Australia | Feb 26 2019
In three months Australia elects a new federal government. Though a lot can and will change in the weeks ahead, Labor remains favourite and experts are trying to assess the potential implications for investors.
-A Labor victor at a May federal election could dent the prices of housing and stocks paying franked dividends
-However, some of this risk could already be priced into assets
-A Labor victory could be to Telstra's benefit
By Nicki Bourlioufas
A win by the Australian Labor Party at a May federal election could be negative for investors in the short term with a rise in political risk and a slew of measures which will cut benefits to investors, compounded by a deteriorating budget position and a housing downturn, say some share market strategists.
However, some of the risks may already be priced into assets, a view being proposed by Credit Suisse, who thinks an ALP government will expedite the economic cycle and introduce higher spending policies than a Liberal-National government, favouring a return to stronger economic growth over the longer term.
Challenges to personal investment strategies
Labor is proposing changes to franking credits, negative gearing, the capital gains tax regime, trust distributions and taxes for high-income earners. EL & C Baillieu Chief Investment Officer Malcolm Wood says the proposals would have very significant and different impacts on individuals, self-managed super funds and property investors, as well as other investment vehicles.
Under Labor policy, excess franking credits would not give rise to a cash refund.
Wood says a decline in the value of franking credits for many investors could adversely impact the value of select securities offering fully franked dividends. The prices of hybrid securities, often dominated by retail investors, could fall and see a rise in yield, though institutional investors able to utilise the franking credits should soften the impact.
Dual-listed securities such as BHP Group ((BHP)) and Rio Tinto ((RIO)) may see a narrowing of their Australian price premium. “Other listed securities are less likely to be materially affected given the high ownership and participation of institutional and foreign investors,” according to Ballieu.
Separately, Labor’s plans to limit negative gearing to new housing and to cut the capital gains discount to -25% from -50% would likely lower investor interest in property investment.
Baillieu forecasts gross rental yields may need to rise about 1%, lowering home prices by about -20% to partially compensate investors for a loss of negative gearing and capital gains tax concessions.
But Credit Suisse thinks these risks are already priced into housing and stocks. Indeed, the housing- and retail-led economic slowdown has put an interest rate cut on the RBA’s agenda, so shares and property values may not suffer as much as some analysts and investors fear, though there may be a short-term negative impact on banks, residential property developers, builders and retailers.
Indeed, shares could rally on a Labor win in a similar way to the US market after Donald Trump’s victory, on the increased prospect of big-spending policies, says Credit Suisse.
Political risk in Labor’s anti-investor, interventionist, big-spending agenda
Baillieu's Wood cites five reasons why a Labor victory would likely prompt the market to raise its assessment of Australian political risk. First, if Labor leader Bill Shorten becomes Prime Minister, he will be the seventh person to hold the office in less than 10 years.
By contrast, the nation had only five PMs in the previous 35 years. “If Australia were a public company and had changed CEOs with anything like this frequency it would signal extreme turmoil,” Baillieu says.
The second cause for concern is that the widely predicted ALP landslide could deliver control of both chambers of parliament to a left-wing party for the first time since the 1940s. Alternatively, unease in the electorate could result in Labor winning the House of Representatives but not the Senate, leaving the government reliant on independent senators to advance its legislative agenda.
A Liberal-National scare campaign on tax could give the Coalition a victory in the House but similarly deprive it of control of the Senate, continuing the current legislative dysfunction.
Baillieu says that, third, Labor is pursuing an anti-investor agenda. Extra taxes on investors, trusts and high-income earners are projected to raise $280bn over a decade. These would be partly offset by tax cuts for low-to-middle income earners, $10bn in accelerated tax breaks for business investment and increased spending on health and education, but the net effect would be “negative for growth and most investment returns”.
Fourth, a Shorten government is expected to pursue interventionist policies on energy and telecoms, and to re-regulate the financial sector in the wake of the Hayne Royal Commission. But while Australia has lost reform momentum, the world has not stood still. Labor is not likely to reduce the company tax rate, which at 30% compares badly with the OECD average of 23.5%.
Fifth, Australia has clocked up 11 consecutive budget deficits since the Global Financial Crisis and this deterioration in fiscal management would likely continue under Labor. If the NBN and other large infrastructure projects were added to the government’s balance sheet, the rise in debt could drive a loss of Australia’s AAA-credit rating.
As a result, Ballieu recommends investors increase exposure to non-Australian assets as ALP policies will increase investor uncertainty, deepen the housing downturn and impact some security prices.
Telstra to win from Labor’s proposed NBN write-down
JP Morgan says the election of the Labor party at a May election could result in positive sentiment for the fixed telecom industry. This would be a reversal of the negative impact from the National Broadband Network (NBN) over the last four years.
In particular, JP Morgan says Telstra ((TLS)) would benefit if a Labor government writes down the value of the NBN.
For every 5% improvement in NBN margins over the three financial years from 2019-20 to 2022-23, the direct impact for Telstra is to add 0.9-1.3 cents a year to projected Earnings Per Share (EPS) and 0.8-1.2 cents a year to forecast Dividends Per Share (DPS).
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