Key takeaways:

• ASX stocks across themes like healthcare, infrastructure and housing, critical minerals and renewables, and the NBN are beneficiaries of government spending over the coming years

• Investors will no longer be able to derive tax benefits via off-market buybacks

• Inflation, at its highest level since 1990, is expected to get worse before it gets better, and persist for longer amid a weak macro outlook, adding fuel to the RBA rate hike path

With no shortage of economic data released this week, both home and abroad, investors may be wondering what it all means for their share portfolio.

Whether it is the federal budget, inflation, or GDP data for the two largest economies in the world, each of these updates have a bearing on a range of stocks.

Rather than get bogged down by the ins and outs of the size of the federal deficit, and forecasts for future net debt, we're going to focus on what this week updates mean for investors.

Federal Budget

While much of the federal budget focused on social services like parental leave and child care that won't have a direct bearing for investors' portfolios, a number of policies announced have direct implications for other key industries. For investors, targeted spending in these areas could prove to be a tailwind for long-term earnings and share prices.

Positives for Investors

• Health and aged care: Spending will grow to $548 billion over the next four years, which means aged care homes will be equipped to improve their services, and individuals will have better access to healthcare services, including diagnostics and monitoring. Aged care stocks: Estia Health (ASX: EHE), Regis Healthcare (ASX: REG)

• Renewables: Thanks to $25 billion in climate-related spending out to 2030, including $20 billion to upgrade the electricity grid to bring renewables online, investor awareness in ESG ETFs could increase, and stocks with assets in this space stand to benefit.

  Renewables stocks: Infratil (ASX: IFT)

  ESG ETFs: BetaShares Australian Sustainability Leaders (ASX: FAIR), VanEck Clean Energy ETF (ASX: CLNE), BetaShares Climate Change Innovation (ASX: ERTH)

• Critical minerals: Approximately $100 million has been split evenly between establishing the Australian Critical Minerals Research and Development Hub, and funding early and mid-stage critical minerals projects. This could help miners exploring for lithium, vanadium, and cobalt.Battery metals stocks: Pilbara Minerals (ASX: PLS), Allkem (ASX: AKE), Lynas Rare Earths (ASX: LYC)

• Building and infrastructure: One million new houses will be built over five years from 2024. A total of $9.6 billion has been set aside for key infrastructure. Construction activity should lead to more demand for building materials, and extra work for building contractors.Building stocks: Downer (ASX: DOW), LendLease (ASX: LLC), Adbri (ASX: ABC), Boral (ASX: BLD)

• National Broadband Network: An additional investment of $2.4 billion into the nation full-fibre network means telecom providers will reach up to 1.5 million new premises.Telecom stocks: Aussie Broadband (ASX: ABB), TPG (ASX: TPG), Telstra (ASX: TLS)

Negatives for Investors

• Economic outlook: Household consumption is expected to decrease dramatically into 2023, with GDP projected to drop to just 1.5% by FY24. An estimated 140,000 people are expected to be out of work by 2024. Real wages are not tipped to return to growth until 2024. These conditions could weigh on sales for discretionary retailers, so investors may wish to review valuations for stocks in this sector to ensure they reflect the uncertain outlook ahead.Consumer discretionary stocks: Harvey Norman (ASX: HVN), JB Hi-Fi (ASX: JBH), Nick Scali (ASX: NCK)

• Soaring energy and gas costs: Household energy prices are set to increase by 56% before the end of next year. Gas prices are forecast to increase 40%. It follows that industries with intensive energy needs face additional headwinds, which means investors should be alert to rising costs. Investors should monitor government intervention, as gas companies have warned it could stifle investment, reduce supply, and increase prices.

  Energy-intensive stocks: BlueScope Steel (ASX: BSL), Evolution Mining (ASX: EVN), Brickworks (ASX: BKW)

  Gas stocks: Santos (ASX: STO), Beach Energy (ASX: BPT)

• Share buybacks: Effective immediately, investors will no longer be able to derive tax benefits from franking credits associated with off-market share buybacks. Instead, off-market share buybacks will be treated the same as on-market buybacks. This means the share buyback amount will be considered capital proceeds, with no portion considered a franked dividend. Retirees and 'low tax-bracket' investors are most affected.

Important for Investors

• Cryptocurrency: The government has indicated crypto will be treated as an asset and not a currency when traded via an exchange, meaning investors will be liable for capital gains tax on profits.

Inflation and the RBA

The latest annual inflation (CPI) reading, which measures the increase in prices of goods and services, was 7.3%, and 1.8% for the September quarter. The 'Trimmed Mean' CPI, which excludes more volatile inputs, hit a record high of 6.1%, exceeding the RBA's peak forecast from August.

Since each of these metrics were higher than expected, investors should consider how the central bank might respond in setting interest rates.

Positives for Investors

• Trade partners: The RBA is aware the gap between Australian and US interest rates is widening. This has weighed on the Australian dollar relative to the greenback, but the AUD is down just 2% versus key trading partners. RBA officials do not believe this will have a material impact on inflation. Companies with high USD earnings are currently leveraged to a strong tailwind. USD-earning stocks: CSL (ASX: CSL), Woodside Energy (ASX: WDS)

Negatives for Investors

• Higher peak interest rate: September inflation data suggests recent rate hikes have had no impact in stifling inflation thus far. It has already led to a number of analysts to increase their forecast for the peak RBA cash rate. Treasury believes interest rates will peak at 3.35% in H1 2023. Investors have witnessed the effects that rising rates have had over recent months, and a higher peak rate may weigh on rate-sensitive stocks in property and tech.Property stocks: Goodman Group (ASX: GMG), DEXUS (ASX: DXS), Charter Hall (ASX: CHC)

• Inflation timeline: Inflation is expected to be higher for longer, with the budget suggesting a rate of 3.5% in FY24 before dropping to 2.5% the following year. Upside' risks include floods and the global energy crisis. Investors should be aware that higher inflation typically weighs on margins for price takers', companies where it is more difficult to pass on higher costs. Investors also need to outperform inflation to achieve real' returns, which could make fixed income securities more appealing.

  Price-taker stocks: Domino (ASX: DMP), Inghams (ASX: ING)

  Fixed income securities: Exchange-traded bonds

Final Thoughts

Investors are no doubt aware of the various challenges facing the global economy, which are now intensifying across Australia. While the economy is not the stock market, and the stock market is not the economy, investors should be aware of, and pay close attention to the major drivers that ultimately impact individual stocks, sectors, or industries. 

This week federal budget serves as a reminder that even amid difficult economic circumstances, there are a number of investment themes leveraged to concerted action and targeted spending, including healthcare, infrastructure and housing, critical minerals and renewables, and the NBN. At the same time, the inflation outlook remains challenging, and investors should pay respect to the risks that accompany higher interest rates.