We’re in the midst of the 2019 Federal election campaign, and some investors may be worried about the impact of the outcome on investment markets.
There is definitely a clearer difference between the major parties this time, which is creating more uncertainty than in previous campaigns. But those differences aren’t as extreme in many other countries around the world.
While the election result may trigger some short-term market volatility and could dampen productivity, I believe over the longer term it’s unlikely to lead to any major disruption to the Australian economy.
A messy market
If you look back through history, share markets tend to track sideways during election campaigns. Then, once the election is over, there is often a bit of a rally.
This election has been a little bit different. Initially in the election campaign, Australian shares pushed higher, perhaps on the back of global developments as US shares went to record highs. But recently we’ve seen a few more worries creep in, particularly about global trade.
It’s the same story for the Australian dollar. It has actually weakened during the campaign, partly due to global developments and investors speculating about Reserve Bank of Australia interest rate cuts at some point.
What might happen
If the Coalition wins on May 18 there will probably be a bit of a ‘relief rally’ in share markets, due to a continuation of the current government being viewed as a known quantity.
But if Labor wins, I think there will probably be a bit of uncertainty, particularly due to its plans around increased taxation.
Labor has a plan to increase the top marginal tax rate, and not proceed with the tax cuts the Coalition has proposed in the coming years.
It’s expected that a Labor Government would probably result in a higher level of taxation in Australia overall, which it would allocate to sectors like health and education, and to low-and-middle-income earners.
Labor has also proposed other changes which might unsettle the markets. It wants to wind back the capital gains tax discount, wind back negative gearing, remove franking credit cash refunds, and tax distributions from trusts at 30 per cent. In addition, it is also proposing some changes around superannuation.
So overall, the market would probably see a Labor win as a bit of a negative. A Labor victory would impact upon certain parts of the market, particularly housing which includes building materials companies, developers, and property trusts exposed to housing. The banks would also be bit vulnerable.
Offsetting the negatives
But before investors panic, there are some positives that would provide a bit of an offset to that uncertainty.
To some degree it will depend on how Labor spends the money it raises through higher taxation. If it is spent wisely it could have a positive economic impact.
For example, if you take money from high income earners (who tend to save a lot of their income) and give it to low income earners (who tend to spend a higher proportion of their income) that might boost consumer spending.
There is also a tendency for Labor Governments to act fairly quickly in crises. We saw that at the time of the global financial crisis when, along with other stimulus measures, the Rudd Government handed out two rounds of cash bonuses to boost spending.
It’s also important to note that, historically, Labor is pretty good at taking advice from Treasury, and therefore I’m confident that, overall, economic policy will remain reasonably sensible in Australia, regardless of who is in government.
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