2016 Australian Election & Brexit – How does it impact investors?
In mid-May 2016 we officially flagged our increasing caution towards investment markets and our strong advice to raise cash levels amid the adoption of a conservative outlook for medium-term portfolio returns.
At that point we highlighted a suggested rise in CASH WEIGHTS from 5% to 10% of portfolios. However in light of the outcome from both Australia’s Federal Election and the surprise UK referendum, WE WOULD NOW COMFORTABLY ADVOCATE FOR CASH/TERM DEPOSIT WEIGHTINGS OF 10-15%.
BREXIT, Australia’s Election & Donald Trump – all reflect the same theme.
A fortnight ago and leading into the British referendum over European Union membership, English book-makers had made the odds on a British withdrawal from Europe at 25%.
Circle forward to the weekend, and even in spite of a long and insipid domestic election campaign, most political pollsters and pundits foresaw the Coalition Government reaffirmed, albeit with a diminished majority.
The learnings we should take from both of these polls is quite clear – a rapidly emerging and underestimated part of western society, is entirely dissatisfied with the political and social status quo. The effects of ‘globalization’ have not been kind to them and they are now expressing this via the ballot box.
The vote for ‘BREXIT’ speaks to a dissatisfaction with the entire political (and business) elite, not any one side of politics in particular.
In Australia at the weekend, the evisceration of the Coalitions parliamentary dominance in the House of Representatives came in spite of the SECOND LOWEST PRIMARY VOTE FOR LABOR SINCE 1949.
This election’s primary vote showed the highest vote for minor parties and independents on record, and numbers almost a quarter of the electorate.
Both in Britain and now Australia, the evidence is quite clear that a not inconsequential part of society now feels strongly that the major political parties and their policy agendas of the past decade or more (at the core of which is globalization) have not enriched them nor do they represent their desires for the future.
The rise of Donald Trump in the United States, which to many seems laughable, is yet more evidence of this ongoing political shift away from the status quo.
If we learn anything from the results of both ‘BREXIT’ and the Australian Federal Election it is that we underestimate at our peril the chance of Donald Trump emerging as President of the United States on November the 8th.
Implications for Investment Markets
There are general implications from the outcomes of both ‘BREXIT’ and the Australian election that are shared, but there are also specific remarks for each.
Keeping it simple and local to start – the diminished Federal majority (or potential hung/minority parliament) is wholly disappointing insofar as the direction for the country and its economy.
In simple terms, we have infinitely greater uncertainty ahead of us. Unsurprisingly that tends to impact on business and consumer spending habits.
Policy implementation will grind to a halt, but worse than that, future policy will be entirely clouded. In the near term the prospect of promised small business tax cuts and superannuation amendments look all but dead.
But to really understand the uncertainty, let’s play devils advocate and ask what we should expect if this country saw another election within the next year or two (plausible), and if the opposition Labor party were triumphant? Would we see Labor apply their plans to unwind ‘negative gearing’ and if so, what impact would this have on house prices and household confidence?
It is precisely the open-ended nature of this hypothetical that creates the obvious confidence hit.
This is but one of the myriad ‘uncertainties’ now raised by this vote and the lazy Liberal election campaign (there is my one, sole political remark, Ed).
Australian interest rates, like their global comparisons, are headed lower for longer.
BREXIT & Europe
Insofar as the ‘BREXIT’ vote is concerned once again the upshot is massive uncertainty.
Like Australia, the British political establishment have been roasted for the outcome and the questionable motivation driving the referendum in the first place.
Britain and Europe are now faced with massive uncertainty regarding Britain’s future access to the ‘common market’ – how far-reaching will it be and at what cost. The mammoth uncertainty cast over this and myriad other regulatory issues means businesses and consumers alike will again draw breath before committing to future capital expenditure and business strategy.
The European Central Bank Governor said the potential hit to European GDP could be 0.5%.
In the near term British property stocks have collapsed as concerns rise about the size of future employment in London’s financial sector in the wake of the decision.
The knock-on effects are many and varied from an economic and social sense, but the scariest is clearly the potential now for nationalist groups amongst the European Union to capitalize on ‘BREXIT’ by pushing ‘anti-European’ agendas. Forgetting the human catastrophe wrought on Europe by similarly emergent nationalism in the 1920’s and 1930’s, the much nearer term risk created by the weakening in European federation is that of sovereign debt default.
As we learned in 2011 and again last year, Europe’s dominant Franco-German political axis is highly keen to ensure confidence in the idea that European member states stand behind the sovereign debt of each member state.
The 2015 Greek debt deal is clear demonstration of this.
Greece alongside several other European nations has enormous sovereign debt, and but for the implicit European guarantee would see its debt traded and priced with far higher risk of default than it currently does.
Should Europe weaken, either by way of further ‘exits’ or by a weakening in the fiscal rules surrounding EU membership, investment markets will rapidly begin to question the ability of nation’s such as Greece to repay their substantial debt.
Any whiff of increased European sovereign default risk will trigger significant falls in government bond prices and leave a massive hole in both the European and global financial system,
This is the single greatest threat to investment markets to have emerged from the ‘BREXIT’ vote.
In a big picture sense, the rejection of ‘globalisation’ and recently perceived ‘liberal conservative’ political agendas speaks to a world in which the public (or a large proportion of it) wants less ‘big picture’ and more ‘show me the money’.
Politics (and with it societies and economies) will turn inward. Big ideas will struggle. Payback periods will shorten. Action and results will be prioritized at the expense of the bigger, arguably noble, dreams.
Again, these are massive generalizations, but their essence has merit I think.
The point is that once again, slower economic growth is further being reinforced.
Central Theme (ongoing) – Key Takeaway
The world remains in a state of excess supply. The combined effects of emerging market labour supply and the excessive productive capacity built up during the pre-GFC years is still to be washed through the system.
As a means to ensure the world didn’t face a decade of lost growth like it did with the Depression in the 1930’s, authorities globally hit the world economy with a tsunami of cheap money.
QE as it is called has acted to temper the downside, but in doing so has drawn forward future demand as well as creating enormous monetary and asset price distortions (such as negative interest rates).
Leverage has built up and up and up.
Without growth, the ability to service this vastly accumulated debt is weakened.
This is precisely why the last thing investment markets need right now is further shocks to economic growth that the ‘BREXIT’ vote in particular has delivered.
Right now think of the world economy as a dinner plate being balanced on a marble, but with more and more weight being added to that plate.
The upshot of the ‘BREXIT’ and Australian election outcomes is greater economic uncertainty, less robust growth and hence a need for LOWER INTEREST RATES FOR LONGER.
Where we previously felt Australian interest rates might be cut to 1.25-1.5% (from 1.75% currently), we now genuinely see the prospect for local cash rates down to 1% or more.
What to do?
All portfolios are individual and investor needs and risk-appetites differ, so we would encourage you to speak to your adviser as to how you should amend your portfolio to suit this cautious view.
However, in principle we would –
- Raise your cash/term deposit weightings to 10-15% of total portfolios.
- Reduce exposure to miners & reduce any OVERWEIGHT positions in Australian banks
- Be patient
We think that when adding the impact on global economic activity from ‘BREXIT’ to the risks associated with China’s economy that we have previously flagged, Australia’s ASX200 still has downside risk to 4700-4800.
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.