Federal Budget October 2022/23 - The start of a longer journey
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 25 October 2022, 10:30 PM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
Quick background for context
The March 2022 pre-election Budget prioritised spending over saving, following the script of expansionary fiscal policy enacted through COVID.
Initiatives including income tax relief, housing subsidies and infrastructure spending as well as levers to encourage consumption including cash handouts were seen to support Australian equities.
Upward pressure on inflation was the unintended consequence and the focus of tonight’s budget is to prioritise saving over spending to ensure that fiscal policy avoids adding to inflationary pressure. It also begins a longer process of budget repair.
October 2022-23 budget largely goes to script
Tonight’s budget was always shaping to be basic and has been described in parts to be ‘bland’. Most of the key features below were well flagged and we take the finer details as read;
- Reduced forecasts for Australian economic growth.
- Higher for longer forecast inflation (= higher for longer cash rates).
- $28.5 billion in identified savings over four years.
- Re-arrangement of Infrastructure spending policies toward Labor priorities.
- Lower forecast deficit near term (higher company tax, commodities) – Savings banked.
- Much higher forecast structural deficits medium term (interest costs, NDIS, Health).
- Further fiscal restraint coming “hard days to come and hard decisions to accompany them.”
Implications for the market overall
Not much in this budget wasn’t already well flagged/understood so we’re not expecting much change in market opinions. We don’t think the budget will bring about significant revisions to corporate earnings.
The market well knows that further fiscal restraint is required to respond to inflationary risks and the budget challenge, and the fact harder measures weren’t taken now may be seen as a small win. However focus will likely turn to potentially sharper policies/restraint ahead in 2023.
Attention turns to the May 2023 budget
We wouldn’t be surprised to see proposals to scrap the planned Stage 3 personal income tax cuts re-enter public debate.
This along with speculation about other measures/cuts and possible reforms introduced via the May 2023 budget has potential to impact market sentiment in advance.
No changes our overall Equity Strategy
We maintain a neutral view on Australian equities as ongoing volatility from higher interest rates and moderating economic growth will likely challenging above-average returns. We continue to favour stocks with defensive attributes, pricing power and lower exposure to the economic cycle.
We currently favour consumer staples, healthcare, and some financials along with select materials/ energy exposure.
As a by-product of uncertainty, we continue to see a steady stream of tactical opportunities emerging, for which investors need to remain alert to. See our updated Best Ideas for our most preferred equity exposures.
Sector comments & Economic insights:
Some cost-of-living relief (parental leave, cheaper childcare, medicines, affordable housing) but nothing not already flagged and these benefits will take time to arrive.
There’s more immediate pressure coming from higher interest costs, from higher power costs (+20% this year and +30% next year) and from food inflation (crop losses, flooding).
Senior Analyst & Co-head of Research Alexander Mees has previously noted that Consumer confidence/ expenditure will likely track lower in coming months due to pressure on household budgets. Sector valuations look more compelling on a medium-term basis, although he expects short-term volatility in pricing and sentiment. He has a Neutral sector view.
Higher power costs will also pressure broader business activity and earnings. Persistently higher costs are influenced by the war in Ukraine, ageing electricity infrastructure and investment uncertainty in renewable generation.
This is a global phenomenon, suggesting investors should maintain their investment hedges against these forces via Energy sector exposure. (STO, WDS).
The Government is introducing Incentives for the superannuation sector and other institutional investors to direct more money into residential and Social housing, addressing undersupply and affordability.
A positive initiative but one which will also take time to arrive.
As part of a broader spending review, the Budget seeks to cut spending on external contractors, consultants, advertising, travel and legal services to the tune of $3.6 billion.
This may have implications for listed services firms in the IT/Software, financial services and media sectors with high exposure to the public sector.
Planned infrastructure spending remains a key feature ($55bn budgeted) however the budget does re-arrange spending away from some controversial Coalition election promises and toward Labor priorities.
$14bn has been removed from various infrastructure (roads, dams, car parks) and community programs enacted under the previous government.
Political influence remains high in infrastructure (unfortunately) and whether some individual projects are actually an efficient use of public money remains up for ongoing debate.
Morgans Chief Economist Michael Knox has tonight provided an economic interpretation of the Budget and revised economic forecasts. Among his analysis is recognition that Australia is in the midst of a major commodities boom.
He notes Australia is an economy benefiting from a major rise in its terms of trade, which is precisely the reverse of the terms of trade slump suffered in Europe.
This puts Australia at a significant advantage in combating inflation/ growth challenges versus comparable developed economies elsewhere (US/UK/Europe). See key economic indicators below.
Budget Commodity assumptions
Further to Michael’s views, we think that the Commodity price assumptions used in the budget forward estimates are truly difficult to fathom.
Commodity prices are assumed to decline from current elevated levels by the end of the March quarter 2023. (Iron ore to $55/t, Met coal to $130/t (from $300), thermal coal to $60/t (from $400)).
We can understand why forecasts should be conservative but these levels are a fraction of our own conservative house forecasts. They leave room for large upside to the forward estimates (Company tax) as they effectively imply a scenario of collapsed industrial demand which we don’t see as a base case.
International GDP growth forecasts
Source: Budget Papers
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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.