Don’t Worry When The Election Comes

By Glenn Dyer | More Articles by Glenn Dyer

There's a Federal election looming: later, rather than sooner, judging by the poor polls for the Howard Government.

Normally, some people worry that the poll will be a disruption to the stockmarket, interest rates and the economy generally.

But Dr Shane Oliver, the head of strategy at AMP Global Investors, argues there's no need to worry. Both sides of politics are good for the economy, and the market.

Here's his case:

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Uncertainty associated with the potential for a change of government following the upcoming Australian Federal Election has the potential to impact financial markets, notably shares.

There are basically three ways elections may impact investment markets. Firstly, there may be an impact as a result of policy changes flowing from a change of government.

Secondly, elections themselves engender a degree of uncertainty for investors regardless of any actual policy change. Finally, there is often thought to be a cycle in share markets associated with the political cycle.

History provides little reason to think the outcome of the election later this year will have a lasting impact on the share market. Over the period 1945 to 2006, the average return from Australian shares under Coalition and Labor governments has not been that different.

Thanks to the current global bull market the average return under the Coalition of 13.5% pa has edged ahead of that under Labor governments of 12.7% pa, but there is not much in it.

While the Whitlam Labor government was associated with tough economic times and shares lost an average 5.8% pa, the Hawke/Keating period saw very strong share market gains with an average return of +17.3% pa.

In any case, the bear market during the Whitlam period was part of a global malaise.

It's interesting to note that since 1945 in the US, shares have actually done better under Democrat presidents (returning an average 15.1% pa) than under Republicans (11.6% pa), belying simplistic political notions.

On this basis, investors should not be too worried about a change in government.

Once in government, political parties of either persuasion are usually forced to adopt sensible macro economic policies if they wish to deliver rising living standards to their constituents.

Both the Coalition and Labor agree on the key macro fundamentals – i.e., the need to keep inflation down and the budget in good shape and the benefit of free markets.

The key policy impact of a change of government in Australia is more likely to be felt at the sector level than at the macro level.

But there is potential for uncertainty. However, elections can sometimes have a short-term impact on investment markets. This stems mainly from the fact that investors don't like the uncertainty associated with the prospect of a change in government.

The looming Federal election in Australia offers scope for short-term investor uncertainty for several reasons.

Firstly, opinion polls are still showing Labor ahead of the Coalition. Secondly, the challenger is relatively unknown.

In Australia, investors may simply assume that a Coalition government is more market friendly favouring deregulation, privatisation and lower tax rates compared to Labor (even though it was Labor that kicked off de-regulation in the 1980s).

For Australian share prices, there is some evidence of a period of softness in the run-up to elections followed by a relief rally soon after it is over.

However, it is interesting to note the difference in share market performance following the 1983 poll when Labor won compared to that following the 1996 poll when the Coalition won.

Contrary to what might be regarded as conventional wisdom, the Labor victory of 1983 was soon followed by a surge in the share market, whereas the 1996 Coalition victory was followed by period of range trading.

While more fundamental considerations drove this divergence, it highlights that it is not obvious which party is best for shares!

In the six months or so prior to a Federal Election there is some evidence that the $A experiences a period of choppiness which is consistent with uncertainty about the policy outlook, but the magnitude of change is small – just a few percent – and in any case, on average the $A has drifted sideways after elections.

While the $A fell soon after the 1983 Labor victory, this was a policy devaluation in the dying days of the fixed exchange rate system.

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.

The best example of a political cycle impacting investment markets is that associated with the US Presidential cycle.

In Australia, there is no evidence of any regular share market cycle around Federal elections because, unlike in the US, there is no regular election cycle in terms of timing.

Our broad assessment is that a Labor government would have little lasting impact on aggregate share price levels overall. However, there is more potential for a significant sectoral impact.

Sectors which might be affected by a Labor government could include construction and building materials (via increased infrastructure spending), stocks exposed to education and training and fund managers (v

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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