Another mixed day for Asian shares as Euro concerns linger Australia passes carbon tax bill

Asian stocks were slightly lower overall today as more angst over Italy’s role in the European debt crisis grows. The MSCI Asia Pacific index was 0.4% lower in early afternoon Tokyo trading, swinging between gains and losses more than a dozen times.

In economic news, Australia is set to introduce a carbon tax after the senate voted 36 to 32 in favour of the bill today. Our focus is today on addressing the impact of the carbon tax to both regional and global traders. In terms of the impact on markets, we see three main areas:

1) The price set by the government compared to current market pricing

2) The positive impact on companies as the rate of tax falls and

3) The impact on media markets as advertising for the policy ramps up.

We already know the losers under the regime – energy intensive industries with little pricing power. Steel makers will be compensated which combined with a higher iron ore price and better demand outlook might see stocks like OneSteel turn a corner in 2012, but we aren’t holding our breath.

Qantas and Virgin have already said they will pass through the higher charges to customers. Utility providers will also pass on the tax burden, although compensation should in theory limit the impact. Retailers could see a short term uptick in spending once compensation starts to hit taxpayers, although we don’t think this is a sustainable investment trend and will quickly reverse.

The carbon price is set at A$23 per tonne until an emissions trading scheme is introduced. The price per tonne of carbon as priced in European markets is down around 21% year on year, last trading at around EUR9.65. This implies a big discount to the Australian price with which the government is balancing its budget. If the global price remains depressed then the impact on the highest polluting industries in Australia under a trading scheme will be much less than that under the government’s initial carbon taxing policy. Perhaps this explains why equity markets are not really concerned.

A fall in the corporate tax rate to 29% will in theory mean higher net profits for Australian listed companies across the board – all other things being equal. This should naturally be earnings accretive for the market – higher earnings lead to higher valuations. But tax is only one element in corporate earnings so the impact of this will be limited. Still, it’s worth considering.

The government has made it very clear that they are committed to communicating the message to voters over the coming months. We interpret this as saying there will be a lot more taxpayer funded advertising, which comes at a time where media companies are struggling with forward bookings. They will no doubt welcome the higher spending around the policy announcement.

Outside of these three areas and the obvious loser scenarios we don’t see too much of an immediate impact on the market. We will be closely monitoring the situation.