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Investment Portfolio Monthly Report – June 2014

Economic Review

At its meeting on 1 July, the Reserve Bank of Australia decided to leave the cash rate unchanged at 2.50% for the eleventh consecutive month and stated that based on present economic indications, the most prudent course is likely to be a period of stability in interest rates. The seasonally adjusted estimate for dwelling approvals fell 1.7% in May and has fallen for five months. The seasonally adjusted estimate of total building work done rose 3.3% in the March quarter. The latest ABS retail trade figures show that Australian retail turnover fell 0.5% in May, seasonally adjusted, following a fall of 0.1% in April. Employment decreased by 4,800 to 11,564,600 in May and with the participation rate decreasing slightly to 64.6%, the unemployment rate remained unchanged at 5.8%. The Australian Dollar strengthened by 1.1% against the US Dollar during June to close at 0.9420. The A$ has strengthened 7.5% against the US$ since the end of January.

In the United States, information indicates that growth in economic activity has picked up, after having slowed sharply during the winter mainly due to adverse weather conditions. Real gross domestic product decreased at an annual rate of 2.9% in the first quarter of 2014 according to the “third” estimate released by the Bureau of Economic Analysis. Total nonfarm payroll employment rose by 217,000 in May, and the unemployment rate was unchanged at 6.3%. Inflation remained within target with the consumer price index increasing 0.4% in May 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 $35 billion per month effective beginning July.

Strategy

In Australia, some indicators of consumer and business confidence have improved from a year ago and exports are rising. There has also been some improvement in the labour market but it will probably be some time yet before unemployment declines 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 some time to come. 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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