Stocks & sectors most likely to benefit from the 2016 budget

Picking stocks to buy based on Budget Night 2016 revelations or the RBA's latest rate cut is fraught with danger, but now that the dust has settled, it's becoming a lot clearer which stocks and sectors are likely to be the biggest beneficiaries.

For starters, with interest rates likely to remain lower for longer, there's even greater compulsion for those requiring greater certainty of income to look to higher yielding stocks.

Wealth management & health care

But while lower borrowing costs is a net positive for the entire share market, the government's decision to tighten superannuation tax concessions from next year – reducing the income threshold to $250,000 from $300,000, and capping contributions at $25,000 – may have a negative knock on effect for wealth management stocks, like AMP (ASX: AMP), BT Investment Management (ASX: BTT) and IOOF (ASX: IFL).

Similarly, extending a current freeze on Medicare rebate indexation by two years is most likely to impact medical centre operator Primary Healthcare (ASX: PRY) and diagnostic services operator Sonic Healthcare (ASX: SHL); while an additional $2.9 billion for hospitals is good news for hospital operators like Ramsay Health Care (ASX: RHC), Healthscope Ltd (ASX: HSO), and Pulse Health Ltd (ASX: PHG).

The government's commitment to investing $40 billion in child support over the next four years should also be good news for the child care service provider like G8 Education (ASX: GEM), the only listed childcare play after Affinity Education last year was taken out by private-equity interests.

Infrastructure and construction

Infrastructure-related stocks – including Sydney Airport Holdings (ASX: SYD), Transurban Group (ASX: TCL) and Macquarie Atlas Roads Group (ASX: MQA) – in varying degrees – stand to benefit from budget night plans to spend $30 billion on national infrastructure, including big-ticket dams, pipelines and road projects, over the next four years.

Plans to spend around $594 million on an east coast rail link between Brisbane and Melbourne are also expected to benefit freight firm Aurizon Holdings Ltd (ASX: AZJ).

Construction materials firms like Adelaide Brighton (ASX: ABC), and Boral (ASX: BLD) should also benefit from government's commitment to infrastructure spending on key projects in WA, Victoria and Queensland.

Discretionary retail

But given that the rally many of stocks have enjoyed in the past year has left them stretched on most valuation measures, it's the discretionary retail and consumer stocks that could receive the single biggest tailwind from A) the RBA's 0.25% rate cut, and B) the federal budget's decision to raise the tax bracket for middle-income earners from $80,000 to $87,000.

Assuming the coalition government is re-elected, this cut is expected to be a precursor to additional tax cuts in upcoming budgets, while a more immediate impact for retailers like Harvey Norman (ASX: HVN) and JB Hi-Fi (ASX: JBH) is likely to come from the extension of concessions to companies earning less than $10 million, up from the current $2 million threshold.

Then there's the pending withdrawal of the 2% deficit levy which will increase the discretionary income for those earning more than $180,000.

Included among retail stocks that could receive an as yet unqualified boost from these initiatives are Wesfarmers (ASX: WES) – especially its office supplies business Office Works; operator of specialist retail fashion chains Premier Investments (ASX: PMV); household furniture retailer Nick Scali (ASX: NCK); auto, leisure and sports goods retailer Super Retail Group (ASX: SUL); and fashion jewellery and accessories retailer Lovisa Holdings (ASX: LOV).

Network TV

Another modest winner from budget night are the free-to-air TV network owners, which pocket a collective $164 million benefit from lower licence fees up to 2020. But while the savings will come in handy, they're hardly a compelling argument for investors to buy into Nine Entertainment (ASX: NEC), Ten Network (ASX: TEN) and Seven West (ASX: SWM), which have been losing advertising revenue to digital media.

Challenger Ltd

With an 80% share of Australia's annuity market, Challenger Ltd (ASX: CGF) will be the primary beneficiary of federal government plans, announced on budget night, to extend the tax exempt status of pensions to products such as deferred annuities.

As a result of this budget night announcement, earnings on deferred lifetime annuities will be tax exempt from July next year.

This will allow providers like Challenger to offer a much wider range of retirement income products that offer greater flexibility and choice for Australian retirees, and help them to better manage the longevity risk of outliving their savings.

International educators

The $12 million earmarked to support Australia's National Strategy for International Education 2025, could provide a kicker for the four ASX-listed stocks in the international education space, including: Academies Australasia Group Limited (ASX: AKG), Education (ASX: RDH), Education (ASX: RDH), IDP Education (ASX: IEL).