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Bank rally to be ‘short-lived’ as economy remains ‘vulnerable’

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By James Mitchell
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4 minute read

Investor confidence is on the rebound and the ASX hit a 12-year high on Monday. But it’s not all good news for the Australian economy.

On Monday the S&P/ASX 200 closed at 6,476, up 1.7 per cent and the highest it has been since mid-December 2007. 

Financials experienced the greatest rally and added 113 points to the index. Westpac performed the strongest of the big four banks after closing 9.2 per cent higher on Monday, followed y NAB (7.9 per cent), ANZ (7.8 per cent) ad CBA (6.3 per cent).

History shows that Australian shares have risen on average 4.8 per cent in the three months after an election, regardless of which party wins. The coalition's previous victory edged Aussie equities up 4.5 per cent in three months, while the 2013 LNP win saw the market contract by 1 per cent 90 days after Tony Abbot became Prime Minister. 

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The ASX rally was able to continue on Tuesday after the RBA signaled a June rate cut. The market closed at just over 6500.

Speaking to Investor Daily, Natalie Tam, investment director at Aberdeen Standard Investments, said the re-election of the coalition is particularly positive for banks, which benefit from the removal of franking credit and negative gearing policy risk, as well as a reduced risk of further bank levies. 

“We expect the rally in banks to be short lived as investors eventually focus back on the operating landscape post the election. Banks continue to face slowing credit growth, high regulatory and compliance costs and deteriorating credit quality,” she said. 

“Heading into the election, there was a strong consensus view that a Labor party win would be negative for equity markets because of the extent of the reforms Labor were proposing. This drove the relief rally we saw seeing on Monday. A return in policy status quo is likely to calm anxiety in the sectors most heavily impacted from the ALP proposed reforms.”

Ms Tam said the coalition win is also a strong positive for private health insurers and private hospital operators as it removes the overhang of a 2 per cent cap for two years on premium rate increases. 

“This was a key source of uncertainty for the sector,” she said. 

Former Reserve Bank of Australia economist Jeremy Lawson characterised the Morrison government’s victory as “short-term gain but long-term pain”. 

“Although the government has few plans to properly address the country’s long term challenges, the Coalition’s return could boost the economy in the short term,” the head of Aberdeen Standard Investments Research Institute said. 

“Corporate Australia and SMEs were opposed to much of Labor’s policy agenda, creating scope for business sentiment to improve in the wake of the election. The government’s proposed tax cuts are regressive and will likely have a low multiplier, but they will support consumption growth at the margin against a backdrop of weak real wage growth.

“Meanwhile, the struggling housing market will receive a fillip from changes to negative gearing being taken off the table and the new proposed federal subsidy for first home purchases. 

“Excessively low inflation still warrants policy easing and our central view is still for two cuts this year. However, the election result tilts the near-term risks to the upside of that baseline view and housing, consumption and business investment dynamics will bear very close monitoring. 

“That said, it remains very unlikely Australia will be able to sustain a policy tightening cycle during the current expansion and the country remains one of the more vulnerable in the world to the end of the current global expansion given the scale of its household imbalances and sensitivity to commodity demand.”

AMP Capital chief economist Shane Oliver said that apart from the housing deposit scheme, the coalition did not promise a lot in this election – which is a good thing – beyond what was laid out in the budget. 

“So it’s back to business as usual in terms of the immediate economic policy outlook with modest tax cuts for low and middle income earners on track for the next few months. 

“Our view remains that growth will average around 2 per cent in the short term, unemployment will move up to around 5.5 per cent and the RBA will cut the cash rate twice this year to 1 per cent with the first cut likely next month. 

“Increased short-term fiscal stimulus on the back of a still improving budgetary position (with the 2018-19 budget likely now in or close to surplus) thanks to the still surging iron ore price is on the cards though but is unlikely to be big enough or come early enough to head off rate cuts.”

Bank rally to be ‘short-lived’ as economy remains ‘vulnerable’

Investor confidence is on the rebound and the ASX hit a 12-year high on Monday. But it’s not all good news for the Australian economy.

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