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Investment Portfolio Monthly Report – February 2015

Economic Review

At its meeting on March 3, the Reserve Bank of Australia decided to leave the cash rate steady for the time being at 2.25% and stated that further easing of policy may be appropriate over the period ahead. Real gross domestic product grew 0.5% in the December quarter and 2.5% in year ended December. The unemployment rate decreased by 0.1% in February to 6.3%. The latest ABS retail trade figures show that Australian retail turnover rose 0.4% in January, seasonally adjusted, following a rise of 0.2% in December. The terms of trade decreased 1.7% in the December quarter and by 10.8% in the 12 months ended December. The Australian Dollar strengthened by 0.1% against the US Dollar during February to close at 0.7792.

In the United States, real gross domestic product increased at an annual rate of 2.2% in the fourth quarter of 2014, according to the “second” estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 5.0%. The consumer price index decreased 0.7% in January on a seasonally adjusted basis. Over the last 12 months, the index decreased by 0.1% before seasonal adjustment. Total nonfarm payroll employment increased by 295,000 in February, and the unemployment rate edged down to 5.5%. Job gains occurred in food services, professional and business services, construction, health care, and in transportation and warehousing. Employment in mining was down over the month.

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 further during 2015. We expect the A$ to weaken against the US$ over time. We believe the US economy will continue to improve and for unemployment to decrease further albeit at a slower pace. 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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