Federal election 2019 - a good outcome for the equity markets

The ambitious reform agenda led by the Labour party was largely rejected by the Australian public opting for minimal change and economic conservatism. Major market concerns around changes to negative gearing, dividend imputation and the tax code are now off the table, which is a big relief.

The Scott Morrison government enters a new term having to contend with a softening economy and stagnant wage growth. While policy certainty will no doubt provide comfort for investors, a clear agenda on how the Coalition can turn the economy around will be key over the next few months. Rate cuts are still on track later this year. We'll be watching indicators around business confidence and investment and their potential impact on employment and growth.

In the run up to the election, corporates have favoured returning cash on the assumption that refundable franking credits were likely to go. Corporates favoured returning cash over capital investment so forecasts for earnings growth naturally softened. The full year results in August will be a critical time for investors to assess whether companies have changed their behaviour on an improved political climate for investment. Without it, we suspect sub-par growth and elevated valuations will mean sub-par returns for Australian equity returns over the next few years.

With the election out of the way and major economic reform off the cards, we think markets will react favourably to political certainty over the short term. Since 1980 the ASX 200/All Ords has been up on average 5.2 per cent the 12 weeks after an election. Consistent with conventional wisdom, political certainty revives the consumer so sectors such as retail, consumer staples and industrials respond well. But ultimately, we think that larger forces (interest rates, US and China trade disputes) will be the dominant driver of Australian market fundamentals and returns.

With the more controversial policy proposals gone the way of Labor's leader, here's what we make of the sector implications:

On dividend imputation: Despite significant media attention on the refundable franking credit issue we don't believe investors would have dramatically altered their portfolio allocation in anticipation of a policy that would have faced a difficult road through the senate.

On negative gearing: Restricting negative gearing to new housing stock while the property market is soft was likely to exacerbate downward pressure on house prices and place stress on household balance sheets not to mention put further pressure on the economy. The coalition has recommended no changes to the current negative gearing framework. We think the election result could further support the bottoming out of the property market. Auction clearance rates have stabilised in recent weeks, particularly in Sydney and Melbourne. With the Royal Commission out of the way, this is another piece of good news for the banking sector.

On tax policy: The most immediate benefit to tax policy is the extension of the instant asset write off for businesses turning over up to $50m (write off a single asset up to $30,000) and the low income tax offset from July 1 this year, where individuals earning less than $37,000 will receive up to $255 with their tax returns, those earning between $48,000 and $90,000 will get $1080. The offset then scales down to zero for anyone earning $126,000 or more. These measures are positive for the consumer at a critical time.