In our view, probably the best outcome from last night’s leadership ballot was that the election is now more likely to be held earlier. While a Coalition victory would probably be better for the stock market, restoring stability within government is more important. In our view, a hung parliament has not served the nation well and the hope is that we see a clear winner when the election is eventually held.

Spill delivers a new leader

Forces have moved within government and Australia now has a new Prime Minister. Former Prime Minister Kevin Rudd won a party ballot 57-45, regaining the party leadership and his old job from Julia Gillard. Following the ballot seven ministers have resigned and a new cabinet will be announced in due course. As the result of the ballot was reasonably narrow, the new Labor leader’s longevity in the top job could depend on how successful the party is at the upcoming election. Polling has shown that Labor has a much better chance of winning the election with Kevin Rudd as leader. Indeed, this was the key reason why he was able to win the ballot.

Election timing

The election must be held between 3 August and 30 November, and there is media speculation that it will be held around a month earlier than the date announced by the previous Prime Minister (14 September). In our view, bringing forward the election is good for the country. It has the hope to deliver a clear majority to the winner that gives them unequivocal power to pass legislation though the lower house. It’s more difficult to speculate on the composition of the Senate, but the change of Labor leadership probably makes it more difficult for the Coalition to control this house of parliament.

Furthermore, any new Senators that will be elected this year won’t take their seat until 1 July 2014 and this means that even if the Coalition gains control of the Senate it will be difficult for them to pass legislation prior to that date.

Stock market implications

Our previous note (‘Landslide Coalition win expected; assessing market implications’) on the prospects for equity markets from the election showed that there would be more benefits for investors from a Coalition victory. In particular, QUB could benefit from a private sector development at Sydney’s Moorebank intermodal freight terminal. However, there are also marginal benefits for BHP, RIO, FMG and QAN from the Coalition’s plan to repeal the carbon tax if elected. Our retail analyst thinks that CCL could benefit from any subsidy that the government might pay the food manufacturing industry.

The spill

Last night the Labor leadership reached another tipping point, with a ballot held at 7.00pm. Challenger Kevin Rudd won the ballot 57 votes to 45, regaining the Labor leadership from Julia Gillard. He was reappointed Prime Minister by the Governor General this morning.

The fallout from the result of the ballot has been swift, with seven cabinet ministers resigning last night. It’s possible there is more fallout given the reasonably tight ballot result. The following ministers have already resigned following the change in leadership:

  • Wayne Swan (Treasurer)
  • Craig Emerson (Trade)
  • Peter Garrett (School Education)
  • Stephen Conroy (Broadband and Telecommunications)
  • Joe Ludwig (Agriculture)
  • Greg Combet (Climate Change)
  • Stephen Smith (Defence)

Julia Gillard has kept her pre-ballot promise by announcing that she will resign from politics and not contest the election.

At this stage, it seems likely that Bill Shorten (Employment and Workplace Relations Minister) will retain his cabinet position, and Resources Minister Gary Gray has also confirmed that he will retain his place in the cabinet. Anthony Albanese has been confirmed as the new Deputy Leader of the Labor

Party and Deputy Prime Minister. Penny Wong has confirmed that she will be the new Senate leader, taking the place of Stephen Conroy. Chris Bowen is the new Treasurer.

The opposition has stated it would not move a no-confidence motion against the government, so it seems likely that the current parliament will see out its term.

Milestones from here

  • Both houses of parliament will sit tomorrow after the Greens voted with Labor to extend the current sitting until Friday. There are reportedly at least 50 bills that are yet to pass the upper house. Parliament is not scheduled to sit again until 20 October. Consequently, it is very unlikely new policies would be presented to Parliament prior to the election.
  • The former Prime Minister had not issued writs to the Governor General to dissolve Parliament, so the announced election date may change. Consequently, given the change in leadership, it’s now unlikely that the election will be held on 14 September.
  • There is some speculation that Prime Minister Rudd may want to build on any momentum he might currently have by calling the election earlier than planned by his predecessor.
  • The earliest possible date is 3 August 2013 and the latest possible date is 30 November 2013, based on the sitting times of parliament. However, a further caveat is that it may only take place no less than 33 days after the writs are issued.
  • Dates currently being mentioned in the media are 3 August and 24 August.

Let the campaign begin

The most recent Newspoll was released three days ago, and it showed Labor’s primary vote had fallen to 29%, and 43% on a two party preferred basis. Recent polling shows that the party is better placed to win the election with Kevin Rudd as leader. Indeed, consistently poor opinion polling for Julia Gillard was the driving force behind the leadership spill.

In our view, there are several key political issues that the new Prime Minister will need to address in the lead up to the election:

  • The government’s policy on asylum seekers and border protection
  • The carbon tax and climate change
  • The Minerals Resource Rent Tax (MRRT)

These were some of the key issues that caused opinion polls to turn on Mr Rudd when he was last Prime Minister. However, the lack of tax revenue delivered to government by both the carbon tax and the MRRT mean that these taxes are possibly a smaller political issue than when Mr Rudd was last Prime Minister.

Market implications

If the polls are right and the upcoming election will be much closer now that Kevin Rudd has been reinstated as Prime Minister, then there are some market implications worth considering:

  • Another hung parliament is a possibility, if the polls are accurate. However, this would be the worst possible outcome for the stock market and the economy because it would not improve general business confidence.

Indeed, the government’s lack of power to legislate has been one of the key reasons that it has been difficult to introduce new reforms.

During past changes in government there has been a tendency for business confidence to improve for around 12 months following the election. The outlier to this trend was the 2007 election, when Kevin Rudd lead Labor to victory over John Howard (Figure 1)

  • The budget position is tight, leaving little room for spending promises.
  • An election will generally benefit the media sector, in particular SWM, FXJ and TEN.

In our view a Coalition victory would be generally more favourable for the stock market:

  • It has been announced that the Coalition will repeal both the MRRT and the carbon tax. Even though these taxes have raised little revenue, their removal would benefit companies exposed to these taxes. The removal of the MRRT would benefit BHP, RIO and FMG, while the removal of the carbon tax would benefit QAN.
  • QUB would benefit if the Coalition was to win the election because the government currently has its own plans to develop an inter-modal terminal at Moorebank. QUB has an alternative concept that is more
  • favourable for the company.
  • The Coalition seems supportive of removing the 75% audience-reach rule, although this is probably not a high priority. We think PRT could benefit from any consolidation that would occur in the sector due to the removal of this rule. In our view, in the case of industry consolidation SXL may also merge with one of the major networks.
  • The Coalition plans to fully restore the Australian Building and Construction Commission (ABCC) to police union activity in the sector.

However, the extent of industrial relations reform would most likely be limited given the opposition leader’s promise that Work Choices would not be re-introduced in his first term of government if he was elected. LEI, LLC and other builders could benefit from more liberal workplace relations.

The return of a Labor government could mean that some of the pressures on the manufacturing sector may ease.
Our retail analyst, Daniel Broeren, thinks that under the new Prime Minister the government could introduce subsidies for the food manufacturing industry. The possibility of industry support could be a small positive for CCA.

As it seems more likely that the stock market would benefit from a change in government.