The Australian economy remains resilient. Last week’s Q1 consumer price index was high but in line with expectations, affirming the need for further rate rises. The RBA lifted rates this week to 4.35%, this was the RBA’s third hike in the current cycle, effectively unwinding the easing delivered in 2025. We still think the RBA is biased towards tightening. Our view is that the cash rate is now at least 50 basis points above what’s considered to be the neutral rate and given the uncertainty around the Middle East conflict and fuel prices, the RBA can afford to move to a ‘wait and see’ mode over the next few months. Indications are that Australian consumers also remain resilient for now.

 

US reporting season was generally positive and highlights a resilient consumer. Several big tech companies reported last week, providing a positive backdrop with revenue generally ahead of consensus and increases to AI-related capex.

 

We are less than a week away from an Australian Federal Budget and as is common before a budget we are getting dribbles of policy announcements in the news. The government looks to be seriously considering changes to the Capital Gains Tax (CGT) discount. The current rules are that a 50% discount is applied to the capital gain if an asset is held for over 12 months. Before CGT was introduced in 1999, inflation indexation was applied to assets to calculate the capital gains tax implication. Now, the government is talking about reducing the discount from 50% to 30 or 25% due to concern that the current system favours wealthy, older investors, locks younger generations out of housing and worsens inequality.

 

Negative gearing changes also look to be on the table. I doubt the government would consider scrapping the CGT discount or negative gearing concessions entirely as it would cause too much backlash (like the Bill Shorten campaign in 2019 to curb negative gearing) but reducing concessions is probable.

 

The bottom line is we can debate all day about how best to tax housing investment, but housing inequality won’t be fixed through tax alone. The real solution is to build more homes, which practically means less regulation, faster approvals, faster construction, more tradies and less government crowding out private construction. A wider tax reform is also necessary and arguably an indexation-based system has merits, but changing CGT alone won’t change the big picture.

 

Global and Australian share markets have likely seen the worst from the war and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remains high given uncertainty around the peace talks and flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and increasing worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Fed rate cuts likely later in the year, Trump still likely to pivot to consumer-friendly policies ahead of the midterms and there is solid profit growth.

 

Bonds are likely to provide returns around running yield.

 

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

 

Australian home price growth is likely to slow to around 3-5% due to poor affordability, RBA rate hikes and the hit to confidence from higher fuel prices and the war.

 

Cash and bank deposits are expected to provide returns around 4.25%.