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On 6 October 2020, Treasurer Josh Frydenberg released Australia’s 2020-21 Federal Budget.
The objective of this Budget is pretty simple – economic recovery – by increased spending, lower taxes, job training and re-skilling workers.
A stimulatory Federal Budget on a standalone basis is beneficial for the sharemarket. Tax cuts have the potential to boost consumer and business spending, putting extra dollars in people’s pockets and boosting confidence levels. Of course, economic recovery also depends on whether people have jobs, are confident about securing a job, and what happens with wages.
Looking through the array of stimulus measures, there are a host of factors that will affect Australian equities. This blog discusses some of the business incentives announced in the Budget, and considers how investors could position themselves to capture the potential benefits.
Notable tailwinds for business:
- Investment write-offs and loss carry-backs – more than 99% of businesses will get access to a new investment allowance. The mining giants, global biotech company CSL and the big four banks are among the few businesses to be excluded from the nearly $27 billion plan, set to allow firms with turnover of up to $5 billion to deduct the full cost of eligible capital assets until June 2022.
- Wage subsidies – $4 billion program offering all businesses – excluding the big four banks – credit to hire young job seekers.
- Research and development – The government has backflipped on previously proposed cuts to research and development (R&D) tax incentives, and will spend an additional $2 billion through the R&D tax incentive program to help innovative businesses that invest in R&D.
- Incorporated small businesses – Loss carry-back provisions will allow small businesses that make a loss in the 19/20, 20/21 and 21/22 financial years to claim a refundable tax offset up to the amount of their previous income tax liabilities.
- Small business start-ups – Small businesses with a turnover of between $10 – 50 million will be able to claim up to ten tax breaks, with fringe benefits tax scrapped on car parking, phones and laptops, simpler trading stock rules and easier PAYG instalments.
Other things to keep in mind:
Tax cuts can be spent as well as saved. If personal tax cuts are spent, consumer discretionary stocks such as retailers will benefit.
Interest rates are generally expected to remain low for at least the next three years. That means the capital growth and dividend returns from listed shares will be important in attracting people to shares as an investment class.
How might investors use ETFs to take advantage of the potential benefits of these measures?
The BetaShares Australian Ex-20 Portfolio Diversifier ETF (ASX: EX20) holds stocks 21-200 on the ASX based on market capitalisation, which tend to provide a more growth-focused and diversified sector exposure than the broad market.
EX20 excludes the big four banks, mining giants and CSL, none of which will receive the full benefit of the tailwinds discussed above.
EX20 has outperformed the broader market returning 6.94% p.a. net of fees since fund inception (5 October 2016) compared to the S&P/ASX 200 return of 6.20% p.a1. Of course, it’s also important to remember that EX20’s return volatility can be expected to be higher relative to the broader market.
Additionally, whilst not specifically an income-seeking strategy, EX20 can add significant diversification of the income stream from Australian equities away from the banks.
Common inception date is 5 October 2016, being the date of inception of EX20. EX20 performance is net of fees. Past performance is not indicative of future performance of any ETF or index.
With a current forward-looking yield of 2.73% p.a., EX20 is similar to the Australian broad market at 2.86% p.a. but with greater potential for income diversification2.
The Betashares Australian Small Companies Select Fund (managed fund) (ASX: SMLL) employs screens which aim to identify companies outside the top 100 stocks with positive earnings and a strong ability to service debt. Relative valuation metrics, price momentum and liquidity are also evaluated as part of the stock selection process.
SMLL currently has an overweight to technology and consumer discretionary stocks, many of which are expected to be beneficiaries of the above measures. SMLL has outperformed the S&P/ASX Small Ords Index since fund inception (7 April 2017), returning 7.34% p.a. net of fees compared to 6.62% p.a. for the index3.
Common inception date is 7 April 2017, being the date of inception of SMLL. SMLL performance is net of fees. Past performance is not indicative of future performance of any ETF or index.
There are risks associated with an investment in each Fund including:
For more information on risks and other features of each Fund, please see the Product Disclosure Statement, available at www.betashares.com.au. It’s important to remember that the return volatility for EX20 and SMLL can be expected to be higher relative to the broader sharemarket, and each Fund should only be considered as a component of a broader portfolio.
1. Source: Morningstar Direct, as at 31/10/20. Past performance is not indicative of future performance.
2. Source: Bloomberg, as at 31/10/20. Future results are impossible to predict, and forward-looking statements are subject to risks and uncertainties. Actual yield may differ.
3. Source: Bloomberg, as at 31/10/20. Past performance is not indicative of future performance.