Budget 2013: Mining Boom Over. Where Is The Revenue?

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This story features AMP LIMITED, and other companies.
For more info SHARE ANALYSIS: AMP
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

-Mild impact on wealth managers
-Little to disturb health providers
-Impact on discretionary spending
-No smooth transition from mining boom
 

By Eva Brocklehurst

The superannuation changes were pre-announced and did not amount to a lot. The health care sector was relatively unscathed. The Australian government's 2013 Budget has held a mirror to soft profit and productivity growth in the Australian economy in recent years. The government's lack of revenue reflects a struggling corporate sector.

The big ticket items, the 0.5 percentage point increase to the Medicare Levy to support the National Disability Insurance Scheme and the Gonsky Review's new funding model for schools, were flagged amid much discussion ahead of time. There was no new fiscal tightening or hand outs in 2013. Brokers observe this, at least, puts no pressure from the budget on the Reserve Bank's cash rate call. Business and consumers are expected to help to repair the budget in a modest way. What the budget doesn't do, in Macquarie's view, is help the economy transition from the downturn in mining investment.

So what snippets have implications for stock market sectors?

In terms of wealth management, superannuation commitments in the budget target $900m in savings over four years. For the industry this is small. There is a 15% tax on earnings above $100,000 from assets supporting retirement incomes from July 1, 2014, but the broad structure of the tax is the same. There is some relief on capital gains, which will only be taxed at 10% instead of 15%. The treatment of deferred lifetime annuities (DLAs) is to be the same as other superannuation assets. AMP ((AMP)) is the wealth manager likely to be most impacted by super changes, as around 70% of its funds under management are super-related.

JP Morgan suggests the proposals will not change investor behaviour materially, and this should be seen as a positive for AMP, IOOF Holdings ((IFL)) and the bank-owned wealth managers. The treatment of the downsizing of superannuants' homes is seen as perhaps having an impact, but more on the dynamics of the industry. The changes are to provide flexibility in monetising housing assets and could affect the pattern in which retirees draw down super assets, or the mix they hold during retirement.

Issues for super, and hence the wealth managers, come more from overarching consumer sentiment and political risk, in BA-Merrill Lynch's view. Governments (of any persuasion) have been inclined to meddle with superannuation over recent years and this impacts on consumer sentiment. That is, willingness to contribute to super and hence, in the broker's view, investor willingness to push shares in AMP higher. The broker suspects discretionary flows into the super system, because the level of trust in the system has fallen, will stay softer and this will affect the price investors are willing to pay for AMP.

The health care sector, apart from the NDIS, was not a major feature of this budget. The addition of new listings to the Pharmaceutical Benefits Scheme contained the major item, Lyrica, manufactured by Pfizer and not within Sigma Pharmaceutical's ((SIP)) distribution channel. No impact there. JP Morgan suspects there are small wins for Sigma and Australian Pharmaceutical Industries ((API)) as there is more funding in the PBS. Minor negatives come from the savings to Medicare, including the threshold for the application of the safety net and delayed indexation, as well a phasing out of the medical expense tax offset. These items will have the greatest impact on Primary Health Care ((PRY)) in Goldman Sach's view, affecting 45% of earnings, and to a lesser extent Sonic Healthcare ((SHL)), affecting 10% of earnings. Nevertheless, the cuts are minor and should only add up to about 1% negative impact on Primary's FY14 earnings, in the broker's view.

BA-Merrill Lynch notes general practitioner double-billing has been removed. The extent of this behaviour, which involves claiming a Medicare rebate for GP consultation and the chronic care rebate for the same patient, is not known. As it becomes effective on November 1, 2014, the broker presumes the likes of Primary and Sonic will revise practices and find other billing avenues before that date. Whatever the extent, it is another incremental price pressure for medical centres that weakens bulk billing in the broker's view. Overall, the budget underlined the strength of the regulatory position of the health insurance industry and the importance of private hospital operators for BA-Merrill Lynch. Ramsay Health Care ((RHC)) is viewed as most attractive in this light, given its forecast earnings consistency.

The budget was marginally negative for the gaming sector. UBS observes cuts to welfare and the increase in the Medicare Levy have the potential to reduce discretionary spending. In this aspect, Citi also views the budget as no longer supporting retail spending. As the tax revenue from the mining boom fades so has the assistance to households. This has led the broker to take a look at retailers. Value-drive retailers, particularly Woolworths' ((WOW)) Big W and Wesfarmers' ((WES)) K-mart and Target are likely to experience the larger impact. The scrapping of the baby bonus and changes in family assistance will impact spending by households with children. Macquarie notes none of the changes will smash consumer spending, but they will reduce disposable income and weigh on confidence. Citi has a negative outlook on the sector, believing sales will be sluggish. Sell ratings have been issued for Wesfarmers, Woolworths, Harvey Norman ((HVN)), JB Hi-Fi ((JBH)), David Jones ((DJS)), Myer ((MYR)) and Premier Investments ((PMV)).

Other items of a general nature affecting business were limits to research & development incentives to companies with turnover less than $20 billion in Australia. For the miners, Macquarie notes the upfront tax deductions on exploration will become more difficult to obtain. Exploration expenditure deductibility is being removed, expected to save $4.2 billion over four years. Foreign miners and investors are now expected to pay an additional 10% for property purchased in Australia, given the lack of payment of the foreign resident capital gains tax. The government is also clamping down on banks that shift income offshore to reduce payable taxes. Engineering contractors might see the $24 billion in funding over five years for new road/rail infrastructure, particularly urban public transport. Goldman Sachs found this aspect disappointing. The funding is back-end loaded and there is no incremental spending in 2013-14, with only $3 billion slated for 2014-17.

The last word is from Macquarie on the terms of trade. Treasury expects the terms of trade will eventually fall by 20%, back to the level of 2005-06, beginning in earnest after 2014-15 and occurring gradually over 15 years. Macquarie suggests the history of mining booms tells us the ending is usually more abrupt.
 

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