How Far Will Budget Stimulus Go?

Australia | Oct 07 2020

An extremely stimulatory Australian government budget was expected after the economic destruction wrought by the pandemic. Where are the stock market beneficiaries/victims likely to be?

-Pro-growth budget supportive of equities, particularly resources & infrastructure
-Tax concessions to benefit a range of medium-sized enterprises
-Industrial A-REITs the likely beneficiaries of manufacturing strategy

 

By Eva Brocklehurst

Is it business as usual for financial markets in the wake of the much-hyped Australian government budget for 2020/21? As expected, this was an extremely stimulatory budget, brought on by the economic destruction wrought by the pandemic.

Commonwealth Bank economists welcome the broad array of stimulatory measures and the goal of increasing local capacity in a range of industries, along with a focus on jobs.

Crestone expects further gains in those equity sectors linked to the consumer and infrastructure while the preservation of Australia's AAA credit rating, although on “watch” with Standard and Poor's, should be positive for the Australian dollar.

Bond yields are likely to remain low and constrained because of easy policy globally and additional debt issuance. Crestone also expects the banking sector, currently trading at depressed price-to-book levels, should experience better sentiment, to the extent an economic recovery can be priced and bad debt exposure reduced.

Combined with a positive trend in commodities globally, Macquarie believes the stimulus measures will be positive for resources. While the quantum of the deficit and debt looms large, as expected, the broker assesses this is a pro-growth budget and supportive of equities.

One key element Macquarie highlights is that the economic situation appears not as dire as many anticipated back in July. Yet National Australia Bank economists point out the recovery in capacity utilisation has been quite modest, which signals there is some way to go before a full recovery can occur.

Forward orders are weak and, at face value, this signals the work available continues to shrink. As a result, the NAB economists expect confidence will remain fragile and business investment could fall sharply over the next year.

They suggest structural reform would have been useful but acknowledge fiscal stimulus was the necessary component. The main “surprise” observed is the absence of the stage 3 tax cuts or a permanent increase to the JobSeeker payment.

The government has a more optimistic view on the labour market than Westpac economists assess, as well as a more constructive view on consumption, dwelling and business investment.

Westpac economists put greater emphasis on potential headwinds, such as the weak wages growth that was occurring ahead of the pandemic and the legacy of a severe recession in terms of high unemployment and low confidence.

Highlights

Stage 2 tax cuts featured, having been brought forward, and retailers may benefit, Macquarie asserts, along with other discretionary consumer businesses to the extent they are not constrained by social distancing.

However, CBA economists were disappointed there was no consideration of voucher schemes that may better target consumer expenditure, and point out there are no guarantees the stimulus will be spent.

Companies with turnover up to $5bn will be able to deduct the full cost of eligible assets in the first year and there are other benefits from loss “carry-back” provisions. Credit Suisse highlights Domino's Pizza ((DMP)), Metcash ((MTS)) and Harvey Norman ((HVN)) among those that will benefit from the write-offs, as well as chemicals & agriculture stocks.

Morgan Stanley considers the measures should benefit all stocks under its coverage with the exception of AGL Energy ((AGL)) and Origin Energy ((ORG)), which have turnover in excess of $5bn, and foreign earners such as Auckland Airport ((AIA)) and Atlas Arteria ((ALX)).

The JobMaker plan worth $74bn includes a $4bn hiring scheme while JobTrainer involves measures to improve skills, including a 50% wage subsidy available to those businesses employing new apprentices and trainees. For small-medium enterprises, the refundable R&D tax offset on annual cash refunds has been removed, while for larger firms the non-refundable R&D tax offset is increased from July 2021.

Nevertheless, the Australian Small Business ombudsman, Kate Carnell, remains disappointed that the government failed to clarify the position on software R&D and missed a "golden opportunity" to commit to prioritising small business when it comes to procuring work.

Infrastructure/Housing

A major theme is the bringing forward of infrastructure expenditure, which the CBA economists welcome as the stimulus has trickle-down effects across the economy. The package includes major road, rail, road safety and community infrastructure enhancements.

This underpins not just construction/mining but also the support/services business in the towns and regions where projects are located. The Master Builders Australia welcomes the productivity-enhancing infrastructure commitments as well as the $1bn for construction of new affordable housing.


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