The political environment is arguably more important now for investors than it has been for many years. Trump’s presidential victory in the US, the rise of ‘populism’ in Europe, and potentially more regulation for domestic energy, healthcare and banking sectors all have the potential to impact markets.
In this update, we address the most important political issues facing financial markets over the next 12 months, starting with Australia.
The role of government is becoming more important
Domestically, the government is becoming increasingly important in almost all facets of the economy. Whether this is via government spending on infrastructure projects, employment in the education and healthcare sectors, or regulatory developments in the banking and energy sectors. It should be apparent that its influence is growing rapidly. The government is also having a major impact on sectors such as commercial property. As an example, 39% of the Brisbane central business district has been leased to some form of government, and a significant proportion of Sydney’s central business district has been impacted by infrastructure projects.
Australian bank price movements
Source: Bloomberg. Data based at 100
This is not necessarily a bad thing for the economy, or for financial markets, as it offers a great deal of underlying support. Although the private sector has struggled with higher expenses and tepid wage growth (which can be seen through weak retail sales figures and a sharp decline in the savings rate) government spending, along with resources exports, immigration, increased tourism and an ongoing construction boom, is a major reason why Australia has maintained an acceptable economic growth rate.
There are several counterbalancing negative factors which are weighing on confidence and creating major headwinds for certain sectors. Primarily, Australian politics has become bipartisan in nature, with opposition leaders of both parties seemingly only interested in blocking opposition policies irrespective of their merits and benefits to the country. This has seen little to nothing being done on important issues such as fiscal policy reform and policy related to the environment.
Indeed, policy uncertainty is what has led to the recent energy crisis, causing blackouts and higher prices for electricity and gas. It’s also the reason why the government is vigorously attacking the private sector providers. Regulatory developments and the threat of royal commissions and the abolishment of negative gearing have also weighed on the banking sector. Without going into the merits of these developments, they have clearly influenced bank share prices and, hence, the overall equity market over the last twelve months.
Domestically, the most important thing for investors to understand is that the political situation is impacting individual sectors in very different ways—it’s not a one-size-fits-all issue. As such, it is important to recognise which industries have political headwinds, and may be subject to further regulation, and which have tailwinds, and can benefit from increased public spending and are relatively free from negative regulatory developments. Infrastructure is clearly expected to benefit, while banks are likely to remain under a regulatory cloud. Healthcare is arguably the most uncertain sector as both negative and positive political factors are at play.
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