A tightening in superannuation contributions, as revealed by the Federal Budget on Tuesday, will leave the equity market worse off, says Credit Suisse.
The government plans to tighten up on superannuation tax concessions from next year, reducing the income threshold from $300,000 to $250,000 and capping contributions at $25,000.
"The budget will mean less money into the Australian pension pool, less money managed by selfies and less money flowing into Aussie equities," said Hasan Tevfik, equities analyst at Credit Suisse.
"While the budget provides small positives for Aussie equity investors, we think the changes to superannuation leave our market worse off."
Self-managed superannuation funds buy between $10 billion to $15 billion worth of equities each year and own 17 per cent of the Australian share market.
However, some argue the drop off in super contributions from higher income earners will be offset by the increase to lower income earners' super and won't diminish involvement in the share market.
"Chances are that a lot of those high income earners who were putting millions into their super are still going to end up putting a lot of their savings into equities because few asset classes offer better returns," said Angus Nicholson, analyst at IG Markets.
"Australian equities, in particular, are the only ones where you receive franking credits for dividend payouts, a key factor for high income earners, so it's unlikely a lot of those funds will dramatically increase their exposure to overseas equities instead."
That said, the interest rate cut combined with Chinese stimulus and easier global credit market conditions, still leaves Aussie equities as an attractive proposition and Credit Suisse expects the ASX to hit 6000 points by December.
"Having painted itself into a corner on negative gearing and the GST, the government has decided to focus on hacking back concessions in the superannuation area," said David Bassanese, chief economist at BetaShares.
"If there's one consolation for retirees and the superannuation industry, it's that the changes were so extensive that it might now face at least a few years of relative calm and certainty."
Corporate tax rate cut...a boost for stocks?
The Budget revealed a commitment to cut the company tax rate from 30 per cent to 27.5 per cent for businesses with turnover of up to $10 million.
While the impact on equities may not be immediate, given the larger stocks on the ASX will miss out, over time analysts expect share prices to improve.
"Lowering the corporate tax rate will be a positive for ASX stocks, particularly for longer term stock valuations," said Angus Nicholson, analyst at IG Markets.
"Although a lot of the companies that will receive the most immediate benefits are small and medium enterprises, which is unlikely to move the ASX 200 given the large market cap stocks will miss out in the early years.
Will we keep the AAA rating?
The release of the budget has eased speculation regarding the sustainability of the country's AAA rating, though ratings agencies have been cautious in their responses.
Fitch sees the budget as consistent with an AAA rating; Moody's raises some concern about the challenge of slower nominal revenue growth, and while S&P has postponed a public view until it's reviewed the documents in the coming weeks, it has stated briefly: "Improving budget balances remain important to the rating to offset Australia's high vulnerability to shifts in offshore financial market sentiment."
"[Moody's] comment suggests much may hinge on whether the agency believes the government's forecasts for improved budget balances over the next four years," said Ivan Colhoun, chief economists, markets at National Australia Bank.
A recent rebound in commodity prices has supported the government's revenue forecast, a downward revision to $13.5 billion over the next four years, though economists warn this leaves the forecasts exposed to unpredictable global headwinds.
"There are downside risks with Treasury's practice of using a recent average for the iron ore price incorporating the recent rally in the iron ore price - US$55 a tonne is assumed," said Mr Colhoun.
"This exposes the forecasts to any correction. A US$10 a tonne fall in prices would lower tax receipts by $5.3bn over two years."
While the Coalition forecasts a return to surplus by 2020-2021, unchanged from last year, it appears more cautious on the economic outlook than many market economists. The budget revealed a reduction in expected growth for the next financial year from 2.75 per cent to 2.5 per cent, lower than the forecasts of the Reserve Bank of Australia.
"An improvement in the budget trajectory remains the central forecast but the underlying budget remains firmly in the red," said Su-Lin Ong, head of Australian economics at RBC Capital Markets.
A Bloomberg survey of economists reveals the average deficit forecast is $35 billion in 2016-2017 and growth is tipped at 2.6 per cent.
