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Investment Portfolio Monthly Report – December 2014

Economic Review

At its meeting on 2 December, the Reserve Bank of Australia decided to leave the cash rate unchanged at 2.5% for the seventeenth 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. The unemployment rate decreased by 0.1% from a revised November estimate to 6.1% in December. The latest ABS retail trade figures show that Australian retail turnover rose 0.1% in November, seasonally adjusted, following a rise of 0.4% in October. The Australian Dollar weakened by 3.4% against the US Dollar during December to close at 0.8202.

In the United States, real gross domestic product increased at an annual rate of 5.0% in the third quarter of 2014, according to the “third” estimate released by the Bureau of Economic Analysis. The consumer price index declined 0.4% in December on a seasonally adjusted basis. Over the last 12 months, the index increased by 0.8% before seasonal adjustment. The unemployment rate declined by 0.2% to 5.6% at the end of December. Job gains occurred in professional and business services, construction, food services, health care, and manufacturing.

The gross domestic product of China increased by 7.4% in 2014. The year-on-year growth of the first quarter for 2014 was 7.4%, the second quarter was 7.5%, the third quarter was 7.3%, and the fourth quarter 7.3%.

Strategy

In Australia, some indicators of consumer and business confidence have improved and exports are rising. However, labour market conditions are subdued and wage growth remains low. 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 and it seems likely that the RBA will cut interest rates during 2015. We expect the A$ to continue weakening against the US$. We believe the US economy will continue to improve 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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