If you’re looking to the federal budget for effects on small cap stocks, you’re probably way too in the weeds — but there are a couple of things in there which could have an effect on the fortunes of your favourite small cap company.
Of course, the headlines were all about taxes — or to be more accurate, the cutting of them.
If it’s good for the economy, it’s good for business
The headlines will be all about tax relief for middle income earners — with the budget bringing forward a swathe of cuts for middle-income earners.
It added a further $550 to the tax cuts announced for middle income earners (defined as people earning between $48,000 and $90,000).
That means come July (and if the cuts are actually passed) single income households will get a maximum of $1080 in tax relief and dual-income families will receive a maximum of $2160.
As Ross Gittens pointed out in a piece written in budget lock-up, the cuts are all about politics but should provide some stimulus to a flagging economy.
What does that mean for small cap stocks?
- If a small cap companies is selling a product or service into the Australian economy, you may find that customers are more willing to spend on its products
- It may also be the case that if people feel like they have a bit more in their hip pocket and are feeling good about things more generally, they may be willing to take a punt and pick up some shares
At the time of writing there’s no guarantee the cuts will even be legislated anyhow, and there’s certainly no guarantee the LNP will find its way back into power.
Effectively though, the tax cuts could act as somewhat of a stimulus package.
Small business moves
A small cap listed company is effectively still an SME, and a raft of measures thrown out to the small business community last night could benefit the small caps.
The first cab off the rank is news that the much-loved instant asset tax write off had been extended to assets under $30,000, and made available for companies with revenue up to $50 million.
While a $5000 increase in the limit on assets isn’t likely to move the dial for small companies, the continuation of the scheme should help with cash flow.
Meanwhile, measures previously announced showed up on the budget papers for the first time, which is always nice.
For example, a 2018 pledge to put $2 billion aside to effectively back loans from alternate lenders provides another pool of capital for small caps to potentially look at.
Tougher cops on the (corporate) beat
One of the measures in the budget included a $405 million boost to ASIC to help crack down on dodgy financial services operators in the wake of the Royal Commission.
While this funding is tied to the Royal Commission recommendations, it still does mean that the corporate regulator will enjoy higher levels of funding.
The flow-on effect is that ASIC could have more resources for cracking down on any operators in the corporate space not following the rules – which could make the space a lot more desirable if investors have confidence that the businesses are well-governed and have no skeletons in their closets.
A boost for small exporters
Small ASX stocks who often pursue a listing to ‘turbo-charge’ their businesses into new markets could get a bit of a welcome boost with a $61 million boost to assist small companies with marketing — starting in 2019-2020.
It’s nice, but any small cap stock who wanted to pile in for the funding would be competing for a pot of about $20 million per year with thousands of other small businesses.
Again, it’s hard to draw a line between a budget measure and an outcome for small cap stocks directly, but this is one area where expenses could be reduced for a company.
Small cap stocks run the full gamut of businesses, from oil exploration companies, to biotech stocks, to mineral miners, to early-stage tech plays — so finding particular things which could affect them in a federal budget is difficult.
But here are a few things which have been picked out by our friends over at Stockhead (click through for a full list) as having a potential impact to particular stocks:
- A $5 billion spend on medical research through the Medical Research Future Fund — including $150 million for stem cell research.
- An $8.4 million spend for gas exploration in the Beetaloo Basin
- A $200 billion spend on defence, including an undisclosed spend on cyber security
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