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Investment Portfolio Monthly Report – April 2014

Economic Review

At its meeting on 6 May, the Reserve Bank of Australia decided to leave the Cash Rate unchanged at 2.50% for the ninth consecutive month and stated that based on present economic indications, the most prudent course is likely to be a period of stability in interest rates. Employment increased by 18,100 to 11,553,200 in March and with the Participation Rate decreasing by 0.2% to 64.7%, the Unemployment Rate decreased by 0.2% to 5.8%. The seasonally adjusted estimate for Dwellings Approvals fell 3.5% in March and has fallen for two months. The Consumer Price Index rose 2.9% through the year to the March quarter. The Australian Dollar strengthened by 0.7% against the US Dollar during April to close at 0.9287. The A$ has strengthened by 6.0% against the US$ since the end of January and as the RBA noted at its May meeting, remains high by historical standards.

In the United States, economic activity has picked up recently after having slowed sharply during the winter in part because of adverse weather conditions. Real gross domestic product increased at an annual rate of 0.1% in the first quarter of 2014 according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2013, real GDP increased by 2.6%. Nonfarm payroll employment rose by 288,000, and the unemployment rate fell by 0.4% to 6.3% in April. Inflation remained subdued with the Consumer Price Index increasing 0.2% in March on a seasonally adjusted basis. Over the last 12 months, CPI increased by 1.5% seasonally adjusted. The US Federal Reserve reduced its asset purchase program by a further $10 billion to $45 billion per month effective beginning of May.

In March, China’s PMI was 50.4%, a slight increase of 0.1% month-on-month. The Consumer Price Index increased by 2.4% year-on-year in March.

Strategy

In Australia, some indicators of business conditions and confidence have improved from a year ago and exports are rising. There has also been some improvement in the labour market but it will probably be some time yet before unemployment declines consistently. Mining investment is set to decline significantly over the next 12 months and Government spending is expected to be subdued. We expect economic growth in Australia to remain below trend for some time to come. We believe the US economy will continue to improve at an accelerated rate and for unemployment to decrease further. Accordingly, we continue to recommend a diversified portfolio with exposure to both the Australian and US economies. Australian Equities reward investors with attractive dividend yields whereas US Equities offer higher capital growth.

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