Both equities and bonds have been positive over the past few weeks as we draw closer to the U.S. election. The S&P/ASX 200 was the notable outperformer, up 5.4% at the time of writing, driven by a big Federal Budget and prospects of further monetary easing from the Reserve Bank of Australia (RBA). Meanwhile, a tech-led rebound saw the U.S. S&P 500 up 2.6%, with China up a similar amount, whilst the Euro STOXX 50 bucked the trend, posting a negative 1.8% return in the same period.
Commodities were largely flat with iron ore still sitting around the U.S. $120 mark. Gold fell slightly under U.S. $1,900 per ounce, whilst oil rebounded slightly, with WTI crude bobbing around the U.S. $40 mark.
Bond yields fell over the month, with central bankers continuing to signal an accommodative approach. The Australian 10-year bond yield fell 10 basis points back down to 0.76% whilst the U.S. 10-year yield is largely flat at 0.7%.
Meanwhile, the Australian Dollar weakened against most major currencies and is back down to 71 U.S. cents again.
It has been an interesting few weeks with the Australian Federal Budget, the rollback of responsible lending rules, a chaotic and incoherent U.S. Presidential Debate, and President Trump contracting COVID-19 and his subsequent quick recovery.
There was great anticipation and hope in the build-up to the Federal Budget, and it certainly did not disappoint markets with small and medium businesses, job-seekers and consumers set to benefit most via tax cuts and allowances, wage subsidies and additional welfare payments. Furthermore, the RBA stoked speculation of further monetary stimulus via a potential cut to the interest rate and 3 year yield target from 0.25% to 0.1% with their commentary, and the potential for more comprehensive quantitative easing as RBA Governor Lowe spoke about studying the potential benefits of buying longer term bonds. With both fiscal and monetary stimulus working in tandem and Victoria potentially set to ease restrictions, sentiment has risen strongly and the Australian economy looks relatively well-placed for a recovery.
Meanwhile, China, the only economy above pre-COVID levels, continues to strengthen, driven by strengthening momentum in services and consumer spending. Whilst exports have been strong on demand for electronics and medical supplies during the pandemic, imports have shown a recent spike as domestic demand surges. Domestic tourism is also recovering strongly with some reports stating that domestic travel has recovered to 80% of pre-pandemic during their week-long holiday in early October known as Golden Week.
Elsewhere, surging new cases in Europe and the U.S. are leading to mobility restrictions and targeted lockdowns across various parts of Europe, with the likelihood of further measures being taken over the coming weeks. This is hurting business and consumer sentiment, with economic activity and employment indicators weakening as the economic recovery loses steam.
We have an even more exciting slate of events ahead, with the headlines of course focussed on the U.S. election. Perhaps more importantly for both markets and economies, U.S. fiscal stimulus negotiations remain ongoing though the likelihood of an agreement before the election is fading, and updates on several late stage vaccine trials are expected to be released. Furthermore, the U.S. third quarter reporting season just kicked off. With so many catalysts, we expect a volatile period ahead.
Highlights from the Federal Budget
The Federal Budget was well-received by investors as the Morrison government announced $98 billion in new measures, with the objective of creating 950,000 jobs over the next four years, which is forecast to bring unemployment levels down to 5.5% in the 2024 financial year. With these measures, the budget forecasts net government debt to hit $966 billion by the end of the 2024 financial year, equivalent to 44% of GDP. Whilst this level is high for Australia, compared to global peers, the level of debt remains relatively small, and with low interest rates set to stick around for a while, interest costs are expected to be a very manageable amount of just 0.9% of GDP.
A big highlight of the budget was the investment allowance which applies to any company with less than $5 billion in turnover. This allows eligible companies to write off, in full, any depreciable asset used or installed by 30 June 2022 with no limit. The $5 billion hurdle is large enough for even many of the S&P/ASX 200 companies to be eligible.
Additionally, the loss carryback provisions could be a major boon for cyclical industries, allowing any losses incurred to be offset against profits between the 2019 to 2022 financial years.
There were several initiatives targeting the retention or creation of new jobs including the fringe benefit tax exemptions for retraining employees facing redundancy or being redeployed, and the JobMaker Hiring Credit scheme, where employers receive $200 for hiring unemployed people aged between 16 to 2 9, and $100 for those aged 30 to 35.
Consumers will also be pleased with the decision to bring forward tax cuts. Starting this financial year, the 37% tax rate threshold is lifted from $90,000 to $120,000. Meanwhile, the Low and Middle Income Tax Offset will be made permanent with 19% threshold lifted from $41,000 to $45,000 and the same rebate will apply for another year so it will provide an additional rebate up to $1,080.
Included in the budget are also additional welfare payments for pensioners, veterans, low-income families and concession holders to the sum of $250 in December and March.
Furthermore, an extra 10,000 first home buyers will be able to obtain a loan to build or buy a newly built home with a deposit of as little as 5 per cent. The government will also increase the caps on the price of such homes that can be purchased to as much as $950,000 from $750,000, to reflect the higher prices for new properties compared to existing.
Other highlights were an additional $14 billion allocated to infrastructure on top of the existing $100 billion plan, of which, $10 billion will go to road and rail projects. Aged care also received some reprieve with $1.6 billion allocated to another 23,000 home packages, whilst the aviation industry received another $355 million in additional support through to 2024.
From an investment perspective, these measures are positive for infrastructure exposed construction and maintenance players, small to medium businesses with high capital expenditures, and consumer discretionary exposures. Whilst the first two may only see temporary benefits, consumer discretionary exposures look to be the biggest beneficiaries over the long term with lower personal taxes and a lower unemployment rate.
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This month’s perspective highlights that market sentiment on all asset classes is constantly changing. It is important for us to quickly recognise any threats, to preserve your investment capital or to identify early investment opportunities to maximise any return advantages. At Partners Wealth Group we don’t get complacent with the current state of play and constantly monitor investments and your portfolios.
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