Sharemarket riding Coalition's election high

Saturday's Federal Election result seemed to take everyone by surprise, so to discuss the implications of it all — especially the Coalition's recent budget, I first chat to Chris Richardson, Partner at Deloitte Access Economics.

The surprise result has also had a major impact on the sharemarket, especially the banks, so to dissect that, I chat to Brett Le Mesurier, Senior Banking and Insurance Analyst at Shaw and Partners.

Chris Richardson - Partner at Deloitte Access Economics

And now let's talk about the budget implications of what's just happened, with Chris Richardson of Deloitte Access Economics.  Chris, obviously now the April federal budget stands.  What's the net effect of that going to be now on the economy?

I think it will be large, and that most people haven't realised it.  Many Australians turned off politics a while ago, and one thing that the average Australian, I suspect, has not noted is that regardless of who won the election, their tax refund will be substantially better.  Received typically somewhere between July and September, many people getting an extra thousand bucks, in total over $8 billion dollars, getting poured into the public's pockets in a handful of months.  And best guess is that a chunk of that unexpected windfall for many people will actually end up being spent. 

I think part of the reason it's passed everyone by is that there's a sense that there's fiscal consolidation going on.  The budget is being taken from deficit to surplus fairly quickly.  So, I think that the view would be that...  not that there's lots of handouts and spending going on, but it's fiscal consolidation. 

Yeah, that's it.  Improving in the budget has happened relatively fast.  For that matter, it's broadly been on the improve for three years now.  Not because the politicians have been taking money out of our pockets.  We've had the weird thing if you like, the China slowdown means stimulus there.  Most of that went through the construction sector, great for steel demand and hence Australian coal and iron ore.  Those prices continue to look great. 

And the turnaround in the budget has been essentially off the back of the company tax take, that explains almost all of the turnaround and it also helps explain a little of the recent election, if you like.  The government didn't really expect the extent of that budget turnaround.  Labor didn't really expect it.  Labor announced its nasties a while ago, because it thought it needed those dollars to then do other things with it.  In effect, the economy, or the Chinese economy then handed our politicians on either side the potential to do stuff.  The government moved later if you like, and its story was won around goodies of tax cuts. 

Labor's story was a more complicated one.  And yes, you're right, most people have missed the basic story that there's big bucks, the equivalent of more than two interest rate cuts, and indeed in terms of their economic impact, probably likely to be bigger than had we got those two interest rate cuts.

Do you think that therefore the fiscal boost or the tax cuts this year that you're talking about, will mean that the RBA won't have to cut interest rates, or in fact, will decide not to?

I think there's a fair chance, but the Reserve Bank won't cut.  I don't think they have to cut.  Question is, the extent to which they're building in things like that, fiscal stimulus as well, And the fastest moving thing in the economic environment remains China.  Much of the economic news out of China through 2019, we're starting to bounce to the good side, the stimulus which kept coming, and it's still coming, seem to be having quite an impact.  Now, the last round of data out from China was less flash.  It does suggest that some of those trade war negatives are starting to get the upper hand again.  When you're looking where interest rates go, where the federal budget goes, or indeed more broadly, where the Australian economy goes, keeping a pretty weather eye on what's happening in China remains the smartest bit.

Do you think the tax cuts that the Coalition is proposing for outer years, will be able to be brought forward?

Best guess is no, although there are still budget positives coming from things like coal and iron ore prices, and hence the company tax take.  There are some negatives out there as well.  Housing continues to be a problem for the wider Australian economy.  Things like the extent of the slowdown evident through the second half of 2018, and continuing at the moment.  Not big, but big enough to be a drag on other bits of the budget.  That combination suggests that the government is unlikely to get the extra wiggle room to bring it forward.  Having said that, and even with just one election now only days under our belt, don't forget there'll be another one out there and tax is likely to figure prominently at that one, too.

You mean next year's budget?

I mean the next election.  What the government did, was to scrape together every dollar of the treasury expects they'll have, and I know there's questions over that, but they scraped every dollar and threw it into tax cuts.  Up front, they're delivering those for people who earn under $120,000.  Down the track, the dollars get bigger of course, because people on higher incomes pay much more tax.  The proposed medium-term tax cuts have had perhaps worse press than they deserve.  Treasury figuring released at the time of the budget noted that if anything, the proportional personal tax paid by the top 20% of taxpayers would edge up a little, but essentially, remain pretty close to 60%, or in other words, it's not really changing the share of personal tax paid by higher income earners, but that's not the way that it's played and down the track, the politics of those second and third rounds of tax cuts will remain tricky.

It sounds like you, on the whole, feeling pretty positive about the Australian economy in the near future.

Yeah, look, compared to the consensus, we are more positive.  Yes, there's a slowdown at the moment, but that's a slowdown relative to pretty good years, 2017 and 2018 on the whole, pretty good.  Yes, a slowdown a moment, but we know there's a substantial helicopter drop of money coming from Canberra, and it will come as a surprise to a bunch of pundits, a sufficiently happy surprise and we think a chunk of it will be spent.  And if you think of our biggest negative, housing negatives, it's not that the policies of either, you know, had Labor won, I don't think it would have made a big difference to the outlook for the Australian economy.  But one difference would have been the degree of uncertainty in housing, and that's now less of an issue, and other things equal, that's probably a small additional positive.

Well, in fact the bank share prices are up at 7% today, and that is to be made...

Yeah, and we're seeing markets react to that in a variety of ways.  It's not unusual for business confidence to take a hit ahead of elections.  I mean, to recover after elections regardless of who wins, we now have a winner, maybe not a decisive winner, and that's a risk for down the track, but decisive enough that markets are looking a little more comfortable, and maybe businesses would be a little more willing to take some decisions around capex than they'd otherwise would be.

Great to talk to you, Chris, thank you.

Cheers, thanks Alan.

Brett Le Mesurier - Senior Banking and Insurance Analyst at Shaw and Partners

And what a big day it’s been for the banks.  Here’s Brett Le Mesurier who is the Senior Banking and Insurance analyst at Shaw & Partners.  Brett, the banks obviously are all up, 5, 6, 7 per cent on the case of Westpac today, NAB 7 per cent roughly.  Do you think that these prices are now justified and sustainable?

Yes, I think the share prices fairly reflect the growth opportunities for the banks which are of the order of 3-4 per cent in the medium term.  Previously there’d been a much more pessimistic view of the outlook for the banks.  Of course, one of the issues that was hanging over them was the removal of negative gearing and what that would do for loan growth, and therefore, profit growth for the banks.

Do you think that the bounce in today’s share prices on the banks is due to the continuation of cash refunds of dividend franking or negative gearing or just a bit of both?

I think it’s a combination of the two but I suspect the negative gearing issue is more dominant than the franking credit one and I say that is because the banks are the ones that have seriously received the bounce, rather than any other industries which also have franking credits attached.

Yes, that’s right.  There’s a number of yield stocks that would be beneficiaries of the dividend franking cash refunds but as you say, the banks have had a huge rise.  That suggests that it’s to do with the prospects for the property market?

Yes, that’s right.  Obviously, home loans are the most significant asset class that banks have and negative gearing is highly likely to have had an adverse impact on home loan prices.  An adverse impact on home loan prices is bad for loan growth and what’s bad for loan growth is bad for profit growth for the banks.

Which of the four major banks do you prefer now?

Westpac is looking the best positioned at the moment.  Commonwealth Bank is also and extremely good bank, but the expectations for Commonwealth are a little bit higher than what it seems to be capable of delivering at the moment in the post Royal Commission environment.  We just saw over the last few weeks the higher customer remediation charges the Commonwealth Bank is facing and also the decline in its fee income which makes it a little bit more problematic.  Westpac has also come out earlier and perhaps harder with its customer remediation provisions.  We’ll see what happens with its fee income, but it may not be as adversely affected as Commonwealth Bank.

Tell us what you like about Westpac?

Westpac’s advantages are the fact that it’s provisioned very heavily for customer remediation so there should not be significant further costs in relation to that.  Also it’s one of the two largest home loan providers in Australia, so if we are seeing the bottom of the housing market then they should benefit most significantly from the turnaround in that market.  Plus the control that they’re exhibiting on expenses is reasonable in the current environment as well.  You can also add a fairly decent asset quality position for them although there are some mounting problems for them and also all major banks in the increasing past due home loans.

Westpac is paying a dividend of 94 cents every six months and it has done for quite a while now and it’s yielding just under 7 per cent, so that’s pretty good.  Is there any reason to think that the dividend is likely to rise?

No I don’t think there’s any reason to think that the dividend is likely to rise over the next year or so, but beyond that you’d like to think that when growth picks up, profits will pick up and therefore the dividends will follow.  But in the short term don’t expect increases in Westpac dividends.

NAB, of course, has cut its dividend, is anyone else likely to cut their dividend?

Well Commonwealth Bank, what it does with its dividend at the full year result will be interesting given that the provisions are so significant in this half.  It may well be that the dividend that they provide for the final dividend may be a little lower than last year, but chances are it will be quite close.

It’s interesting Brett, you seem to be talking up the banks and particularly Westpac as growth stocks, rather than income stocks, which is not quite how people generally see them.

Well, no, it’s a function of when the question’s being asked.  If you’d asked me on Friday I would have had a more pessimistic view.  But the removal of the spectre of adverse consequences from the imposition of Labor Party policy on negative gearing changes the outlook somewhat.  I wouldn’t say it’s an overly rosy outlook, but it is improved from what we were looking at at the end of last week.

Thanks very much for talking to us, Brett.

You’re very welcome, Alan.