MENU

This large cap is the biggest winner from the Federal Budget with two brokers upgrading the stock to “buy”

Experts who may think that this week’s Federal Budget will only provide a marginal benefit to stocks at best should have a closer look at the share price performance of Challenger Ltd (ASX: CGF).

The stock rallied for a second day taking its total gain since Treasurer Scott Morrison unveiled his budget baby to over 7% as Challenger jumped a further 1.8% to $12.75 during lunch time trade today.

While the earnings benefits for a range of stocks at the receiving end of the federal government’s increased spending or rule changes may trigger big earnings upgrades from analysts, it was enough to prompt two brokers to upgrade their recommendation on Challenger.

This is in part because the Turnbull government’s retirement income reforms that were included in the budget will open the market for annuities and similar type products.

What’s more, the government has lowered the value of so called “longevity products” that are used to calculate a retiree’s eligibility for the aged pension.

The reforms will likely boost demand for longevity products and pave the way for Challenger to launch new retirement income products.

Citigroup upgraded the stock to a “buy” as the broker thinks the reforms were more favourable than the market had anticipated; while Credit Suisse used the opportunity to lift its recommendation on Challenger to “outperform” from “neutral”.

“There has been some concern that the means testing of lifetime products would be negative for annuities and lead to a slowdown in CGF annuity sales,” said Credit Suisse, who has a $13.20 price target on the stock.

“The Federal Budget proposal that trustees must offer a product that provides income for life, no matter how long they live, is a clear positive for annuity sales. With an expected implementation date of 1 July 2019, the industry will likely move on this almost immediately and annuities will become a core part of retirement asset allocation strategies.”

Shares in Challenger have lost more than 5% of their value in the past year while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has rallied over 4%.

There’s lots of room to play catch-up and the upgrades for Challenger shows that the impact on the budget is more pronounced on the sentiment towards the stock than even engineering and construction stocks like Downer EDI Limited (ASX: DOW) and Cimic Group Ltd (ASX: CIM), which are seen as key beneficiaries of the government’s increased spending on road and rail projects across the country.

However, the waning Australian dollar could prove to be a drag on Challenger as it makes its Aussie dollar-denominated products sold in the Japanese market less attractive.

If you are wondering what stock may be the biggest loser from the federal budget, the close to 9% collapse in the share price of Link Administration Holdings Ltd (ASX: LNK) could provide a clue.

There’s another group of stocks that the experts at the Motley Fool believe are well placed to outperform in 2018.

These stocks are expected to make a big impact on the market over the medium to longer term and you can find out what they are for free by following the link below.

The Richest Man Alive Invests in This

The richest man in the world has just launched a $100 million investment fund and investors who don't take note could miss out on a massive opportunity.

And it isn't by sheer luck. He did it by looking to the future and investing in the big ideas of tomorrow.

This could be your chance to get in on the ground floor!

Click here to discover more!

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.