Bookmakers have The Australian Labor Party installed as the clear favourite to win government at the next federal election. Labor's policies are far from being enacted, but we identify key potential impacts to the housing market, the consumer, energy and healthcare.
The top-down view
Michael Knox, Chief Economist at Morgans, explains how application of Labor's key policies would assist in financing higher public sector expenditure, and in containing the budget, but are effectively a tax on investment. He argues they risk incrementally reducing productivity in the economy, and with it growth, employment and private incomes.
This is at a time when confidence in the housing market and among consumers is already fragile.
Impacts to the housing market
Our banks analyst flags proposed changes to negative gearing as a risk in exacerbating softness in the housing market. This may also place additional stress on households, and affect consumer confidence. This is the most dramatic impact we identify, but we note the proposed changes are likely to prove unpopular with home owners across the board. As such, we wouldn't be surprised if Labor dropped the policy.
Dividend franking and capital management
Labor's proposal to scrap cash refunds of surplus franking credits has triggered intense public debate. We refer affected retirees to our research note, Refundable franking credits and retirees, published 3 October 2018, which steps through the potential implications.
The proposal may also bring forward plans for corporates with large franking balances to buy back shares and/or pay special dividends. Recent buybacks by BHP and RIO were strongly supported amid jittery markets. We see the potential for short-term capital management initiatives from Woolworths, Wesfarmers, JB Hi-Fi and Flight Centre, as well as the possibility of more returns from BHP and RIO over time.
Keeping context on the market
Labor's policies are far from being enacted and we note many proposals have been watered down since first being announced (franking, gas policy). They may alter the relative appeal of some asset classes (e.g. offshore vs domestic equities), and also affect sentiment, but ultimately we think that larger forces (rate normalisation, China) will be the dominant drivers of Australian market fundamentals and returns.
Morgans clients can login to view our detailed Australia Strategy report, which includes summaries of the possible implications of Labor policies if enacted on housing, banks, energy, healthcare, aged care, telco and the Australian economy overall.
Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.