Coalition Win Saves the Markets?

It’s been a week since the federal election, and the Coalition remain in government, much to the surprise of many.

Prior to the election, we looked at whether or not the election and the two major parties would have any impact on the stock market.

Although it still may be too early to tell, the markets responded positively on the back of the LNP win.

On Monday, the markets opened for the first time since the election, and they went straight up to an 11-year high.

So what may have helped boost stocks?

Well, there were a lot who were unhappy with the policies laid out by the Labor party regarding banks, as well as franking credits and negative gearing reforms. The absence on these policies saw these stocks rise.

The S&P/ASX 200 Index experienced a rise of 110.8 points or 1.7% at market close on Monday. It hit 6,476.1, a high it hasn’t reached since 14 December 2007.

The big four banks also saw gains of 6% on Monday.

The RBA’s effect on the markets

According to fund managers, a third successive term under the Coalition was a better environment for banks rather than a change of government.

WaveStone Capital principal Catherine Allfrey stated, when referring to financials:

The market was following polls and with what has been happening over the last few months and most things domestically focused, they didn’t want to be in those stocks

Even offshore, they’ll have another look at Australia now.’

According to the Australian Finical Review (AFR):

Ms Allfrey concluded that for retail investors, a 6 to 7 per cent yield offered by the banks with the full benefit of franking and reduced tail risks from the housing sector restored the “blue chip yields story”.

But now Allfrey admits that the biggest thing looming over the markets will be what the RBA decides now that we know who’ll be leading the nation:

We’ve really hit an airpocket in terms of the economy, it doesn’t matter what data you look at it’s very weak, they would hope the animal spirits bounce back strongly.’

Brad Potter, Nikko Asset Management’s head of Australian equities, sees the increase in bank shares as a result of the fact that they had fallen so low that any positive news could swing them right back up again:

There’s a bit of recalibration going on, but everyone was concerned about capital gains tax and franking credits. There’s a view now that perhaps we’re getting closer to the bottom of the housing market

Looking forward you’re going to have some stimulus from the tax cuts, you’re probably going to get the rate cuts coming through and you’re certainly not going to get the capital gains and franking changes.

The macroprudential rules are being relaxed, the banks are adjusting to how you adopt responsible lending and how you calculate peoples’ expenditure.’

Darren Thompson, head of asset management at Equity Trustees, said that the rally preceded the sell-off before the election that was in response to the negative gearing and franking credits reform policies announced by the ALP.

It’s a big bounce-back but that probably gives you an idea how aggressive the selling going into the election was’.

But the RBA’s forecasted rate cuts are a threat to the markets, as Thompson further explains:

‘[T]he risk is they don’t cut as aggressively as the market thinks

Our view is the RBA has the potential to wait and see whether the stimulus from tax cuts comes through.’

Sentiment rising

Confidence in the banks is also up thanks to the surprising Coalition election win.

Although it’s not up by too much, just 2.1% on the ANZ-Roy Morgan Consumer Confidence Index.

All of the five survey components saw a rise in confidence:

  • Now a good time to buy household items? — 4.1% increase
  • Confidence towards current family finances — 0.5% increase and;
  • In the 12 months ahead — even larger at 1.2%
  • Confidence in the outlook of the economy looking one and five years ahead — 3.8% and 0.9%, respectively.

As you can see from the points above, sentiment rose after the Coalition won the election.

But even so, David Plank, head of Australian economics at ANZ believes the response may have been muted. The survey was done on Sunday when a Coalition win was likely as they had 74 seats and Bill Shorten conceded defeat, however, not many were sure of the outcome of the election when undertaking the survey and whether or not the Coalition would hold a majority or minority government.

In a note, Plank wrote:

The surprise election result, which people surveyed on Sunday would have known, most likely had a significant impact on sentiment

The tone of the domestic economic data released during the week prior to the survey — such as falling business conditions, modest wage gains and rising unemployment — would not have provided much of a boost to confidence.’

The survey next week may see another boost in sentiment as the Coalitions has firmed as a majority government.

It’s only been a week since Election Day, which is simply too early to predict what will happen in the upcoming months. Some already think this may turn around the housing market (though, don’t hold your breath), but again, it’s only been a week, there are polices that haven’t even come into play yet.

It will be some time yet before we see the actual effect on all factors of the share and housing markets this election has had.

Kind regards,

Alana Sumic,
Editor, Markets & Money

We believe Markets & Money is unlike any other finance newsletter. Our mission is to look at the world of investments and finance in a sceptical and contrarian way. Our editorial team looks beyond the headlines and obvious explanations to bring you what we think is really moving the market. More importantly, we’re trying to show you where the next big opportunities and  big risks could be that you might not be aware of. In Markets & Money, you’ll read about the state of the Australian housing market, the future of the commodity boom, China’s rise to an economic superpower, the fate of the US dollar, and of course, a whole lot more.

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