by Raymond Chan

What happened last month?

Australian Federal Budget was announced on 13 May. Our Chief Strategist Michael Knox summarized the budget as follows: “Joe Hockey has produced a horror budget where the horror is purely PG rated. Spending in future years is supported at recent levels. At no times does spending as a percentage of GDP fall to the level of the Gillard / Swan Budget of 2012 / 2013. Spending remains well above the prudent levels achieved at the end of the Howard government in 2007 / 2008. Growth increases. Unemployment stabilizes; then begins to fall. The budget even improves to almost balance. Best of all, the faint hearted can pretend that they have lived through true horror.”

What do we think?

Obviously, the government is looking to narrow the budget deficit by:

  1. Increasing revenue by raising taxes (such as Temporary Budget Repair Levy, the return to fuel excise indexation and the 1.5% increase in corporate tax for companies earning > A$5 million revenue p.a.)
  2. Cutting costs by cutting to welfare, the public services and introducing a co-payment for GP services and medicines covered by the pharmaceutical benefit scheme. 
  3. Limiting New Spending by scaling back on paid parental leaves

Among all the cutting, (1) The increase in Centrelink Pension age and (2) The co-payment of $7 both signal “the age of entitlement is over”. It’s particularly important as 50% of our Federal spending is in the areas of Welfare / Heathcare and certainly not sustainable with our aging population.

Also, there are a few spending initiatives in the budget which we found interesting. The cut in corporate tax will benefit small business while the spending on infrastructure will likely offset the impact of mining investment slowdown. Further, the much talked about paid parental leave scheme is significantly smaller than the Coalition proposed prior to the election.

The challenge now is how all political parties get their act together and pass the legislation.

Consumer Discretionary – Despite some fear mongering in the media, the FY15 Budget does not appear to be a significant burden on the consumer but the majority of cut will be from FY16 onward. We think the budget is relatively neutral for DJS, MYR, DSH, JBH, WOW and WES. Similarly, the gaming stocks, CWN and TAH, should be relatively unaffected.

Infrastructure - An additional A$15bn in infrastructure spending over 6 years is aimed at offsetting the impact of the mining investment downturn by hopefully stimulating A$125bn in infrastructure investment by FY20. If successful the infrastructure program should benefit LEI, LLC, BLD and possibly DOW. TCL should benefit from increased spending on Westconnex and the road network around the new Sydney airport and East-West link in Melbourne.

Investment Banks – The sale of Medibank Private is expected to raise $4 billion in FY14/15 and the government also plans to sell Royal Australian Mint, Australian Hearing, The ASIC corporate register and Defence Housing Australia etc which will certainly keep our investment banking colleagues busy.

Healthcare - Across our universe, PRY and SHL will be directly impacted, with our expectation for the reduced demand from these changes likely offset by revenue increases having a net neutral/positive for both companies.
Overall, we think the budget is quite market neutral as such after the initial relief rally we think the market may again experience volatility going into the end of financial year. 

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Raymond Chan is the Managing Partner and Authorised Representative of Morgans - 259387 Morgans Financial Limited (ABN 49 010 669 726 AFSL 235410) A Participant of ASX Group
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