Bourse revival expected
The Australian
May 11, 2005
IF the budget assumptions are correct, the recent Australian share market fall is just a correction and it will regain forward momentum.
All those in the wealth management industry are in the front line to benefit because superannuation will be made more attractive, but conventional banking growth will be subdued because of continued tough conditions in the housing market during the next year.
And retailers may not see all the tax cuts go through their cash registers because Treasury believes there could be further falls in home prices that will hold back consumption expenditure as Australians reduce their debts levels.
In a thinly veiled warning to the Reserve Bank, Treasury says that a prolonged period of falling or flat house prices may rein in consumption expenditure more than expected.
In other words: "Ian Macfarlane don't put up interest rates."
But underpinning the share market, Treasury is forecasting an 18 per cent rise in corporate tax revenue led by the resources companies. To be on the safe side, it has assumed a big fall in commodity prices in 2006 and 2007 but emphasises this is not a prediction.
Indeed, if Treasury's optimistic global scenarios are correct commodities will remain strong until there are big increases in supply.
The Future Fund sums are mind-blowing. In 2005-06, about $16 billion will be taken out of government coffers and put into a fund with an independent investment team to manage the money like any other retirement fund. And in the following three years another $15 million will be transferred.
While the fund will invest in the overall share market, a large portion of its money will go to income-earning infrastructure investments and commercial property, because they provide a reliable income and are not as volatile as ordinary shares.
Indeed, when I asked Costello where the future fund money would go, he isolated infrastructure investment and used Macquarie infrastructure funds as an illustration.
Because of delays, there may be a shortage of good projects and many will take time to produce revenue.
The early estimates of future fund returns appear to be less than 5 per cent.
If Telstra is sold, Costello would like to put all the funds received into the future fund, but recognises that this target may be too optimistic.
Of course, the Government could also transfer, say, 25 per cent of its Telstra stake to the future fund, which would substantially reduce the number Telstra shares being sold to the public and institutions. This would increase the price.
Champagne began flowing at the AMP, Axa, CBA and Westpac wealth management operations as soon as Costello announced the levy abolition.
Even NAB CEO John Stewart, who today is announcing the retrenchment of some 2000 people in Australia, may have briefly smiled.
All wealth management groups have been handed an enormous marketing opportunity. As middle-income people are enticed to be once again serious about superannuation, many will take the self-managed fund option.
Treasury expects new business investment to rise 6 per cent but it will be dominated by resource projects.
Increasing commercial office vacancy rates, a slower rate of commencement of new infrastructure projects and increasing prices for steel and cement will restrain growth in non-dwelling construction.
That means many labour-intensive building suppliers are in for a tough time, which will affect the employment market in some areas.
But the biggest danger is abroad. Treasury warns that a danger to continued global prosperity is a "sudden change in sentiment regarding relative risks and reward from holding US dollar assets" which would result in "an abrupt and disruptive adjustment" to exchange rates and interest rates.
But, if that does not happen, Treasury expects US growth to hold at 3.5 per cent this year and 2006 (4.4 per cent in 2004) and China to fall from 9.5 per cent last year to 8 per cent in 2006, leading to only a mild downturn in the growth rates of our trading partners – a wonderful outcome and a very soft landing.