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Investment Portfolio Monthly Report – July 2014

Economic Review

At its meeting on 5 August, the Reserve Bank of Australia decided to leave the cash rate unchanged at 2.50% for the twelfth consecutive month and again stated that based on present economic indications, the most prudent course is likely to be a period of stability in interest rates. The consumer price index rose 3.0% through the year to the June quarter. The latest ABS retail trade figures show that Australian retail turnover rose 0.6% in June, seasonally adjusted, following a fall of 0.3% in May. The seasonally adjusted estimate for dwelling approvals fell 5.0% in June. Australia’s seasonally adjusted unemployment rate increased by 0.3% to 6.4% in July. The Australian Dollar weakened by 1.0% against the US Dollar during July to close at 0.9324. The A$ has strengthened 6.4% against the US$ since the end of January.

In the United States, real gross domestic product increased at an annual rate of 4.0% in the second quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 2.1%. Total nonfarm payroll employment increased by 209,000 in July, and the unemployment rate was little changed at 6.2%. Inflation remained within target with the consumer price index increasing 0.3% in June on a seasonally adjusted basis. Over the last 12 months, CPI increased by 2.1% before seasonal adjustment. The US Federal Reserve decided to reduce its asset purchase program by a further $10 billion to $25 billion per month effective beginning August.

In China, the annual real growth rate for GDP was 7.4% for the first half of 2014 according to a preliminary release. In July, the manufacturing purchasing managers index was 51.7%, 0.7% higher over last month, and had increased for 5 consecutive months.

Strategy

In Australia, some indicators of consumer and business confidence have improved from a year ago and exports are rising. However, there has been some indication of a deterioration in the labour market and 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 at an accelerated rate and for unemployment to decrease further. We expect for the A$ to weaken against the US$ over the next 18 months. 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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