While one needs to be more of a political strategist to appreciate the implications of the Federal Budget on the political cycle, there will be implication for markets.
We are projected to be back in the black with an underlying projected cash surplus of $1.5 billion for 2012/13 (0.1% of GDP), which is unchanged from the mid-year economic update. The 2011/12 deficit has worsened significantly to $44.4 billion (it was $37.1 billion previously), which the whole market has pretty much picked up on straight away. Thereafter, the balance improves, in the out years at modest levels.
Chart 1 illustrates the Budget as a percentage of gross domestic product (GDP). The projected return to a marginal surplus for 2012-13 is $1.5 billion or 0.1% of GDP. The current 2011-12 year will be worse at an estimated $44.4 billion, or 3% of GDP.
The 0.1% of GDP projected surplus leaves little room for changes in forecasts. While the direction towards a surplus is a notable improvement, this has been achieved via key savings from the cancelled corporate tax cuts, reduced defence spending, foreign aid spending and superannuation changes. These savings fund the large handouts to low and middle-income households, and key Labor objectives around national disability and aged care reforms.
The risks going forward will be lower growth and a weaker labour market that may challenge the Government’s forecasts and therefore the small 0.1% of GDP surplus target.
No catalyst for business to invest
The previously touted corporate tax rates not being passed on will fund some of the Government’s key spending initiatives. This combined with the higher superannuation levy in the years ahead and other various new tax initiatives (carbon and mining tax) has diminished business confidence.
What is important to note, however, is that conditions are not as bad as confidence, but that said, there does not appear to be a catalyst to get business (outside of mining and mining services) to invest.
Consumer stock are the winners
Of more significance will be a lower Reserve Bank of Australia (RBA) cash rate that will be beneficial to earnings going forward. Further, an even lower cash rate will have downward pressure on the Australian dollar. The higher currency has been a major detractor of business earnings outside of the mining sector.
The spending initiative aimed at low and middle-income households is a positive for the retail sector, which has gone through a fair degree of pain in recent years. Healthcare, a traditional defensive, in broad terms does not benefit from the recent budget.
Stock recommendations
A diversified approach within equities will remain the most prudent strategy with a focus on cyclicals (which remain cheap) and defensives. Regarding cyclicals, both BHP (BHP) and Woodside Petroleum (WPL) around the low $34 are great value and ideal accumulation ranges. Likewise with Rio Tinto (RIO) under $61. For mining services, there are plenty of options but Worley Parsons (WOR) under $26 is a strong accumulation price target range.
In the quality industrial space, Coca-Cola Amatil (CCL) has performed well as a defensive play in a portfolio and is approaching profit-taking levels for many fund managers. Likewise, CSL (CSL) has also performed well over the past six months as it is very much a global healthcare exposure.
With even lower rates expected, income themes will continue to dominate. For a dividend strategy portfolio I would continue to target Telco’s (Telstra (TLS)), utilities (AGL Energy (AGL), Origin Energy (ORG)), infrastructure (Transurban (TCL), Duet (DUE)), Gaming (Tatts (TTS), Tabcorp (TAH)), A-REITs ( (WRT), Westfield (WDC)) and some of the major banks.
George Boubouras, Head of Investment Strategy & Consulting, UBS Wealth Management.
Important information: 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. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.
Also in the Switzer Super Report:
- Peter Switzer: How big a threat is Europe to the market? [1]
- Rudi Filapek-Vandyck: The broker wrap: 13 stocks upgraded [2]
- Tony Negline: A strategy to bring forward super contributions [3]