(Bloomberg) — Australia’s decision to support a swath of industries to help stimulate an economic recovery in the wake of the coronavirus pandemic means there will be few “losers” in the stock market, according to analysts.
Treasurer Josh Frydenberg unveiled a budget Tuesday that forecast a shortfall of A$213.7 billion ($152 billion) in fiscal 2021, and pushes debt and deficit to a peacetime record amid a raft of tax cuts, wage subsidies and investment in infrastructure and manufacturing. Australia’s benchmark stock index rose 0.9% as of 1:21 p.m. Sydney time.
Australia is trying to drive a private-sector led recovery and get people back to work as it seeks to recover from its first recession in more than three decades. Potential tax cuts may support discretionary retailers, while mining and construction firms might benefit from plans to boost infrastructure spending. Three-year bond yields fell to a record low after traders ramped up bets the central bank will cut interest rates next month to bolster the coronavirus-battered economy.
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“A stimulatory Federal Budget is positive for the share market,” Commsec Chief Economist Craig James wrote in an Oct. 6 note. “Economic recovery is the aim, and that requires lower taxes, increased spending, job training and re-skilling workers. There are few losers.”
Yields on three-year debt dropped as much as four basis points to 0.12% after Westpac Banking Corp.’s influential economist Bill Evans reiterated calls that the Reserve Bank of Australia will ease in November after keeping rates unchanged on Tuesday.
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The RBA’s overnight cash rate has been sitting around 0.13%, below the 0.25% target. Overnight swap markets are now pricing for a drop to around 0.06% at the November meeting.
Here’s what analysts are saying:
Tax cuts have scope to boost consumer and business spending; If people are confident about job prospects then discretionary retailers such as Harvey Norman, Premier Investments and JB Hi-Fi will benefitInterest rates to stay low for next three years, meaning capital growth and dividends will be important to attract investors; NOTE: Fortescue, AMP among companies with highest projected dividend yield next 12 months, based on BDVD forecasts: Bloomberg dataInfrastructure spending plans, state government incentives and low rates to support mining and construction sectors; Adelaide Brighton, Lendlease, Boral, Brickworks and Bluescope may benefitDecision to extend first-home deposit plan may support property developers and residential builders like Stockland, Mirvac, James HardieCSL, Cochlear, Resmed may benefit from plans to boost manufacturing spending, while fuel security plan may help Santos, Woodside, Senex and AmpolStill, migration outlook remains uncertain; Lack of foreign students, tourists and workers may impact travel firms, airlines and other tourism-based businessesNOTE: May impact firms including Crown Resorts, Star Entertainment, Qantas, Flight Centre, Corporate Travel Management: BloombergSee ASX 200 rising to 6,450-6,550 by June 2021; Benchmark closed Tuesday at 5,962.07
Budget supportive for healthcare sector, with focus on coronavirus diagnosisGovernment unveiled increased funding for clinical labs to go with previously announced spending for aged and primary careReasonably benign regulatory environment for Australian health and aged care firms in near- to medium-term during Covid-19 and its aftermathNo changes to forecasts for stocks including Estia Health, Healius, Japara, Regis Healthcare, Sonic Healthcare, Sigma and Virtus Health
Budget actually results in “significant step-down in stimulus provided” in 2021Stay cautious on discretionary retailers with elevated P/E ratios; Impact on retail demand is positive but needs to clear high hurdle in 2021Volume of stimulus from tax cuts and pensioner payments “pale in comparison to the stimulus paid in June and September 2020”Wage subsidy plan may boost Ebit 1% for retailers that can add staff, particularly supermarkets; Full expense of capex may lift operating cash flows 5%-10%Super Retail, Coles and Woolworths may benefit from these changesInfrastructure spending proposals may drive small earnings uplift at Adelaide Brighton, BoralHomebuilder program not extended; While it did pull forward some work into FY21, medium-term housing risks from stimulus wind-back and border closures remain
Budget is a stockmarket friendly one with clear focus on consumption support and businessSets a stage where equities positioning is important; “Leveraging to the broader fiscal theme, gaining exposure to longer-dated reopening plays and embracing more broadly the prospect of cyclicility and rotation has been reinforced”Consumer stimulus carries greater duration, infrastructure offers stability, while virus evolution remains keySee measures supporting business investment and lower unemployment as positive for banksChanges to private health insurance seen supportive of system and may also feed into hospital operatorsHealius and Sonic Healthcare have exposure to Covid-19 testing, which secured additional government funding; Suggests upside to current test assumptions, although volume will reflect demandWhile there was some additional investment for aged care, more details for sector not expected until 2021Construction components of budget support preference for Adelaide Brighton amid focus on “shovel-ready” small-to-medium-sized projects projects
Australian budget deficit is large but broadly within range of market expectationsPro-growth budget seen as supportive of a rising equity market, although given most measures were pre-announced the immediate impact is seen as minimalConsumer spending support likely from tax cuts and payments to the elderlyInfrastructure investment likely to help companies including Downer EDI, Monadelphous Group, Cimic, Service Stream and Transurban, while construction firms CSR, Adelaide Brighton and Boral to also benefit‘We see a global wave of infrastructure stimulus as positive for resource stocks. Investors should continue to rotate to value and companies negatively impacted by Covid-19”
While not a significant amount of direct support for infrastructure and aviation stocks, they are likely to benefit if the budget achieves the broad-based increase in activity it is targetingQube among infrastructure firms that may benefit from increased trade via consumption and manufacturing productionTransurban and Sydney Airport more likely to get boost from increased consumer activity rather than direct road investment impact
(Adds bond yields in the third paragraph, Goldman comments at the end.)
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