This post will be a simple post-Australia Federal Election summary.
Relief would be the one word that perhaps most adequately sums up the view of Australian ‘asset-owners’ in the wake of this weekend’s election outcome.
Putting politics aside, we were very seriously concerned that the election of a Federal Labor Government would significantly deteriorate Australia’s economy and asset markets for the remainder of 2019 due to the legislative changes to tax treatment on property and equity it had planned.
We have displayed serious concern and caution in our investment postings for the last 3 months on account of this issue, and the economy too has been significantly impacted by the uncertainty.
We have spoken about a hiring and capital-expenditure hiatus amongst Australian business in the lead up to the election and that this has exacerbated the more fundamental concern relating to credit availability that has been the root cause of our slowing economy.
CREDIT AVAILABILITY STILL AN ISSUE
Make no mistake, the Royal Commission into Banking’s inadvertent impact on bank lending criteria and the knock-on availability of credit to the economy, when coupled with record household debt, is the undisputed driver of our recent economic softness.
However, the uncertainty surrounding the election and the outlook for business profitability, house values and retirement portfolio values had an undeniable impact, by forcing many companies and individuals to put off important business and personal financial decisions.
PROPERTY ACTIVITY CAN STABILISE, BUSINESSES CAN BEGIN FORWARD PLANNING
In the property market, as we have pointed out time and again, investor activity typically comprises over 30% of all activity.
Investor activity in Australian property markets has been at a trickle in recent months.
Australian business confidence, building approvals and job advertisement data all says the Australian economy is at its weakest ebb in terms of activity in around 6 years.
With the certainty afforded by a further 3-years of policy continuity under the Coalition, and the carrot of future middle-income tax cuts from 2022 onwards, there is ample reason to believe activity stabilizes and even rebounds somewhat in the coming 6 months domestically.
Property transaction volumes will begin to swell, hiring intentions stand some chance of stabilizing and the prospect of improved property sentiment means residential construction activity should improve.
Put very simply, the prospect of the Australian economy and its sharemarket with it, hitting a rather major near-term air-pocket has been removed.
RBA STILL LIKELY TO CUT RATES, BUT WITH LESS VIGOUR AND POSSIBLY LESS IMMEDIACY
Arguably, the RBA might feel less pressured to cut interest rates quite as aggressively and as soon as we and the market previously had thought and may indeed choose to wait for a month or two’s data on the economy before moving.
Nobody truly knows how much of the deteriorating economic activity has been related to election uncertainty, and I think the RBA will be keen to avoid a future policy error by displaying a degree of restraint and patience before aggressively taking domestic rates down under 1.00%.
The knock-on effect here is that the Australian Dollar might actually stabilize somewhere higher than the mid-60’s that we had previously foreseen.
RISKS REMAIN LOCALLY AND GLOBALLY
Domestically, the status quo is unequivocally a positive and frees individuals and businesses up to continue in the manner with which they had been, and not forced to make significant life and business adjustments under a new legislative regime.
But the status quo also infers little or no real change for the positive either, and but for the middle-income tax relief in 3 years, there is little planned by the existing government that is likely to provide the economy and the significant household debt in its mix with much fresh stimulus.
Internationally the world economy remains hostage to the outcome of tariff talks between the U.S and China, talks which at best seem to have stalled for the time being, or at worst deteriorated on account of the recent Huawei sanctions.
It remains to be seen as to the outcome, but it would be reasonable to expect that the absence of tariff relief and the application of new and higher tariffs on goods trade between both countries in the past month will likely have a negative impact on industrial activity in the coming months.
That remains a material risk and one we are highly conscious of.
IMMEDIATE PORTFOLIO IMPLICATIONS
At the index level there is now some chance the ASX200 tries to reach its pre-GFC high above 6800 which would be a further 4-5% above current levels, but this move would be highly dependent upon a favourable global trade outcome, and so still contentious.
Australian banks will bounce hard and are understandably leading the charge higher this morning, and up an unsurprisingly strong 7% or so.
The significant short interest in the banks ought help them outperform further in the coming month or two, but the election outcome will not change a jot our view on the long term likelihood of ongoing underperformance from the sector.
Medical insurers such as Medibank (MPL) and NIB (NHF) are also strong as the fee cap won’t be applied to their services.
Property development and construction names should do well, and our key bet in this space is Boral (BLD) since we feel like its valuation is already heavily discounting future profitability in spite of its more significant exposure to both Australian non-residential construction and U.S housing.
The sharemarket, the property market and the economy all ducked a bullet in the very near term with Saturday’s election outcome.
There remains to be seen just how much of our recent economic softness has been driven by the election uncertainty, but it won’t be insignificant.
Australian economic data stands a strong chance of stabilizing, albeit at weak levels, and perhaps even strengthening as well, so long as there are no surprises from the global tariff discussions.
Markets have thus managed to climb the ‘wall of worry’, and in truth, it would seem there is some chance locally, this continues for a time and grinds the ASX200 to within touching distance of its 2007 high – which is around 5% from here.
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