Aussie markets cheer Morrison's surprise win Aussie markets cheer Morrison's surprise win Aussie markets cheer Morrison's surprise win

Aussie markets cheer Morrison's surprise win

Macro 6 minutes to read
Strats-Eleanor-88x88
Eleanor Creagh

Australian Market Strategist

Summary:  Australian markets are on the rise after centre-right incumbent Scott Morrison held off the rival Labor party in this weekend's national election.


Australia’s federal election rendered a surprise return for the centre-right coalition government for a third three-year term. This result defied opinion polls in the run-up to the vote; according to an Ipsos poll in the Sydney Morning Herald, the opposition Labor party was ahead of the ruling coalition by 51% to 49% on two-party preferred basis as late as Friday.

This surprise result for the incumbent even caught Prime Minister Scott Morrison off-guard, with the PM commenting “I’ve always believed in miracles”. 

The market has taken the Morrison victory positively, hitting an 11.5 year high today and trading at levels last seen in December 2007. The price rally reflects investor aversion to Labor’s less business-friendly policy proposals as well as the removal of government-change uncertainty. 

A Labor win had arguably been priced in ahead of the vote, boosting the relief rally.

The ASX 200 typically rallies in the aftermath of an election; historically, the average has been 3.7% in the first 12 post-election weeks, once policy uncertainty is removed.
ASX 200 returns prior to & post-election
ASX200 returns prior/post-election (% return 12 weeks post: average 3.73%
Cash refunds on franking credits live on post- the election, and dividend yields also remain compelling relative to term deposits, particularly with rate cuts on the horizon. High-yielding stocks will therefore be bid as the franking credit system is no longer in the firing line, keeping demand for high-yielding, fully franked stocks intact. 

Banks and financial services companies rallied as the Morrison government is perceived to be more business-friendly. The major banks, being in the high-yield bucket, also have a significant weighting in retiree portfolios and are now safe from any pressure that could have materialised from changes to franking credits. 

The gains today were likely magnified by a short squeeze on traders expecting a Labor win, and investors rebalancing heavy underweights in the banking sector. On that basis, the rally could be short-lived as the banks still face continued NIM pressure, headwinds from decelerating housing credit growth and a sagging property market, increasing bad debt levels, and ongoing remediation and regulatory expenses. All of these factors make the outlook for bank earnings challenging. These themes were evident in the recent interim reports, where it was made clear that the banks face significant difficulty in growing revenues. 

Weak mortgage growth will remain via increased scrutiny on the capacity to service debt and heightened expense verification by the banks; a Morrison government won’t stop the banks from recalibrating their lending standards. To summarise, the earnings outlook remains under pressure despite the election result as not much has materially changed and revenue growth will remain anaemic but there are fewer risks on the horizon with a more “pro-business” government and no changes to negative gearing. 

Property and housing-related stocks will find support as there will be no changes to negative gearing, but this could be short-lived as the housing market is still soft and the outlook remains challenged. The changes to negative gearing, however, would have added further pressure to an already weak market so the removal of this negative may put a floor on these stocks for the time being. There may be a boost to confidence in the housing market from the fact that Labor’s proposed changes to negative gearing won’t go ahead, but fundamentals are still weak, credit growth remains under pressure and new supply is yet to come online – particularly in Sydney and Melbourne. 

The pace of declines in the housing market may have moderated but the declines are also more broad-based on a national basis. The credit-driven adjustment is still underway, pointing to continued weakness. This makes it unlikely that the housing market will bottom in the near term, although the outlook is undoubtedly less negative. 

The AUD found relief from the elimination of the threat of Labor’s less business-friendly policies and improved economic sentiment with a Morrison victory. Traders are cheering as they have one less uncertainty to deal with – a Labor government with a progressive redistributive agenda – at a time when the economy is losing momentum and the country is caught in the crossfires of the US/China trade war. 

The bounce may fizzle as AUD remains under attack with rate cuts on the horizon and the escalating trade tensions; with these worries still looming large, any relief rally may be cut short. The Reserve Bank of Australia minutes are out tomorrow and Governor Lowe’s speech could erase any gains today. Given the current lack of clarity from an RBA that has left market participants second-guessing whether their reaction function has shifted, Tuesday will be an important day for RBA watchers.

Governor Lowe’s speech titled ‘The Economic Outlook and Monetary Policy’ could be vital in resolving the current confusion given Lowe has previously used speeches to provide monetary policy guidance (see: February). The minutes of last week’s monetary policy meeting will also be released on the same day, so the current ambiguity could be rectified in the minutes as well.  

Despite the return to “business as usual” the Morrison government still have to contend with a languishing economy, stagnant wage growth and a slumping housing market. Once the sugar hit of the election fades, reality should soon set in and investors will turn their attention elsewhere. The bigger impact for company profits is the fragile state of the economy, global risks (elevated trade tensions and the Chinese slowdown), monetary policy and the sluggish housing market, which will be more impactful on economic growth and profit growth over the long term.
 

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.