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ASX and Budget2020: companies set to benefit

Nicki Bourlioufas  |  12 Oct 2020Text size  Decrease  Increase  |  
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The federal budget could help to support share prices across the board as the government pumps money into the economy, which will help offset the impact of global recession along with lower interest rates, but any boost will be marginal.

Scott Haslam, chief investment officer at Crestone Wealth Management believes if covid-19 mobility restrictions are eased further, the federal budget should pave the way for the S&P/ASX 200 index to break out of its four-month trading range between 5,700 and 6,200.

“The significant fiscal and monetary support being provided to the economy should ensure a pro-cyclical impetus for domestic portfolios,” Haslem says.

“This was a particularly business-friendly budget, with considerable incentives to support business investment and cash flow. Specifically, for the business sector: tax loss 'carry back' benefits, wage subsidies and research and development (R&D) tax breaks. 

“The income tax cuts are a circa 1.6 per cent benefit to household disposable income over the next 12 months. In conjunction with wage subsidies for apprentices, additional support for 2.5 million pensioners, and the previously announced extension to the JobSeeker and JobKeeper payments (to December 2020 and March 2021, respectively), it is likely that the retail sector is a key beneficiary of this year’s budget,” said Haslem.

However, any lift to household demand, which makes up over 60 per cent of gross domestic product, will be limited given immigration and population growth have been stunted by the covid-19 pandemic, according to Morningstar analyst Johannes Faul.

“You have to remember the reason why we are having this budget; the economy is struggling, we've got high unemployment, and population growth has suffered given immigration has during the pandemic,” says Faul.

While retailers may benefit from this budget and existing fiscal stimulus, including those selling food and liquor such as Woolworths (ASX: WOW) and Coles (ASX: COL), a big questions remains whether tax cuts will be spent, or saved by households, who are already savings more than they have been for years.

“I think a big unknown is whether these tax cuts will be spent or saved,” says Faul, adding that some households are also paying down debts.

“With all the fiscal stimulus we've got, retail spending growth is keeping in line with what it has been over the past 10 years. Food and liquor retail sales have accelerated, but we’ve seen less spending in restaurants, pubs and on apparel. So overall, retail sales are just treading water.”

A budget bump?

a table showing a list of Australian stocks tipped to benefit from the budget

Source: Morningstar Direct. Data as of 12 October 2020

Surge in online shopping

However, one area where change is expected to stick is the movement to digital shopping. Faul says all online retailers will benefit over the long term from the shift to online sales away from in-store shopping.

“While the accelerated rate of online retail sales will eventually drop off, that gain in market share by online retailers will stay. This has benefitted the pure online retailers such as Amazon, Wesfarmers-owned Catch and Kogan (ASX: KGN). Woolworths itself, as Australia’s largest online retailers, has benefitted too.”

David Harrison, Charter Hall managing director and group chief executive officer, says the retail and residential sectors will be beneficiaries of the tax cuts.

“The budget sets up Australia to be one of the best performing global economies coming out of covid-19. This, and continued low interest rates, will not be lost on investors.”

Jamie Nicol, chief investment officer at DNR Capital, says his analysis suggests this budget will be incrementally positive across several sectors.

“Hard-line goods and automotive retailers like Wesfarmers will benefit from the instant asset write-off program boosting capital asset purchases,” Nicol says.

“Employment service providers like Seek (ASX: SEK) are likely to see increased volumes on the back of the JobMaker incentives. Waste Management companies including Cleanaway (ASX: CWY) are potential beneficiaries of the recycling initiatives.”

Infrastructure boost

Outside of tax cuts and job programs, the Treasurer announced an additional $10 billion in funding for infrastructure projects over the next four years, increasing the post covid-19 infrastructure commitment to $14 billion in new and accelerated projects.

Another $2 billion has been allocated for road safety upgrades while an additional $1 billion of funding to be provided for the Local Roads and Community Infrastructure program. Separately, another $2 billion in new funding to build water infrastructure such as dams and pipelines.

Sarah Shaw, global portfolio manager and chief investment officer at 4D Infrastructure, says that investment in the nation’s infrastructure improves the economy’s “arteries”, aiding economic growth and job creation.

In terms of listed infrastructure companies, she expects a positive impact on APA Group (ASX: APA) and Transurban (ASX: TCL). “A number of the road and bridge proposals feed or connect directly to Transurban concessions,” she says.

In Ord Minnett’s view, the increased funding is also positive for contractors exposed to infrastructure spending, including CIMIC Group (ASX: CIM), Downer EDI (ASX: DOW) and Seven Group Holdings (ASX: SVW) and notes that the “use it or lose it” nature of the small-scale road project funding should provide a more immediate boost to the sector.

Healthcare

With the exception of improved R&D incentives, there were no huge changes in healthcare spending, says Morningstar director of equity research Mathew Hodge.

“There is some money in the budget for covid-19 vaccines. Like a lot of companies, CSL (ASX: CSL) is working on a vaccine for covid-19, but we think this is likely a humanitarian endeavour, rather than a likely profitable one. And we don’t factor any specific profits from the covid-19 efforts into our valuation.

“Research into covid-19 is a very crowded field, so there is a small chance CSL’s will be commercialised. According to the World Health Organisation, CSL’s vaccine candidate is just one of 42 in clinical trials, with a further 151 in preclinical evaluation,” says Hodge.

In terms of R&D incentives, the federal government announced $2 billion in additional research and development incentives. “We expect this to support those companies with large R&D programs in Australia including CSL, ResMed (ASX: RMD) and Cochlear (ASX: COH),” says Ord Minnett.

Housing

The housing sector too could benefit from tax cuts, though the economics team at NAB still sees further weakness in house prices from here, with a deterioration in household income growth, high unemployment and a very sharp slowing in population growth still weighing on demand overall.

“In the near term there is also a still significant pipeline of new dwellings to come online. Supports to the housing market will come from very low interest rates and a sharp fall in the pipeline of work, with approvals at relatively low levels,” says a research paper from NAB.

“However, government support through the HomeBuilder program (previously announced) will provide some support to the activity side of the market while support for first home buyers which was extended in the budget via the First Home Loan Deposit Scheme will continue.”

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