No Hit From New Government Change

Sydney, Nov 26, 2007 (ABN Newswire) - Don't look for any rattling of investors' confidence today from the federal election result.

Friday's thin trading-boosted 181 point gain on Wall Street, plus positive news on post Thanksgiving sales in the US over the weekend, and higher gold and copper prices, will have a bigger impact.

As is their wont, investors, analysts and others will be searching for winners and losers: well it might become clear in a few months or a year's time but there's little separating the economic policies of the new and old federal governments and, the Reserve Bank is in charge anyway.

There will be a solid dose of reality from the RBA next week with their December meeting, the last until February, plus the September quarter national accounts as well.

The election of a new government will mean no rate rise and probably nothing now until the second quarter of 2008, unless there's a sharp rise in inflation revealed at the end of January in the December quarter's Consumer Price Index.

The decision by the former Treasurer, Peter Costello not to contest the leadership of the Liberal Party is a significant factor and changes the political landscape dramatically, which will in turn have a significant impact for business.

The decision would leave the way open for millionaire businessman, Malcolm Turnbull, to become Opposition Leader.

We can also expect Federal Departments like Treasury will come back into the mainstream economic debate; more so than just being limited to one-offs like budgets and the two Intergenerational reports.

Water, carbon trading, climate change, conservation and new technologies are all things Federal Treasury is known to have been looking at in the context of the current Australian economy.

AMP's chief economist and strategist, Dr Shane Oliver points out that:"Through this election campaign both the share market and currency market have largely ignored the election with the gyrations in the US and global share markets being the key driver and this is likely to remain the case after the poll.

"A change of government may be more important at a sectoral level with construction, building materials, education and maybe health related stocks likely to benefit over time.

"As can be seen in the charts below the performance of the share market and $A around Australian elections is somewhat ambiguous. There is some evidence that shares track sideways in the run-up to elections and then pick-up thereafter but the two episodes in the last 25 years where there was a change of government show seemingly surprising results.

"Soon after Labor's victory in 1983 shares took off, probably reflecting the global recovery at the time, but after the Coalition's 1996 victory shares just range traded," Dr Oliver said.

This week will see (See Diary report below) that the events in US financial markets remain the most important external factor for us in Australia and other economies around the world. 

It could start out a strong day here and a weak week by Friday if there's poor housing numbers, a sharp drop in consumer confidence in the US and a very high level of growth in the US economy in the third quarter.

Offsetting that will be reports that US consumers spent more than expected on Friday in the first day of post Thanksgiving sales, while big middle class retailer, J.C. Penny also reported a solid performance, but cautioned against too much optimism.

Analysts said there was a similar bright start last year, only for the Christmas season to turn out to be disappointing as the sales momentum faded in December.

But a quick summary of broking and media reports from late last week and the weekend show the best sectors to watch are infrastructure, construction and mining services, renewable energy, childcare, telecoms (broadband) and funds management.

Funds management will be a key sector to keep an eye on (the likes of AMP, AXA, Platinum and the listed investments companies like Argo, AFIC and Milton).

The new prime minister, Mr Rudd singled out the funds management industry as one which could be used to spearhead a big push into Asia by the financial services sector. Companies like these big groups (and the banks and others like IOOF for example) have ideas, processes and the people with considerable experience in managing money, pensions and manufacturing products.

Rudd in fact asked a very sensible series of questions in making this push a priority in the campaign. He asked why Australia, with the fourth biggest funds management industry (and superannuation/retirement pool) in the world, wasn't making more of the expertise in Asia.

It's a solid point: AXA is battling away in Hong Kong (that's a result of a break up in the geographic structure of its French parent), but the closest most Australian companies in the sector have got to Asia, is in direct or indirect investment through portfolios, or through Foreign Direct Investment in minority stakes.

The resources industry, from the miners, to the contractors and service suppliers (and no doubt some customers) will be watching the ALP's approach on industrial relations very closely, especially on Workplace Agreements.

But that won't impact the market immediately.

Of greater importance will be the ALP's plans to examine the prices of petrol and retail grocery and fresh food: that has the capacity top generate a lot of easy headlines and problems for retailers like Woolworths and oil groups like Caltex.

Mining services companies might be more affected by AWA changes because they operate on thin margins, but such is the strong demand for labour, that that won't be an immediate problem as well.

The ALP has been concerned about the overly legalistic and very long product disclosure documents all financial products now carry, and the seemingly easy way some unregulated products (such as the Bridgecorp/Westpoint debenture groups to raise money for high risk property developments) have slipped through the net, costing small investors well over $1 billion dollars in the past two years.

Whether the ALP Government calls a new large scale inquiry into the financial system and its regulation is up in the air: there's no pressure inside the ALP to 'do over the banks' which while on the nose, have also been net (what) employers in recent years, even while pushing some jobs offshore.

The so-called four pillars (plus St George) policy will remain in place even though some bankers (such as The ANZ and Westpac) want it to end.

There's also little interest in the media laws, even though the ALP opposed the changes started in April which reduced diversity. There's talk of allowing a fourth commercial network in 2013, but that's two elections away at least.

Of greater interest is whether the ALP can produce a firm switchover date from analogue to full digital. With around 30% of the country's 7.2 million homes now digital in some way or another, there's a lot riding on a switch over date decision for Harvey Norman, JB Hi-Fi, David Jones, Woolworths and Wesfarmers.

The ALP has had a small group of leading businessmen advising them, led by former British Airways chief Rod Eddington.

Eddington is on a number of boards including News Corporation, Rio Tinto and David Coe's Allco Finance. He is a director of the John Swire Group, and is Australian chairman of US investment bank JP Morgan.

There's also speculation that David Morgan, the about to retire Westpac chief executive may become an adviser. He wants the four pillars policy removed, but apart from that he was a senior official in Treasury under Liberal and Labour and has an impeccable track record as a banker. Dr Morgan is also married to ex-Labor government minister, Ros Kelly.

Observers note that the Business Council of Australia and other business lobby groups have had policies calling for improved federal-state relations, infrastructure spending and improving skills education in Australia that could benefit from Mr Rudd's proposals.

In a report last week, Goldman Sachs JB Were said the ALP's broadband policy could be "positive for Telstra", but Goldman added this depended on the company changing tack and trying to co-operate with the new Federal Government which has been critical of the Telco's privatisation and high salaries in the past.

A report last week from Citigroup identified infrastructure operators and constructors, such as Leighton Holdings, Boral, OneSteel, Macquarie Bank and Babcock & Brown as possible beneficiaries. Downer EDI, United Group, Macmahon Holdings would be others, along with big funds management groups such as AMP.

A tightening of trade practices laws to give the ACCC more power over cartels and unfair competition (and jail for criminal breaches of the law) will emerge somewhere in the first term of a Rudd Government.

And the attitude of the Federal Labour Government to the suggested merger between BHP Billion and Rio will be examined to see if there is any influence from Sir Rod, or if he has recused himself from any discussion on the deal.

The area to watch will be relations between the ALP Government and the two big business lobby groups, The Business Council and the Australian Chamber of Commerce and Industry. The two sponsored research and advertising campaigns attacking and criticising the ALP's industrial relations policies.

It will be a test of both sides in that debate and their maturity, if they can talk to each other without rancor and some feeling of wanting to say "told you so".

Corporate pay and board remuneration is likely to be more harshly criticised by some in the new government (although Mr Costello was pretty tough on the subject when Treasurer).

Some comments might be made for the sake of saying something, rather than doing anything.

The Dow Jones industrial average was up 181.84 points at 12,980.88 after Friday's shortened trading period. The Standard & Poor's 500 Index rose 23.93 points at 1,440.70 and the Nasdaq Composite Index was up 34.45 points at 2,596.60.

For the past week, the Dow fell 1.5%, the S & P 500 slipped 1.2% and Nasdaq dropped 1.5%.

For the year so far, the three major indexes are up: the Dow is up 4.2%, while the S&P 500 is up 1.6% and Nasdaq is up 7.5%.

In Australia the All Ords rose 2% to Friday's close of 6392.4. The ASX/200 was up a similar amount at 6330.2.


 

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