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Investment Portfolio Monthly Report – September 2014

Economic Review

At its meeting on 2 September, the Reserve Bank of Australia decided to leave the cash rate unchanged at 2.5% for the thirteenth 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. Real gross domestic product grew 0.5% in the June quarter and 3.1% in the 12 months ended June. The unemployment rate decreased by 0.3% in August to 6.1%, and the consumer price index rose 0.5% in the June quarter and 3.0% through the year. The latest ABS retail trade figures show that Australian retail turnover rose 0.1% in August, seasonally adjusted, following a rise of 0.4% in July. The terms of trade decreased 4.1% in the June quarter and by 7.9% in the 12 months ended June. The Australian Dollar weakened by 6.4% against the US Dollar during September to close at 0.8752.

In the United States, real gross domestic product increased at an annual rate of 4.6% in the second quarter of 2014, according to the “third” estimate released by the Bureau of Economic Analysis. The consumer price index decreased 0.2% in August on a seasonally adjusted basis. Over the last 12 months, the index increased by 1.7% before seasonal adjustment. The unemployment rate was little changed at 6.1% at the end of August.

In China, total investment in real estate development in the first eight months of 2014 increased by 13.2% year-on-year. The growth rate for the same period in 2013 was 19.3%. Comparing August with July, among 70 medium and large-sized cities, the sales prices of newly constructed commercial residential buildings declined in 68 cities, that of 1 city remained the same, and that of 1 city increased. For the price changes month-on-month, the highest increase was up by 0.2%, the lowest was down by 2.1%.

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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