The fallout from the Federal election

While results of the recent Federal election may have been a surprise to many, there are positives for the economy as a result of the Coalition winning office. Here, we explore in further detail what the Coalition victory means, how it may impact the economy and the implications for investors.

The Coalition win has given the economy more certainty, and also prompted a rebound in the stock market. The ASX 200 surged to 6472 points on 20 May, the first trading day following the election, up from the previous week’s close of 6365 on 17 May.

Franking credits retained

The market surge has been partly attributed to the strong performance of stocks with a high level of franking credits. A key campaign issue was Labor’s plan to remove cash refunds for franking credits and with the Coalition’s re-election, this risk has been removed from the economy.

Should this have gone ahead, Dermot Ryan, AMP Capital co-portfolio manager says it would have made it difficult for advisers to structure investment portfolios, and that in particular, self-managed super funds in pension phase would have needed to restructure their investments.

But the fact that some other key Labor policy proposals had been taken off the table also had an impact on the economic mood.

“If Labor had been elected, this may have meant more uncertainty for the economy, due to shifts this may have prompted in the housing market as a result of the party’s proposed changes to negative gearing and the halving of capital gains tax concessions. The removal of these negatives is positive for the economy,” AMP Capital senior economist Diana Mousina says.

Near term, Mousina expects more upside for the stock market as business confidence improves, as well as an uptick in consumer sentiment.

Interest rates, housing and real estate

The Reserve Bank of Australia (RBA) has this week indicated a rate cut is likely in early June, with the potential for a subsequent cut in following months, which Mousina says would be positive for the housing market.

During the election campaign, the Coalition announced a policy to support first home buyers who only have a deposit of five per cent. Mousina says this initiative is only likely to help about 10 per cent of first home buyers and could prompt some concerns about lending standards and housing market risk.

Commenting more broadly on the state of housing market, while further falls are expected in residential house prices over the coming months, Mousina says the Coalition’s re-election should mean house price falls bottom out sooner. “We anticipate the market will fall by 15 per cent altogether, with the drop now at about 11 per cent,” she adds.

The election outcome also has ramifications for local commercial real estate, as Luke Dixon, AMP Capital head of real estate research notes.

“House prices were a risk issue, but it appears there’s now a floor on the falling market. This will have flow-on effects to the commercial property sector,” he says. The election result could be positive for the performance of office real estate assets and consumer spending, which could help support retail assets.

Dixon says: “Having more certainty and a reduced risk of volatility should enhance Australia’s reputation as a destination for capital.”

Risks on the horizon

Looking ahead, Mousina said economic conditions look relatively stable. “There’s little sign of a recession and a rate cut will also help economic conditions. But the performance of the global economy and the US-China trade agreement will also have a bearing on the performance of the local economy.”

The Coalition’s policy to deliver tax cuts of about $1,000 for low-to-middle-income earners, subject to its successful passage through the Senate, should also support consumer consumption but there are still risks to watch. “There are still issues around consumer spending in the near term, stimulus notwithstanding. Wages growth may also be an issue, in addition to the need to lift productivity and persistently low inflation,” she said.

Overall, with a majority government, the Coalition has a strong policy mandate. From this point, the future direction of the economy is less about politics and more about consumer confidence.