ASX 200 (XJO) Wednesday – key takeaways from the Federal Budget

The S&P/ASX 200 (INDEXASX: XJO) is tipped to open lower this morning according to the Sydney Futures Exchange. Here’s what’s making headlines.

ASX 200 edges higher, merger of equals

The ASX 200 struggled to a 0.3% gain on Tuesday, the energy (+2.3%) and materials sector (+1.1%) the key contributors.

The biggest news was the ‘merger of equals’ between Australian gold miners Saracen Minerals Holdings Limited(ASX: SAR) and Northern Star Mining Ltd (ASX: NST). The merger will value the combined company at $16 billion, making it a top 10 global player with hopes of some $1.5 billion in synergies sending both share prices 10% higher on the news.

This may be the eternal pessimist in me, but the last time we saw a gold merger of this magnitude was Newcrest Mining Limited (ASX: NCM) and its purchase of Lihir, which seemingly timed the top of the market. Interestingly, Newcrest announced yesterday it would be listing on the Toronto Stock Exchange.

The Reserve Bank of Australia chose to keep rates on hold at its October meeting, with market participants all but guaranteeing a cut in all three short-term interest rates to just 0.1%. This reference rate is key to ensuring the ongoing funding of the major banks, allowing them to lend this capital on but also support Australian Government bond-buying in the secondary market.

Featured video: The Australian Finance Podcast October Q&A

Federal Budget revealed, Baby Bunting booming

The (delayed) Federal Budget delivers as the Government seeks to guide the economy out of a global economic contraction that is 45 times worse than the GFC. Most of the announcements had already been flagged, with instant asset write-offs becoming uncapped, the stage two tax cuts being brought forward and tax losses able to offset previous profits.

The biggest surprise was a new ‘hiring credit’ through which businesses will be paid for hiring those currently unemployed between 16 and 35 years of age. Combined, the policies are expected to support close to one million new jobs in the next four years.

Baby Bunting Group Ltd (ASX: BBN) has clearly been a key beneficiary of lockdown, the company reporting same-store sales growth of 17% in three months to 2 October, or 28% when Melbourne’s stores are excluded. The group has benefitted from its e-commerce platform, online sales 126% higher in the quarter with ‘click and collect’ sales doubling, more than 230% higher.

Baby Bunting’s profit margin improved as it was able to retain scale and now intends to open four to six new stores in 2021. This is an important but underappreciated improvement, as it is those businesses able to leverage technology that can return to profitability more quickly, compared to say a travel agent, where they need more staff on the ground before they can deal with bookings at scale.

Elsewhere, Star Entertainment Group Ltd (ASX: SGR) was the latest company able to negotiate with its lenders, agreeing to a waiver of important debt covenants that ensure its ongoing operations and avoid the need for more capital in the short-term.

US stocks slide, President Trump back in the White House

President Trump was straight back to business after returning to the White House, requesting that his team cease negotiations with the Democrats on a second stimulus bill until after the election.

The market dropped sharply lower on the news, with the Nasdaq and S&P 500 falling 1.9% and 1.4%, respectively, for the day.

The White House also dropped its objections to the US Food and Drug Administration’s approval process for a new vaccine, meaning any vaccine will not be cleared by election day.

It appears New York will shortly restart lockdown measures, with the combination of news supporting the work-from-home sector.

This article was written by Drew Meredith, Financial Adviser and Director of Wattle Partners. To get in contact with Drew, click here to visit the Wattle Partners website.

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Disclosure: At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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