On Saturday 17 July, Julia Gillard announced Australia will go to the polls on 21 August - a week earlier than what the bookies had been expecting.
Julia Gillard, who took over from Kevin Rudd on 24 June, spoke positively of maintaining the enviable economic growth that has kept Australia from going into a recession. Tony Abbott, on the other hand, is looking to make Labor the first ‘one-term’ government in 80 years, and is really using the mining tax as his main carrot to attract voters.
As election campaigns go into full swing, how will the Australian market react to heightened media speculation, fresh polling data and manifestos filled with newly-unveiled economic policies?
The election and the Australian market
The Australian market’s reaction on the first week after the announcement was muted. Investors appear to be looking more at the macro worries that have seen them shy away from equities and into cash.
Expect opinion polls to be studied very closely over the next few weeks. A recent Galaxy poll taken for Nine Television showed that Liberals and Labor were running neck and neck. Given Gillard chose to have a five-week campaign, this result may be a blow for her, as she had felt her ratings had improved after the changes to the RSPT.
There is no reason to believe the broader market will be too affected by the election. However uncertainty over a possible change in government may breed some instability in equities and the Australian dollar. Whilst policies will continue to be debated, history has shown that the ASX 200 and the Australian dollar tend to post modest gains with an average of around 1% prior and post an election.
Future management of Australia’s economy
The key area of debate for traders will probably be who’s more suited to look after our future economy. The Liberal Party has possibly the better reputation for money management. However, Labor has kept Australia out of recession and will use this to its advantage. Probably the biggest point here is that Labor expects the economy to return to surplus in 2011-12 by $3.1b, where as the coalition say it’ll be within three years. Labor also want to restrict government spending to 2% a year and cut corporate tax to 29% for small businesses in 2012-13. The coalition on the flip side want to slash spending by $46.7b, pause any increase to the superannuation guarantee, and halt the 50% tax discount on income from savings.
Resources sector
Whilst the economy will be debated, you can look at individual sectors/companies which stand to be impacted both positively and negatively depending on the election outcome. One of the biggest differences is their stance on the Minerals Resource Rent Tax ( MRRT) with Labor pushing the tax to the public to help improve the surplus going forward. However, you would think this has been largely priced into coal and iron ore stocks. With analysts having re-rated net present values (NPV) for companies impacted by the tax, the upside comes from a coalition victory, who has promised to scrap the tax. If this does occur, expect companies like BHP, RIO, Fortescue Metals and Macarthur Coal to attract buyers both domestically and internationally as brokers positively re-rate stocks, thereby providing a more attractive valuation.
Telecommunications sector
The coalition has also promised to scrap Labor’s National Broadband Network (NBN) in favour of a cheaper alternative. It will be interesting to see how Telstra trades, if this is the case. A liberal win would suggest there’ll be no NBN and enhanced optionality for Telstra. Telstra also will fully avoid a potential break-up which may be a net positive for its share price. If Labor maintains office, there will probably be little reaction to its stock price. However the key date will be 12 August as traders disseminate Telstra’s full-year results. Consensus forecasts for full-year net income is a$3.8b, an increase of 4.3%.
Healthcare sector
Other sectors that could see increased price volatility is the healthcare space. Stocks like Ramsay Health Care, Primary and Sigma have seen selling recently because of changes to government reimbursements. However, Labor has signed a deal with all states and territories except WA to fund 60% of public hospital costs in return for one-third of their GST revenue. The Liberal Party has committed $1.5b towards mental health. Given the respective policies, there may not be a strong case for selling in this sector.
Consumer discretionary sector – Media stocks
Media stocks could also get a lift as we should see a pick-up in advertising for election campaigns. This could support the likes of APN, Fairfax, West Australian News, Ten Network and Seven.
The Australian dollar
The Australian dollar will probably continue to track developments, notable in China, where the AUD and the Shanghai composite have strong correlations. Again, like the equity markets, uncertainty may make the local currency susceptible to sellers. If the Liberals gain power, it may attract foreign capital to Australia through removing the MRRT. Whilst this may bolster the AUD; it may be impacted by Abbot’s promise to keep interest rates lower than the Labor Party. A move like this could backfire as it did for former Prime Minister John Howard during the 2004 campaign.
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Updated: 26/07/10
Disclaimer: The above material does not contain (and should not be construed as containing) personal financial or investment advice or other recommendations. The information provided does not take into account your particular investment objectives, financial situation or investment needs. You should assess whether the information provided is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision based on the material above. You can either make this assessment yourself or seek the assistance of an independent financial advisor. IG Markets Limited accepts no responsibility for any use that may be made of these comments and for any consequences that result.
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