by Raymond Chan

Voting is compulsory for every Australian citizen aged 18 years or older. On 7th September, 15 million Australian casted their vote on which party was going to manage our economy over next 3 years. It has come as no surprises that Coalition, after losing to Labor in 2007, won back the control of parliament. Tony Abbott has become the 28th prime minister elect of Australia.

We highlighted the implication of Federal Election in this month edition.

Back to the stock market, it’s interesting to note the out perfomrance of Asia Pacific stocks over the US stocks on better China PMI and ahead of FOMC meeting on 19th September. Over the past month with Shanghai +4.6%, Heng Seng +4.4%, Japan +1.9%, ASX 200 +1.6%, S&P -2.5% and Dow Jones -3.7%. US Federal Reserve data continues to point towards a gradual expansion in the US activity while positive PMI manufacturing data also buoyed investor sentiment. Activity in China's services sector hit a five-month high in August, according to a leading index. The HSBC China services purchasing managers' index printed at 52.8 in the month, after a reading of 51.3 in July. A reading above 50 indicates expansion, while below 50 points to contraction.

The RBA held its September board meeting and met economists' expectations by leaving the cash rate at 2.5%. In the RBA's statement, the central bank noted the Australian dollar's fall of around 15% since early April and the possibility of further possible depreciation, which it said would help rebalance the economy. The RBA also pointed to the local economy's slightly below-trend growth in the past year, saying it expects this to continue in the near term as the economy adjusts to lower levels of mining investment. Supporting these statements was the release of ABS data which showed the Australian economy expanded in line with expectations (+0.6%) in the June quarter but remains below the long-term trend. In concluding, Governor Glenn Stevens said the easing in local monetary policy since late 2011 had supported interest-sensitive spending and asset values, and further effects could be expected over time.

Ahead of Federal Election, the market was relatively flat as investors took a “wait-and-see” approach towards investments. Now that the election is over, let’s summarize our collective thoughts here:

Strong Mandate: Australian voters endorsed Coalition with strong mandate (at least 85 seats) to get our economy out of “Growth Recession”. This looks like to be at least two term government.

Business and Consumer Confident should improve from the removal of political uncertainty and begin to push ahead with spending plan. Business confidence is at its lowest level since November 2012, despite the fact that a falling Australian dollar and low interest rates should be easing some of the pressures on business. Consumer confidence is faring better with a small increase in August 2013, but it is still below levels seen in 2010 when consensus was that the worst of the GFC had passed. It is also historically well below levels that could be expected given the ultra low interest rate environment. Our Chief Economist Michael Knox highlights that an election outcome usually boosts both business and consumer confidence. This increasing confidence acts like a reduction to the risk premium and is similar in its effect to an interest rate cut in that the flow-through to GDP has a lag of about five quarters. Therefore, we should see the more long lasting result from an election outcome continuing on throughout 2014.

Stock Market: Our analysis has shown that Federal Election outcomes are positive for the Australian stockmarket, regardless of who the winning party is. A look back at the last 30 years and 11 elections, has seen the Australian stockmarket increase by 1.31% each month on average in the three months following an election. That equates to an almost 4% gain for the quarter immediately following an election.

Stock Sector Specfic Implications

We highlight the likely impact on election on various sector here:

Retail: benefit from a repeal of the carbon tax through a reduction in their directly payable expenses, as well as through a fall in upstream energy costs (eg, electricity pass-through). As one of our largest retail groups, the Wesfarmers story is all about ongoing growth at Coles and Bunnings, which combined account for more than 80% of the group’s earnings. This is a core portfolio holding. On the discretionary side, we believe JB Hifi is best positioned for a rebound in consumer spending on electronics, gaming, music and technology as well as the group’s new Home division, which should capitalise on the recovery in housing activity.

Banks and Financial Services: NAB, our biggest portfolio weighted stock, is our preferred business bank exposure and well positioned for a turnaround in business confidence leading to increased lending. Meanwhile, Westpac is the best value of the retail/housing banks.

Contractors & Constructions: The Coalition plan promises to fully restore the Australian Building and Construction Commission (ABCC) to police union activity in the sector, although the extent of industrial relations reform should be limited given Abbott’s pledge that the previous Work Choices regime (or similar) would not be re-introduced in his first term.

Airlines: As a major carbon producer, the aviation industry would welcome the cancellation of the carbon tax. Winners include: REX. In the outlook statement as part of their FY2013 results presentation, the airline laid out that their future performance would depend on the election result. REX stated that a win by Labor would lead to a “continued deterioration” while a Coalition government would mean a “slight improvement” to future earnings.

Telecom: A Coalition government would likely maintain the overall NBN structure, but switch from fibre to the premises (FTTP) to a lower-capex fibre to the node (FTTN) technology. We estimate Telstra is about as well off in present value terms under this policy as with the current NBN plan. Telstra would receive migration payments earlier, although PSTN revenues would decline faster, particularly as regional markets open up faster to competition. Contractors would see the scope of NBN works decline under a Coalition govt.

Mining: The potential removal of the MRRT and carbon tax could be a big sentiment boost for BHP as foreign and domestic investors return to the sector. The stock is still very good value and its progressive dividend yield is rewarding for investors. ORG and NHC are other potential beneficiaries on removal of Carbon Tax.

Infrastucture: AOFM to examine an Infrastructure Partnership Bonds Scheme for private-sector investment. Coalition will contribute A$5.6bn to Pacific Highway duplication between Newcastle and QLD, A$1.5bn to M4 East (WestConnex Project), A$1.5bn of East-West Link tunnel in Melbourne and A$1bn for Gateway Motorway in Brisbane. QUB may directly benefit if the Coalition abandons the Federal Government’s own plans for the development of an intermodal terminal at Moorebank, allowing QUB to proceed with their alternative concept.

Financial Services: Labor’s plan of increasing the super contribution tax from 15% to 30% for those earning above A$300,000 per annum and proposing a 15% tax on post-retirement incomes above A$100,000 per annum will be revoked. At this stage, it is unclear whether either of these measures will gather the minority-support required to become law, but we believe the Coalition will not look to reverse the changes if legislated before the election. AMP could be one of the potential beneficaries.

Healthcare: The Coalition opposed means-testing of the 30% private health insurance rebate and has promised to wind the move back as budget conditions permit, which would be a positive for RHC if it eventuates. Pathology (PRY, SHL) may benefit from a Coalition govt, which historically has been more generous in funding negotiations.

Utilities: The Coalition has proposed an ‘Emissions Reduction Fund’ of A$3bn for carbon emissions reduction tenders. This may be used to buy out inefficient generation in a similar manner to that proposed, but never executed, under the ‘Energy Security Fund’ of Labor’s Carbon Pollution Reduction Scheme (CPRS).

Media: We believe the election campaign will add 1% to TV advertising spend in this election year. The Coalition has appeared supportive of removing the 75% audience-reach rule, although we do not believe it would be a high priority (we see PRT as a potential beneficiary of consolidation in the sector, with SXL also likely to merge with one of the major networks).

Besides, we noted our CIMB / RBS Morgans analysts have been upgrading th FY13/14 EPS earning estimates over past three weeks, after considerable downgrades back in July and early August. If this trend persists, then FY13/14 earnings could climb back to three year high (but still way below 2007 reported earnings).

Source: CIMB, IBES, Latte with Ray

Theoretically speaking, the market may rally next week on the back of election outcome and FY13/14 earning upgrades. Having said that, reporting season has now passed and macro issues are likely to shift markets during the remainder of the year. While US markets have buckled due to the prospects of Fed stimulus, Australian markets have performed well in short term. We think the Fed remains committed to withdrawing stimulus, beginning in either September or October, and we are still cautious about the geopolitical situation in the Middle East over next few weeks and FOMC meeting on September 19th.

There could be better buying opportunities towards late September / early October.

This is a time for knuckling down, putting your tin hats on and being sensible.

Disclaimer – RBS Morgans Limited
This report is provided for general information purposes only and is not intended as an offer to enter into any transaction.  This information contained in it is not necessarily complete and its accuracy cannot be guaranteed.  We have prepared this presentation without consideration of the investment objectives, financial situation or particular needs of any individual investor.

Before a client makes an investment decision, a client should, with or without RBS Morgans' assistance, consider whether any advice contained in the presentation is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal recommendation.

The information contained in this presentation has been taken from sources believed to be reliable. RBS Morgans Limited does not represent that the information is accurate or complete and it should not be relied on as such. Any opinions expressed reflect RBS Morgans' judgment at this date and are subject to change. RBS Morgans and/or its affiliated companies may make markets in the securities discussed. Further RBS Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this presentation and may, as principal or agent, sell such securities.

The Directors of RBS Morgans advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our representatives may be remunerated wholly or partly by way of commission. The presentation is proprietary to RBS Morgans Limited and may not be disclosed to any third party or used for any other purpose without the prior written consent of RBS Morgans.

The views expressed here are those of the author and do not necessarily reflect those of RBS Morgans Limited (ABN 49 010 669 726), its related bodies corporate, directors and officers, employees, authorised representatives and agents (“RBSMorgans”). RBS Morgans may publish research on the company/s named here, which will be forwarded on request. While this report is based on information from sources which Raymond Chan considers reliable, its accuracy and completeness cannot be guaranteed.