It’s been a big week in Australia, with the central bank meeting and the government handing down one of the most significant Budgets in our history. For a detailed analysis of our thoughts on the Federal Budget, you can read a note from Shane Oliver and I. Here, we take a look at the outlook for some asset classes after a busy few days.
1. Cash and term deposits
The RBA kept the cash rate on hold at 0.25% at its October meeting, though we thought there would be a cut to 0.1%. We think it’s likely the cash rate will fall to 0.1% at the central bank’s November meeting, meaning cash and bank deposit returns will remain low for a long time.
The Budget papers confirmed a huge surge in public debt. This surge would normally, all other things being equal, point to higher bond yields. However, this is offset by massive spare capacity, low private sector borrowing and low inflation so it’s hard to see a lot of upside in bonds yields. If COVID-19 comes under control it’s hard to see much downside either, so medium-term bond returns are likely to be low.
This budget was supportive of companies and the business environment, both through attempts to boost household spending and through tax cuts and incentives at the business and individual level. Further, the ongoing addition of stimulus will further aid the recovery at the same time that interest rates are very low, all of which is supportive of shares in the medium-term.
High unemployment, the phasing down of income support and the hit to immigration still point to more downside in prices in Melbourne and Sydney. However, continuing government property support measures will offset – particularly for houses in the outer suburbs and cities less impacted by immigration.
5. The Australian dollar
Ongoing fiscal stimulus at the high end of comparable countries coming at a time of rising commodity prices and a declining US dollar point to more upside for the Australian dollar. This is a continuation of the Australian dollar’s strong run this year.
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