Morgan Stanley's strategists in Australia recently assessed the impact of the FY25 Australian Federal Budget on the country's equity market. They characterize the budget as a mixed bag, offering some protection against downside risks while complicating the potential for significant cyclical upturns.
The primary aim of the budget is to address headline inflation effects, provide support for cost-of-living challenges, and pave the way for future investment opportunities. However, the strategists argue that rather than providing a substantial boost, the budget acts more as a cushion for economic conditions.
Though the already legislated tax cuts are significant, their impact on consumer spending will take time to materialize. Similarly, subsidies aimed at offsetting future expenses may alleviate inflation pressures but offer limited immediate stimulus. For businesses facing broader tightening conditions, the stimulus set for July 1st and its associated delays may seem distant.
Furthermore, the budget complicates the path to significant monetary easing. While headline inflation is forecasted to decrease in 2024, the removal of subsidies is expected to reverse base effects in 2025. Additionally, the longer-term investment policy, though sensible, provides limited additional incentives for hastened spending.
Addressing the housing supply shortage, crucial for tackling low housing construction volumes and rents, is unlikely to rebound within a timeframe relevant to the market, based on the announced policy.
Consequently, Morgan Stanley's strategists concluded that although some buffers have been reinstated, a scenario of higher interest rates for an extended period appears probable. This contrasts with the prevailing consensus positioning in sectors sensitive to cash rates. While the budget does provide protection against downside risks, navigating towards significant cyclical upswings remains challenging.
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