Tim Hext: the fiscal factors investors should watch

By Pendal Group


Which fiscal factors will impact investors in the months ahead? Here’s a quick snapshot from portfolio manager Tim Hext of Pendal’s Bond, Income and Defensive Strategies team.

MELBOURNE’s second virus shut-down was the story of this week — and will no doubt cause slower-than-expected growth this quarter.

An increase in cases was expected as economies re-opened, but the speed with which this wave hit parts of the Victorian capital was a surprise.

Nevertheless, unlike the massive initial shock in March, markets barely skipped a beat.

Equities saw some moves within sectors, especially those exposed to the Melbourne economy. But overall equity and bond markets were almost unchanged.

The government will again play a key role in buffering the impact.

We have written a lot in recent months about the transfer of economic control from monetary to fiscal policy. Economists have turned their gaze from Martin Place in Sydney to Langton Crescent in Canberra.

A number of key markers will be laid in the months ahead. JobKeeper and JobSeeker are due to end in late September. We expect more colour in the weeks ahead on how they may be extended or adjusted.

Then a budget is due in October. The need to encourage investment should see more aggressive schemes and tax breaks introduced.

The big fiscal question is whether tax changes will be brought forward. The government has two big tax cuts scheduled for July 2022. The 19c tax cap is due to be raised from $37,000 to $45,000 and the 32.5c cap from $90,000 to $120,000.

This would bring significant tax relief to most taxpayers. Given the current environment these could be brought forward.

Another, more controversial tax cut is due in July 2023. This would establish a single tax rate of 30c for $45,000 to $200,000 — a massive cut for middle and higher income earners. Whether the Senate agrees to bring this one forward may be more controversial because it favours higher income earners.

Tax cuts would put more money in taxpayers’ pockets. But would they have the confidence to spend it rather than save it?

As always, lower income earners have a much higher propensity to spend — so it could be argued keeping JobSeeker at a higher level beyond September would be more help.

Other ways of injecting activity into the economy may be more difficult, short of handing out coupons rather than cash. Infrastructure is already operating at capacity and housing will not be helped by the static population.

Either way fiscal policy will be left doing the heavy lifting.

Graphic: Bloomberg

In regard to bonds, we continue to watch the massive excess capacity gap and attempts to close it.

The RBA expects GDP output to take until mid-2022 to return to pre-crisis levels — but even that looks optimistic.

Inflation will see the first negative annual print since the 1960s in late July. It will bounce back, but when combined with wage freezes, low population growth and sluggish housing, the medium-term outlook is not promising.

We remain comfortable that bonds will continue to do their defensive job in portfolios.


Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies team. 

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