Retailers and Builders Likely to Benefit Most From Australia Budget

(Bloomberg) -- Australia’s pre-election budget is unlikely to have an immediate impact on equities, although retailers may benefit from planned tax refunds and infrastructure-focused companies might find support from a long-term spending program.

With an election scheduled for next month, Australia’s budget has forecast a return to surplus, while also increasing tax relief to more than 10 million low- and middle-income earners. The payments will come as rebates of tax paid and may trigger an increase in retail spending of as much as 1.5 percent in the September quarter, according to Citi analysts led by Craig Woolford.

The benchmark S&P/ASX 200 Index is set to rise 0.6 percent in early trading, having already risen the past six sessions, carrying on from producing its strongest first quarter performance since at least 1992. Still, the gains place Australia 31st in a global ranking of indexes.

“We could see a little bit of a reaction from retail stocks and consumer-facing stocks,” CommSec Market Analyst Steven Daghlian told Sky News Australia this morning. “Infrastructure spending could also help some of those construction and building companies as well moving forward.’’

The government plans to spend A$2.1 billion ($1.5 billion) on infrastructure in fiscal year 2020 as part of a plan to outlay A$100 billion over the next 10 years to ease congestion in the major cities and improve access to regional Australia. Still, there are concerns that these plans won’t have as much of an impact on the economy.

“While we’ve penciled in a 6% rise in public investment this year, today’s budget suggests that public capital spending will be less supportive next year,” Marcel Thieliant, Australia & New Zealand senior economist at Capital Economics, writes in April 2 note.

If the opposition Labor Party, which is leading in the polls, are successful at the election later this year there may be some small changes to the budget, although they are unlikely to influence publicly traded companies.

“At the margin, there may be some small additional stimulus relative to the current outlook as an ALP Government may refocus some of the later tax cuts on low and middle income earners, which tend to have a higher marginal propensity to consume,” ANZ Bank Senior Economist Cherelle Murphy writes in April 2 note.

Winners

  • Consumer discretionary, staples including Super Retail, JB Hi-Fi, Bapcor, Crown, Tabcorp Harvey Norman, Domino’s Pizza, Premier Investments, Star Entertainment, Aristocrat Leisure. Treasury Wine Estates
    • Tax offset to provide A$7.3b boost to households, with most spending likely in the Sept. qtr; May boost spending 1%-1.5% in the period: Citi
      • Coles, Super Retail, Accent Group rated buy at Citi amid a broad re-rating of retail sector the past month
  • Infrastructure firms including Adelaide Brighton, Cimic, CSR, Lendlease
    • Govt pledged A$2.1b for infrastructure in FY20, although net capital spending has been lowered to A$4.7b from A$5.8b: Capital Economics
  • Early learning centers including G8 Education and Think Childcare
    • ~350k children to get access to 15 hrs of early learning a week in year before school
  • Health care companies including Healius and Sonic Healthcare
    • Primary health care funding increased A$1.1b; Imaging spending lifted A$309m
    • Healius a clear beneficiary, with A$5m lift in profits in FY20, amid increase in practice incentive payments and indexation for medicare items, JPMorgan analyst David Low writes in April 2 note

Losers

  • Financial service providers including Commonwealth Bank, ANZ Bank, National Australia Bank, Westpac and AMP
    • ASIC to get A$400m funding boost to increase supervision and pursue more court action; APRA to also get extra A$152m to target governance, remuneration

©2019 Bloomberg L.P.