Federal Budget 2021-22: Market implications
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 11 May 2021, 9:55 PM
- Sectors Covered:
- Equity Strategy and Quant
The 2021-22 Budget follows up on the pivot in strategy delivered at the 2020-21 Budget in October putting aside balance sheet repair in favour of tax relief and fiscal expansion. This comes despite the backdrop of a rapidly improving economy.
Today’s Budget announcements confirm the LNP’s commitment to the economic ‘restart’ and prioritises job creation.
At the previous Budget, the Treasurer noted that the government’s focus would not shift from economic support to budget repair until the unemployment rate was “comfortably below 6%”. Last month the Treasurer confirmed that the current rate of 5.6% was not enough to meet that threshold and that the government won’t be “undertaking any sharp pivots towards ‘austerity’”.
Based on Treasury estimates, this is unlikely to occur before June 2023.
Key announcements around taxation, essential services (aged care, childcare, mental health) and housing form the centrepiece of the government’s plan to reinvigorate the job market.
In our view these measures do support the move to full employment given the shrinking set of tools available to the RBA to stimulate the economy via monetary policy. Unless rating agencies downgrade Australia’s sovereign credit rating - which we think is unlikely - we see the measures announced today as broadly supportive for equity market sentiment.
Market implications of key announcements
GDP forecasts over the forecast period have been revised higher from the December Mid-Year Fiscal and Economic Outlook. The recovery from COVID continues to surprise on the upside supported by higher Iron Ore prices and a faster rebound in employment. The key challenge now is to reduce unemployment to drive wage growth. History has shown that this will take some time and will require a period of sustained above-trend growth. Policy settings on the monetary and fiscal front, will need to remain accommodative for an extended period to see wages grow inline with forecasts.
Market implications — While GDP is expected to take a hit in FY21, a rebound of 4.25% is forecast in FY22 and return to trend growth in FY23 and beyond. A manageable fiscal position and a better than expected return to growth should be received positively. This will also help reinforce the major Bank credit ratings. We also see some support for the AUD as the fiscal position remains manageable despite the step up in fiscal spend. However there remains a significant degree of forecast uncertainty given the prevailing risks.
As widely expected there were no announcements to bring forward the controversial ‘stage three’ tax plan. In October’s Budget, the government extended the tax offset for low to middle income earners ($1,080 for individuals or $2,160 for dual income couples) to 2020/21. This Budget extends the tax offset for a further year at an additional cost of $7bn. An extension to full business expensing and loss carry-back was also announced. The program will run to 30 June 2023.
Market implications — The extension to the income tax offset and extension of the instant asset write-off for business is supportive for consumption benefitting retailers (JBH, APE, PWR, SUL, HVN, WES through Officeworks and Bunnings).
Boosting Apprenticeship Commencements hiring credit extended to March 31, 2022 which eligible employers can claim a 50% wage subsidy of up to $28,000 per year. $50 fortnightly increase to JobSeeker was announced in February.
Market implications — Expected to lower the cost of hiring and broadly positive for earnings growth in FY22. SEK’s online platform is a key beneficiary for hiring.
$17.7bn Aged Care package introduced focusing on home and residential aged care and improving the quality of care. Designed to fund 80,000 Home Care packages. Additional payment of $10 per day for residential aged care. Retention bonus for nurses in aged care.
Market implications — Key aged care exposures JHC and REG. Labour services (PPE).
$1.7bn childcare package targeted towards low-middle income earners with more than child. Increasing the subsidy to 95% of the daily fee up from 85%. The $10,560 cap will also be scrapped in a move that will benefit high income earners. Changes come to effect in July 2022.
Market implications — Changes support increased workforce participation positive for childcare linked exposures GEM, TNK, ARF, CQE. However earnings benefit won’t be until FY22+.
$1.2b rescue package for tourism and aviation. $274m in support for travel agents, tour operators, business events. $200m international aviation support payment to preserve the international airline workforce.
Market implications — Travel operators HLO, WEB, FLT, CTD and airlines QAN.
An additional $15.2bn investment in infrastructure over 10 years. With the bulk of the spending in three key projects including $2bn committed to the Melbourne Intermodal Terminal, $2.6bn for the North-South Corridor in SA and $2bn to upgrade the Great Western Highway between Katoomba and Lithgow in Sydney’s Blue Mountains.
Market implications — The incremental ramp up in infrastructure spending should support tendering opportunities for suppliers, engineers and contractors (WGN, BLD, CIM, DOW, ABC TCL, ACF).
COVID response - $700m for telehealth, pathology testing. $354m to support women’s health including improvements to cancer screening and birth-related services. IVF pre-genetic testing added to the Medicare schedule as part of women's health initiative. Commitment to developing a locally produced mRNA platform. ‘patent box’ system starting in July 2022 will tax profits derived from patents developed in Australia at 17%.
Market implications — Diagnostic/pathology operators (SHL, HLS) IVF providers (VRT, MVF). ‘Patent Box’ system will benefit the medical and biotech sector.
Establishment of a Family Home Guarantee which will allow single parents with a household income of less than $125,000 to purchase a home with a deposit of as little as 2%. The New Home Guarantee will then be expanded into a second year, with first home buyers able to purchase a home with a deposit of 5%.
The First Home Super Savers Scheme threshold of $30,000 for maximum voluntary contributions that can be released will increase to $50,000. Retirees downsizing will be rewarded by being able to contribute $300,000 to superannuation at age 60.
Market implications — Key beneficiaries Banks (ANZ, WBC), Mortgage Brokers (AFG, MOC), key housing exposures (ABC, BKW, SGP, MGR, REH) and affordable housing developers (CWP, DVN, AVJ).
The key objective of this year’s Budget is to extend the bridge of fiscal support until the economy can generate sufficient employment to trigger wage growth. While there are a few significant assumptions (acceleration of the vaccine rollout and international borders reopen mid 2022), the announcements today reinforce our view that fiscal support will not be withdrawn hastily.
However, the government still lacks the determination to bring about significant structural reform, chiefly around productivity, environment and innovation. The lack of genuine long-term reform has been an unfortunate feature of more recent Budgets.
In our view, the Budget is unlikely to bring about significant revisions to corporate earnings, however the ongoing commitment to support the economic ‘restart’ will underpin market sentiment and lead to further gains over the next 6-12 months.
Retailing, Housing, Resources, Energy and Financials have benefitted from the bounce back in economic activity. Household balance sheets are in great shape which should continue to support the strength in consumption.
We also see upside risk to dividends as uncertainty from COVID clears, keeping payout ratios elevated.
In the current market, we prefer a targeted portfolio approach favouring reflation (Banks, Energy, Resources) and COVID-19 reopening beneficiaries (Travel, cyclical Industrials, traditional Retail). See our Best Ideas for our most preferred exposures.
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