Our market is firing up today with just about all sectors trading higher. Investors have forgotten the "sell in May" market mantra, at least for today, and next week's federal budget could give the bulls more reasons to bid the market higher.
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is trading 0.8% higher, with Seven West Media Ltd (ASX: SWM) and Super Retail Group Ltd (ASX: SUL) leading the charge.
But depending on what Treasurer Scott Morrison reveals next Tuesday evening, we could find another group of stocks racing ahead of the market.
Morgan Stanley has come up with three scenarios for the budget from austerity to all out stimulus and something in-between.
The Treasurer could appeal to the fiscal conservatives to drive our budget more quickly into surplus and stagger spending and income tax cuts over a number of years.
Morgan Stanley doesn't think this is a likely scenario (and neither will most economists, particularly given that this is Scotty's last budget before the federal election), but it certainly can't be ruled out.
Under an austerity budget, you can expect the Australian dollar to soften further, while big banks like Commonwealth Bank of Australia (ASX: CBA) and retailers like JB Hi-Fi Limited (ASX: JBH) will also underperform.
On the flipside, the best stocks to own are defensives, according to the broker. While no specific stock was mentioned, I would think toll road operator Transurban Group (ASX: TCL) and Australia's largest airport operator Sydney Airport Holdings Pty Ltd (ASX: SYD) would fit the bill.
The Turnbull government could swing totally the other way and step on the gas too. Again, no one thinks this is a likely outcome given how the LNP have been banging on about being the responsible ones that voters can count on.
But hey, politicians often turn crazier when baying under the full moon of an election season!
Under this scenario, Morgan Stanley believes the Aussie dollar will rally while domestic cyclical stocks like banks and retail are the places to be.
The most likely scenario is somewhere between – a zone that Morgan Stanley calls "short-term refund, long term relief" where the government will "refund" the $8 billion to $10 billion budget windfall that is got in 2018 through tax cuts and infrastructure spending, which will kick in almost right away.
"In addition, the government has flagged the potential for a 10-year profile of income tax relief, although we would see the majority taking effect after FY21, at which point the Budget is projected in surplus," said Morgan Stanley.
While the Aussie is unlikely to move much, the broker is recommending investors go overweight on energy stocks at the expense of the miners. I assume this means good news for the likes of Oil Search Limited (ASX: OSH), but bad news for BHP Billiton Limited (ASX: BHP) and friends.
The broker also thinks investors should hang on to healthcare and buy "quality industrials", while staying clear of the banks.
Get ready for some interesting times next week. Beam us up Scotty!
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