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Investment Portfolio Monthly Report – December 2013

Economic Review

With no meeting by the Reserve Bank of Australia in January, the Cash Rate remained unchanged at 2.50% for the fifth consecutive month. The seasonally adjusted Unemployment Rate increased by 0.1% to 5.8% in November with the number of unemployed persons increasing by 3,400 to 712,500. The Australian Dollar weakened by 1.5% against the US Dollar during December to close at 0.8948.

The U.S. economy continued to improve. Real gross domestic product increased at an annual rate of 4.1% in the third quarter of 2013 according to the “third” estimate released by the Bureau of Economic Analysis.  The Unemployment Rate declined from 7.3% to 7.0% in November, and Labour Productivity increased at a 3.0% annual rate during the third quarter of 2013. Inflation remained subdued with the Consumer Price Index unchanged in November on a seasonally adjusted basis. Over the last 12 months, CPI increased by 1.2%.

The US Federal Reserve decided to modestly reduce the pace of its asset purchases. Beginning in January, the US Fed will add to its holdings of mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The US Fed reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. It also reaffirmed its expectation that the current low target range for the federal funds rate of 0 to 0.25% will be appropriate at least as long as the unemployment rate remains above 6.5%, and inflation between one and two years ahead is projected to be no more than 0.5% above the 2% longer-run goal.

In November, China’s manufacturing purchasing managers index was 51.0%, down by 0.4% month-on-month, and CPI increased by 3% year-on-year.

Strategy

We expect economic growth in Australia to remain below trend for the next couple of years and for unemployment to increase. This is primarily due to the very sharp expected reduction in mining investment over the next two and a half years. In contrast, we believe the US economy will continue to improve at an accelerated rate and for unemployment to decrease.

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 better capital growth prospects.

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