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Election sounds alarm on how investors will react

It's the beginning of the electoral smackdown Australia's anticipated for months, but it's also yet another nationwide shake-up that's likely to keep investors sitting on their hands when faced with risky financial decisions.

As Prime Minister Scott Morrison has now formally pegged 21 May for Australians to decide the composition of the next Parliament, the tight race to follow is set to be a nail-biter for financial market punters eager for a quick and decisive electoral wrap-up to ensure that their ventures are safe from potential post-election volatilities.

It's a challenge for an incumbent Coalition already beleaguered by natural disasters, highly publicised Parliamentary scandals, and the unenviable task of balancing the budget following a deluge of stimulus spending to stem the spread of COVID-19.

But should Anthony Albanese be handed the keys to the Lodge, the persistent economic problems will then become his own, and it will be his prospective government’s turn to face mounting debt and looming interest rate hikes likely to hit borrowers' hip pockets hard.

Facing the prospect of a change in government is never easy for punters either, whose delicate portfolios often hinge on the economic policies of whichever party forms government.

And with minor parties and Independent candidates eyeing off battleground swing seats, an expansion of the crossbench could usher in a steady stream of policy headaches for whoever governs, adding to the plethora of legislative uncertainties investors may experience that are likely to extend beyond the inauguration of the next Parliament.

Reading the tea leaves for potential investment opportunities in the lead-up to an election is seldom regarded as smart, especially when the polls indicate a possible photo-finish – so AMP’s head of investment strategy and economics Dr Shane Oliver has argued that investors will probably be careful before making their next big moves.

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Speaking with ifa in a follow-up analysis from the Prime Minister's election date announcement, Dr Oliver offered a frank and sobering view of the electoral duke-out, saying that although the policy differences between the two parties are small, investors may still withhold their market bets until after Australians hit the polling booths.

So where do investors stand? Dr Oliver says there is historical evidence to support investor hesitancy during an election campaign, where share markets have often been ‘range bound’, with a “pick-up” after the dust settles.

But he also feels this election is distinguished from the 2019 election where Labor was offering significantly different tax policies to the Coalition, which was “creating significant uncertainties”.

He outlined that big ticket policy differences between the major political parties in 2019 such as Capital Gains Tax, franking credits, negative gearing, trust structures and climate change created major uncertainties for investors, which led to stock markets going sideways before experiencing a post-election boost in confidence.

However, he believes now the differences are “quite mild”.

Regarding the hypothetical scenario of a minority government with a big crossbench swallowing up time in legislative negotiations, which has been a much talked-about point among political and economic commentators in this election cycle, Dr Oliver feels the initial process of forming a new government may also lead to a timeframe of investor uncertainty that could last for as long as the election campaign itself.

“A minority government does present more uncertainty,” Dr Oliver asserted.

He also warned that investors need to be alert to the scenario where crossbenchers may “tilt the policy mix” of the government that may potentially impact their returns.

Citing the lead-up to the 2010 federal election as a cautionary tale when then-Prime Minister Julia Gillard asserted that her government would not implement a carbon tax, which led investors to assume that Labor policy was opposed to placing a price on carbon, Dr Oliver said the election result of a ‘Hung Parliament’ meant a carbon tax would be implemented from a deal with the Greens to form government.

There are many scenarios that could either quell or exacerbate investor uncertainties, but Dr Oliver’s illustration of a potential minority government is certainly among the worst-case ones.

“Minority governments also come with less stability” he said, explaining that the government is more often distracted with keeping the crossbench satisfied, while also failing to operate with a mandate, making the process of governing “more difficult”.