The broker team at UBS has digested last week's Federal Budget, and, not surprisingly, it has raised some concerns about how it impacts investing.
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Property market at risk
In the words of the UBS team, it was "the most consequential to investment markets in decades'', and risks putting pressure on the all-important property market.
This would, in turn, add "another headwind to stock prices which were already facing challenges from persistently high oil and a hawkish RBA''.
The big issue which came out of the Budget, of course, was changes to negative gearing rules for both property and shares, but which specifically removed the ability to negatively gear investments in residential property – except for new builds.
UBS said Australia has not really had a bear market in property over the past few decades, except for a "short, sharp slip in prices" in 2018-19.
Should property prices come under pressure, it will have implications for the broader economy and the share market in the short to medium term, they said.
But interestingly, UBS believes that over the longer term, the Federal Budget will shift more money towards the share market.
As they said:
We believe that the long run impacts from the Budget should be equity friendly, via making it a relatively more appealing place to invest versus residential property. But shorter-term, we believe this budget raises the risk of pressuring the property market, adding another headwind. A property market unwind, and the associated negative wealth effect impacts it would bring, has long been a tail risk for investors in Australia. We believe this budget raises the risk of this scenario playing out.
Banks to bear the brunt
UBS banks analyst John Storey said Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) were the most exposed among the banks should there be a slowdown in mortgage growth.
The UBS note said:
John also points that Budget tax changes which reduce incentives towards property investing would be slightly negative to the banks' margins given that investor loans typically price better than prime owner-occupier loans.
In terms of broad investing themes, UBS is overweight on the healthcare, industrials, and mining sectors.
It is underweight on banks, consumer discretionary, and real estate.
Within resources, UBS has added BHP Ltd (ASX: BHP) and Santos Ltd (ASX: STO) to its preferred stock list, as well as ALS Ltd (ASX: ALQ).
They also said the government's tax changes "improve the relative appeal of non-housing investments", which should help platforms such as HUB24 Ltd (ASX: HUB).
They also added Aristocrat Leisure Ltd (ASX: ALL) to their preferred list.
