By Paul Rickard

According to Sportsbet, if you bet on Labor forming government next week, you can now get $8.00. Backing the Coalition will give you a return of just $1.08 for every $1 bet. Eerily, these odds are almost the same as those available last Friday just before counting began on the Brexit vote.

We now know how wrong the bookmakers were on that occasion. Could they be as wrong again on the outcome of our Federal Election?

While it is unlikely, it must be a possibility as the average of the major opinion polls says that on a two party preferred basis, it is running at 50/50. And like last week, almost no commentator expects it to happen and the market seems totally unprepared for the possibility.

If by some fluke Bill Shorten and his Labor team wins, I think you are looking at an event that will have a much bigger impact on our local market than Brexit. Our dollar could test 70 cents, and an immediate share market fall of three or four per cent is on the cards. There won’t be any quick bounce-back this time because offshore will take a really dim view of the election outcome. For the first time in years, the media will be right when they use their favourite term “wiped out” to describe a fall in the market.

Offshore investors will take fright and give Australia the flick. Consider how this will look from offshore, given Labor’s astonishing anti-business/anti-investment rhetoric.

Labor opposes cuts in company tax, targets multi-nationals, proposes to increase capital gains tax for personal investors and with their Green friends, is largely anti-mining. Australia will have had six prime ministers in six years - Rudd/Gillard/Rudd/Abbott/Turnbull/Shorten. More than Italy, and starting to look a little like a banana republic. With more spending, higher taxes, and larger deficits, it is inevitable that the Ratings Agencies will make noise again about cutting our AAA rating. And finally, how could Australian voters be dumb enough to elect a Prime Minister who has told such an outrageous lie about privatising Medicare, and by doing so, stopped much needed reform and investment in the infrastructure that supports the payment of government benefits. Why would you invest in Australia? 

Foreign institutions don’t have to invest in Australia. Economically, we are a very small country with a very small market, so if they invest in Australia, they choose to do so. Put the wrong Government in place with the wrong set of policies and they will choose not to invest, or worst of all, start to bail out. Either way, electing Bill Shorten next week will be bad for our markets.

What stocks will be most at risk?

With Labor proposing to hold a Royal Commission into the banks, CBA, ANZ, NAB and Westpac will be among the companies hardest hit. While the Commission won’t have much of an impact on short-term profits, banks will incur extra costs preparing for it, including a huge drag on management time. The real risk is long term, particularly if the person chosen to head the Commission is on a “hero journey”. Will banks be asked to pay a levy to recognise the taxpayers’ implicit guarantee? Will the vertical integration of banks across the wealth spectrum (asset management, product management, advice, broking and distribution) be outlawed? Will banks be required to invest in a more rigorous compliance environment? You can bet that there will be several recommendations for a populous Government to embrace.

The miners will also be hit. Coalminers like Whitehaven Coal will find life under a Labor/Green alliance more challenging, but you also have to expect that given the anti-business rhetoric, a Bill Shorten government won’t be cosying up with BHP or RIO. Listed power station operators such as AGL and to a lesser extent Origin may also feel some pain.

Historically, Labor hasn’t been a friend of the private health insurance industry, having opposed measures such as the tax rebate on premiums. On Sunday, Labor announced it would stop paying the rebate on so called private health insurance “junk” policies, offered by insurers including Medibank and NIB. Moreover, with industry margins back at historically high levels, it is very unlikely that a Labor Health Minister would next March approve the average premium increases that Medibank and NIB achieved this year - 5.64% and 5.55% respectively.

Another Labor policy is to stop negative gearing for investors on other than a new home, and increase capital gains tax for personal investors by reducing the discount on gains on assets held for 12 months from 50% to 25%. Both of these policies are likely to cause huge dislocation in the property market. Companies to be impacted by the inevitable slowdown will include the suppliers of construction materials such as Boral, CSR and Adelaide Brighton, new home builders such as Villaworld, real estate agents such as McGrath and companies that provide associated services such as settlements and titles data like SAI Global. There are no doubt many more that could be added to this list.

And, if consumer confidence slumps, this will impact the discretionary retail sector, which includes companies such as JB Hi-Fi, Harvey Norman and the Super Retail Group. 

Winners? 

In a big move down, it is very hard for any company’s share price to withstand the selling onslaught. However, if Labor goes ahead with its promise to reverse some of the Government’s changes around freezing Medicare rebates and bulk billing arrangements for pathology and radiology services, Primary Health Care could be a winner. Sonic Healthcare could also feature on this list.

Bottom Line

Forget Brexit for the next couple of days and keep some powder dry. While the market will breathe a sigh of relief if the Coalition is returned, it won’t have a big impact on the immediate direction. A shock result, on the other hand, will have a major impact.