This time last year we were dealing with a Federal Budget “emergency” that arguably, due to political over-spinning, led to a genuine confidence loss in households and corporates. However, the good news is the Federal Government appears to have learnt from that tactical mistake and this year’s Budget has been positive for the domestic equity market, led by consumer facing equities and high fully franked yield exposures.

Australian Budget – non-negative

According to the media, the Budget was an exercise in re-shuffling savings and expenditures programs for little result. I also read that the Budget was more about saving the Coalition than saving the Nation. While the first comment has some merit, the second is naive in the extreme. I can’t ever remember a government introducing policies to intentionally lose an election. Clearly, the Government adopted a populist approach by postponing any major policy reforms and cost cutting measures in an effort to regain support. In short, the Budget was framed to appease an obstructive Senate and to pass the fairness test with the voters. The reality was the Government had no choice.

The final judgement on the success or rejection of the Budget is invariably the reaction of financial markets. In recent conversations with investors, the overwhelming response has been: “It appears the share market liked the Budget.” That’s true. The equity market did respond positively, led by consumer stocks and high fully franked yield exposures. I believe the main reason for the investor vote of confidence was the policy omissions rather than any major new policies. Rather than adopting an aggressive reform agenda, this was always going to be a “steady, as she goes” Coalition budget with a primary focus aimed at restoring both consumer and business confidence.

As such, the lack of any changes to negative gearing and any reference to the possibility of diluting the tax effectiveness of dividend imputation was a welcome relief for investors. Similarly, the omission of any proposal to impose any tax changes on superannuation balances or an intention to raise the GST rate was also received well by the electorate. This was important as the consumer confidence figures prior to the budget revealed genuine uncertainty in the economic and political outlook. The Budget’s success was not what the Government said, but what it didn’t say. I think the omission of any negative policy is a genuine positive for both Australian property and equity investors.

The importance of support

While the Budget didn’t provide any major reform initiatives, the economic importance of providing support for both consumer and business confidence should not be underestimated. It’s clear that European austerity measures proved to be ill conceived and even more poorly-timed. At a time when the Eurozone was staring down a genuine deflationary threat, the harsh cost-cutting strategies aimed at reducing high sovereign government indebtedness proved a disaster. The EU chose sovereign debt reduction over economic growth, which only exacerbated and, ultimately, prolonged the EU recession.

The other positive is that an accommodative budget has taken the pressure off the RBA as the sole driver of economic growth within the domestic economy. At a recent NY conference, the RBA governor commented that monetary policy alone was unable to stimulate global economic growth. This is even more important domestically, considering the Budget papers contained yet another downgrade to economic growth forecasts following the RBA’s similar move last week.

It’s important to note that the Budget was complementary to RBA policy. In no way has the Budget weakened the RBA’s easing bias. On the contrary, the RBA’s downgrade to economic growth last week, a confirmation that inflation will remain within the target over the next two years and the recent Aussie dollar strength, has provided the RBA with the perfect opportunity to cut the cash rate again later this year. In my view, the “search for yield” is far from finished.

Although the ASX/S&P 200 has fallen below the low end of my forecast trading range 5700 – 6200, I think with the cash rate at record lows, bond yields coming back down, and a non-negative budget out of the way, along with the big jump in consumer confidence yesterday, the stage is set for a return to outperformance from anything Australian with a reliable fully franked dividend yield. The fact that franking credits weren’t touched in the Budget is another positive for this theme, particularly with our benchmark ASX200 index being 56% financials.

Time to buy oversold blue chips

It may well seem boring, but I think the major and regional banks are oversold and offer solid contrarian prospective total return value:

• Commonwealth Bank (CBA)
• ANZ (ANZ)
• NAB (NAB)
• Westpac (WBC)
• Bank of Queensland (BOQ)
• Bendigo and Adelaide Bank (BEN)
• Suncorp (SUN)

Fund managers now have clear air after no changes to superannuation taxation:

• AMP (AMP)
• Magellan (MFG)
• Platinum (PTM)
• IOOF Holdings (IFL)
• BT Investment Management (BTT)

While on the consumer facing side, I continue to like:

• Wesfarmers (WES)
• Sydney Airport (SYD)
• Transurban (TCL)
• Westfield (WFD)
• Crown Resorts (CWN)
• Telstra (TLS)

This pullback in Australian industrial equities is an opportunity to selectively deploy cash. I also think the short-covering/quasi index fund covering in resource stocks is coming to an end and trading profits should be taken.

Hunker down for a long period of low cash rates in Australia. They could even go lower (1.50%) if US data continues to disappoint and the Aussie dollar remains 10 to 15 cents above fair value.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.