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Investment Portfolio Monthly Report – January 2015

Economic Review

For the past year and a half, the cash rate has been stable but at its meeting on 3 February, the Reserve Bank of Australia decided to lower the cash rate by 25 basis points to 2.25%. The seasonally adjusted unemployment rate for January was 6.4%, compared with 6.1% for December. The seasonally adjusted wage price index rose 0.6% in the December quarter and 2.5% over the last year. The latest ABS retail trade figures show that Australian retail turnover rose 0.2% in December, seasonally adjusted, following a rise of 0.1% in November and rise of 0.4% in October. The Australian Dollar weakened by 5.1% against the US Dollar during January to close at 0.7781.

In the United States, real gross domestic product increased at an annual rate of 2.6% in the fourth quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis.  In the third quarter, real GDP increased 5.0%. Total nonfarm payroll employment rose by 257,000 in January, and the unemployment rate was little changed at 5.7%. Job gains occurred in retail trade, construction, health care, financial activities, and manufacturing. The Consumer Price Index declined 0.4% in December on a seasonally adjusted basis. Over the last 12 months, the all items index increased 0.8% before seasonal adjustment.

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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