By Raymond Chan

Another week, another shock political result. With so much yet to be decided, our Strategy Team made some quick inferences and offer some perspective on potential market impacts.

We take the political press ‘as read’ and infer that a hung parliament is the base case outcome.

Messy policy implications

A hung parliament, or even a razor-thin majority, may effectively deliver a government without a mandate. i.e., these scenarios cast serious doubt over the passage of key proposed legislation around superannuation, company tax, industrial relations and even this year’s federal budget. Key spending cuts (e.g. healthcare) may be forced off the table. We will consider these in more detail separately.

Economic implications

A more difficult legislative environment may delay the process of reform, which may impede future economic flexibility and arguably, growth. Australia’s fiscal position is unlikely to improve under a minority government which puts a cloud over its AAA credit rating. We’ll be watching indicators around business confidence and investment and their potential impact on employment and growth.

Short-term market implications

Saturday's events re-enforce our view that the RBA will move to again cut rates in August, although this itself may be taken positively by the market.

Political instability ratchets up, but a familiar story

Political instability is clearly concerning and we know that markets discount uncertainty. However, we pose these questions;

1) are perceptions of Australian politics going to change that much in the context of five Prime Ministers in eight years? And;

2) is a hung parliament going to concern all-important marginal offshore investors more than the Brexit inspired political crisis in the UK/Europe and the unknowns around Trump versus Clinton in the US? We suspect not. Of deeper concern in the medium term is the rise of populist politics globally, as seen in the rise of the European radical right, the shock Brexit result and the US Republican nominee. In President Trump? Michael Knox explains how populism can be very successful and well supported by markets in the short term (e.g. increasing budget deficits), yet it’s short-term success purchased at the cost of potentially high long-term damage.

Economic realities will ultimately drive the market

This result shares similarities with the events post the September 2010 federal election. Australian shares rallied strongly under the Gillard minority government (2010-13), with telcos and healthcare stocks surging 65-75% and banks 40%, due primarily to a fall in the RBA cash rate from 4.5% to 2.5%. Our point here is that economic drivers far outweighed the political drivers during this period of instability, but we note that valuations are elevated this time around.

What we expect from the market

We expect volatility to spike, particularly as markets have rallied close to their pre-Brexit levels. Banks are likely to be most susceptible. However, we also noted that the markets very quickly rebounded from the equivalent “hung parliament” inspired volatility in late 2010, but market valuations are far fuller this time around.

Implications to equity strategy

The lack of a political majority and clear mandate for the government is clearly frustrating for markets.

At this stage, we retain our cautious Investment Strategy, but again stand ready to accumulate quality names which may be oversold in any market over-reaction, similar to last week's Brexit shock.

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.