25th February 2009

Dear Investor,

Don't be too pessimistic!

There is a real risk that the mood in Australia is becoming too pessimistic, so, to provide a more balanced perspective, some commentators are now prepared to voice more optimistic opinions.

As Commonwealth Bank of Australia (CBA) Chief Executive, Ralph Norris has said, Australia is better prepared than most countries to weather the global economic slowdown, helped by the biggest boost in disposable income in the nation's history. Mr. Norris has noted that CBA economists estimate that the combination of tax cuts, lower fuel prices and interest rate reductions (average home loan rates are now 5.85%), and the pre Christmas $10 billion Federal Government hand out has resulted in an 11 per cent boost to the average Australian's disposable income over the past six months. "That is equivalent to almost three annual wage increases and is by far and away the biggest increase in disposable income, on average, in the history of Australia," he said. Another stimulus package of some $42 billion from the Federal Government and an additional $60 billion from state and territory governments is currently going to soften the slow down. "The governments at State and Federal level should be commended for being decisive," Mr. Norris said. "The important thing here is to get stimulus packages up." Mr. Norris said CBA's economists estimated that one-third of the December stimulus payments had been spent, a third saved and a third was used to pay down debt. "Paying down debt can't be a bad thing," Mr. Norris said.

That would explain December's surge in retail sales, which had the biggest monthly rise in eight years, or 3.8%. He said that economic growth would probably be "anaemic" for one or two years as the world economy repaired and a rise in unemployment, if severe, could make conditions feel like a recession. CBA is forecasting the unemployment rate to rise from December's 4.5%.

But Mr. Norris cautioned about becoming too pessimistic about the economic outlook.

"Everybody is uncertain about the future (and) I'm not saying that we're going to be immune to the international crisis," Mr. Norris said. "There's a danger in this environment that we can be too negative and that we end up covering our thoughts in doom and gloom." He said Australia was well prepared for the slowdown because of the 17 years of economic growth prior to the financial crisis, 10 years of fiscal surpluses, low unemployment and interest rates that were relatively higher and which add room to move lower.

The Reserve Bank of Australia from September 2008 has cut the overnight cash rate by four percentage points, or more than half, to 3.25 per cent - levels last seen in the mid 1960s. The national average petrol price fell to just over $1 a litre in December 2008 and January 2009 from over $1.60 in July 2008, according to the Australian Institute of Petroleum. Since then, the average price has risen to about $1.20. The Federal Government announced tax cuts over four years in its budget last May, which it followed with a stimulus package, which included $10 billion payments made in December 2008.

Another commentator prepared to be more optimistic is CommSec's Craig James, who has noted that Australian banks are in a better financial position than the US and Europe, and had a higher exposure to the domestic market. "Australian banks are still recording solid profits at time when overseas banks are reporting losses," he said.

Mr. James also observed that Australian house prices were unlikely to fall. "Despite gloom and doom predictions, house prices haven't slumped in Australia," he said. "Quite simply, population has been rising in recent years but supply of housing hasn't kept pace, leading to an under-supply of housing."

So, while times are tough and as we continue to deal with the challenges of the global economic conditions, as the Chinese proverb says, a gem is not polished without rubbing, nor a man made perfect without trials.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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