29 May 2023
Caution amidst the calm?
An eerie calm has fallen over markets in recent weeks, as the banking stresses of early March fade into the background. Market measures of risk, such as the VIX, have retreated, while global equity markets have rebounded strongly, buoyed by a resurgence in technology stocks.
We remain somewhat cautious. We have seen a rapid shift from record-low interest rates and abundant liquidity to an environment of higher interest rates, central banks shrinking their bloated balance sheets and a general tightening in lending standards. These tighter liquidity conditions will continue to impact the economy and markets over the course of the year.
From a macro perspective, inflation has peaked but is proving sticky. While goods inflation has come down as the covid-era shortages have largely eased, services inflation and rising wage costs are complicating issues. We think central banks may have more work to do to really drive those inflation numbers down. A lengthy period of sub-par growth may be required to tame inflation, meaning a pause is more likely than an outright pivot, barring any further financial instability.
Growth has been surprisingly resilient to date thanks in part to a resilient consumer, tight labour markets, a milder European winter than expected and the China re-opening story. However, our base case remains that growth will slow as the year progresses, as the lagged effect of rising interest rates and cost of living pressures make their way through the economy.
In our view, none of these factors point to a great environment for risk assets despite the more attractive valuations we are seeing. We remain close to benchmark with a slight underweight in global equities while remaining alert to risks and opportunities as they emerge.
Market Developments during April 2023
The S&P/ASX 200 Accumulation Index finished April with a gain of 1.9% after two negative performing months. Softer inflation figures and a pause in the RBA’s rate hikes led to strong gains in the first half of the month, while a slump in commodity prices, particularly iron ore, moderated those gains in the back-half of April. Property was a key contributor (+5.3%), with I.T. (+4.8%) and Industrials (+4.5%) also performing strongly. Materials (-2.6%) was the sole detractor.
Property led all sectors for the month off the back of the RBA’s rate decision, meanwhile, slowing construction activity in China contributed to the declines in Materials stocks. Overall, domestic markets were driven by relief from inflation data and the interest rate pause, while concerns around the U.S. banking system were somewhat tempered. These factors were all conducive to a positive month for the Index.
Global equities started with another positive month despite mounting higher interest rates. Emerging markets underperformed developed market counterparts returning 0.2% (MSCI Emerging Markets Index (AUD)) versus a 3.2% gain according to the MSCI World Ex Australia Index (AUD).
A greater proportion of earnings surprises and decreased investor expectations have buoyed the U.S. markets, coupled with an outlook for disinflation to continue. Over half of companies have now reported, with the S&P 500 Index posting a 1.6% return (in local currency terms) for the month.
UK economic data followed a similar pattern with headline inflation also falling slightly. The FTSE 100 Index was one of the top performers globally having a gain of 3.4% (in local currency terms). This was driven by a resurgence in value stocks leading the UK index charge.
Equities across China saw a decline off the back of concerns on the economic recovery slowing down. This was reflected by the Hang Seng Index and the CSI 300 Index, returning -2.4% and -0.5% respectively (in local currency terms) for the month. Expectations are that China’s central bank will ease policy to support weakening economic data.
In April, the bond market remained range-bound despite concerns over fallout from banking developments in March. US short-term Treasury Bills declined due to uncertainty regarding the debt ceiling with further volatility expected over the next few months.
The Australian 2-year and 10-year government bond yields were relatively unchanged, only moving up 9bps and 4bps respectively. The Bloomberg Ausbond Composite 0+ Yr Index reflected a return of 0.2% for the month. The US 2- and 10- year Government bond yields fell by 2bps and 5bps, respectively. In the United Kingdom, GILT yields rose due to resilient activity data and inflation surprises. The 2 Year Gilt yields rose 34bps and 10 Year Gilt yields rose 22bps. During the month, higher quality fixed income delivered strong performance as spreads remained narrow despite apprehensions about the economic outlook. The Bloomberg Barclays Global Aggregate Index (AUD Hedged) returned 0.4% for the month.
REIT’s (listed property securities)
The S&P/ASX 200 A-REIT Accumulation Index finished +5.3% higher in the month of April as the A-REIT sector rebounded from its negative first quarter. In a global context, G-REITs (as represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) ended April +1.9% higher. The Australian Infrastructure sector (As represented by the S&P/ASX Infrastructure Index) finished +2.3% higher in line with the A-REIT sector.
The Australian residential property market experienced an increase by +0.7% Month on Month (as represented by CoreLogic’s five capital city aggregate). Sydney was the biggest riser alongside Perth (+0.6%) also performing strongly. In contrast, Darwin (-1.2%) was the only city to regress during April.
10 May 2023
2023-24 Federal Budget: Highlights
On Tuesday the 9th of May, the Labor Government handed down the 2023-24 federal budget. The main themes of this budget were stated to:
- provide temporary and targeted cost of living relief;
- strengthen Medicare;
- focus on investments and measures that relate to renewable energy, with the goal of making Australia a renewable energy superpower.
The key highlights from the budget include.
- $20,000 instant asset write off – The Government has announced it will temporarily increase the instant asset threshold from $1,000 to $20,000 from 1 July 2023 to 30 June 2024 for small businesses.
- Energy Price Relief – The Government proposes to provide $1.5 billion over two years from 2023/24 to establish the Energy Bill Relief Fund to provide targeted energy bill relief to eligible households and small business customers.
- Medicare levy exemption – From 1 July 2024 eligible lump sum payments will be exempt from the Medicare Levy for low-income taxpayers who satisfy the eligibility requirements.
- Small business energy incentives - Deduction of an additional 20% of the cost of eligible depreciating assets that support the electrification and more efficient use of energy.
- Fringe benefits tax (FBT) - Amendments to the Electric Car Discount.
- The budget now forecasts a surplus of $4.2 billion with a cash deficit of $13.9 billion for 2022/23.
- Inflation is expected to remain at 6% for 2023-24 but is expected to fall to 3.25% in 2023-24 before returning to the target band of 2-3% in 2024-25.
- Unemployment is expected to rise to 4.25% in 2023-24 and then to 4.5% in 2024-25.
For more information on the budget announcements please read below.
- $20,000 instant asset write off – While the temporary full expensing measures will cease from 30 June 2023, the Government has announced it will temporarily increase the instant asset threshold from $1,000 to $20,000 from 1 July 2023 to 30 June 2024 for small businesses with an aggregated turnover of less than $10m. Additionally, the measures preventing small business entities from re-entering the simplified depreciation regime for 5 years if they opt out will continue to be suspended until 30 June 2024.
- Small business energy incentive – Small and medium businesses with an aggregated turnover of less than $50m will be able to deduct an additional 20% of the cost of eligible depreciating assets that support the electrification and more efficient use of energy. Up to $100,000 of total expenditure will be eligible for the Small Business Energy Incentive, with a maximum bonus deduction of $20,000. Eligible assets and upgrades will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024.
- Increase to Road User Charge – The current Road User Charge of 27.2 cents per litre for diesel will increase over 3 years to 32.4 cents per litre by 2025-26, leading to a reduction in fuel tax credit entitlements.
- Build-To-Rent Developments - For eligible new build-to-rent projects where construction commences after 7.30PM AEST on 9 May 2023 the Government proposes to:
- Increase the rate for the capital works tax deduction to 4% per year (ordinarily 2.5%);
- Reduce the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30% to 15%, to apply from 1 July 2024.
- PAYG and GST instalment uplift factor – The GDP uplift factor will be set at 6% (rather than 12% as would otherwise apply) for instalments with respect to the 2023-24 income year.
- Fringe Benefit Tax (FBT) – amendment to the Electric Car Discount – From 1 July 2025 the Government is proposing to sunset the eligibility of plug-in hybrid electric vehicles from the FBT exemption for eligible electric cars.
- Expanding the general anti-avoidance rule (Part IVA) – From 1 July 2024 the Government proposes to expand the scope of the general anti-avoidance rule in Part IVA so that it can apply to:
- Schemes that reduce the tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and
- Schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.
- Implementation of a global minimum tax and a domestic minimum tax - The Government proposes to implement key aspects of the Pillar Two of the OECD/G20 Two-Pillar Solution to address the tax challenges arising from digitalisation of the economy. These rules are intended to apply to large multinationals with annual global revenue of EU750 million (approximately AUD$1.2billion). This will include:
- a 15% global minimum tax rate for large multinational enterprises with the Income Inclusion Rule (IIR) applying to income years starting on or after 1 January 2024 and the Undertaxed Profits Rule (UTPR) applying to income years starting on or after 1 January 2025; and
- a 15% domestic minimum tax will apply to income years starting on or after 1 January 2024.
- Reforming the Petroleum Resource Rent Tax - From 1 July 2023, the Government will be capping the deductions to 90% of assessable PRRT income.
- Medicare levy exemption – From 1 July 2024 eligible lump sum payments (such as compensation for underpaid wages) will be exempt from the Medicare Levy for low-income taxpayers who satisfy the eligibility requirements including the requirements for the lump sum payment in arrears tax offset.
- Personal tax rates – There were no announcements in respect to changes in personal tax rates. As such it is expected that the stage 3 tax cuts will commence from 1 July 2024 as previously legislated.
- Increasing concessional tax treatment for carbon abatement and biodiversity stewardship income – The Government has announced that it intends to delay the start date of the biodiversity certification component of the 2022/23 March Budget measures titled Primary Producers – increasing concessional tax treatment for carbon abatement and biodiversity stewardship income from 1 July 2022 to 1 July 2024.
- The Government is proposing to provide an additional $1billion over 4 years from 2023/24 (and $268.1m per year ongoing) to strengthen Australia’s biosecurity system. To assist in funding these initiatives the Government proposes to add a biosecurity protection levy on Australian producers of agricultural, forestry and fishery products from 1 July 2024, set at a rate equivalent to 10 per cent of the 2020–21 industry-led agricultural levies, which is estimated to increase receipts by $153.0 million over 3 years from 2024–25. The levy is intended to recognise the benefits that primary producers derive from Australia’s biosecurity system, including detection, identification and response associated with invasive pests and diseases, maximising trade opportunities, and enhancing access to premium overseas markets.
- Increased taxation on super account balances above $3m – the Government has confirmed its intention to apply an extra 15% tax on total superannuation balances above $3 million from 1 July 2025.
- Payday super – employers will be required to pay their employees' super guarantee at the same time as their salary and wages from 1 July 2026.
- Energy Price Relief – The Government proposes to provide $1.5m over two years from 2023/24 to establish the Energy Bill Relief Fund to provide targeted energy bill relief to eligible households and small business customers, which includes pensioners, Commonwealth Seniors Health Card holders, Family Tax Benefit A and B recipients and small business customers of electricity retailers. It is intended that this plan will provide up to $500 in electricity bill relief for eligible households and up to $650 for eligible small businesses.
- Cyber security - The Government is proposing to provide $101.6m over 5 years from 2022/23 (and $11.8m per year ongoing) to support and uplift cyber security in Australia. This includes $23.4m over 3 years from 2023/24 to the Department of the Treasury for a small business cyber wardens program delivered by the Council of Small Business Organisations Australia, to support small businesses to build in-house capacity to protect against cyber threats.
Please note that the budget measures announced above will only take effect once they become law. To know more about how this budget will affect your financial position, please reach out to your Boyce Advisor.