By Darren Thompson, Head of Asset Management, Equity Trustees
The re-election of the Coalition Government was clearly a surprise to many, particularly corporate bookmakers such as SportsBet who had already paid out on a Labor win. Of course, the indicators (polls, bookmakers) strongly pointed to a Labor win and while that is what we expected as well, the expected outcome has not been a material driver in our portfolio positioning. Rather, the negative impact on areas expected to be disadvantaged under prospective Labor policies (franked dividend streams, banks, housing and construction) had already been priced for adverse policy outcomes. As such, in some areas we felt there was asymmetric risk of a rebound in certain sectors in the event of a Coalition win. Our thoughts in relation to the impact of the election result are as follows:
- Macro perspective – There is not a great deal of difference in the near term between a Liberal or Labor outcome as the fiscal stimulus from tax cuts and spending initiatives would have been comparable. Stimulus was probably even a little higher under Labor. However, both consumer and business confidence is likely to be higher under the returning Liberal government as confidence in economic stewardship appears to have been a major factor in voters’ decision making.
- Fixed income markets – Flowing from the point above, there is no material change to our view that fixed income markets remain expensive with the Aussie 10-year bonds at 1.64%. We think the Reserve Bank will only cut as an absolute last resort and would like to wait to see if the post-1 July tax cuts and other stimulus measures take effect. In any case, the market is already pricing in two 25bp rate cuts this year and, as such, we expect returns from fixed income to be low over the next 12 months.
- Banks – Banks are a clear beneficiary of a Liberal win as Labor policies on negative gearing, as well as their general heightened adversarial attitude, would have adversely affected the property market, lending conditions and the regulatory environment. The banks still face significant headwinds such as weakening credit growth, financial planning remediation costs and increased regulation, but this would have been a gale under Labor. Further, as the largest provider of franked income streams, valuations will be relatively more positive given that Labor’s changes to franking credit refunds will not occur.
- Franked dividend streams – As noted above, Labor’s policy on restricting franked dividend usage has de-rated companies with large franking credit balances relative to their market capitalisation. Although it’s not the primary reason to own a stock, companies such as Caltex or Harvey Norman are worth more today than they were on Friday.
- Housing sector – There are a number of factors driving the pull-back in housing markets across many areas of Australia. A number of these – such as high levels of gearing, restrictions on access to credit and high valuations relative to income levels - have not disappeared. However, the retention of negative gearing and first homeowner funding initiatives announced in the election campaign will provide some additional support for the sector. This will assist the banks and building materials companies such as CSR and Boral. Property development companies such as Stockland, Mirvac and Lendlease (portfolio holding) should also be assisted.
- Resources – It can be argued that the election provides a mild mandate for jobs over the environment. Consequently, projects such as the Adani mine are more likely to proceed under a Coalition government. This will be positive for companies leveraged to infrastructure and construction (Cimic, Lendlease, Aurizon) as well as resource development.
- Health insurance – This sector is the most obvious direct beneficiary as Labor had proposed a hard 2% p.a. cap on annual price increases.
In summary, a Coalition win is arguably good for markets in the near term compared to the Labor alternative, particularly in the areas noted above. However, of more relevance to markets are the outcome of global issues such as US/China trade policy, US Federal Reserve interest rates and bond markets, and European political stability.