Investors bask in mother of all relief rallies as Labor fears dissipate

They forgot the US market’s poor showing on Friday. Monday was Australia’s Day and investors were basking.

The sharemarket gains, which took the index up to levels not seen since before the global financial crisis, were driven by the Australian banks, which were trading between 6.5 and 8.5 per cent higher before lunch as investors digested the impact of returning a government that would be less punishing on the big four.

There are a number of sectors that should receive a boost from the pro-business policies of the Coalition, but banks will benefit in several ways.

In the first instance, they distribute billions in franked dividends now no longer threatened by Labor’s plans to outlaw cash rebates — a policy that particularly affected retirees.

Other high yield stocks that pay fully franked dividends will also have a renewed popularity.

Interestingly Telstra — a yield favourite — wasn’t bid up on Monday because there had been hope that a Labor government may have addressed some NBN issues and improved the returns made by broadband retailers.

Meanwhile, there was evidence that in the December half that many companies with a bank of franking credits had upped their dividend payments or distributed bonus dividends as a kind of insurance against a Labor win.

Andrew Forrest’s Fortescue Metals even announced a hefty full-year dividend before the financial year had ended. Its shares smashed through $9, a rise of about 2.8 per cent on Monday thanks to generous dividend yield and the iron ore price landing above $US100 on Friday.

The Coalition win will also allow the big banks to avoid an additional $640 million levy and the re-opening of some already settled customer compensation cases.

Labor planned to boost compensation caps at the Australian Financial Complaints Authority, establish an independent retrospective compensation scheme for past victims of financial services misconduct and establish a compensation scheme of last resort in financial services.

And then there was Labor’s plan to close the negative gearing tax loophole (and tighten capital gains tax). Both were seen as a potential headwinds for the housing market.


There is now a view that house prices may level out sooner as demand for housing finance, particularly from property investors, could start to strengthen or (at least) stop weakening.

Such an outcome would be a significant positive for banks who derive the lion’s share of their income selling mortgages.

Beyond banks, the election outcome was a godsend for health insurers — which will no longer face a 2 per cent cap on price rises on premiums. This explains the 10 per cent bounce NIB and Medibank Private experienced on Monday.

Consumer discretionary stocks experienced a small bump as concerns about higher wages and penalty rates abated.

Discretionary stocks may also feel the ripple effect of improvement in the housing market as the «wealth effect» kicks in. This sector rose 0.9 per cent on Monday.

There is also a view among economists that consumer sentiment will improve as the election uncertainty is over and Morrison’s leadership has been cemented.

Many companies including retailers and airlines had experienced softer conditions in the lead up to the election.

However, the fact that the market’s mini-boom is not particularly broad-based suggests the party may last long.

Investors had punted on a Labor win — and had marked down some stocks accordingly. This has now been reversed.

For big business and executives at the top end of town the outcome is a double bonus. They get the party they favoured and the certainty they crave.

Elizabeth Knight comments on companies, markets and the economy.

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