How will the Federal Budget impact your investments?
Our experts analyse the implications of this week's budget announcement on infrastructure, property, fixed income, and equities.
Shift in approach to funding infrastructure projects
John Julian, Investment Director – Direct Infrastructure, AMP Capital
The national infrastructure plan attempts to address the major impediments to developing modern infrastructure and telegraphs more federal involvement. Support for Sydney’s second airport and the inland Melbourne to Brisbane rail freight corridor, amongst a range of other projects, marks a significant departure from previous federal policy on infrastructure development in that there is now a clear guideline for federal intervention. A targeted focus on projects rather than general grants to state governments signifies the need to develop those infrastructure projects that are in the public interest but are not yet financeable by the private sector.
This is an important development in addressing some of the issues affecting infrastructure planning and development over much of the last decade.
From an investor perspective, the adoption of such policies is good news because it provides a pathway to delivery of much-needed infrastructure, which will help drive Australian economic growth; and it may also provide a pipeline of assets available for future privatisation.
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. We are supportive of efforts to strengthen the links between the private sector and various levels of government to create more innovative financing solutions.
Tackling softness and a lack of investment
Michael Kingcott, Head of Property Investment Strategy, AMP Capital
Commercial real estate is performing strongly in the current environment of lower interest rates and we welcome initiatives in the budget to help stimulate economic activity and improve the cost of living for consumers and business.
As a major landlord, we can see firsthand how businesses and consumers are faring across a broad spectrum of industries and cities. Our view is that while there are pockets of strength, there are many areas of softness caused by shifting economic conditions and structural issues such as technology disruption. A lack of investment in infrastructure and housing over a long period has led to added costs and congestion.
The government’s move to bring forward infrastructure spending, start to address housing affordability, introduce taxation reform and alleviate business red tape is a positive step towards achieving a lower cost of living for Australian consumers and businesses. This should translate into stronger economic momentum over the long term.
While the public eye is very much focused on residential property – we’ve seen it dominate much of the limelight over the past few months – it’s the commercial real estate market that is likely to outperform in the next couple of years. As economic growth strengthens, the commercial space will benefit from higher income yields and increasing demand for accommodation and retail spending.
Is the Budget inconsequential for bonds?
Andrew Scott, Senior Portfolio Manager – Fixed income, AMP Capital
The direct implications of the changes in the Federal Budget for the Australian bond market are unlikely to be large. Australian bonds have performed reasonably well over the past year when compared to other developed markets such as the US. The budget itself is unlikely to change this dynamic.
With a targeted return to surplus not projected until 2020/21, the government continues to run the risk of a downgrade by the credit ratings agencies but with a fairly modest growth profile in government debt levels, the ratings are likely to be maintained. A further decline in the terms-of-trade or a slowdown in economic growth will bring this downgrade risk into sharper focus. The tilt towards additional infrastructure spending is welcome from a growth perspective, but fairly small in overall terms and will ultimately add to the overall debt burden via increased bond issuance.
The Reserve Bank of Australia has cut interest rates since the last budget, but has been on hold since August. Market expectations are for this to continue over the remainder of 2017; given the lack of inflation, this seems reasonable. With low wages growth and soft domestic demand, inflationary pressures will remain weak. In an environment of relatively modest budgetary changes and an ongoing strong credit rating, we expect to see Australian bonds continue to be well supported relative to other markets.
Budget may put downward pressure on the Australian dollar
Michael Price, Head of Australian Fundamental Equities, AMP Capital
The budget intends to deliver $75 billion in infrastructure funding and financing over the next ten years. The spending will include $8.4 billion on developing an in-land rail route between Melbourne and Brisbane. The input will have local content requirements (a Trump-like ‘Australian steel in Australian infrastructure’) that will benefit local builders, infrastructure and steel makers. The spending also introduces the concept of good debt, or debt that the government is happy to increase the budget deficit for as it is going into productive infrastructure and will pay returns to the economy in the longer run. At the macro level, an increasing deficit will put downward pressure on the Australian dollar. A lower Australian dollar will help address the Reserve Bank of Australia’s concerns about the current gap between credit growth (7%) and wage growth (2%). A 5% decrease in the Australian dollar equals a five-year correction to high credit and low wages growth differential.
The budget will also contain measures to help first home buyers, encourage retirees to downsize and penalise overseas investors who buy and leave houses empty. The first home buyer and retiree initiatives will push and pull housing supply in different directions and housing prices will move up or down depending on the effectiveness of each measure. The ‘ghost housing measure’ will put downward pressure on the high end of the housing market.
Cuts to private education, health and welfare will help offset the budgetary impact of higher infrastructure spend and also offset the short-run benefits of the electricity ‘bonus’ payment for pensioners. Net-net discretionary retailers will be most impacted balancing the impact of the electricity payment and cuts to health, education and welfare.