earnings, that drives market recoveries

Source: IBES, Datastream, Deutsche Bank

3 April 2012 Australian Equity Strategy

130 120 110 100 90 80 70 60

Equity market performance since Mar 2009 Index

130 120 110 100 90 80

Australia Asia ex Japan

Source: Datastream, Deutsche Bank

0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8

Earnings revision ratios MSCI AC World Australia

0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8

Source: IBES, Datastream, Deutsche Bank

Deutsche Bank AG/Sydney

3 April 2012 Australian Equity Strategy

Source: IBES, Datastream, Deutsche Bank

Source: IBES, Datastream, Deutsche Bank

Deutsche Bank AG/Sydney

3 April 2012 Australian Equity Strategy

Drivers of equity market gains since since September 2011

Source: IBES, Datastream, Deutsche Bank

Source: Datastream, Deutsche Bank

Deutsche Bank AG/Sydney

3 April 2012 Australian Equity Strategy

All Ordinaries, logged

1st year of recovery shaded

Figure 9: PE re-rating tends to drive the first 6m of a recovery

0 -42 -50 1993

-8 Earnings 1993 PE -146

-50 2003 2009 2003 2009

Deutsche Bank AG/Sydney

3 April 2012 Australian Equity Strategy

Source: IBES, Datastream. Deutsche Bank

Deutsche Bank AG/Sydney

3 April 2012 Australian Equity Strategy

This holds across the major sectors, particularly in resources

200 150 100 50 0 -50 -100

200 150 100 50 0 -50 -100

100 139 57 52 84 48 16 Earnings 1993 PE -50 2009

100 119 63 124 57 37

50 43 63 0 Earnings 1993 PE -149 -50 2009

Deutsche Bank AG/Sydney

3 April 2012 Australian Equity Strategy

Key indicators of commodities demand are stronger than they appear

Global steel production Mt China World ex China

Note: Data are seasonally adjusted by DB Source: Datastream, Deutsche Bank

China industrial production % 3m/3m annualised yoy%

Deutsche Bank AG/Sydney

3 April 2012 Australian Equity Strategy

Germany Business Sentiment Index Ifo-expectations (lhs) PMI (rhs) Index

50 US Euro area China 45 Jan-10

45 Jul-10 Jan-11 Jul-11 Jan-12

Note: China PMI is seasonally adjusted by DB.

Source: Bloomberg Finance LP, Deutsche Bank

200 180 160 140 120 100 80 60 40 20

Commodity prices Iron ore (lhs) Copper (rhs) US$/lb