Based on opinion polls there may be a change in government at the next Federal election slated for May next year. A change in Government would create winners and losers across markets.
Whatever the outcome of an election the Australian political backdrop will remain uncertain over the next 12 months. While economic growth is likely to be unchanged, there will be impacts on key sectors within the economy. The three most significant topics highlighted by our equity analysts are:
- Removing franking credit refunds: The changes to franking credits proposed by Labor could impact high-dividend high-franking stocks such as the major banks, major miners and Telstra.
- Removing negative gearing on property investments: The changes to both negative gearing and capital gains tax concessions are likely to weigh on both housing turnover and moderately lower prices. This will impact the property developers, online portals and banks. Although investors can still get negative gearing on new property investments any buyer further down the track will not get those benefits, lowering the incentive for investors to pay a premium for a property. Owner/occupier buyers will benefit from decreased competition for house stock from investors.
- Changes to Energy policy: The cost of electricity for households and business has become the key area for political debate. The focus has increasingly shifted towards lowering prices, rather than reducing carbon emissions. Regulatory risk is rising for retail energy providers. However, we also expect more wholesale price volatility under Labor given its desire for 50% renewable energy.
In addition broader issues will impact the entire market. Three issues we see as significant include:
- Labor unlikely to reduce corporate tax: Corporate tax cuts for large corporations look increasingly unlikely and are not part of Labor’s policy platform. Labor does have an Investment Guarantee scheme that would offer accelerated depreciation on both tangible and intangible capital investment. Labor has also announced that it will remove the safe harbor and arm’s length debt tests for highly leverages companies. This may impact companies with offshore operating segments.
- Industrial relations and wage growth: Labor is likely to reintroduce penalty rate payments and look to strengthen collective bargaining by employees. We may see increasing industrial unrest and higher wages growth.
- Immigration: The level of immigration has been raised by both political parties. While a sensitive topic, the focus is likely to be on tightening the rules about eligibility for migrants and the cost of entry.
In equity markets the cessation of franking credit refunds in particular may reduce the differential between after-tax returns on Australian and international shares. This is likely to diminish demand for Australian shares relative to other investments, and contribute to some de-rating of the market.
And even if Labor wins the election it’s unlikely to bring political stability as a majority in the Senate is not expected. This means highly politicised sectors will be most exposed. These are likely to include the banks, energy and property sectors.
While policies diverge, the Australian budget outlook for both the Government and Labor is similar. As a result, any impact from a change of government on interest rates and economic growth is likely to be modest. However, Labor's tax policies are different and may be disruptive in their transition. The greatest economic risk is changes to industrial relations, which may dent business confidence.
Political mandate still lacking
While we may see a change of Government in the lower house of parliament, the Senate is likely to include a number of independents and the Greens party. As a result, any policy changes will be time consuming and difficult. We expect it to remain a challenging environment to pass legislation.
However, there is financial scope for government to announce additional policies without risking the triple A rating of the sovereign.
The ALP would limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected by this change and will be grandfathered. Losses from new investments in shares and existing properties can still be used to offset investment income tax liabilities. These losses can also continue to be carried forward to offset the final capital gain on the investment.
The ALP also would halve the capital gains discount, from 50 per cent to 25 per cent, for all assets purchased after a yet-to-be-determined date after the next election. This will reduce the capital gains tax (CGT) discount for assets that are held longer than 12 months from the current 50 per cent to 25 per cent. All investments made before this date will not be affected by this change and will be grandfathered. The policy change will also not affect investments made by superannuation funds. The CGT discount will not change for small business assets.
Both these proposals would face significant resistance from housing industry groups and may not have sufficient support to pass through the Senate in their current proposed form.
The Grattan Institute supports both measures and argued that contrary to popular opinion, any fall in house prices as a result of lower demand would be modest and that residential rents would be unlikely to rise because of the tight constraints on land suitable for urban housing. Polling conducted by the Grattan Institute showed the electorate was split fairly evenly on these reforms and the Institute argued that by phasing in the policies this could make the policies easier to sell politically.
Craig is Citi's director of research
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