What the change of Government means for the markets, wage growth still soft, and more...

As you would all know, the Government changed over the weekend. Although polling showed that the Australian Labor Party were consistently ahead, many quietly thought it would be a tight race. It was anything but. However, it wasn’t quite the Labor landslide either, with a lot of climate-focused independents and Greens being elected. Notably, the Liberal Party lost quite a few of their heartland seats in wealthy enclaves in Sydney, Melbourne, Brisbane and Perth.

So what does all this mean for the markets? With it increasingly looking like Labor will lead a slight majority Government, this reduces the potential influence the crossbench would have had in the lower house if it was a minority government.

With this, we can focus solely on Labor policies. Running a small target campaign, on economic issues Labor largely aligned themselves with the Coalition on many policies, including supporting the final stage of the personal tax cuts, as well as not raising corporate tax rates. However, they do support larger wage increases to reduce or eliminate a real wage cut, which could add to labour costs.

Labor has promised more spending in the areas of infrastructure, health care and education. This includes spending on the Victorian Government’s suburban rail loop project, promising to lower the cost of medicines, funding urgent care clinics, and both aged and child care.

Like the Coalition, Labor’s housing focus is primarily focused on the demand-side, in helping younger people buy their new home. Their policy is a shared-equity scheme, which is quite different to the Liberal’s proposal of allowing people to withdraw the superannuation early. Either way, a focus on the demand-side not on housing supply are policies that will put upward pressure on house prices. With rising interest rates putting downward pressure on house prices, this may moderate the price drop.

However, they have addressed the issue of housing supply on a small scale. Labor have committed to a $10 billion Housing Australia Future Fund, where the returns on investment will be used to build 30,000 new social and affordable houses.

The new Government will have a bigger climate focus, committing to net zero emissions by 2050 and a 2030 target of a 43% reduction. Their plan includes investing in green metals production, making electric cars cheaper and upgrading the electricity grid to allow it to handle more renewable energy. A faster transition to renewables may have some long term impacts in the energy space, but we will wait and see until Labor enact more policy in this space.

Employment data was released last week. Headlining the news was the print for the unemployment rate, which edged down to 3.9%. Unsurprisingly, the Morrison Government had spruiked this figure during the final days of their campaign, as a part of their argument that they are effective economic managers. What wasn’t promoted however, was that this decline from 4% from the previous month was helped by a lower participation rate, which went down 0.1% to 66.3%. This helped offset the lower employment growth of 4,000 for the month.

Rhetoric aside, the facts are that unemployment is low, which is reflected by a tight labour market where employers are facing a more difficult time in hiring than before. This has contributed to the Wage Price Index rising by 0.7% for the quarter, or 2.4% for the year. Although wages are growing, for a lot of people they aren’t growing enough. A 2.4% rise in wages still represents a real wage cut of 2.7%, with the latest inflation figures coming in at 5.1%.

Looking to the week ahead, it’s a relatively quiet one in terms of earnings and economic news. This might be the quiet news week we needed with everything that has been happening including the federal election.

In Australia, retail sales for April are expected to grow 0.6% from the previous month. Across the ditch, the Reserve Bank of New Zealand (RBNZ) are expected to hike rates by 50 basis points to 2%, which will be well above our interest rate of 0.35%. With New Zealand dealing with inflationary issues that also occur in Australia, this may be seen as a lead of what’s to come in Australia. However, they are facing much higher inflationary pressures than in Australia, with their latest CPI figure coming in at 6.9%.

A few companies will also be reporting this week. Most notable will be NVIDIA (NASDAQ: NVDA). They are expected to report earnings per share of US$1.30 and revenue of US$8.12 billion. We will be interested to see how they perform given the shortages of chips around the world, and the fact that their products are in demand.

Costco (NYSE: COST) will also be reporting. Wall Street expects Costco to post earnings of $3.06 per share, and revenue of $51.28 billion for the quarter. Costco will be looking to perform better than its competitor, Target (NYSE: TGT), who saw a decline due to supply chain disruptions and inventory mismanagement. We see Costco as the stronger of the two, and expect Costco to manage their inventory better.

We will also be looking at how Chinese tech stocks Baidu and Pinduoduo performs. Baidu is expected to post earnings of US$5.09 per share and revenue of US$29.92 billion. Pinduoduo is forecasted to have an earnings per share of US$1.72 and revenue of $20.61 billion. It’ll show the impacts of the start of some lockdowns such as in Shanghai. In recent years, the Chinese Communist Party’s increased scrutiny of the power of Chinese companies has weighed down valuations, but in recent months they have pivoted their rhetoric by announcing more accommodative policy to allow businesses to grow.

Interesting Finance Fact

Corrections in the US stock market are least likely in the third year of a presidential term

Statistics from the past two centuries show that the average returns for the S&P 500 are the highest right after the midterms, which is in the third year of the president’s term, a phenomenon known as the ‘Presidential Cycle Theory’ of stock returns.

This is due to investors being averse to uncertainty. Investors are more cautious as they are uncertain of the outcome of the midterm elections. After the midterms, investors ease back into the market, knowing that there will be two years of political stability before the next election.

Have a great week,

Sam Waldron - Research Analyst

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