InvestSMART Radio May 10th Transcript

InvestSMART Chief Market strategist Evan Lucas reviews the Federal Budget.

Narrator: And now InvestSMART with Steve Price. Sponsored by InvestSMART, helping Australians grow and protect their wealth.

Steve Price: Yes, indeed Thursday night week 3 of our new finance segment sponsored by our great sponsors InvestSMART, helping Australians growth and protect their wealth. We were joined two weeks ago by the chairman of the group, Paul Clitheroe. He’ll be with us next week, one of a team of experts in InvestSMART. This week we have, and we had him on last week, Evan Lucas, InvestSMART’s Chief Market strategist. Evan, good evening to you.

Evan Lucas: Good evening Steve.

Steve: This is like your grand final week, like your Wimbledon, like your FA cup all rolled into one. You’ve got financial statements from the government, now the opposition.

Evan: Yeah it is a big week for us, look I’m sure most of your listeners have heard so much about it but yes it is a big week for us and it is also one of those weeks from a market perspective you look at with great detail because we look at it from an economic side and how that’s going to impact markets and how it’s going to impact the economy. Trying to take the politics out of it, you never can because politics is always the fun bit, let’s be honest. On the other side, it’s been a very interesting two days and I promise listeners it’s going to be at least the next week to the way things are shaping up all the way through to June because the rate of what we’re hearing there’s going to be a lot of tussling about whether what was announced on Tuesday will even get through whether it’s broken up, how it looks and the next six to eight weeks is going to be very interesting.

Steve: Evan’s with us, happy to take your calls if you have any questions about the budget. We’d love to hear your comments on how it might impact you 131873. Particularly the tax scales and where you might put your money and invest it now. What it’s going to do to your cost of living, what it’s going to do to energy prices, electricity what it’s going to do to fuel prices. Where will we start let’s, perhaps we should start with income tax what about this idea the most radical part I guess of the government’s plan was the removal of the 37% tax rate that they’re going to phase out.

Evan: It is. The other thing that everyone was picking up on obviously is how far out it is. 2024. So flattening of the tax curve has not, it’s not a new sort of policy when you look back over history there’s been a lot of minor parties that have sort of suggested similar things along those lines. You’ve also seen over the years the Liberal Party saying it and talking about it over time. It does reduce the burden on the individual person. Now I understand the argument around lower vs upper you still see the, if you actually look at what it means over time, the upper end of the band will still pay more tax. The question is what it does from what I look at which is the stimulatory factor. Because you have more money in your pocket do you actually go out and spend it, do you go and invest it, do you do x, y, z with and arguments would say that you do.

Steve: Look given that there has been no wages growth and I guess people will spend it.

But correct the catch with what’s going on is that what we’re talking about is that it doesn’t actually fall into the budget projections. What I mean by that is that it’s 7 years ahead, two elections, as I heard you talking about with Andrew in your previous segment. That realistically it doesn’t fall into the GDP estimates the government gave us nor does it fall into the RBA’s GDP estimates because realistically it doesn’t hit anybody’s coffers until 2024. And even the one that’s happening in 2022 where they are moving the band from $90 000 after moving it up from $87 000 up to $120 000 up to that 37% tax bracket before scrapping it, it’s still a long long way away. At the moment it’s fiscally prudent and that needs to be put out there but nothing with what’s likely to happen within the next two years anyway barring what’s going to happen in the election and all the promises that are going to get thrown at us. That is won’t necessarily see any major impact economically. From what we see, the interesting thing will be investment. At the moment investment has been good, but I wouldn’t say it’s been fantastic.

Steve: You’re a crystal ball man so everything has got to go right though. There’s some blue sky predictions about employment, about productivity growth, about they’re being very optimistic about nothing going wrong in the global economies, are you as confident as the government that we can have seven years of blue sky?

Steve: Ah no, but that’s not to say that I don’t believe where we are right now is in a very good spot and should continue for the next two to three years. I mean for the first time basically in the post GFC era, global growth is growing at above trend. So the IMF, the world bank have global growth sitting at just on or over 4%. Australia including, in fact this is the interesting thing that happened the other night, everybody talks about the treasury being overly optimistic, the RBA is more optimistic. They think GDP in this country will be 3.25% but the end of the year whereas the government only has it at 3%. There is good signs I mean have a look at what happened in the first quarter of this year, our net exports were astounding. We had one of the largest exports of iron ore on record. We had three months in a row of net surpluses of a billion dollars or more, so everything is pretty good. The catch that is put out there in the cynicism is does China stop. When China stops, Australia stops considering that they make up 37% of our exports. Maybe but again there are other parts of our economy that are growing quite nicely, there are stimulatory effects that are still coming in. That actually comes from this budget fiscally, we know that over the longer term that they are trying to put in more infrastructure spending.

Steve: Darryl here from Manly has got a question for us about infrastructure for us.

Evan: Fire away.

Steve: Away you go mate.

Darryl: Hi Steve, hi Evan, how are you doing?

Evan: Good Darryl, how are you?

Darryl: Good mate, I just have a question having grown up in Queensland and now living in Sydney for 16 years. It’s pretty clear that the infrastructure around certain parts of the country aren’t keeping up with demand, with population growth etc. I just wondering what your thoughts are. I’ve heard some things; I haven’t dug into any detail myself so I’m asking you really. Obviously there some money set aside but do you think it’s enough, is it all smoke and mirrors, you think?

Steve: It’s a bit smoke and mirrors because a lot of that infrastructure money Darryl, and we’ll get Evan to talk about this isn’t in the budget

Evan: That’s correct and that’s probably what I would pick up first off. The smoke and mirrors comment. That’s an interesting one Darryl. That is probably what most people picked up. If you actually have a look how much new money is allocated in the budget itself. They will talk about the 24.5 billion dollars being allocated over the next ten years to go to their 75 billion. But only 7 billion actually hits the budget which is 0.1 of GDP. So it’s actually quite small in the interim. So it means that there will be time. Infrastructure, the advantage of infrastructure is that it’s a slow burn, it requires decent amount of money and quite a huge amount of money at that. It takes a long period of time, it creates quite a bit of employment although the argument from some sides is that it creates part time employment and subcontracting; that’s not a bad thing they’re normally good paying areas.

Steve: And some of these projects unless I’ve read it incorrectly are going to be equity funded are they not?

Evan: Correct yep and that’s the other side of this. If you look what happened two weeks ago down in Victoria with regards to the five billion dollars towards the rail linked Tullamarine that has needed the state government, it will also need private enterprise to get involved. So it’s also not fully costed from the point of view that you will need to actually put it out to tender. I can tell you right now that there are definite engineering firms and infrastructure firms in this country places like Downer EDI, places like Lendlease, Transurban will be jumping at this opportunity. They make good money out of it, they get a very good project, long term – the leasing on them tends to go for 100 years. So that’s the kind of stuff.

Steve: Is that reflected in their share price after those announcements?

Evan: To a point. If you look at them, the interesting thing about them is that they are growth and income. And what I mean by that is let’s look at something like Transurban which is a really good example because it is, getting back to Darryl’s question, around infrastructure. It is the biggest provider of toll roads in this country and will continue to be so. And this fact that you’ve got the government, particularly in Sydney at the M roads basically out the west.

Steve: How’s my spit bridge Darryl?

Darryl: Yeah yeah it’s all good.

Steve: How many times have you sat their misjudging the quarter hour bridge opening?

Darryl: Oh exactly, it can be a bloody nightmare if you miss it.

Steve: Darryl did what Evans explain to you make sense?

Darryl: Yeah yeah it does, thanks a lot.

Steve: Good on you. That is the problem though. Politically you can go out there and rave about infrastructure projects. People see that in parts of Sydney and Melbourne there are big projects underway and shovel ready, they’re being built. There’s disruption to the way they get around but when you announce all of these things if the money is not actually in the budget, you can’t say we’re going to build it

Evan: True not only that the money needs to come from debt and that’s where the majority of it is coming from over the longer term. Admittedly the advantage is that it’s going to be probably paid off by the project itself. Getting back to your point there Steve, and I agree with you, is that the advantage also from a political side with regards to infrastructure is that it’s tactile, you can see it, you can feel it, you can understand what it’s doing, you can see the benefit of it. Economically it’s also very positive. Darryl’s right, particularly on the eastern seaboard, let’s also include up to Queensland, particularly all the way to the sunshine coast – they all have the same problem, which is that urban congestion is a massive problem. It will require, let’s use the adage, aeroplanes, trains and automobiles that is clearly going to be at the core pitch to any part of the eastern seaboard over the next 12 years because that is where all of the drive needs to come from.

Steve: Good stuff.

 

Steve: Evan Lucas is in the studio with us. Give us a call on 131873, what did you pay for petrol this week? It has gone through the roof – the price of fuel. I’d love the audience to tell us if you’re in Queensland I know you’re getting hit in particular but also here in NSW and Victoria. 131873 what’s the most you’ve paid for a litre of fuel this week? I paid a $1.79 Evan for premium unleaded in Sydney yesterday.

Evan: Yes, that’s to be honest with you that’s unfortunately not unsurprising and again I’m being bearer of bad news for you. In fact, it’s likely that it’s hold true there’s been a double whammy going on in petrol price land and that’s partly because over pretty much the last three and a half months. I know it’s geopolitical and I’m sure your listeners are well and truly aware of what’s going on over in America and President Trump’s negotiation in Iran and what’s going on in North Korea you’ve also got a scenario with the OPEC freezes you’ve probably heard about over the last two years are finally taking effect. The US is actually drawing down on inventory so put that all together oil prices over the last two months have actually moved up US$10 a barrel. So from about $58 to $59 for WTI and about $62 to $63 for Brent to about $73 and $70 for each of those respectively. The other catch is that here in Australia, over that same period the AUD against the USD has fallen 6% so you’ve got a double hit there and the fact that it’s more expensive to buy oil with our currency and the underlying oil price has gone up as well so unfortunately normally around a dollar movement in the oil price sees roughly around 15c extra.

Steve: So given the the circumstances around Donald Trump and the US tearing up the deal with Iran, the uncertainty whether this Singapore summit with Donald Trump and Korea is actually going to achieve anything. Given that there’s uncertainty with China and Malaysia now with an election with Mahathir back in. All of those global pressures mean that price trickles up doesn’t it?

Evan: It does. The geopolitical risk is unfortunately always equals higher oil prices and that the catch is that what really hasn’t been talked about hugely is what’s happening last sort of 48 hours in the Middle East with the Israelis firing missiles into Syria. That is also why particularly in the last 48 hours, oil has really spiked up. There is issues around also those sanctions you’re alluding to back on Iran meaning that the actual oil coming out of Iran, Iran was the fourth largest provider in OPEC – makes up around 7/8% of global supply. If you saw the sanctions like we had before 2015 it would put a premium on Iran’s oil so 7% of the global oil supply gets more expensive. The catch is and what may actually be good for motorists is that over the last two to three years while we’ve been watching OPEC trying to control the price by pushing it higher by controlling supply, non OPEC, places like Canada, places like Brazil, the US, even places like Norway people forget about these are big suppliers of oil, they’ve actually mopped up and put into supply market to catch the price we may find we cap out because those nations start to supply the global market again with the fact that the oil price is more expensive and they are therefore getting a better price so it could hopefully over the long term push down but unfortunately over the short term bit of bad news for listeners, it will be more expensive.

Steve: Regular unleaded Sydney went up 5c to $1.48 and Melbourne was down 4c to $1.46 – so pretty close. Canberra was down 0.3 of a cent to $1.48 as well. So those cycles are different in each state. I don’t have the Queensland price there but why do we have different retail prices in different states?

Evan: That comes down to a few other bits and pieces that get incredibly complex and to be honest with you, you have to look at somebody like Caltex which is a very hard company to completely understand to be dead honest with you Steve and the reason for that is refining costs, then for also delivery costs, all of this sort of structure in and they’re all quite cyclical, it’s all sort of sort of seaborn ship, it’s very, very random and the other thing you’ve got to look at is the way the actual companies themselves have to price the whole thing. So unfortunately it’s not the sort of cause and effect I wish it was. There are a whole lot of other factors that go into it as well state by state.

Steve: We’ve got Evan Lucas from InvestSMART with us, their chief market strategist. Let’s talk tax. Bill shorten has trumped the government tonight and he’s doubled their tax cut for those people earning up to $90 000 a year. So they’re classified as low to middle income earners. How are those tax cuts? Let’s forget about the 7 year down the track tax cuts for higher income earners. Let’s just concentrate on and for a moment pretend that these tax cuts are going to come in because politically it looks like they’re not going to be able to get the whole package through and so the lower income tax cuts from the government are not going to be legislated. If they were Evan, and you had people on salaries between $37 000 and $80 000 paying less tax is that good for the economy?

Evan: Overall actually it is. You’ve got to look at it from the point of view that it alleviates pressure and therefore allows for either higher levels of investment and saving. Even simple savings are looking at stimulation, through to actually more spending. And that’s the one thing that you’re going to remember that $530, although you can break it down to being $10 a week, $530 is a whole heap of range of things, it can actually not only be your car rego, people have pointed out, or your insurance, or blah blah blah. It’s also a new product of some description which is what happened last time we saw that kind of money filtering in if you go back to the GFC when Kevin Rudd and Wayne Swan gave you that amount of money to go and do with as you see fit.

Steve: Buy a slab of beer, get a new TV.

Evan: Correct but that all helps is you look at it collectively but that still as a group a huge amount of money. It’s still $10 billion in terms of money of going into going back into the coffers to the individual. If you look at it from a double couple sort of scenario, $1000. It’s like tonight I can go to a café, tonight I can go and do x, y z that I wasn’t able to last week because I didn’t have that money. All of that helps it goes back into the small business owner. It therefore goes back into other areas as well. It is small but you do see the help and that’s part of the factor into what we saw in the GDP figures the other night.

Steve: I was talking to a small businessman today and he said it’s great that they’ve extended the small business ability to claim back as a tax deduction $20 000 spent on capital infrastructure in your business. But he said that I’ve done that, I did that when it came in two years ago and I did it again this year. I don’t need any more equipment but my small business is getting hammered by energy costs, my electricity bills have gone up over 5 years 100%, that’s what’s going to kill me. No government has seemed to have any thought to try and reduce the cost of energy for small to medium businesses.

Evan: Yeah, add the other issue and this gets back to the original issue is that stuff we were talking about Steve which is infrastructure. Infrastructure is the big key to also making energy more affordable. We have aging infrastructure in energy in terms of coal products or traditional sort of energy. We are spending a lot of money and it is a lot of money on renewables they are very expensive to actually get up. The best company I can tell you to go and look at is, have a look at something like Infigen Energy which is a wind farm provider listed on the ASX. The amount of money it requires to actually get a window farm is staggering. Let alone listen to AGL who tell you how much it costs per km to put it back into the gird. It’s still quite expensive. What I always come back to and again ideology can be one way or not. Companies I listen to on this is actually Shell and BP both of them, both of them believe that by 2050 the majority of the world will be using some form of renewables as their major power source. This is a gas and energy provider in oil and that’s what they believe. That’s an interesting scenario but that’s still a very long way away, like 32 years. There needs to be infrastructure now to make energy cheaper. And that is gas power. There is no doubt about it.

Steve: But the Infigens of this world will be going tonight thank you Bill Shorten because he said that he’s recommitted the Labor Party if they win government, and the polls say that they will, 50% renewables by 2030. Not a target, he intends to get there by 2030. That’s only 12 years away.

Evan: That is and not only that that is getting back to where I look at it. Therefore, means that money needs to be raised to get there. And that is the question of debt and how the debt will be used. It’s to sort of help private investment, that is public investment that needs to get them towards that because the other issue this country has, it’s a beautiful country it is a ginormous country, but we are also very small population. We are not the US which has 400 million people, we’re a country that has 25 million people. So 14 times less but we have an area the same size just a little bit smaller than the US. So getting that power to people efficiently is very very hard. Unlike the US where you can do it quite equality because there’s a ginormous city within a stone’s throw of each other all across the country – we don’t have that. And that also comes to telecommunications, it’s part of the reason why Telstra has always struggled to give regional people a fair go, because the ability to get infrastructure there is cost effectively and offer and effective rate is very very hard.

Steve: Evan Lucas from InvestSMART thank you very much for coming in, we’ll talk again soon.

Evan: You will, thanks Steve.

Steve: Evan Lucas from InvestSMART for more information on the budge just visit investsmart.com.au. Next week we’ll talk to Paul Clitheroe in the studio. 

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