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What Does The 2022 Australian Federal Election Mean For Investors?

By ActivTrades (Carolane de Palmas)Market OverviewMay 20, 2022 07:01
What Does The 2022 Australian Federal Election Mean For Investors?
By ActivTrades (Carolane de Palmas)   |  May 20, 2022 07:01
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With the impending Australian Federal Election scheduled for the 21st of May, many traders and investors will be considering what impact it might have on their portfolios.

This is especially important for them to profit from the upcoming short-term market movements, as well as take advantage of potential longer-term changes in current market trends, with the new macroeconomic environment of rising inflation and tighter monetary policy. Understanding what to expect from this election is also a great way to better protect their investments.

It’s generally accepted that most investors have a more cautious approach in the lead-up to an election, with questions surrounding the differences in policies for the major parties, what impact the independents will have this time around if there is no clear majority, and what the newly elected or continuing government will be facing in its next term.

The last 15 years have seen six changes in Prime Minister in Australia. Although Scott Morrison has been the longest serving leader since John Howard’s term ended back in 2007, one would be forgiven for feeling there is somewhat less stability in the political landscape in Australia since then, especially given the uncertainty surrounding the management of the pandemic and the impacts of recent climate-related disasters such as flooding, drought, and bush fires in the eastern states.

Globally, the Australian market has been volatile in the lead up to this weekend’s poll day, especially with the major sell-off happening on the Dow, Nasdaq, and S&P 500 for a few days, with performances being globally lower over the last month according to the latest ASX heatmap.

What are the major parties campaigning on?

It would seem the economic policies that the currently ruling Liberal-National coalition and the opposition Labor Party are campaigning on in 2022 are not as starkly different from each other as they were back in the 2019 election.

Cost of living, rising inflation, and the billions of dollars of new debt accumulated as a result of stimulus and pandemic response have been a large portion of the conversation, with both parties largely looking to repair the damage through the promotion of economic growth as opposed to austerity measures like higher taxation, etc.

But there is a high risk of a hung parliament in 2022…

The greatest reason for uncertainty in this election, and a cause for concern for both major parties, is the rise of so many Independent candidates. Bankrolled by a clean energy investor and the son of Australia’s first Billionaire, Simon Holmes à Court, these Independents will undoubtedly cause some interest in the days following the election if there is no clear majority.

To form a government with a clear majority in Australia, either party needs to secure 76 of the 151 seats in the House of Representatives. With the growing popularity of some of these independents, it’s very possible that they may cause a minority government to be formed instead, which would mean that the major parties will be negotiating on policy promises to have them join their side, which is likely to add selling pressure on the markets.

What does it mean for the Australian stock market?

Historically, changes in government do not seem to always be relevant for any major changes to occur in the ASX.

The Coalition is regarded stereotypically as being friendlier to business and would therefore be more favorable to the ASX, but the actual difference in performance, however, is fairly minor if we review the figures for the last half-century, returning around 13% per annum under the Coalition and around 10% under Labor.

Overall, the ASX appears to trade sideways during election years, even if we observe those years with changes in party leadership, as uncertainty is always something feared by investors who prefer to wait to have a clearer picture before deciding to buy or sell the markets.

As the underlying inflation reached its highest level since 2009 according to the Australian Bureau of Statistics, investors need to anticipate its consequences regardless of which party is ruling, as the Reserve Bank of Australia (RBA) will very likely keep raising key rates in an attempt to slow down rising prices.

With higher inflation, Australian purchasing power is lower and debt will be more expensive, which can have a significant impact on the country’s growth prospects. Still, there are some stocks that can drive in such a macro-economic environment, such as large companies that are able to increase their final prices and value stocks.

Find out How can traders hedge against inflation in this dedicated article.

How will the election impact the AUD?

In every election since 2013, the Australian Dollar (AUD) has on average strengthened very slightly (1.3 cents) during the day of and the 15 days following the polls, regardless of the outcome.

Little consolation however as the USD has become increasingly popular, pushing the AUD/USD currency pair as low as 68.28 cents on the 12th of May, its lowest level since June 2020. Right now, the pair bounced back and is hovering at a key level of around 70 cents.

Source: Trading Platform from ActivTrades

In addition to the Australian election, the AUD/USD will likely react to job data coming up next week, after weak key statistics from China, Australia’s largest trade partner - not to mention the evolution of the conflict in Ukraine and the situation with Sweden and Finland taking historic steps to join NATO could add pressure.

What it all boils down to?

The hype in the lead up to and shortly after the Australian election may have some sway over share markets and the dollar in the short term, but it is more important to take into consideration the economy’s overall strength and the earnings profiles of companies when determining long term trends and opportunities.

So, while you need to think about the potential impact on the markets if the current government is replaced, the most important risk could come from a hung parliament and how it will succeed in facing major economic challenges, such as regaining control of the fiscal deficit, addressing housing affordability issues, fighting lower spending power, as well as boost productivity and growth, while interest rates are rising to fight growing inflation.

What Does The 2022 Australian Federal Election Mean For Investors?

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What Does The 2022 Australian Federal Election Mean For Investors?

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Comments (1)
Alex Ounz
Alex Ounz May 22, 2022 11:12
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the election result means sweet fa to investors. to aussies who know their policies, it means, higher interest rates, higher cost of living and tax increases...period the end.
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