AMP has issued its response to the Federal Budget handed down on Tuesday night.
Commenting from the infrastructure perspective, Michael Cummings, AMP Capital Head of Australian and New Zealand Infrastructure Equity Funds said:
“This year’s federal budget continues the government’s strategy of direct and indirect stimulation of infrastructure investment, first outlined in the 2014 Budget. The emphasis continues to be on economic infrastructure, mainly transport, but has shifted towards regional rather than urban development with the announcement of several new measures including a $0.5 billion commitment to new investments in road projects in Western Australia and a $5 billion concessional loan facility designed to increase private sector infrastructure development in Northern Australia.
“Asset privatisations remain one of the major pillars of the government’s infrastructure strategy, but continue to be challenging for state governments. The cancellation of the Queensland asset leasing program means there are far fewer Australian infrastructure investment opportunities for the private sector, leaving a hole in the government’s original forward estimates of overall Federal and State infrastructure funding which the budget does not address. In addition the leases of the NSW poles and wires businesses and the Port of Melbourne are yet to face potentially difficult passages through their respective State upper houses.
“Direct grants, under which the Federal Government makes available funding to support State infrastructure projects, have been more effective to date with three out of the four major identified major projects having made substantive progress, while the government has re-affirmed its commitment to support infrastructure development around Badgery’s Creek Airport. However, Victoria has elected to not proceed with the East West Link, which puts at risk the $1.5 billion Federal grant earmarked for that project, although the Federal Government has noted it may consider reallocating these funds to other projects of national significance in Victoria.
From a private investors perspective, the state governments repudiation of the East West Link project and uncertainty around upcoming privatisations has the potential to impact private capital appetite for investment in Australian infrastructure. The federal government’s commitment to increase consultation with the private sector in the development of improved partnering models is welcome. The challenge will be to rebuild momentum against a backdrop of cancelled privatisations and projects.”
Commenting from a fixed income perspective, Ilan Dekell, AMP Capital, Global Fixed Income Head of Macro:
“We will be watching data releases closely in the months ahead – particularly consumption, and employment data – to gauge if the traction we have witnessed in the non-mining sector of the economy due to interest rate cuts is sustained by the fiscal measures announced in the budget.
“If this is the case, we would expect market interest rates to push higher as the market prices expectations that the Reserve Bank of Australia (RBA) has delivered its last interest rate cut in this cycle. Whilst we still see this as a premature judgement, given the structural headwinds from the weak mining sector and a high Australian dollar, we do think that the hurdle to cut again in 2015 is high even with a dovish RBA.
“With regard to the Australian AAA sovereign rating, the risk of a negative outlook has increased. Nonetheless, we believe that as long as the change in general government debt as a percentage of Gross Domestic Product (GDP) is between 0-3.0%, net government debt can hold below 30% of GDP, holding off a sovereign credit downgrade.”
Michael Price, AMP Capital Co-Head of Australian Fundamental Equities, said:
“Investment markets are likely to treat the budget measures announced today without too much of a reaction. Initiatives to provide additional support for families would be seen favourably as they go towards directly assisting management of heightened cost of living items like housing, health and education, which are generally good for equity markets. Last week’s cut to official interest rates also provides a timely boost to mortgage serviceability, which has a secondary effect of assisting consumer-related sectors.
“Beyond shorter term considerations, this year’s budget highlights the challenges facing policy makers around taking politically palatable steps towards reducing the nation’s deficit while ensuring our aging demographic is adequately supported to meet future needs. Like other major economies around the world, longevity risk – the risk of us outliving our savings – presents a significant challenge for funding pensions and entitlements to essential services amid a shrinking tax base.
“Initiatives like the ‘Intergenerational Report’ are a step in the right direction as it stimulates debate and policy development for these longer-term issues. Many retirees that I speak to are addressing these challenges and we encourage them to consider options around growing and protecting their savings to reduce reliance on government support which appears to be on a path of gradual reduction.”
Michael Kingcott, AMP Capital Head of Property Investment Strategy, said:
“Our position has been that the large, dominant shopping centres will be best equipped to combat retail headwinds and the changes announced in this year’s budget add further conviction to this view. After a period of low interest rates, we believe that the residential housing market will soften, leading to more sustainable levels of growth. We welcome further commitments to major infrastructure spending as this will benefit all real estate sectors – residential, office, retail and industrial.
“The measures announced in this year’s budget should see consumer confidence strengthen, which raises the prospects for a pick-up in retail spending in the near future. Looking forward, we expect this trend will extend to other markets that were held back during the mining boom such as Melbourne and South-East Queensland. Resource states are now expected to underperform as their pricing adjusts to a lower growth outlook and vacancies rise particularly in the office sector.
“While we expect better momentum in Sydney and Melbourne, we expect Australian businesses to remain focused on cost containment and restructuring until strong economic growth returns. Our research suggests it is important to focus on population growth areas/cities, dominant assets and core locations and to deepen the ‘destination’ and experiential feel of assets to attract customers and staff. This will help offset flatter or declining accommodation demand over the long term.
“From a macro perspective, the weight of money into real estate is understandable. Global bond yields remain near all-time lows and are well below the levels of potential economic growth. Part of this is due to monetary policy, part is due to risk perceptions, and part of it is due to the sluggish nature of the global recovery so far.”
