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Investment Portfolio Monthly Report – January 2014

Economic Review

At its meeting on 3 February, the Reserve Bank of Australia decided to leave the Cash Rate unchanged at 2.50% and also indicated that the rate will likely remain at this level for some time to come. One of the main reasons for the RBA’s stance was higher than expected Inflation over the last two quarters of 2013.  The Consumer Price Index rose 0.8% in the December quarter following a 1.2% rise in the September quarter. Demand for labour has remained weak with the Unemployment Rate at 5.8% at the end of December. The Australian Dollar weakened by 2.1% against the US Dollar during January to close at 0.8763.

There are indications that economic growth in the United States is accelerating. Real gross domestic product increased at an annual rate of 3.2% in the fourth quarter of 2013 according to the “advance” estimate released by the Bureau of Economic Analysis.   In the third quarter, real GDP increased 4.1%. Job growth averaged 182,000 per month in 2013 and the Unemployment Rate declined from 7.0% to 6.7% in December. Inflation remained subdued with the Consumer Price Index increasing 0.3% in December on a seasonally adjusted basis. Over the last 12 months, CPI increased by 1.5%.

The US Federal Reserve decided to make a further reduction of $10 billion in the pace of its asset purchases from the beginning of February. 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 confirmed its expectation that the current low target range for the federal funds rate of 0 to 0.25% will be appropriate to maintain well past the time that the unemployment rate declines below 6.5%. Dr Janet Yellen took the oath of office as Chair of the Board of Governors of the Federal Reserve System on 3 February.

China’s manufacturing purchasing managers index was 50.5%, down by 0.5% month-on-month in January.

Strategy

We expect economic growth in Australia to remain below trend for some time to come and for unemployment to increase. This is mainly due to the sharp expected reduction in mining investment this year and next. In contrast, 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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