PORTFOLIO POINT: The budget will have an immediate impact upon selected bank, mining and property stocks.
In broad terms, the 2012 federal budget should be stimulatory for Australian shares. As Adam Carr points out elsewhere in today’s special edition, there is little evidence the budget will be 'contractionary’ and, coupled with the recent sharp reduction in cash interest rates, there should be more encouragement for investors to seek an earnings premium from shares.
However, within the budget there was a range of measures – and a number of 'non-starters’ – that will have particular effects on stockmarket sectors:
– For bank stocks, the introduction of a stimulus for small business in the form of a widely-tipped 'loss carry back’ provision for 110,000 small businesses should help underpin a nascent recovery in business lending.
Banks also benefit from the reforms to bank interest withholding tax – a measure which local banks have campaigned on for many months. The government will return the withholding rate to a 2007 election commitment of 15%. The measure brings the tax of local and international banks into line. However, the cutting of superannuation contribution tax benefits from 30% to 15% for more than 100,000 top earners who take home more than $300,000 per annum will be bad news for wealth management divisions.
Similarly, the inflows to superannuation – which represent up to 60% of funds under management – will be immediately hit by the postponement of a clause which would have allowed those with less than $500,000 in superannuation to have higher contribution caps (it will remain at $25,000; it should have been $50,000).
Though all banks may regret the scrapping of a proposed plan to soften tax on 'interest income', investment banks may be excited to hear of Wayne Swan’s decision not to go ahead with a company tax rate cut as promised, but instead introduce the so-called 'loss carry back’ provisions, which compensate businesses that have been making losses. A trade in acquiring companies that are carrying losses could emerge in the near future.
– For mining stocks, the long-anticipated MRRT mining tax finally comes into effect this coming financial year. The measure is expected to take in about $13 billion. The measure will hit mid-tier mining companies, especially those that have mature assets in production.
Mining investors will be glad to hear there was no sign of an anticipated cut to the diesel fuel rebate, which would have hit a number of road-dependent companies such as Fortescue Metals, OZ Minerals and Atlas Iron.
– For commercial property investors, recent investor demand for the development of 'green buildings’ may be negatively hit. It has become clear that 'green buildings’ in the prime office sector can attract premiums, with tenants willing to pay higher rents for better buildings.
The sector had been looking forward to further government stimulus, however in the budget papers Treasury has hit the sector with a surprise removal of tax breaks.
“The tax breaks for green buildings will no longer proceed saving $400m over the period of the former estimates. As a consolation the government has said that the Clean Energy Finance Corporation will provide financing that will build up to $10 billion for renewable energy, energy efficiency and low emission technologies.”
Overall, the budget is not expected to make any significant difference to interest rates. However, in the context of relatively better conditions for buying shares, the sector impacts outlined above may become quite important in the months ahead.