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What does the budget mean for investors?

Dr. Shane Oliver - Head of Investment Strategy & Chief Economist

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Deficit is forecast to fall to $6bn in 2019-20 (0.3% of GDP) from $37.1bn (2.2% of GDP) in 2016-17

Lifting the 32.5% personal tax level threshold to $87K from $80K

Small business corporate tax rate will be reduced to 25% by 2026-27

40% tax rate will apply to global companies with a turnover of $1 billion+ from 2017-18

The 2016-17 Australian Budget – putting popularity ahead of austerity

This year’s budget faced two challenges. First to serve as the Government’s main economic statement with sufficient sweeteners ahead of a likely July 2 election. Second, to provide more confidence that the budget is on track to a surplus to keep ratings agencies on side after they have recently started to lose patience.

The Government has arguably achieved a bit of the former via modest individual and small business tax cuts funded in part by a wind back in superannuation concessions for higher income earners but it’s not clear we are any closer to a budget surplus. Superannuation reform is in fact a key aspect of this budget.

Key points:


Read the full Oliver's Insights article


What does the budget mean for your investments?

 
Property

Tim Nation
Head of Real Estate Capital
 

“The government’s decision to hold off on any changes to negative gearing supports continued residential development and a correction of the long-term undersupply. We will see continued appetite from domestic and offshore investors alike for income-producing commercial real estate.”
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Infrastructure

Michael Cummings
Head of AUS & NZ Infrastructure Equity Funds
 

"We welcome the continued focus on infrastructure investment to build even greater confidence in the Australian infrastructure sector for both local and international investors. We also support efforts to strengthen the links between the private and public sector."

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Fixed income

Ilan Dekell
Global Fixed Income Head of Macro
 

“Once again the government has pushed the return to a budget surplus out to beyond the forecast horizon of 2020. This ongoing delay of returning to surplus will continue to test the credit rating agencies’ assessment of Australia's sovereign risk.”

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Australian equities

Michael Price
Head of Australian Fundamental Equities
 

“Investment markets will focus on the RBA rate cut. The longer term prospect of a reduction in Australia’s credit rating and associated impact on the Australian dollar may have a larger impact on equities markets than direct budget measures.”

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The chase for high-quality property will continue

Tim Nation
Head of Real Estate Capital

We believe the impact of the federal budget on commercial real estate is fairly benign with no ‘show stoppers’ likely to materially impact real estate markets either negatively or positively. Continued focus on infrastructure investment across the country is great news and has positive implications for real estate both commercial and residential.  The government’s decision to hold off on any changes to the negative gearing regime supports continued residential development and a correction of the long-term undersupply.

Clearly we remain in a low-growth environment and this will remain the case for the medium term-based on the government forecasts. This is likely to see continued appetite from domestic and offshore investors alike for income-producing commercial real estate where yields remain at a historically wide spread to the risk-free rate.  While Australian commercial real estate is priced at historically high levels, it remains relatively cheap versus other asset classes and versus other global core property markets. 

With the weight of money continuing to chase high-quality real estate and further yield compression, the focus remains on identifying assets that will be in a position to capture net operating income growth through the cycle. For example, assets with long-weighted average unexpired lease terms, let to strong covenants and offering a fixed 3% or more plus annual rental uplifts will generate defensive returns and income stream irrespective of capital markets.

Currently, we favour Sydney and Melbourne office, high-quality retail assets and well-located industrial assets with the ability to drive net income as offering the best opportunity for investors to capture rental growth that’s above inflation moving forward.

Building confidence through infrastructure development

Michael Cummings
Head of AUS & NZ Infrastructure Equity Funds

We welcome the federal government’s continued focus on infrastructure investment as it will help to build even greater confidence in the Australian infrastructure sector for both local and international investors.

The national infrastructure plan attempts to address the major impediments to developing modern infrastructure and telegraphs more federal involvement. Transport reform in particular is key to stimulating economic growth by both reducing the cost of transport inefficiencies and creating more development opportunities, which is positive for investors.

We are also supportive of efforts to strengthen the links between the private sector and the federal government to create more innovative financing solutions. The private sector has an important role to play in financing the essential assets that support service delivery, enhance growth and productivity, and underpin the operation of Australia’s society, and it has a lot of insights and ideas to offer.

Pressure for yields to push higher

llan Dekell
Global Fixed Income Head of Macro

During the past two years, economic forecasts have been somewhat more conservative, which has led to less slippage with regard to the budget undershooting the government’s forecast. Nonetheless, the economic forecasts used to project the budget into the future continue to be high relative to Australia’s economic performance over the past few years.

Once again the government has pushed the return to a budget surplus out to beyond the forecast horizon of 2020. This ongoing delay of returning to surplus will continue to test the credit rating agencies’ assessment of Australia's sovereign risk. We continue to believe that as long as the change in general government debt as a percentage of GDP is between 0-3%, and net government debt can hold below 30% GDP, a sovereign credit downgrade can be held off.

In regards to impacts on activity and interest rates, we will be watching non-mining capital expenditure and household consumption in the months ahead for any signs of positive momentum following the budget announcement. With the RBA having cut rates, a positive interpretation may lead to improving growth and inflation expectations, and therefore see some pressure for yields to push higher.

 

Rate cut overshadows budget measures

Michael Price
Head of Australian Fundamental Equities

Investment markets are likely to overlook federal budget measures and focus on the Reserve Bank of Australia’s (RBA) rate cut. However, at the margin, the small decreases in personal income tax to combat bracket creep and cuts to small business tax will assist consumer-related sectors. Increases in tobacco excise will impact on gaming revenues and discretionary consumer spending. Increases in spending on state works and city infrastructure will go part way to alleviating the impact of a reduction in mining and energy capital expenditure.

If the government continues to increase the fiscal deficit, the longer term prospect of a reduction in Australia’s credit rating and associated impact on the Australian dollar is likely to have a larger impact on equities markets than direct budget measures.

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