Clear growth agenda needed

A clear agenda for economic growth needed


It is likely markets will continue to react favourably to political certainty over the short term.

Justin Still

Justin Still

With the election out of the way and Labor's more disruptive reforms defeated, we think markets will continue to react favourably to political certainty over the short term. Banks and consumers are the clear winners after the Coalition's victory.

While investor sentiment has improved and will continue to buoy the market over the short term, a clear agenda for stimulating economic growth will be necessary to sustain outperformance over the next 12 months.

The 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 to 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 (Michael Knox expects the RBA to move twice this year). Keep a look out for indicators on business confidence and investment intentions, which will be key for the outlook on employment and growth.

In the run up to the election, corporates favoured returning cash on the assumption that refundable franking credits were likely to go. A softening economic backdrop naturally added to corporate inaction so as capital investment dried up earnings growth appropriately softened. The full year results in August will be a critical time for investors to assess whether companies have changed their behaviour given an improved political climate for investment. Market consensus (Refinitiv) forecasts for growth currently sit at 4 per cent over the next three years, which is short of the 7pc forecast at the same point over the past 10 years. Put another way, if current valuations hold we can expect a 3pc lower return than we are used to over the medium term unless earnings growth can be stimulated.

The 8pc relief rally in the banks the week after the election highlighted the uncertainty priced in by the market. We think the market will continue to react favourably to political certainty over the short term provided uncertainty from global factors remains at bay.

Since 1980 the ASX 200/All Ords has been up on average 5.2pc the 12 weeks after an election and up nearly 80pc of observations. Consistent with conventional wisdom, political certainty revives the consumer so sectors such as the retail, staples and industrials respond well after the result. However the domestic environment is not immune to global factors and escalation of trade wars or uncertainty in Europe have the potential to spill over into all asset classes.

The recently announced reduction in the banking serviceability assessment combined with the Coalition's First Home Loan Deposit Scheme should be positive for system home loan growth and positive for dwelling prices. We think this will continue to turn sentiment around in the banks.

  • Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410

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