Implications of the Liberal National Coalition Holding onto Government
In what was reminiscent of a presidential style campaign by the Prime Minister, Scott Morrison, he has appeared to emerge with a strong personal mandate from the electorate, which should be reflected in his power base within the Liberal party. Indeed, with the loss of former Prime Minister, Tony Abbott, in the seat of Warringah, it could be argued that the right wing of the Liberal party may have less influence than it did previously.
The Coalition has yet to find out if it will lead a minority or majority government, currently holding 75 out of the 76 seats required to win, although in reality 77 seats are required for a party to govern in its own right once it has provided the Speaker (there are currently five seats in doubt, two of which the Coalition could still win). It may also face a minority in the upper house, being four or five seats short of a majority there. However, the Coalition may be able to obtain sufficient support from a number of independent senators for future legislation, especially for its tax reform package for low and middle income earners.
Impact on the Australian Share Market
This surprising result is unequivocally positive for the Australian share market. The scenario of the Coalition retaining power was certainly not factored in ahead of the election; we, along with most commentators had expected a Labor victory, although we had always been sceptical of Labor gaining a workable majority in the upper house, thereby limiting the potential to pass some of the more contentious legislation through the Senate, without a degree of compromise.
What had been factored into the market was some investors (primarily self-managed super funds (SMSFs) and self-funded retires) switching out of stocks with high, fully franked yields, ahead of the likely change in franking credit refunds, into stocks with partially and unfranked yields, as well as offshore investments offering higher capital growth than some of the mature dividend paying companies in Australia.
In addition, some institutional investors may have factored in some negative net wealth impacts, and the flow on effects onto the broader economy, as a result of Labor’s policies into their expectations and valuations.
We are therefore likely to see a potential recovery in securities with fully franked yields, as well as those that were most exposed to Labor’s policies, with the following sectors and securities most likely to benefit:
- Sustainably high, fully franked yields
- Listed Investment Companies
- Major Bank Hybrids
- Private Healthcare
Those sectors which had the least impact from the Labor policies, or actually benefited from them, may see some switching by investors. However, we would caution that some of these, especially the bond proxies, have been driven more by falling bond yields than demand by retail investors. These sectors include:
To access our sector rationale and key stock picks, continue reading this report on the Patersons Client Portal.
Warning: This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate to your particular investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from your Adviser, on whether any relevant part of this report is appropriate to your financial circumstances and investment objectives.
- Listed Property Trusts
- Consumer Staples
- Domestic International Fund Managers