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Investment Portfolio Monthly Report – February 2014

Economic Review

At its meeting on 4 March, the Reserve Bank of Australia decided to leave the Cash Rate unchanged at 2.50% for the seventh consecutive month and expressed the view 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 increased 0.8% for the December quarter and surprised on the upside.  Demand for labour has remained weak with the Unemployment Rate increasing by 0.1% to 6.0% at the end of January. The Australian Dollar strengthened by 2.1% against the US Dollar during February to close at 0.8947. As the RBA noted at its March meeting, the exchange rate remains high by historical standards.

In the United States, Real GDP increased at an annual rate of 2.4% in the fourth quarter of 2013 according to the “second” estimate released by the Bureau of Economic Analysis.   In the third quarter, Real GDP increased 4.1%. Total nonfarm payroll employment rose by 113,000 in January, and the Unemployment Rate decreased by 0.1% to 6.6%. Inflation remained subdued with the Consumer Price Index increasing 0.1% in January on a seasonally adjusted basis. Over the last 12 months, CPI increased by 1.6%.

Real GDP rose by 0.4% in the European Union during the fourth quarter of 2013. There was strong growth in Germany, Europe’s largest economy and Spain had its best quarter in seven years, while Italy is growing at a near three-year high. Greece and France remain laggards. The Markit purchasing manager’s index (PMI) shows business confidence at its highest level since 2011.

In February, China’s PMI was 50.2%, down by 0.3% month-on-month with the “Spring Festival” having a negative impact. The non-manufacturing PMI was 55.0% for February, an increase of 1.6% over the previous month after decreasing in each of the three months prior.

Strategy

Mining investment is set to decline significantly over the next 18 months and we expect economic growth in Australia to remain below trend for some time to come and for unemployment to increase. 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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