In this edition:

  • In balance, we are in an investment friendly environment.
  • A health check on the residential housing sector.
  • Microsoft well-placed to reward investors.
  • The National Commission of Audit – what is it and what does it mean to Australians?

National Commission of Audit - what it means

The independent National Commission of Audit (the Commission) was established by the Australian Government shortly after it was elected to office in September 2013. The purpose of the Commission is to “review and report on the performance, functions and roles of the Commonwealth government”. What does the review mean for Australians?
The bottom line is that Australia’s fiscal finances should be in much better shape than they are given the boom over the last decade. In addition, the budget outlook is unsustainable and the problem is structural, reflecting excessive long term growth in spending particularly beyond 2017-2018 as the impact of the aging population drives up spending in areas like health, pensions and aged care.

Even if revenue rises to 25% of Gross Domestic Product (GDP) by 2024, which is 1 percentage point above its long-term average, the budget will still be in deficit because spending is projected to have increased to 26.6% of GDP, which will be its highest ever, and still rising. Relying on stronger economic growth simply won’t solve the problem.

To address this projected blow out in spending and ensure a return to surplus by 2020, the Commission recommends a combination of measures including:

  • Tougher means testing for the pension including the value of the family home above $500,000 for a single, slowing the indexation of the pension and increasing the retirement age from 2033;
  • Co-payments for Medicare services;
  • Abolishing Family Tax Benefit Part B;
  • Limiting industry assistance;
  • Reducing the number of government bodies; and
  • More privatisation.

Some of these are likely to be acted upon in the upcoming Budget. However, the focus has to be on measures to rein in spending growth over the longer term – right now the key is to put policies in place to bring long-term spending growth under control so a return to surplus is assured, without damaging the economy in the near term thereby making the deficit reduction task even more onerous. If Australia’s budget and public debt problems were on the same scale as those seen in recent years in the US and parts of Europe (where budget deficits hit 10% of GDP and public debt pushed up to around 100% of GDP) then an argument could be made for more drastic immediate action, but that is far from the case.

Either way, on the 13th of May all eyes will be on how the Coalition picks its way through the puzzle.

An attractive investment backdrop

The widely-held consensus for 2014 is that share markets will rise with returns likely to be more muted in magnitude that last year. While conditions remain favourable for share markets we expect to see an increase in market volatility as any news that does not support the consensus view of markets could trigger a sharp price response.

Nevertheless, in balance, we are in an investment friendly environment. There are several points that, on balance, add up to an attractive investment backdrop:



Monetary policy

Fiscal policy

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Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.