• The policies of the new Government if implemented are likely to lead to smaller government, less regulation and over time improved productivity and economic growth.
• Expect a mini-budget around November that may contain more aggressive budget savings.
• The historical experience combined with the more business friendly approach of the Coalition suggests a positive share market response over time.
• The key uncertainty relates to the new Senate.

Pretty much as the opinion polls and betting agencies had foreshadowed, Australia now has a new Liberal/National Government. While it’s dangerous to ascribe too much in terms of their economic impact to elections in Australia as either side of politics are not radically different from each other in their core beliefs – there was perhaps more riding on this election than usual given the difficult period of minority government over the past three years and the more uncertain environment the Australian economy has now found itself in. This note looks at what is expected in terms of changes to policies and implications for the budget, the economy and the share market.

Policy change

Based on their election platform, key policy changes under the Coalition Government will include the following:

• the abolition of the mining tax;
• the abolition of the carbon tax/Emissions Trading Scheme and its replacement with a direct action plan where companies will be paid to reduce emissions;
• a 1.5% cut in the company tax rate, although companies with income above $5m per annum will see this offset by a levy to pay for a paid parental leave scheme;
• a refocussing of government spending towards infrastructure and away from hand-outs like the “Schoolkid’s Bonus”;
• a delayed increase in the superannuation contribution;
• a reduction in the size of the public service;
• reduced spending on the National Broadband Network;
• various other savings such as reduced foreign aid, removal of carbon tax compensation payments, cancelling the low-income super contribution, ending the instant asset write-off;
• undertaking inquiries into the labour market, taxation, productivity & competition, the financial sector and infrastructure funding and an audit of government which will potentially pave the way for smaller government, reduced regulation & reinvigorated economic reform; and
• a greater focus on returning the budget to surplus.

Taken together and assuming the policies are implemented, this should lead to smaller government, less regulation and over time improved productivity and growth in the economy.

Impact on the budget

Prior to the election, policy costings released by the Coalition indicated a cost to the budget over four years of just over $33bn, which is more than offset by budget savings of around $42bn. This results in net savings to the budget of just over $6bn on a cash basis over four years. Allowing for debt interest savings the total saving may be a bit more than this.

While the Coalition has not committed to the latest budget projections contained in the Pre-Election Economic and Fiscal Outlook (PEFO) they give a rough guide to the impact of the Coalition’s proposed savings to date. The table below shows the latest PEFO budget balance projections in the first row, with a return to surplus not occurring until 2016-17 under the previous Labor Government’s policies. The Coalition’s net savings (second row) help improve the budget balance over time but only marginally, by just 0.1 to 0.2% of GDP per annum and a surplus is still not achieved until 2016-17 (third row). In other words, on current policies the Coalition essentially has the same overall budget strategy as the previous Labor Government!

Source: Federal Treasury, Federal Coalition, AMP Capital

Now of course, under the new Government these projections are likely to change. In particular, the starting point for the budget projections may have deteriorated further and this may be accentuated by more conservative economic growth assumptions. As a result, there is a high risk the new Government will adopt more aggressive savings measures in order to meet its election commitments but at the same time ensure a return to surplus by 2016-17.

This is pretty much what the Howard Government did following its election in 1996. A mini-budget coinciding with the Mid Year Economic and Fiscal Outlook in November, and possibly after an audit of government spending has reported, may contain more aggressive budget savings.

Implications for financial markets

Putting aside the usual global influences it’s likely that over time the response in financial markets to the change of government will be positive, particularly for the share market. There are several reasons for this. Firstly, over the last 30 years Australian shares have generally risen after Federal elections. This is evident in the next chart which shows Australian share prices from one year before till six months after Federal elections since 1983. This is shown as an average for all elections (but excludes the 1987 and 2007 elections given the 1987 global share crash and the start of the global financial crisis in 2007). What is clear is that after elections shares tend to rise more often than they fall.

The next table shows that after 8 out of 11 elections since 1983 the share market was up 3 months later with an average gain of 5.4%, which is above the 1.8% average 3 monthly gain from shares over the whole period.

Secondly, over the post World War Two period the average annual return from Australian shares (capital growth plus dividends) under Coalition Governments has been 13.2% pa as opposed to 9.9% pa under Labor Governments.

Some might argue though that the Labor Governments led by Whitlam and Rudd/Gillard had the misfortune to be affected by the global stagflation of the 1970s and the GFC. The reformist Hawke/Keating period from 1983 to 1996 certainly defied conventional perceptions that conservative governments are always better for shares. However, it can be seen that Liberal/National governments have seen solid and reasonably stable average returns from shares and this may reflect a more business friendly policy approach.

Thirdly, we have now seen the end of a period of destabilising and uncertain minority government in Australia which has not been good for confidence.

Finally, Coalition policies with a focus on cutting taxes, refocussing government spending on productivity enhancing infrastructure, smaller government and less regulation promise to be business friendly, which should be positive for confidence and the economy. This is particularly so given that business confidence is running at sub-par levels.

Overall, this suggests a favourable reaction from investment markets.

What are the risks?

But, there are qualifications. First, the strong performance of Australian shares in August relative to global shares may have already partly factored in the change in Government.

Second, the favourable boost to confidence and longer term growth may be offset in the months ahead if the new Government chooses to go hard in terms of cutting spending.

Finally, and most importantly, the Senate may thwart the Government’s program. Whilst the Coalition clearly won control of the House of Representatives, the Senate won’t necessarily respect any claims that it has a “mandate”. The current Senate that sits until June next year is controlled by Labor and the Greens and is very unlikely to pass legislation to abolish the carbon and mining taxes. Vote counting for the new Senate that will sit from July is yet to be finalised, but it looks like the Coalition will need the support of a variety of independents and minor parties with varying views to get its program through. With most of the minor parties to the right of the Coalition, the new Government has some chance of success. But hopefully this won’t lead to a bunch of concessions and giveaways that are not in the national interest. Failure to reach agreement could mean a double dissolution election, although that is looking a bit less likely.

But on balance, the reaction from financial markets to the new Government is likely to be positive, with shares likely to be stronger than would otherwise have been the case, notwithstanding the usual gyrations driven by forces such as global developments. Share market sectors and companies likely to benefit include the miners (from the abolition of the mining & carbon taxes), heavy carbon emitters, engineering and contracting companies (from the infrastructure program), companies that provide salary packaging and car leases (as car FBT changes won’t proceed) and small businesses.

The $A may also be a beneficiary, although given the need for a lower $A to help the economy adjust as the mining sector slows this would only bring forth more RBA rate cuts which would offset any positive impact on the currency.

A boost to consumer confidence may also boost the recovering housing market. This was perhaps evident on the weekend with auction clearances surging in both Sydney and Melbourne, albeit helped by lower listings owing to the poll.

Concluding comments

A whole range of factors influence financial markets with elections playing a relatively minor role. In the short term these include the threat of US military intervention in Syria, the US Federal Reserve’s taper decision, US Congressional negotiations regarding the US Government’s debt ceiling and worries about the emerging world and the mining slowdown locally. However, given the unstable policy environment of the last few years in Australia partly associated with minority government, the relatively subdued levels of business and consumer confidence and the business friendly policies of the Coalition there is likely to be a favourable reaction to the change of Government evident over time.

Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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Brad Fox

The Association of Financial Advisers (AFA) today congratulated incoming Prime Minister, Tony Abbott and the Federal Coalition on their success at the polls.

“The AFA has a mandate to work with Government to achieve outcomes that support advisers and advice businesses in the important role they play helping to build, manage and protect the wealth of everyday Australians,” says AFA CEO Brad Fox. “With the new Coalition Government, this will involve addressing issues close to the heart of the financial advice industry and the impact they have on consumers.”

Mr Fox says the AFA will proactively engage the incoming Minister for Financial Services and Superannuation and seek to contribute to the new Government’s financial services and superannuation agenda. “We will be particularly interested in the Government’s approach to improving the effect of the Future of Financial Advice (FoFA), Stronger Super and Default Super reforms,” he says.

While in Opposition, Mr Fox says the Coalition team demonstrated a strong understanding of the dynamics of the financial advice industry and put a considerable amount of effort into influencing the direction of the recent reforms in the financial services industry. “The AFA is supportive of the changes to the FoFA reforms as announced by Senator Mathias Cormann and the Coalition prior to the election and will work closely with the new Government as these changes are implemented.”

The AFA is also looking forward to the Coalition ironing out some of the problematic consequences of FoFA, including problems with the Grandfathering rules which have reduced competition in the advice market and the ability for advisers to change licensees.

The AFA is also seeking a solution that will allow corporate super advisers to both recommend a fund and continue to service the fund.

“The AFA strongly supports the consumer benefits associated with FoFA and we are looking forward to the Coalition’s promised roll-back and amendment of parts of the legislation which will eliminate much of the red tape associated with the reforms, improve the effectiveness of the financial advice industry and help advisers deliver quality, cost-effective advice to Australians,” Mr Fox says.

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• While share markets mostly rose over the past week helped by a delay to action regarding Syria and on the back of more evidence that the global economy is improving, gains were limited as bond yields rose sharply as stronger US data fuelled expectations that the Fed will start to taper its monetary stimulus this month.
• In Australia, the focus in the week ahead will likely be on the aftermath of the Federal election which if the polls and betting agencies are correct will see a new Liberal/National government. Based on stated policies, key policy changes under a Coalition Government are likely to be the abolition of the mining and carbon taxes, reduced company tax but offset by a levy on large companies to pay for paid parental leave, a refocusing in government spending towards infrastructure, a delayed increase in the superannuation contribution, smaller government, a greater focus on returning the budget to surplus and a range of inquiries (including into the labour market and productivity) which will likely pave the way for less regulation and more economic reform. The likely change in Government towards what would appear to be a more business friendly approach will probably provide a boost to confidence and past experience points to a post-election bounce in shares. This has averaged 5.4% over three months for elections since 1983. However, much will depend on whether conservative forces gain control of the Senate – the prospect of a double dissolution election next year would not go down well – and how hard the new Government goes in cutting spending with an announcement on this front likely in November.
• While an attack on Syria has been delayed it still looks likely with a key US Senate committee approving it, on the grounds its limited and tailored and doesn’t involve troops on the ground. It now goes to a Congressional vote on September 9. As with all US led military interventions in the Middle East, the concern is that it will lead to a wider confrontation threatening oil supplies. Given this it wouldn’t be surprising to see further share market weakness and oil price strength in the run up to any strike, even though Syria only produces 300,000 barrels of oil a day. This is consistent with past experience which saw share market weakness/oil price strength in the run up to interventions followed by a recovery in share markets from around the time it commences. The 1991 Iraq invasion, the December 1998 bombing of Iraq, the March 2003 Iraq invasion and the March 2011 Libyan bombing saw US shares fall 5.6%, 3.5%, 14% and 6.3% respectively in the run up only to see the losses recovered within two months. A similar pattern could be expected this time around, particularly as it becomes clearer that any intervention will be limited and that surrounding countries are unlikely to become involved.

Major global economic events and implications

• US economic data was mostly positive, adding fuel to expectations that the Fed will soon start to slow its monetary stimulus. The ISM manufacturing conditions index improved further in August, the non-manufacturing ISM rose to its highest since 2005, labour market indicators improved, construction spending rose solidly and auto sales rose to their highest since 2007. However, higher mortgage rates and higher oil/gasoline prices are clearly a bit of a headwind for US growth and so if the Fed slows its monetary stimulus following its September 17-18 meeting, as appears likely, it may only cut it back by $10bn a day.  
• Final Eurozone business conditions PMIs confirmed the recovery already evident in the flash readings. As expected the ECB and the Bank of England left monetary policy unchanged but with the ECB retaining a dovish bias. Italy remains a risk point though with the threat remaining that members of Berlusconi’s party will withdraw support for the Government if Berlusconi is forced out of his Senate seat.
• In Japan, the Bank of Japan left monetary policy unchanged but Governor Kuroda made clear it can respond if a planned hike in the GST impacts growth. The Yen fell through 100 to the $US as a result.
• Chinese business conditions PMIs mostly improved in August or stayed around solid levels, adding to confidence that 7.5% growth remains on track for this year. House prices continued to rise in August but the new Chinese leadership seems to be less concerned about it, perhaps concluding that demand curbs are ineffective and the only solution is via increases to supply.

Australian economic events and implications

• In Australia, June quarter GDP data showed that growth remains sub-par at 0.6% quarter on quarter or 2.6% year on year, the same pace it has averaged since the June quarter 2012, reflecting soft consumer spending and investment. The bad news is that growth is below the pace necessary to stop unemployment rising, but the good news is that growth has not collapsed. Other indicators presented a soft picture as well with retail sales very weak, business conditions PMIs still soft and the trade balance back in deficit.
• However, there are some positive signs: house prices continue to rise, building approvals rebounded in July consistent with an ongoing recovery in dwelling construction, household savings remain high at 10.8% indicating a significant buffer in household budgeting, productivity growth is solid at 2.2% and inflationary pressures are weak with falling real unit labour costs and a benign reading on inflation from the latest TD Inflation Gauge.
• The RBA surprised no one in leaving interest rates on hold. What was surprising though was that its post meeting statement was virtually identical to that from last month leaving out yet again any explicit easing bias. As a result it has yet again missed an opportunity for a free kick in pushing the $A down. The risks still point down though for rates particularly if the $A holds up from here, economic data remains soft and the post-election Government embarks on more spending cuts.

Major market moves

• Share markets mostly rose on the back of good economic data and the delay to any attack on Syria, but with gains limited as Fed tapering looks likely this month. Australian and Japanese shares fell slightly.
• While the $A rose earlier in the week as the RBA left out any explicit easing bias from its post meeting statement and GDP growth was fractionally stronger than expected, its gains were limited as the $US strengthened.
• Bond yields rose sharply in most major countries, including Australia, as stronger US data fuelled expectations for Fed tapering. US and Australian ten year bond yields rose to their highest since 2011.

What to watch over the next week?

• Globally, Syria will probably be the big one to watch with the US Congressional vote on approving a US strike. Don’t expect much from the G20 leaders’ summit though, other than the usual hot air from such events – it’s unlikely to have any impact on what the Fed does or on what the US does regarding Syria.
• On the data front the focus is likely to be on China though with key activity data due Tuesday likely to show that the improvement in growth evident in July continued into August. In particular, growth in industrial production is likely to have continued to edge higher rising 9.9% year on year, up from a low of 8.9% in June. Meanwhile, inflation (Monday) is likely to show a slight moderation on the back of a fall in food prices.
• In the US, it’s a pretty quiet week till Friday when August retail sales are expected to show a 0.3% gain and producer price inflation data is expected to remain benign. Consumer confidence data will also be released.
• In Australia, the aftermath of the election will likely dominate. On the data front though it will be interesting to see whether the NAB business confidence survey (Tuesday) and the consumer sentiment survey (Wednesday) show an improvement on prospects for a change of Government. Odds are they probably will. Expect an ongoing rising trend to be evident in housing finance data (Monday) but another round of soft jobs data (Thursday) with employment likely to be flat and unemployment rising to 5.8% from 5.7%.

Outlook for markets

• Shares are vulnerable over the next month or so with various events and risks that could trigger investor nervousness including the Fed’s September meeting where it will likely start to taper its monetary stimulus, US Government funding and debt ceiling negotiations, the nomination of the next Federal Reserve chairperson, various imbalances in the emerging world, a likely military intervention in Syria, political instability in peripheral Eurozone countries and post-election fiscal tightening in Australia.
• However, a pullback should be seen as a buying opportunity as the broad trend in shares is likely to remain up: valuations are not dirt cheap but they are not expensive either; monetary conditions will remain very easy with interest rate hikes a long way off in the US and in other developed countries and interest rates still at risk of falling further in Australia; and the gradually strengthening global growth outlook points to stronger profits ahead. So by year end we see further upside in global and Australian shares.
• Despite the bond sell off so far this year, sovereign bond yields still remain low and point to low medium term returns from bonds as yields gradually adjust higher in response to the improving global growth outlook. An unwinding of years of massive inflows into bond funds though runs the risk of causing a more aggressive rise in bond yields and hence losses on sovereign bonds.
• With commodity prices in a downtrend and the Australian economy deteriorating versus the US, it’s likely the $A will fall further. Given its overvaluation in terms of relative prices and costs, expect the $A to fall to $US0.80.

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Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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The impact of the federal election on the share market is expected to be minimal.

The Australian share market is likely to experience only a slight rise in volatility in the weeks following the election, according to the S&P/ASX 200 VIX (A-VIX), a tool to monitor the level of near-term volatility in the Australian benchmark equity index.

This also indicates that the market predicts that a share market rally is unlikely.

The level of the A-VIX implies market expectations of volatility in the S&P/ASX 200 over the next 30 days and provides an indicator of investor sentiment.  The A-VIX is currently at 15.628, which is approximately mid-way between the year’s high of 21.675 and low of 10.540.  However, the A-VIX has increased from around 13 to 15.628 over the past two weeks.

Brian Goodman, ASX Product Development Manager said: “Although we have seen the A-VIX rise slightly over the past two weeks it is only nearing the mid-point of the year’s range and so is not at a level considered relatively high.  The A-VIX could be interpreted to indicate that investors are not expecting market volatility to increase significantly over the next 30 days, despite Saturday’s election and current international events.” 

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The future of fixed income.

Roger Bridges, Head of Fixed Income and Anita Daum, Head of Portfolio Management and the portfolio manager for the Tyndall Australian Bond Fund have provided their answers to AdviserVoice on fixed income and the future for bonds.

Roger has 30 years’ experience in the fixed income market, and has overall responsibility for managing and implementing the strategy for Tyndall’s fixed income portfolios. Anita has 11 years’ experience in the fixed income market and has been managing the Tyndall Australian Bond Fund for four years.

Why did bonds take such a hammering in June?

Roger:  The June reaction of bonds was due to the market’s expectation for the reversal of quantitative easing or QE in the US. Bonds prices surged to record highs in recent years, in part due to central banks such as the US Federal Reserve and Bank of England buying them under QE programmes. The intention – and the effect – was to push down bond yields, which move in the opposite direction to prices.

Low bond yields tend to cause interest rates to fall. This helps to reduce the cost of borrowing for consumers and governments and boost the prices of other assets such as shares. These effects can help pull a country out of recession and assist economic recovery.

But as the recovery gathers momentum, central banks try to curtail and then reverse QE, sending the previous trends into reverse. Announcements by the Fed in June that it planned to scale back its QE programme sparked fear among investors, sending bond prices in the US sharply lower and yields higher. Our bond market is strongly affected by the movement of US bonds, particularly longer-dated bonds such as the 10-years. As a result, we also saw a sell-off here with yields rising and bond prices falling below fair value.

Following this upset, the Fed was forced into a partial retreat and tried to calm market fears over QE tapering, which caused bond yields to fall back to more normal levels. In fact, July saw Australian bond market indices post modest positive returns as bond yields fell.

Can we expect more volatility in the short term?

Roger:  In our view, September seems to be a likely start date for the US Fed’s tapering of its bond-buying programme. The Fed indicated back in June that it may start tapering next month and recent strong economic data makes this all the more likely. In the past week or two, we’ve seen strong US employment and consumer price data.

Given the strong correlation between the movement of US government bonds and Australian government bonds, bond market volatility remains a strong possibility as the market tries to work out what the effects of tapering QE will be.

As growth improves in the US and this tapering of QE comes into effect, how likely is it that we will see another 1994 with bonds experiencing negative returns?

Roger:  It is possible, though unusual, for bonds to deliver negative returns. In general, this only occurs when either the cash rate unexpectedly increases by a large amount or the bond market tries to price in unexpectedly large rate increases and adjusts these expectations quickly. If these market expectations are slowly priced in, then the market value of bonds may fall but they don’t experience negative returns, only lower returns.

This is what happened in 1994: The Fed and its chairman Alan Greenspan were worried about inflation following the 70s and 80s and so decided to take swift action to avoid a spike in inflation. The market was surprised by the sharp rate hikes that the Fed introduced and US bonds didn’t respond until the rate hikes occurred since they were not well telegraphed in advance. The market then panicked and bond yields jumped, while prices fell. 2004-2006 also saw rate hikes in the US but because the Fed was more transparent and took action more slowly, the market had time to react to avoid bond losses.

The current situation is likely to be a repeat of 2004-2006. The Fed is telegraphing its moves in advance so the market shouldn’t be taken by surprise, although there might be brief periods of panic, like in June. But in the longer term, QE unwinding and rate hikes will be slow, measured and telegraphed in advance which shouldn’t lead to bond losses even though the trend will be for yields to rise.

Focusing back on the domestic economy, what’s the likely impact on our bond market of the upcoming Federal election?

Roger:  There is unlikely to be much of a reaction. In general, investor confidence should improve if there is a clear-cut outcome, with one party obtaining a decent majority. A hung parliament will be a negative for confidence and add to uncertainty.

Whichever party wins, if they intend to achieve a fiscal surplus, then obviously that will have an effect on bonds due to the reduction in bond issuance. If there are fewer bonds on issue, it should help to support pricing and keep yields lower.

With prices surging to record highs in recent years, is it fair to say that Australian bonds have had their day?

Roger:  Given historically high prices and low yields, investors have been questioning whether bonds have had their day. I don’t think this is the case.

Australian 10-year bonds have fallen from around 15% in 1982 to record lows below 3%.  The decline in bond yields has been largely the result of a structural decline in global inflation expectations, partly due to QE from central banks around the world and partly to slowing population growth and an aging population.

But in the shorter term, there are three main reasons why Australian bonds should remain attractive.

1)     Foreign investment. Even though this has started to drop off, it is still historically very high. Before the GFC approximately 20-30% of our bonds were held offshore, but by this year, it had jumped to just under 80%. This is largely due to other central banks wanting to diversify away from currencies such as the US dollar.

2)     QE globally. For Australia, this artificial suppression by other central banks means that there is increased demand for our higher yielding assets. Although interest rates are at record lows, our cash rate of 2.5% is still much higher than the zero or close to zero rates seen in Europe, the UK and the US.

3)     Our AAA rating. Australia is one of only 8 countries that has a AAA rating with a stable outlook from all 3 major rating agencies (Standard & Poor’s, Fitch, Moody’s).

So, in a world with a still highly volatile macroeconomic backdrop, the combination of very loose monetary policy in other countries and foreign demand for our debt due to its yield advantage should help to support the bond market in the medium term. We don’t envisage many catalysts that would suddenly push bond yields upwards for a sustained period.

Anita, why should an investor maintain a bond allocation in their portfolio?

Anita: Australians have traditionally invested in shares rather than bonds. But bonds are a valuable component in a diversified portfolio. Bonds tend to perform relatively better in market downturns and when deflation is a major risk. Diversifying a portfolio so that it includes fixed income alongside other assets can help balance returns and reduce overall risk.

Although equities can offer the potential for greater returns more quickly, they involve considerable volatility and the potential for capital losses. Fixed income, on the other hand, offers regular, predictable income with a greater likelihood of capital protection and much more stable returns over the long term. It’s the non-correlation to equities that’s important – bonds should outperform when equities are underperforming and vice versa. So it’s important to have some of a portfolio invested in bonds.

What do you think an investor should look for when choosing a bond fund to invest in?

Anita:  If an investor wants a core bond holding to diversify their portfolio, then they should look for a traditional “true-to-label” bond fund to offset the volatility of other market sectors and provide that non-correlation to equities risk.

A fixed income fund should perform well in market downturns, providing the consistency of performance and regular income that investors expect. However, it’s important to note that not all bond funds are the same. For example, some funds are able to allocate large portions of their portfolio to credit. This gave investors in some of those funds a nasty shock during the GFC. Instead of the fixed income portion of their portfolio doing its job and being the outperformer during that time, funds that were very overweight credit actually performed badly and in some cases actually delivered negative returns during that period.

Our flagship bond fund did very well during the GFC because it is a true-to-label fund that is highly risk-aware and designed to deliver consistent performance even through serious market dislocations, when equities are doing badly.

So, it’s important to consider what an investor wants from fixed income and choose a fund accordingly. If it’s a non-core holding and the investor is looking for a higher return and is prepared to take on extra risk, then a fund that is able to invest in riskier securities could be appropriate. But if the investor is looking for a core holding, then they want a conservative true-to-label fund that won’t give them any nasty surprises at a time they can least afford them.

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Disclaimer

This document was prepared and issued by Tyndall Investment Management Limited ABN 99 003 376 252 AFSL No: 237563 (“TIML”). The information contained in this document is of a general nature only and does not constitute personal advice. It is for the use of researchers, licensed financial advisers and their authorised representatives. It does not take into account the objectives, financial situation or needs of any individual. The Tyndall Australian Bond Fund ARSN 098 736 255 is issued by Tyndall Asset Management Limited ABN 34 002 542 038 AFSL No: 229664 (“TAML”).  Investors should consult a financial adviser and the information contained in the current Product Disclosure Statement available at www.tyndall.com.au before deciding to invest.  TIML and TAML are wholly-owned subsidiaries of Nikko Asset Management Co., Ltd.

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• 

  The impact of the federal election on the share market

  Historically election campaigns result in a period of flat lining for the Australian share market followed by a bounce once the election is out of the way.

• The likely end to three years of minority Government should be taken favourably by markets as it will likely result in more certain policy making.

The Federal Election

With the much anticipated Australian Federal election now set for 7 September it is natural to wonder what impact, if any, there might be on investment markets – both in terms of the uncertainty created by the election itself and in terms of the outcome. At present while opinion polls have Labor and the Coalition running at around 50% each on a two party preferred basis, according to bets placed on online betting agency Centrebet the Coalition remains the clear favourite.

The performance of markets around elections

Elections can potentially have a short-term impact on investment markets. This is because investors don’t like the uncertainty associated with the prospect of a change in government during the campaign and then there may be relief once the poll is out of the way and possibly optimism associated with the election of a new Government.

The next chart shows Australian share prices from one year before till six months after Federal elections since 1983. This is shown as an average for all elections (but excludes the 1987 and 2007 elections given the global share crash 3 months after the 1987 election and the start of the global financial crisis in 2007), and the periods around the 1983 and 2007 elections, which saw a change of government to Labor, and the 1996 election, which saw a change of government to the Coalition. The chart suggests some evidence of a period of flat lining in the run up to elections, possibly reflecting investor uncertainty before the poll, followed by a relief rally soon after it is over.

However, the elections when there has been a change of government have seen a mixed picture. Shares rose sharply after the 1983 Labor victory but fell sharply after the 2007 Labor win, with global developments playing a big roll in both. After the 1996 Coalition victory shares were flat to down. The point is that based on the historical experience it’s not obvious that a victory by any one party is best for shares in the short term and, in any case, historically the impact of swings in global share markets arguably played a much bigger role than the outcomes of Federal elections.

What is clear though is that after elections shares tend to rise more than they fall. The next table shows that 8 out of 11 elections since 1983 saw the share market up 3 months later with an average gain of 5.4%, which is above the 1.8% average 3 monthly gain over the whole period.

The next chart shows the same analysis for the Australian dollar. In the six months or so prior to Federal elections there is some evidence the $A experiences a period of softness and choppiness which is consistent with uncertainty about the policy outlook, but the magnitude of change is small – just a few percent. On average, the $A has drifted sideways after elections. While the $A fell soon after the 1983 Labor victory this was due to a policy devaluation in the dying days of the fixed exchange rate system.

The next chart shows the same analysis for Australian bond yields. Interestingly, on average bond yields have drifted down over the six months prior to Federal elections since 1983. The average decline has been around 0.75% which is contrary to what one might expect if there was investor uncertainty regarding the policy outlook. However, the tendency for bond yields to decline ahead of Federal elections appears to be more related to the aftermath of recessions, growth slowdowns and/or falling inflation prior to the 1983, 1984, 1987 and 1993 elections and the secular decline in bond yields through the 1980s and 1990s in general. More broadly, it’s hard to discern any reliable affect on bond yields from Federal elections.

Policy change and shares

Over the post war period shares have had an average return of 12.9% pa under Liberal/National Coalition Governments compared to 9.8% pa under Labor Governments.

Some might argue though that the Labor Governments led by Whitlam in the 1970s and Rudd and Gillard more recently had the misfortune to be affected by severe global bear markets beyond their control and if these periods are excluded the Labor average rises to 14.6% pa. Then again that may be pushing things a bit too far. But certainly the Hawke/Keating government defied conventional perceptions that conservative governments are always better for shares. Over the Hawke/Keating period from 1983 to 1996 Australian shares returned 17.3% pa, the strongest pace for any post war Australian government.

Once in government political parties of either persuasion are usually forced to adopt sensible macro economic policies if they wish to ensure rising living standards. Both the Coalition and Labor agree on the key macro fundamentals – i.e. the need to keep inflation down, to return the budget to surplus and in the benefit of free markets.

Policy differences

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).

Concluding comments

The historical record points to the strong chance of a post election share market bounce. This may also fit in as we move out of the September quarter, which is often the weakest of the year, into the normally strong December quarter, as the profits reporting season ends in Australia and as uncertainty is removed post a possible September decision by the US Federal Reserve to start tapering its monetary stimulus.

Another potential positive from the election is that it is likely to see the end of minority government in Australia as whoever wins is likely to have a clear majority in the House of Reps. This could help usher in a period of more certain and rational policy making. However, it’s not guaranteed as whoever wins may still not have control of the Senate.

– Dr Shane Oliver- Head of Investment Strategy and Chief Economist, AMP Capital

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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