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Investment Portfolio Monthly Report – October 2014

Economic Review

At its meeting on 7 October, the Reserve Bank of Australia decided to leave the cash rate unchanged at 2.5% for the fourteenth 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. Australia’s seasonally adjusted unemployment rate remained at 6.2% in October. The latest ABS retail trade figures show that Australian retail turnover rose 1.2% in September, seasonally adjusted, following a rise of 0.1% in August. The seasonally adjusted estimate for total dwellings approved fell 11.0% in September after rising for two months. The Australian Dollar strengthened by 0.6% against the US Dollar during October to close at 0.8805.

In the United States, real gross domestic product increased at an annual rate of 3.5% in the third quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis.  Economic activity in the manufacturing sector expanded in October for the 17th consecutive month and the purchasing managers’ index compiled by the Institute for Supply Management registered 57.9%. Inflation remained within target with the consumer price index increasing 0.1% in September on a seasonally adjusted basis. Over the last 12 months, the index increased 1.7% 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 had remained 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. 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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