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Investment Portfolio Monthly Report – August 2014

Economic Review

At its meeting on 2 September, the Reserve Bank of Australia decided to leave the cash rate unchanged at 2.50% for the thirteenth consecutive month and reiterated that based on present economic indications, the most prudent course is likely to be a period of stability in interest rates. Real gross domestic product grew 0.5% in the June quarter and 3.1% in the 12 months ended June. The latest ABS retail trade figures show that Australian retail turnover rose 0.4% in July, seasonally adjusted, following a rise of 0.6% in June. The seasonally adjusted estimate for total dwellings approved rose 2.5% in July following a fall of 3.8% in the previous month. The Australian Dollar strengthened by 0.3% against the US Dollar during August to close at 0.9349. The A$ has strengthened 6.7% against the US$ since the end of January.

In the United States, real gross domestic product increased at an annual rate of 4.2% in the second quarter of 2014, according to the “second” estimate released by the Bureau of Economic Analysis. Economic activity in the manufacturing sector expanded in August for the 15th consecutive month and the purchasing managers’ index compiled by the Institute for Supply Management registered 59%. Inflation remained within target with the consumer price index increasing 0.1% in July on a seasonally adjusted basis. Over the last 12 months, the index increased 2.0% before seasonal adjustment.

In August, China’s manufacturing purchasing managers index was 51.1%, 0.6% lower than July but still at the second highest level this year. The non-manufacturing PMI was 54.4%, an increase of 0.2% over the previous month. In July, the consumer price index went up by 2.3% year-on-year.

Strategy

In Australia, some indicators of consumer and business confidence have improved and exports are rising. However, there has been some deterioration in the labour market and it will probably be some time yet before unemployment starts declining 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 the next 12 months. We believe the US economy will continue to improve at an accelerated rate and for unemployment to decrease further. We expect for the A$ to weaken against the US$ over the next 18 months. 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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