From Credit Suisse on the allocation implications of the Budget, for bonds:
The FY16-17 budget does not deliver much stimulus immediately. The underlying deficit is expected to shrink by 0.2% to 2.2% of GDP over the next year. Interestingly, the forecast budget balance has not been boosted by additional taxes on multinationals or superannuants, nor iron ore price assumptions at US$55 (although some of this is offset by a stronger AUD). Tax cuts for households and small businesses are modest (equivalent to less than 0.1% of GDP in FY17), and are largely offset by a number of saving initiatives. In a world pondering the ineffectiveness of monetary policy, we thought that Australian fiscal policy makers would take a more pro-active approach.
However, the government has chosen to run a fairly neutral budget. In our view, this has and will put further pressure on the RBA to deliver the necessary easing. We expect to see more rate cuts, supporting bonds. Bonds will also benefit from the absence of large fiscal stimulus. The impact on the currency is neutral. The slighter tighter fiscal position should be slightly more positive for the currency, but lower RBA rates should be negative (all else equal, of course).
For equities:
…As we highlight below, the budget provides marginal positives for Aussie equity investors but we think these will be more than offset by more significant negative changes mostly to changes to superannuation. We find four changes to the pension system will be to the detriment of fund flows into the Aussie equity market. They are slated to start in July 2017 and include (1) life-time non-concessional cap contributions limited to $500,000 from $180,000 p.a., (2) limiting the annual concessional cap to $25,000 p.a. from $30,000 or $35,000 for over 50s, (3) higher tax rate for super contributions for those earning more than $250,000 p.a. and (4) limiting the balance brought into pension phase to $1.6mn. While some of these changes will be offset by other measures supporting super contributions for low income earners and women, we think the result will be less netinflows into the Aussie equity market.
It is clear the superannuation changes will weigh on Selfies’ ability to contribute large sums to their individual pension pools. Selfies are currently the largest marginal buyer of the Aussie equity market. And these flows were set to become even larger as more move into the Pension Phase. Selfies’ equity allocation in the Pension Phase is currently materially higher than in the Accumulation Phase (Figure 3). However, we suspect the changes to superannuation will mean less money in equities and relatively more in property, where tax advantages still remain.
And for property:
The building material companies are also set to gain as there could be renewed demand for property as a tax effective asset for retirement, especially given that superannuation is expected to be less attractive. In addition, we believe growing demand for property could support the developers and the property websites that benefit from greater property turnover.
…The budget allows ASIC to spend $127mn enhancing its capabilities to combat banking misconduct. The government expects to recover the costs through a new industry funding model which will mostly be contributed by the banks. Although the funding costs alone will not have any sizeable impact on banks’ earnings, we expect the increased scrutiny on banks could increase regulatory compliance costs. Of course, the limiting of Selfies’ flows into equities will be to the detriment of the Banks. Our discussions suggest Selfies were considerable buyers of the big four.
One has to remember that these outlooks are versus baseline not reality which means we must add the economy and business cycle to the analysis as well. When we do that I find the following:
- bonds look good perhaps down to a 1% cash rate. But that’s a guess. At some point the AAA rating is going to be stripped and it looks now to be likely to be this year. The tipping point for an exit will come when the RBA fears cutting further owing to capital outflow. Those counting on Australian QE are deluded in my view (unless the world really does go mad). No small open economy has done QE yet, let alone one running a big current account deficit;
- equities are already on the nose for me. MB awaits a better entry point for everything as the end-of-cycle shock draws near;
- I’m unconvinced on a property resurgence. Why rush in with negative gearing reform overhanging the market, with the Chinese bid clearly in retreat globally, with Sydney internal dynamics pushed towards a 2003 repeat bust, with Melbourne seriously oversupplied, with the entire cycle obviously long in the tooth? I expect a firming up for a while then a fade.
Basically the Budget looks good for bonds a little longer and that’s about it.
