The budget

We had a few client questions about the budget, last week, with a few highlights worth sharing here, and the query, in context of the budget, had a broader focus about the Fed, interest rates, and capital deployment.

The budget

We wrote:

The Australian budget wasn’t terribly impactful to anything, more just an extension of the broad funding objectives of the previous government (perhaps somewhat surprisingly) and some of their (ALP) own preferred items (TAFE, childcare etc).

The NDIS scheme will cost more money than expected, and, overall, we will have a budget deficit for many years to come. Eventually, that’s got to mean either higher taxes, lower spending, or perhaps suffer the consequences of a falling AUD and or rising interest rates.

Sometimes, expansionary deficits can lead to currency appreciation, but if the expenditure is not deemed to drive long run productivity or growth, the currency can fall, just like in the UK).

The childcare subsidies effects listed companies like G8 Education, who specifically benefits, and more broadly encourages higher labour force participation rates, which helps ease worker shortages across all sectors, and that’s supportive to both overall business conditions and corporate profit margins.

However we we aren’t expecting any especially large impact, from this measure alone; more important perhaps is the opening of the borders (companies like ING, CGC, MND, DOW have been crying out for this).

Interestingly, both ING (chicken producer) and CCG (berries) have items in the budget, with government money going to the Sorrel poultry facility, and a berry distribution centre in Tasmania.

The Fed

Regarding higher rates from the Fed, well, things are finely balanced. The economy is very strong, inflation has been persistent but will probably come down from here (there’s lots of anecdotal information to suggest inflation is declining, ranging from shipping costs, van freight rates, truck availability, new rents from Zillow, some commodity prices, annualised wages growth, and of course, the material slowdown in housing), and that combination of good growth, and moderating inflation, gives rises to the goldilocks outcome of soft landing. But, it’s possible inflation takes even longer from here to moderate, which makes it “too high” for comfort, and the Fed overtightens, and causes a recession. That’s the hard landing.

In our view, the soft landing will make us glad we’ve got a sizeable equity exposure (and we’ll wish we had more) and the hard landing will make us glad we’ve got a sizeable bond portfolio (and we’ll wish we had more). So, we think either way we should be okay, although funnily enough we will experience some regret either way, given how I’ve outlined the above.

I should mention, that if a recession is the “true” outcome, history suggests stocks would fall another 10-15% from here. On a long run view, that’s pretty manageable, overall (unpleasant, but not the end of the world). In which case, we’d be selling down the defensive portion of the portfolio and buying growth assets.

So, overall, despite a lot of uncertainty, we feel pretty good about the DAA funds, and the ex-ante (future) returns from most asset classes look pretty good to us.