OUTLOOK FOR MARKETS AS AT DEC 31ST 2014  - AUSTRALIAN HEADWINDS

2015 looks to be a very challenging year for Australian investors with significant increases in volatility and a lack of clear directionality (this should increase risk premiums). Domestically the economy continues to rebalance away from a mining capex and commodity boom and faces rising unemployment pressures. RBA Governor Stevens continues to remind markets that the AUD needs to fall significantly to ease and cushion this effect. Whilst the AUD has cheapened significantly vs USD over 2014 declining 8.3%, it is important to note that on a trade weighted basis the currency has only cheapened~ 3.5%.

JCB retains our long held view that the RBA will cut interest rates by a total of 50bp in H2 2015 as unemployment continues to rise and bad and doubtful debt provisions increase and drag on bank balance sheets. The banking sector will be exposed to continued routs in commodity and energy complex putting pressure on the refinancing of loans and ultimately business failures. This spells troubled times ahead for the Australian story and increases the risk of Australia’s first recession in a generation.

In 2015 JCB believes Australian equities will trade sideways at best, with the strong possibility of a negative year for the ASX 200. JCB views equity market commentators suggesting that particular stocks have bond like qualities as absurd. Telstra may be a great stock but it will be subject to macro events on equity markets just like other stocks would. Bonds are Bonds. They share no similarities to stocks whatsoever. Telstra should not rally if the ASX is off 10%. Australian Government Bonds should.

Further afield the economic story is vastly different. The US economy and USD has decoupled from many markets and remains the shining light within the global economy and as such JCBAF expect the US Federal Reserve to commence policy normalization in late 2015. Conversely Europe and Japan continue to face adverse headwinds from a lack of structural reform, ageing populations and a lingering debt burden from the GFC. We expect both Europe and Japan to provide global liquidity with Quantitative Easing programs replacing the void created by the end of US Federal Reserve QE3.

Finally some of the known unknowns that we will monitor closely over the year include. A credit crisis triggered by large scale defaults arising from the oil price collapse pressuring refinancing of energy sector debt, a surging USD causing large scale capital flight from emerging markets, Greece leaving the Euro, further economic turmoil in Russia emerging from sanctions coupled with lower oil revenue, and terrorism effecting global confidence.

Domestically we feel that the upcoming Federal Budget will soften further with the Government stuck in an increasingly difficult situation especially as the economy sours.

JCB forecasts the 10yr Australian Government Bond rate could trade as low as 1.80% over the course of the year depending on the sequencing of the above mentioned events.

Jamieson Coote Bonds Pty Ltd ABN 12 165 890 28 AFSL 459018 is the issuer of units in the Jamieson Coote Bonds Active Fund. The fund is only available to wholesale clients or sophisticated investors as defined by ASIC. Investors should consider the Information Memorandum (IM) in deciding whether to acquire or continue to hold units in the fund. The IM is available at www.JamiesonCooteBonds.com.au or by calling (03) 9653 9255. The above report is not personal advice and does not take into account individual investment objectives. Future performance is unknown and should not be based on past performance. This report contains forward looking statements, opinions and estimates which are subject to various risks and uncertainties. Forward looking statements constitute best judgment at the time of writing and are subject to immediate change in the fluid and unknown future. Actual events are likely to be materially different, positive or negative, from those reflected in forward-looking statements.

Investments in the fund are not deposits with or liabilities of Jamieson Coote Bonds Pty Ltd and are subject to investment risk. A list of possible risks are available in the funds IM and should be fully considered prior to investment.

FUND HIGHLIGHTS & POSITIONING

JAMIESON COOTE BONDS HOSTED AN OPENING LUNCHEON ON FRIDAY 28TH NOVEMBER WITH THE HON JOSH FRYDENBERG MP (ASSISTANT TREASURER OF COMMONWEALTH OF AUSTRALIA) AS GUEST SPEAKER OFFICIALLY LAUNCHING THE JAMIESON COOTE BONDS ACTIVE FUND (JCBAF).

JCBAF embarked throughout early December on conservatively testing the funds systems and checking processes, custodian arrangements, reconciliations, automated risk and report generation etc to make sure all was in order, operating according to plan and contract. We likened this period to a pre-flight safety check. In doing this testing we completed 5 small Government Bond trades and generated positive returns of 0.76% (net of fee’s) on funds under management in line with our high single digit returns investment objectives. The fund will commence a full month of investment starting Jan 1st 2015, from which time we will commence calculations of fund returns vs benchmark.