MARKET FLASH: 2018 NZ BUDGET ROUND-UP

Yesterday, finance minister Grant Robertson delivered his first Budget. As expected, it sets out the Government’s commitment to what it is calling a “stronger and fairer economy”, while at the same time demonstrating a degree of financial responsibility. We look at what it means for members of ANZ’s three KiwiSaver schemes.

There were few, if any, surprises and it largely delivered on the election promises of the Labour Party and its coalition partners. Here are some of the key take-outs:

  • The Government expects a Budget surplus of $3.1bn this year (ending 30 June), rising to $7.3bn by 2022. There’s increased spending in three key areas; health, education and housing.
  • The additional spending will be paid for through a number of sources, including a reversal of the previous Government’s proposed tax cuts and some higher than expected tax revenues.
  • The Government maintains an upbeat outlook for the economy, with GDP growth of 2.9% expected this year (ending 30 June), and 3.6% next year.
  • While it’s spending more, the Government is being careful around its borrowing. Debt as a proportion of GDP will be below 30% this year, and is forecast to fall to below 20% by 2022.

Why is the Budget even important?

The Budget has important implications for investors as it sets out the overall level of government spending over the coming years. This can impact on the rate of economic growth, as well as inflation and interest rates. Of course, there’s also an impact on households and businesses. Where households have additional income in their pockets, this can be positive for the housing market and retail spending. Meanwhile, for businesses, improving economic prospects have the ability to affect business owners’ willingness to invest in capital and create new jobs.

The implications for investment markets

For share market investors, yesterday’s Budget focuses spending in key areas, including housing and infrastructure, so naturally this should be a positive for companies that operate in the construction and housebuilding sectors. The Budget doesn’t directly impact on households in terms of leaving them with extra dollars. While this might not provide any additional boost to the consumer and retail sectors, both should remain underpinned by expected falls in unemployment and rising minimum wages (announced previously).

To pay for the extra spending, the Government has announced a modest increase in bond issuance, and this could weigh on some parts of the fixed interest market. While we do not see any immediate impact from the Budget on interest rates, the Government does expect the economy to grow by 3.6% next year. If it does, this could mean higher interest rates are in the pipeline, which could provide an additional headwind for bond investors.

What does it mean for the investments in your KiwiSaver account?

At ANZ we favour an active investment management approach. What this means is that through in-depth analysis and careful research, our investment managers continuously look to pick the winners from the losers. While yesterday’s Budget will no doubt shape the decisions we make about the investments we hold, it’s important to remember we don’t look to “trade” the market to make short term gains. Instead our time and effort is spent looking for quality investments which we believe will perform over the longer term.

Published 18 May 2018

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