Buy Hold Sell

As the market comes to terms with what is increasingly looking like an odds-on Labor election win in May, pundits and investors are assessing how some dramatic policy shifts, including the scrapping of excess franking credits as well as changes to capital gains tax discounts and negative gearing, are going to impact portfolios.

But while the widely held consensus is that an ALP victory would be an overall negative for the market, recent political history has shown that chickens are best not counted before they're hatched, with a Coalition victory or a hung parliament still within the realm of possibility.

Join Matthew Kidman from Centennial Funds, Matthew Booker from Spheria Asset Management and Roger Montgomery from Montgomery Investment Management to find out which stocks and sectors will thrive, and which ones will suffer under a Labor government.


Transcript

Matthew Kidman: It's election time, and the conservative types in the financial markets are shaking in their boots. Labour are odds on favourites to win. Change of government and a lot of change in rules, franking, negative gearing, lots to talk about. And to talk to me today about it is Matt Booker from Spheria and Roger Montgomery from Montgomery Investment Management. Good day. Let's start with you, Rog.

Roger: Sure.

Matthew Kidman: Looks like Labour are gonna get in. Is that good or bad for markets? Because the general feel is it's terrible.

Roger: If they got a majority in both houses it would be the first time since 1940 that we had a left-wing socialist government and an anti-investor government in power. I don't think that's going to happen. I think we're going to end up something closer to a hung Parliament simply because of the distrust towards both parties. Having said that, I do think that we end up in a situation where a lot of legislation doesn't get through. Consequently, I don't think we have to worry that much and we've got to remember that there's an election every three years.

Matthew Kidman: On that basis, Matt, the odds are against what Roger said. Hung Parliament seems like a distant opportunity. How do you feel about it? Especially if Labor do actually get in, which looks like the case?

Matt: Yeah, look, it would be a much more difficult market with Labor in given the policies they're discussing and they're promoting. But as Roger said, the legislation has to get through the Senate, and I think that would be a big stumbling block. So particularly on the franking credit side, there's a lot of self-funded retirees out there that would be disadvantaged under that scenario. I think it's quite negative for that constituent. So, you could actually see a push back as well where I think Liberal might do better than you think.

Matthew Kidman: Okay. Let's go down the path, the hypothetical Labor win. They've laid out quite a few of their policies, so we're fairly well informed going into an election. Who wins and who loses in terms of sectors in the share market?

Matt: I think the banks will lose. There's a lot of capital allocated to the banks, because you get a fully franked dividend. So, a lot of pensioners, a lot of self-funded retirees have bank shares in their portfolio. So, I think you'll see a discount applied to the banks and less capital allocated to the banks.

Matthew Kidman: So, who wins off the back of that?

Matt: Well, anyone short the banks probably wins. And off that I suppose the property trust sector benefits. Because they don't pay tax. They're a trust structure. So, I think there will be money that will move from banks probably to property trusts.

Matthew Kidman: Okay. Rog? Have you got a different view on that?

Roger: Well, no, similar, similar. It comes down to price obviously. I think there's a repricing of companies for the loss of the franking credits that have no value to companies obviously but a lot of value to recipients. So, the banks suffer, but so do any companies that have a high proportion of franked dividends and/or a high payout ratio. I think another group of companies are the leasing companies, the car novated leasing companies. Might remember one K. Rudd said that the whole thing was a rort. The last time Labor was in, when they had any sort of chance of putting legislation through, so they suffer. Property developers suffer. Land bankers, and if property developers suffer, that consequently pushes property prices down or land prices down. But then there are other companies that will benefit from that, take advantage of those lower land prices and ultimately …

Matthew Kidman: Why do they suffer? Because negative gearing stays on new developments.

Roger: Yeah, negative gearing stays on new developments, but when you've bought something off the plan the next buyer in the secondary market doesn't get the benefit. So you end up again with a lower premium. So, whether it's shares or trusts or because of the franking credits or property, you end up with a lower PE ratio if you like on all assets as a result of these tax changes if they got through. Remember, that's the caveat. But there will be companies that take advantage of that.

Matthew Kidman: Okay. So, let's go to the other side and stick with you, winners then. You said people might win off the back of that.

Roger: Yeah, look, I think a company like Peet Limited, which is a 124-year-old house and land package property developer, they've been very successful navigating the cycles. They're only a half-a-billion-dollar company, only a small company, but they've got a long history of being successful. They've just raised some money, and I think they're raising money in anticipation of property developers going broke not because of the structural changes, the consequence of government changing taxes or negative gearing, but because of the cyclical element anyway. And I think they benefit if property prices get pushed down even further as a consequence of Labor winning.

Matthew Kidman: Okay. Matt, let's go blanket again. Labor gets in. Consensus? Not so much here but generally? Market goes down, up or doesn't care as an index?

Matt: Look, I think it goes down and for all those reasons discussed. I mean some of the political strategies they're employing are quite negative for share market participants. I do agree with Roger, novated leases looks like a real risk to us. I would not own any of those companies that provide them. I think we don't have a domestic car manufacturing industry any more, so there's no protection required there. A lot of the people that take out salary packages for their cars are wealthy people, so I think that will be shut down. So, I'd be very wary of owning those companies.

Matthew Kidman: So down, come the 19th of May or the 20th or whenever after the election, you think the market will be …

Matt: I don't know the timing of it, but it will be on the agenda. And it's been really quiet so far, which means something's going to happen there.

Matthew Kidman: Okay. Shock scenario, Libs get up or Coalition get up. Market does what?

Matt: Relief rally. I think that'll be seen as positive. The Liberals are obviously pro-business, pro the share market. I think it will be a very positive outcome.

Matthew Kidman: Okay, Roger, same question to you.

Matt: Look, I think the downside as a consequence of Labor winning is a structural change and it takes time for that to feed through. There will be a lot of individual investors in the banks, for example, that will be going and seeing their financial planners. They'll have to get a statement of advice. It takes a long time before you see share registers change dramatically. So, it works its way through over several years, not necessarily instantly. But I think sentiment's definitely negative if Labor wins. If the LNP gets up, and I certainly hope they do, I'm not going to be afraid to tell you that I hope they do, I think Labor's on an anti-investor march. So, if they do get up, I think again relief rally, agree with Matt, it's a good thing, it's the status quo, which is by the way nothing really changes. Nothing good happens either.

Matthew Kidman: Well, the market has hardly moved since the LNP's been in.

Matt: Indeed. So, I think it's more of the same. That's better than the alternative.

Matthew Kidman: It's binary, Labor bad, Liberals good.





Comments

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Henry Nusbaum

Don't agree with any of you....inequality is bad, sitting on your hands waiting for private industry to do social good is bad, ripping off workers and consumers is bad.... making a buck is not the sole reason for existing. At least the labour party has some egalitarian perspective on this ... the libs have none!

Oscar Zarate

WOW, was that the right way of finishing the podcast? :-)

Selwyn McFaul

How anyone in their right mind could vote for the current mob amazes me. More of the same would be a disaster for Australia

Stephen Turner

I think the key takeaway is I wouldn't put my money with either of these funds. Negative gearing changes will increase the relative value of the stockmarket and franking credit changes will lessen the bias for dividend payouts for tax purposes and more value on reinvestment for future growth. Calling labour a left wing socialist party is a bit weird when the liberals party is aiming to implement asset seizure laws in the energy industry.

Alan Hardcastle

The LNP has demonstrated a complete lack of vision. It is way behind where the electorate stands in terms of climate change; sustainable energy; and dealing with growing inequality. Labor may not be as 'business-friendly' as Roger and Matt would want but at least it may introduce some forward thinking policies.

john thurstans

Stockmarket hardly moved since LNP in power, but sure they're all good and Labor are all bad! Energy, mining, manufacturing crying out for leadership and certainty, but sure LNP all good and Labor all bad. If that's the quality of analysis...

Robert Good

Selwyn, "more of the same" has already seen lower unemployment, higher productivity, and lower debt (in fact a budget surplus). Please, give me more of the same! Labor policy will hurt self-funded retirees and investors - the ones who didn't expect the goal-posts to suddenly be moved just to fund unrealistic energy targets.

James Marlay

Folks - good to see some views coming through on this thread and obviously this is a very topical subject with a range of views. Keep the comments coming, however, please try to keep them constructive (i.e. it's absolutely fine to disagree but please do so respectfully).

Lillian Taylor

Totally agree with you. Labor would be a total disaster for the economy. Shorten +Co have lined their own pockets yet Labor is waging a neanderthal 'class war' and punishing self-funded retirees retrospectively. People who've worked for their money and been thrifty and saved for their retirement and planned for it viz franking credits, are now stripped of that saving. I think a lot more people are going to think twice about voting Labor than just 'the rich'.

David Yabsley

With the exception of the GST and decimal currency, most of the major economic reforms of the past century happened when Labor was the Government: Removal of exchange controls; floating of the dollar; removal of the gold standard; removal of the Savings Bank vs Trading Bank lending controls (we had Savings Bank and Trading Banks under the one roof but with completely different sets of rules); removal of govt regulations on bank lending both quantitative and qualitative; removal of the Govt setting all Savings Bank Interest Rates; removal of Govt setting all bank lending rates; the Hawk Accord which bought an unprecedented era of growth etc. As my high school economics teacher Mr Murphy explained: Labor has always achieved the reforms the Liberals wanted but were to timid to introduce themselves. So Matthew your guests could do worse than to brush up on their economic history.

Ruth Alvarado

I couldn't agree more with David Yabsley's comments, "most of the major economic reforms of this century happened when labor was the government". No such a bad effort from what Mr Rogers call " a left wing socialist government. May be both guest could do with a bit more knowledge of economic history.

George Hamor

Henry, the problem with “social good” is the definition. Who determines what is “good”? The concept of egalitarianism is akin to Animal Farm - some are more equal than others. I would prefer to have the choice of deciding for myself how to spend my hard earned dollars than have some left wing government deciding for me.

Graeme Holbeach

How the local market performs in the medium to long term is largely dependent on events in the northern hemisphere. The most we can hope from whichever party is in power is for some long term direction based on expert review of factual information. It's obvious the current incumbents have internal issues which prevent them from doing this. The other side should therefore be given a chance.

Dick Hunt

Research says impact of ALP change to franking on the XJO is pretty small ... put simply the changes mainly affect SMSFs in pension phase and these are not a huge % of overall money. Given ALP are now odds on, why is the market tearing upwards? If it was really that catastrophic people would be preempting it. Rog then talks down the property market but then talks up PPC on the basis they have dry powder to invest. Rog, here are some views on PPC: 1) management are average (opinion) and very highly paid for their market cap (fact) 2) their long term performance is poor (fact) 3) their Victorian stuff is OK but their QLD stuff (Flagstone) and Perth North (Alkimos) is ground zero for current property carnage. Negative equity central. (facts). Not saying it will crash but definately not an opportunity. Finally, ALP changes to negative gearing will assist in curbing the massive misallocation of capital into residential real estate and hopefully be allocated to productive investment. I thought these types would cheer this on!