Budget favours domestic cyclical and growth stocks
Australia’s FY21 Federal Budget is extremely stimulative, adding $82.6 billion (4.1% of gross domestic product) in new initiatives, bringing stimulus over the next 21 months to around $100 billion, or 5% of GDP.
The budget adds to our forecast V-shaped recovery, which is predicated on six positives: i) Australia’s world-leading COVID-19 management, limiting the cost of COVID restrictions to 3-4% of GDP; ii) impressive developments toward confidence-restoring vaccine(s) and effective treatments; iii) ultra-accommodative monetary stimulus, lifting GDP by ~2%; iv) effective fiscal stimulus a stunning 18% of GDP; v) advantageous positioning, lifting GDP by ~3%; and vi) consumer and business confidence at-or-above pre-COVID levels and poised to surge higher (Figure 1).
The budget’s four key policy initiatives are particularly positive for domestic cyclical and growth stocks, including:
- $17.8bn tax cuts: add to the strong case for a consumer boom. We prefer laggards such as Star Entertainment (SGR) and Eagers Automotive (APE).
- $35.1bn investment incentives: business investment, near a record low share of GDP, should resurge, lifting Downer EDI (DOW) and Vocus (VOC).
- $14bn infrastructure investment: whilst already at high levels, further spending is positive for Boral (BLD) and Adbri (ABC).
- $6.6bn job subsidies: job ads should continue recovering, lifting Seek (SEK). Labour intensive growth retailers Wesfarmers (WES) and Super Retail (SUL) should benefit from job subsidies and strong consumption.
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