AMP Capital’s chief economist Shane Oliver has a note out today looking at the impact of Australian elections on the share market. He shows that historically they’re flat in the run-up to an election because of the uncertainty they create, but then are usually followed by a “relief rally”.
Here’s the key chart, with the blue line showing the trend in the run-in to election day and the performance afterwards. 1997 and 2007 – both years just before major market collapses – are omitted.
He lists reasons why a Coalition win would lead to a likely immediate uptick on the ASX, but says Labor’s promises could also lift the market over time:
The main areas of difference between the two parties of probable economic significance relate to taxation, climate change, government spending & the budget and regulation.
- in terms of tax the Coalition has promised to cut the company tax rate (although for large companies this is partly offset by a paid parental leave scheme) and abolish the mining tax;
- the Coalition is proposing to abolish the carbon tax/Emissions Trading Scheme and will rather pay companies to reduce emissions;
- the Coalition is likely to take a lighter/more business friendly approach to regulation than a Labor government. This may involve some partial wind back of industry regulation; and
- the Coalition will likely try and speed up the return to a budget surplus by cutting government spending, much as it did under John Howard following the 1996 election.
As a result, perceptions that the Coalition will be lower taxing and less focussed on regulation and hence more business friendly than a Labor government may increase the chance a Coalition victory will result in a typical post election share market bounce. However, it’s worth noting that this may be partially offset if it announces aggressive fiscal tightening after the election (given the negative impact this could have on economic growth and profits at a time when the economy is already soft). What’s more if a returned Labor Government follows up on its commitment to a National Competitiveness Agenda working to seriously boost productivity growth then it could have a positive long term impact on growth, profits and ultimately share market returns.
However, it does seem that there is the potential for significant sectoral impacts with the Coalition’s policies likely to be positive for miners, heavy carbon emitters and small companies (due to the company tax rate cut).
There’s more here.