The big winners and losers from a business-friendly budget

The federal budget has been unusually positive for the sharemarket as the coronavirus finally gave the government the pretext to abandon its surplus obsession.

Prime Minister Scott Morrison with Treasurer Josh Frydenberg look over the budget papers. Picture: Adam Taylor

This week’s federal budget has been unusually positive for the sharemarket as the coronavirus pandemic finally gave the government the pretext to abandon its obsession with surpluses.

As the economy transitions from the need for life support to recovery, the budget focused more on stimulating business investment, employment and construction than consumption.

But while assumptions may be tested — particularly the budget’s view that a vaccine will be fully effective by late 2021, allowing a gradual return of foreign students and migrants — there’s no denying the magnitude of the world-leading stimulus it provides.

A forecast blowout in the budget deficit to a record $214bn for 2020-21 and a string of deficits until 2023-24 reflect an expected $281bn four-year hit from COVID and $292bn of fiscal stimulus over five years, with $218bn of that, or 11 per cent of annual GDP, front-loaded into the next two years.

Including state governments, the total is worth $343bn or 17 per cent of GDP over four years.

“This is among the world’s largest and compares with global stimulus totalling about 5 per cent of global GDP in 2020,” says UBS Australia chief economist George Tharenou.

With analysts predicting a range of positive implications for listed companies, Australia’s benchmark S&P/ASX 200 share index surged 5.4 per cent to a five-week high of 6102.2 points this week.

It was the best one-week rise since a 6.3 per cent rise in early April as global markets experienced the fastest-ever recovery from a bear market amid unprecedented fiscal and monetary stimulus.

Morgan Stanley’s Antony Conte said fiscal stimulus from the budget should see value stocks build on their September run, with banks, property trusts, utilities and builders the likely standouts.

“The additional fiscal stimulus announced at the federal budget for shovel-ready infrastructure projects and support for business investment is a positive for value-orientated stocks,” he said.

Among builders, Adbri and Downer are well positioned to benefit from small to medium-sized projects, while Transurban, Aurizon and Qube Holdings stand to gain from road and infrastructure projects.

Here’s how the 2020 Budget is likely to impact different sectors.

Retail

Citi analyst Craig Woolford is cautious on discretionary retailers in the wake of the government’s budget announcement on Tuesday night, though he’s optimistic on Coles and Rebel-owner Super Retail Group.

While Mr Woolford said the federal budget would give little incremental demand support for the retail sector as total stimulus provided to households would be significantly reduced, he did say that the supermarkets were likely to be major beneficiaries of the government’s JobMaker scheme.

The scheme, which subsidises labour investment, was likely to benefit Coles and Woolworths, given their employee costs and ability to add staff following strong sales and earnings.

“We see the supermarkets as best positioned, with some benefit to retail demand and a more meaningful potential saving from the newly announced JobMaker program,” Mr Woolford said in a note to clients.

“We also note that Super Retail Group is likely a beneficiary from better operating cashflow.”

The government’s move to full expensing of capex for retailers with a turnover of less than $5bn would boost cashflow for Super Retail, which had about $90m in capex annually and sat below the threshold.

Personal income tax cuts and additional pensioner payments, as well as a potential lift in employment and investment, would support demand somewhat, though conditions were expected to remain tough for the retail sector.

Mr Woolford said a reaction from the tax cuts would be limited, given they had been flagged by the government previously.

“We continue to see a challenging outlook for retail in the June and September 2021 quarters as the consumer laps the very large stimulus,” Mr Woolford said.

“Accelerated tax cuts and pensioner payments are the most meaningful but were well flagged and relatively small, particularly compared to the COVID-19 stimulus in the June and September 2020 quarters.”

Mr Woolford left his buy recommendations on Super Retail and Coles. He remained neutral on Woolworths.

Bank

Bell Potter’s highly regarded banking sector analyst TS Lim declared the federal budget a positive for the banks this week, saying there was plenty in it that would benefit the sector, despite an economic contraction, elevated unemployment and spiralling net debt.  Macquarie remained his top pick of the banking stocks, while ANZ and Commonwealth were his preferred majors and Suncorp was his preferred regional or diversified pick.

“While there appears to be little direct benefit to the major banks out of this federal budget, there’s plenty indirectly that would cheer the overall sector,” Mr Lim said in a note to clients.

As he upgraded his recommendation on CBA to buy, Mr Lim said that support for business, including wage subsidies and small business tax concessions, would indirectly benefit banks that lent in the SME, mid-market and smaller corporate space.

Mr Lim also said that support for consumers in the form of lower taxes would indirectly benefit banks engaged in mortgage and other consumer lending, and noted there was no threat to Australia’s AAA sovereign rating from the budget. “Given the major’s ratings are dependent on this sovereign rating, wholesale funding costs should be stable for now,” he said.

Mr Lim upgraded his recommendation on CBA to buy and increased his target price on Westpac from $18 to $19 after lowering its cost of equity by 50 basis points to 10.5 per cent.

“CBA produced a respectable fiscal year 2020 result amid COVID-19 and a tough operating environment, and showcased better-than-expected top-line, volume-driven momentum,” Mr Lim said.

He also noted the bank’s cost discipline, strong overall balance sheet and good underlying asset quality.

“Allowing for the timing of COVID-19 impacts, CBA’s return on assets and return on equity are still the best among its major bank peers,” Mr Lim said.

Building

An increase in transport infrastructure investment unveiled in this week’s federal budget presents a positive outlook for engineering construction activity as well as demand for materials, according to Ord Minnett analysts.

Still, they left their hold recommendation on Adbri stock and their lighten recommendation of Boral, noting that actual spending on roads has fallen short of estimates in recent years and declined 19 per cent in financial year 2020.

The government said on Tuesday that it would provide $1bn over two years to bolster the Local Roads and Community Infrastructure Program, in order to support local councils to maintain and deliver social infrastructure and improve road safety. That included local roads, footpaths and street lighting.

Expenditure for roads is expected to be $7.4bn in the 2021 financial year, a 64 per cent increase on fiscal year 2020.

Morgan Stanley analyst Andrew Scott said the focus on “shovel-ready” local and state government infrastructure projects supported his preference for Adbri, on which he retained his overweight recommendation.

“Importantly, the skew towards smaller local government projects is likely to see a more timely allocation of these funds as opposed to the mega projects,” he said in a note to clients this week.