– Strategists at Morgan Stanley (NYSE:) Australia have recently evaluated the impact of the FY25 Australian Federal Budget on the country’s equity market. The budget, they say, is a mixed bag, providing some protection against downside risks but complicating the potential for significant cyclical upside.

The budget’s primary focus is to mitigate the effects of , address consumption risks through cost-of-living support and lay the groundwork for future investment pathways. However, the strategists argue that the budget provides more of a buffer than an outright boost to economic conditions.

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The tax cuts already legislated are substantial but require time to influence observable spending habits. Similarly, subsidies, designed to offset future expenses, will help alleviate the pressure of inflation but offer limited stimulus. For businesses experiencing a broader tightening in conditions, the July 1st stimulus and its associated lags may seem a long way off.

The Federal budget has also complicated the path to significant monetary easing. Although headline inflation is expected to decrease in 2024, the removal of subsidies will likely cause a reversal in base effects in 2025. Additionally, the longer-term investment policy, while sound, offers limited incremental incentives for accelerated spending.

Finally, the housing supply, necessary to address the lack of volume in housing construction and rents, is unlikely to rebound within a market-relevant time-frame based on the announced policy.

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As such, MS strategists concluded that while some buffers have been reintroduced, a higher-for-longer rate environment seems probable. This is against the prevailing consensus positioning in cash-rate-sensitive sectors. While the budget helps protect against downside risks, the path to a significant cyclical upside remains challenging to navigate.

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