Sunday, 31 March 2019 07:58

Investors Guide to the Federal Election

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The next Federal election will be held during May 2019.

It is difficult to remember an election that potentially has so many impacts on investors.  Mark Draper wrote this article for the Australian Financial Review which was published during the month of March 2019.

As if worrying about potential changes to franking credits and capital gains tax discounts weren’t enough, there are a myriad of other potential changes that investors need to think about should Australia have a change of Government at the next Federal election, as is widely anticipated.

Normally politics doesn’t usually need to feature prominently with investment decisions, but we suspect that this Federal election will bring politics to the top of mind for investors.

Here we examine some of the sectors that are likely to be impacted by the election.

Nathan Bell, (senior portfolio manager Intelligent Investor) says “If Labor reduce the CGT discount to 25%, that could drastically reduce demand for investment properties, which has already collapsed due to falling property prices and tighter lending.

This would be very bad news for the banks (and mortgage brokers and other lenders), which need to increase the size of their loan books to grow earnings.”  The banks could also face a higher bank levy from either side of politics as a politically acceptable way of funding election promises, particularly following the Royal Commission.

The ALP has proposed a cap of 2% on private health insurance premium increases. Matt Williams (portfolio manager Airlie Funds Management) is of the view that the insurers are already preparing for the introduction of this policy and that the question investors must ask is whether the health insurers, or the hospitals will have the upper hand in negotiating prices.  Who has the upper hand will determine whether the insurers can operate under this policy without a hit to their bottom line.  He points out that insurers are already looking to reduce claims and keep people out of hospitals with a focus on greater recovery at home and other alternatives. The recent profit result from Medibank Private showed very tight cost control.

Williams is also surprised that neither party as yet has committed to policy to write down the value of the NBN, thereby potentially reducing the price that NBN wholesalers, and by extension consumers, pay for their internet access.  He believes it is likely that the next term of Government write down the value of the NBN.  Such a write down would be broadly positive for the Telco sector as it could lead to higher margins for Telcos, which have struggled to generate a reasonable return from re-selling NBN.  This is unless the price reductions were ‘competed away’ in a highly competitive environment.

Nathan Bell is also concerned about the effects of policy changes to consumer behaviour.  He says “Labor's main policies all act as a tax on consumers. We've already got a recession on a per capita basis, so these policy changes will reduce spending. Non-discretionary retailers, including Woolworths and Coles, recently reported weak earnings growth. These policies could see growth evaporate altogether. People will find ways to cut their spending by buying more discounted groceries; shopping less often; buying more generic brands; and avoiding small treats.  Imagine what that then means for discretionary retailers, such as Harvey Norman and JB HiFi.” 

The Coalitions’ energy policy has ensured that the share prices of Australia’s energy retailers have been heavily discounted on the concerns of electricity prices being capped or companies broken up.  

Bill Shorten late last year also contributed to the uncertainty in energy policy suggesting the ALP will redirect east coast gas, earmarked for export, to the domestic market, if certain price levels (which weren’t disclosed) were reached.  Australia’s gas producers have export contracts to deliver gas that usually spans decades.  Investors are right to be concerned if a Government considered mandating that export contracts be put at risk in order to fulfil domestic demand.  Williams believes that this uncertainty is creating opportunities to buy energy companies that are cheap as a result.

It’s hard to be definitive about how to position investments for the Federal election at this stage, given that both major parties haven’t really put many cards on the table.  What ends up being legislated is often not necessarily what is promised during an election campaign, so investors need to ensure they don’t over react too..  

One thing however is certain, populist politics and business bashing is with us for the moment, and is likely to have material ramifications for investors.  Investors must respond by paying more attention than usual to this years’ Federal election.

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