Upload
political-monitor
View
214
Download
0
Tags:
Embed Size (px)
DESCRIPTION
The next twelve months present as a time of heightened political risk for investors in the Australian market. Ongoing leadership speculation, dramatic and unexpected policy changes and a potential change of government at the next federal election all contribute to an environment of uncertainty. These risks have real implications for the Australian market.
Citation preview
Investing in an election year Markets in the political silly season
www.politicalmonitor.com.au
November 2012
Investing in an election year
2
CONTENTS
About Political Monitor 3 Executive summary 5 Politics & markets 8
Political outlook | Nov 2012 – Nov 2014 11 Political risk & Australian equities
§ Resources 19 § Financials 25 § Telecommunications 28
Conclusion 30
Disclaimers, copyright & trademarks 31 Acknowledgements 32
Investing in an election year
3
ABOUT POLITICAL MONITOR
Political Monitor is a political risk research and advisory
firm. Our analysis provides insight into the implications of
political risk for commercial valuations, asset selection,
investment decisions, strategic planning and operational
performance.
The firm was established to meet a need in the market for deep
strategic thinking about the business challenges and
opportunities that arise from political decisions. Our approach
inherently recognises that political risk, like any form of risk,
can produce both benefits and costs. Importantly, our work
goes beyond the day-to-day noise of politics and seeks to
identify longer-term political trends that confront markets and
firms.
What is political risk?
Political risk is the risk that derives from both the decisions of
government and the broader stability of a political system. It
has the ability to impact company valuations and influence long
term commercial planning. Political risk can emerge from any
level of government – local, state or national – and at any level
of decision making – political or bureaucratic.
While political risk is most often thought of in terms of country
risk the reality is that firms and investors can be exposed to
political risk at an industry, sector or firm level even in those
countries that represent as a safe risk at the macro level.
Investing in an election year
4
Understanding Political Monitor’s risk ratings
In this report a number of specific political risks for industry are
identified and each is allocated a risk rating ranging from low to
severe. The rating is an opinion based judgement by Political
Monitor and reflects our perception of the likelihood of the risk
emerging and the potential impact on an industry or firm.
Political Monitor risk ratings
This rating signals a high level of stability in the short to medium term (12 months). Unexpected political decisions are considered unlikely This rating signals political attitudes towards an industry or firm are stable but changes to the macro environment (such as a change of government) may introduce heightened risk in the medium to long term This rating signals an increased level of uncertainty for an industry or firm and the risk of adverse political decisions and / or outcomes in the short to medium term have increased. This rating signals a significant level of risk for an industry or firm with adverse political decisions and / or outcomes highly likely.
Investing in an election year
5
EXECUTIVE SUMMARY
The next twelve months present as a time of heightened
political risk for investors in the Australian market.
Ongoing leadership speculation, dramatic and unexpected
policy changes and a potential change of government at
the next federal election all contribute to an environment
of uncertainty. Perhaps of most concern is the emerging
reality of a political climate in which politics triumphs over
policy.
At the macro level Australia remains one of the safest and most
stable jurisdictions in which to invest and sovereign risk ratings
are right to present Australia in this light. However, beyond the
standard country level risk analysis investors are confronted
with a number of industry and sector specific risks that derive
directly from the decisions – immediate or potential - of
government.
However, not all of this risk is a result of events in the federal
sphere. State government budgetary constraints, a
forthcoming election in the resource rich state of Western
Australia and even global trade negotiations all contribute to
the political risk environment for investors over the next 12
months.
This report examines those risks with a particular focus on the
implications for key sectors in equities markets.
“Perhaps of most concern is the emerging reality of a political climate in which politics triumphs over policy.”
Investing in an election year
6
Section 1 briefly discusses the link between politics and
markets. In Section 2 the general political outlook is examined
with a focus on two key areas - the broad implications arising
from either a change of government at the federal election next
year or the return of Labor; and the budgetary outlook for state
governments’ and implications for business.
Section 3 details the general impact on the resources
(including energy), financials and telecommunications sectors
of a raft of policy changes and reviews in addition to elections
federally and in Western Australia over the next 12 months.
In general, the report presents a picture of heightened
uncertainty for key sectors and identifies the political events
and trends that investors should monitor in order to manage
their portfolio exposure to political risk.
Key findings & risks:
• Investors face heightened political risk over the next
twelve months leading into the federal election –
uncertainty and the triumph of politics over policy will be the
dominant political trends confronting investors.
• Budget and election uncertainty – as a surplus gets
harder to achieve the chances of an early election increase.
The alternative is tax increases for business to fund
expected revenue shortfalls.
• State governments’ face revenue challenges – business
taxes may present as one solution.
“ … a picture of heightened uncertainty for key sectors ...”
Investing in an election year
7
• Carbon tax and the politics of the Senate – over the next
12 months firms will need to make investment decisions
driven by the impact of the carbon tax but will do so
uncertain about its fate after the federal election.
• The energy sector becomes a political football – the
release of the federal government’s white paper signals the
start of a campaign to shift responsibility for power prices
away from the carbon tax and onto the states. Energy
companies will be the subject of intense political focus and
wrangling.
• Western Australian election and uranium mining – a win
by Labor would bring an end to new uranium mining
approvals. Conversely, new opportunities may emerge in
New South Wales.
• Government’s love banking inquiries – the banking
sector is likely to be subject to ongoing inquiries. The most
significant would be a Wallis style inquiry following a win by
the Coalition at the next federal election. In the meantime
there is a clear trend towards enhanced protection for
consumers of financial service products.
• Fibre to nowhere – the telecommunications sector will be
buffeted by the fortunes of the NBN under a Coalition
Government. Scrapping existing works and shifting to a
private sector model may not be as easy as planned.
However, providers of alternate technologies, such as
wireless, would benefit from a Coalition decision to move
away from fibre cables.
Investing in an election year
8
POLITICS & MARKETS
Politics moves markets. One need only look at the
dramatic movement of global equities and bond markets in
recent years, as politicians have fumbled their way
through the global crisis, to understand this reality. Even
without a crisis political decision-making, or the lack
thereof, influences investment outcomes.
The political causes of these market movements are varied.
They include elections and the degree to which the outcome
was expected, changes in political leadership, dramatic shifts in
public policy and the underlying ideology of the political party in
office. Indeed in some markets a clear trend can be identified
simply from the normal course of the electoral cycle.
In the United States (US) the Presidential Election Cycle
Theory argues stocks decline in the year immediately following
a presidential election, then go up over the course of the next
three years, no matter who wins the election.
From 1937 onwards the Roosevelt, Truman and Eisenhower
Administrations all held to the theory with market declines in
their first year followed by a rebound over the next three years
of the term. However, more recently the elections of George H.
W. Bush and Bill Clinton brought market increases in the first
year.1 These recent experiences point to the need to consider
other theories.
“Even without a crisis political decision-making, or the lack thereof, influences investment outcomes.”
Investing in an election year
9
One such alternate theory – from Ned Davis Research –
suggests that the analysis should consider the question from
the perspective of incumbent versus challenger rather than
political parties or stages in the electoral cycle. This analysis
leads to a clear trend in favour of incumbents regardless of
their political party of origin. On average markets have
performed best in presidential election years when the
incumbent has been returned to the White House. However,
investors should take note of the reliance on averages.
In Australia, recent research has suggested a correlation
between political party ideology and market outcomes.
Anderson, Malone and Marshall argue the electoral cycle
influences asset returns with property performing better under
Labor governments and stock prices more favourable to
Conservative governments. In the case of bonds capital losses
are discernible during Labor periods and capital gains are
apparent under Conservative governments.2
For investors the challenge is not just identifying the
emergence of political risk but being able to determine with a
degree of certainty the market impact of that risk, including any
ripple effects.
Adding to the challenge is that the relationship between politics
and markets is not always linear. Rather than political
decisions having an immediate and verifiable impact on market
performance it may be market events themselves shaping
political outcomes that in turn result in a new outlook for
investors.
“Adding to the challenge is that the relationship between politics and markets is not always linear.”
Investing in an election year
10
Regardless of whether the relationship between politics and
markets is causal, or otherwise, the fact that a relationship
exists should be an important consideration in any investment
strategy.
Investing in an election year
11
POLITICAL OUTLOOK | NOV 2012 – NOV 2014
Political risk: Heightened uncertainty until the
outcome of the federal election,
including make-up of Senate, is
known and the feasibility of key
Coalition proposals are tested
Prospect of an early election to avoid
revealing a federal budget deficit for
2013 prior to end of year poll
Threat of new and / or increased taxes
as federal and state governments’
struggle with budgetary constraints
The forthcoming federal election, which once offered the
prospect of a return to stability, is now emerging as a major risk
on the horizon for investors as the outcome becomes uncertain
and investors are unsure of the implications for key policy
areas of carbon pricing, energy reform, financial services
reform and the national broadband network. A Liberal –
National Coalition victory, still the more likely outcome, would
both remove the inherent instability arising from the recent
years of minority government and bring to power a stable
coalition of parties that have a long history of governing
together and are regarded as pro-business.
However, while markets will welcome this ‘stability dividend’ a
new government will in the short-term mean a number of policy
“However, while markets will welcome this ‘stability dividend’ a new government will in the short-term mean a number of policy changes and reviews that have the potential to disrupt current investment plans.”
Investing in an election year
12
changes and reviews that have the potential to disrupt current
investment plans. This is particularly the case for financial
services, energy markets and telecommunications.
Conversely, the re-election of the Labor Government is unlikely
to bring stability to the Australian commercial environment.
Even with recent improvements in public opinion polls it is
highly unlikely that the Government could attain a majority in its
own right, meaning that once again its ability to govern would
be dependent on independent Members of Parliament in the
lower house and the Greens in the upper house.
In essence, the best-case scenario for Labor is a return to
minority government; an outcome that would see continued
political influence for those parties to the left of the political
spectrum and / or a number of protectionist independents.
Whoever wins the forthcoming election will assume
responsibility for a federal budget heading towards surplus.
However, there is considerable doubt emerging about the
timing of a return to surplus. This presents two clear risks to
business.
First, in order to deliver the promised surplus in 2013 the
Government will introduce new taxes, increase existing taxes
and / or remove business rebates to make up for the emerging
shortfall in tax receipts. The recent Mid Year Economic and
Fiscal Outlook highlighted this risk with the Government
prepared to make changes to company tax arrangements in an
attempt to maintain its target of a budget surplus in the current
year. Furthermore, the Government’s revised budget numbers
“However, there is considerable doubt emerging about the timing of a return to surplus.”
Investing in an election year
13
are dependent on meeting its economic growth forecast of 3%,
an outlook supported by few private sector economists. If
growth falls below the Government forecast then more
spending cuts or revenue increases will be needed to make up
for the drop in national income.
Second, the Government may opt for an early election if it
believes a surplus is no longer achievable and wishes to avoid
revealing this prior to the expected end of year poll. The
Government’s political identity has become wedded to
delivering a surplus and a failure to do so will cut at the core of
its economic credibility. In light of weakening tax receipts the
odds of an early election are shortening, particularly if the
Government’s standing in opinion polls continues to improve.
Risks arising from budgetary constraints are also evident at the
state government level. Even those states endowed with an
abundance of natural resources, such as Queensland and
Western Australia, face budgetary challenges. The recent
decision by BHP Billiton to delay expansion of its Olympic Dam
copper and uranium mine in South Australia is a powerful
demonstration of the vagaries of commodity markets and the
pain that can be quickly inflicted on state governments
dependent on royalties as a revenue stream.
Australia’s geographic size means that each of the six states
are confronted with unique budgetary challenges as
summarised below:
“In light of weakening tax receipts the odds of an early election are shortening, particularly if the Government’s standing in opinion polls continues to improve.”
Investing in an election year
14
New South Wales With a state budget deficit for the current fiscal year forecast to
exceed $800m and state net debt of circa $65bn the NSW
government must address both expenditure and revenue
challenges to return Australia’s largest state, and traditionally
the nation’s economic powerhouse, to a firmer financial footing.
While the state’s finances are expected to improve off the back
of public sector cuts and a program of privatisation new
pressures are likely to emerge if predicted softness in GST
revenues continue.
NSW does hold large reserves of coal; however, it lacks the
broader resource base of the outlying states of Queensland
and Western Australia. Furthermore, years of infrastructure
neglect means the state lags behind other coal producers, both
domestically and internationally, in its capacity to produce and
deliver coal at optimal levels.
In essence, the NSW economy is heavily dependent on
consumer spending and housing construction both of which are
subdued in the current climate. While the pro-business
Conservative Government is unlikely to directly tap business
for more cash through new taxes, levies and surcharges any
attempt to instead raise additional revenues from consumers
will ultimately impact business conditions, particularly those
sectors such as retail and construction that are so dependent
on consumer spending. Accordingly, the outlook is for a
general but subdued improvement in NSW government
finances as the Government seeks to improve its budgetary
position through expenditure cuts.
“ … the NSW economy is heavily dependent on consumer spending and housing construction both of which are subdued in the current climate.”
Investing in an election year
15
Victoria At first glance the Victorian budgetary position is healthier than
that of NSW with projections of a $155m operating surplus for
the current fiscal year. Furthermore, business was enthusiastic
about the much-hyped cuts to Work Cover premiums.
However, unlike NSW the long range trend is not as positive.
Net debt is forecast to increase as a percentage of Gross State
Product (GSP) over the forward projections and revenues are
expected to decline as a result of drops in both GST and stamp
duty income. While business may welcome plans for critical
infrastructure investment, the fact that this is funded by debt
simply represents a future tax claim on business cash flows
and the deteriorating revenue position may mean those claims
need to be realised sooner rather than later.
Aware of its heavy dependence on manufacturing and
consumer spending for the state’s economic growth the
Government has elected to invest in blueprints for
manufacturing and exports. However, the reality is that those
plans will take years to develop and implement leaving the
state heavily reliant on the provision of professional services to
the mining and financial services industries, manufacturing
activity and consumer spending. Each of these areas is likely
to come under pressure over the next several years as the
mining boom continues to soften.
“However, unlike NSW the long range trend is not as positive.”
Investing in an election year
16
Queensland In their first budget the Newman Government has decided to
take as much political pain up front as possible in order to
present a vastly improved state of affairs come the next
election. This has been achieved primarily through cuts to
spending and government employment and an increase in
taxes.
The focal point of the budget is the shift from a $10bn deficit
this year to a small operating surplus in 2013 – 14. Around
10,500 state government employees will be made redundant
and an additional 3,500 roles will be removed through natural
attrition. On the revenue side the Government is increasing
mining royalties for coal and increasing stamp duty on homes
sold for more than $1m.
Like the other states Queensland will struggle over coming
years with declining GST revenues and is seeking to make up
the shortfall through increased royalties. However, it confronts
two important risks with this approach. First, it may be
increasing mining royalties at a time when the boom is
softening and investors are less inclined to accept such
imposts. Second, the royalty gains, which essentially shift the
burden of the increase to the federal government due to its own
commitment to credit any such increases against its own new
mining tax, will likely be punished by the federal government
through additional cuts to GST or infrastructure grants.
In essence, Queensland is caught with too big a deficit at the
wrong end of a boom and its attempts to increase revenues
“In essence, Queensland is caught with too big a deficit at the wrong end of a boom and its attempts to increase revenues from the mining sector are likely to simply aggravate the industry’s emerging challenges.”
Investing in an election year
17
from the mining sector are likely to simply aggravate the
industry’s emerging challenges. If the increased royalties don’t
provide the revenues needed the Government may be back
next year with more broad-based tax increases for business. Western Australia Western Australia is a clear example of a state experiencing
growing pains. The state is the economic powerhouse of the
nation with an abundance of resources in hot demand by
emerging economies, particularly China. Yet it faces large
infrastructure bills in order to ensure the state is capable of
meeting global demand and must fund this need from a
revenue base that is experiencing declining flows from the GST
and uncertainty about the federal government’s mining tax and
the resultant impact on royalties.
Fundamentally, the Government is struggling to raise the
revenues necessary to fund the state’s rapid expansion and it
runs the risk of investing too heavily at the end of a boom
potentially setting the state up for excess supply just as prices
start to soften.
The government expects a budget surplus of $196m but
government debt will increase from $15.6bn this year to
$23.156bn in financial year 2014 – 15. Much of the extra
expenditure is dedicated to infrastructure with $7.6bn allocated
to that purpose and $1bn set aside for a ‘Future Fund’. The
risk for firms operating in Western Australia is that the
Government will need to increase taxes to compensate for
declining GST revenues and income from the mining sector if
the boom has peaked. The rising expenditure on infrastructure
“Fundamentally, the Government is struggling to raise the revenues necessary to fund the state’s rapid expansion ...”
Investing in an election year
18
increases the leverage and thus the risk for the Government in
a softening economic environment.
Western Australia has the greatest degree of uncertainty with
an election due in March 2013. While the Conservative
government remains popular in a traditionally conservative
state the Labor opposition needs only a small swing to return to
government. A Labor victory would bring a change of focus
and policy including to the taxation base.
South Australia South Australian finances are perhaps the most precarious of
all Australian states and the outlook for both fiscal improvement
and economic growth is not positive. As with all states South
Australia is confronted with declining GST revenues but rather
than use this reality as a trigger for expenditure cuts the
Government has elected to delay plans for a budget surplus for
at least one year and allow state debt to grow to 75% of
revenues by 2012.
With a declining population, a manufacturing base largely
dependent on government support and uncertainty around
major projects, as evidenced by BHP Billiton’s recent decision
regarding Olympic Dam, South Australia’s economic outlook is
weak and its fiscal position is unlikely to significantly improve in
the short to mid-term without a dramatic cut to public
expenditures and / or an increase in revenues.
“South Australian finances are perhaps the most precarious of all Australian states and the outlook for both fiscal improvement and economic growth is not positive.”
Investing in an election year
19
POLITICAL RISK & AUSTRALIAN EQUITIES
Both the Australian All Ordinaries and the ASX200 – the
two most watched indices – are dominated by the
resources and financial services sectors. In the case of
the ASX200 BHP Billiton and the four major banks
(Commonwealth, Westpac, ANZ and National Australia
Bank) account for around 35% of the index. Unfortunately
for investors these two sectors are exposed to potentially
higher levels of political risk over the next 12 months.
Joining them is the telecommunications sector.
Readers should note that in addition to sectors identified above
the agricultural sector is exposed to significant political risk
arising from the outcome of the US Presidential and
Congressional elections and the implications for trade
agreements. The nature and implications of this risk are not
discussed in this report and instead will be the focus of a
forthcoming report examining the agricultural sector.
Resources – including Metals & Mining sector and Energy & Utilities sector
Issue: Carbon Tax
Political risk: Extended period of political
uncertainty
The primary political risk confronting the sector over the next
12 months centres on the carbon tax. The unexpected
Investing in an election year
20
decision by the Gillard Government to abandon its proposed
floor price when the tax progresses to an emissions trading
scheme in 2015 (just a week after Minister Combet had flatly
rejected such an eventuality) was an important demonstration
that politics, rather than economics, is driving this issue and
highlighted the political risks associated with any investment
decision made in relation to the tax.
The greatest risk and uncertainty stems from the Opposition’s
pledge to repeal the tax if it wins power in 2013. While current
opinion polls point to a win for the Conservatives, investors
cannot simply precede on the basis that the tax will cease to
exist after the next election. Two challenges will make the
promise of repeal a hard one to keep.
The first challenge to repeal arises from the extent to which the
tax has become embedded in the Australian economy. It is
clearly the Gillard Government’s intent to make it impossible to
unscramble this egg and it remains unclear whether repealing
the legislation will be easier said than done.
The second challenge to repeal is the make up of the Senate.
Current polling suggests minor parties will again hold the
balance of power in the upper house and combined with a new
Labor Opposition they are likely to prevent the passage of the
necessary legislation to repeal the tax. While such a course of
action would be politically difficult for a new Labor Opposition,
which had just been rejected at the ballot box largely on the
back of the unpopular tax, carbon pricing has become such a
tenant of faith for Labor that repeal would cut to the core of
their identity in the modern era.
“The unexpected decision by the Gillard Government to abandon its proposed floor price when the tax progresses to an emissions trading scheme in 2015 … was an important demonstration that politics, rather than economics, is driving this issue …”
Investing in an election year
21
These challenges reveal that the primary risk confronting
investors in planning around the carbon tax is uncertainty
derived from the political process. Consequently, the political
environment is likely to act as a drag on the sector until the
identity of a new government and the make up of the Senate
are clear.
Issue: Energy market reform
Political risk: Extended political uncertainty as the
federal and state governments battle
over a reform agenda and prices are
centre stage leading into an election
year
The federal government’s release of its energy white paper
(November 2012) maps out a clear path for reform of
Australia’s energy market. It includes price deregulation, price
signaling, the introduction of smart meters and hints at
privatisation of state assets. However, none of these
recommendations are groundbreaking and very little of it will
actually happen any time soon.
Energy prices have become a hot political issue as price rises
raise public consternation and political parties seek to shift the
blame to each other. This is the political context in which the
white paper’s recommendations will be assessed and debated,
accentuated by the prospect of an early election.
The Gillard Government, well aware of consumer perceptions
that the carbon tax is a key input into rising power prices, is
Investing in an election year
22
keen to shift the burden for these increases to the state
governments. The energy whitepaper, through its focus on
state government reforms, provides a platform from which the
federal government can articulate its case.
This is not to say that the recommendations are wrong. But as
they are not new the Government hardly needed a whitepaper
to identify and develop a pathway forward. This leaves politics
as a primary driver of the white paper’s findings and timing.
The states – principally NSW and Queensland – will have none
of it. Both went to their last state elections opposing asset
sales and while the NSW Government is laying the groundwork
for reform it will not do so without an electoral mandate. The
Newman Government in Queensland is even more forthright in
its opposition to asset sales particularly of transmission assets,
which are essential to any wide reaching and comprehensive
program of energy reform. Queensland and NSW federal
counterparts, who want price hikes to be linked to the carbon
tax and not obscure debates about energy market reform, will
egg on these Conservative state governments in their
opposition to the federal government’s recommendations.
All of this places the energy sector at the centre of a heated
political debate only likely to get hotter as the nation heads into
an election year. The tantalising prospect of reform will in the
short-term give way to a political debate that provides little
direction for investors about Australia’s energy policy into the
future. Accordingly, the industry is confronted with an
immediate period of uncertainty, as it becomes a political
“This leaves politics as a primary driver of the white paper’s findings and timing.”
Investing in an election year
23
football, and little guarantee that the post-election environment
will offer the prospect of wide sweeping reform.
Nonetheless, the white paper is correct in arguing that real
reform is dependent on the state governments. Price signalling
and smart metres in particular are essential to providing
consumers with both an understanding of the real cost of their
energy use and allowing them to control that cost.
Deregulation is at the core of this project. Asset sales are also
an important part of establishing market based pricing signals.
The proceeds from those sales also have the advantage of
being able to fund the development of other government
infrastructure projects.
Achieving these outcomes requires political will and the two
critical states in the reform process – NSW and Queensland –
are clear that electoral mandates are necessary for any such
reform. This destines the industry to be the subject of an
intensive political debate if reform is to become a reality.
Issue: Uranium mining
Political risk: Ban on future mining in Western
Australia if Labor wins forthcoming
election
Upside for industry following
Queensland decision to repeal ban
and NSW decision to allow
exploration
Investing in an election year
24
While uranium mining has always been contentious in
Australia, which is the second largest producer after Canada,
public debate has been somewhat subdued over recent years
and the policy of respective governments, federal and state,
seemingly settled. That is beginning to change.
In Western Australia, where Premier Barnett overturned a
Labor ban on uranium mining in 2008, the prospects of the
Labor Opposition have been steadily improving since Mark
McGowan replaced Eric Ripper as leader in early 2012. While
a Labor victory has seemed unlikely for many years the reality
is that it failed to hold government at the last election by just
one seat and the introduction of one vote, one value during
Labor’s last period in office has decisively shifted political
power away from the regions and back to Perth, Labor’s
stronghold. This makes the prospect of Labor forming
government following the state election in March 2013 more
plausible than many have assumed.
The implications of a Labor win for investors with interests in
uranium related stocks would be decidedly mixed. McGowan
has clearly stated that his policy would allow existing mines to
continue operation along with those that had completed the
approval process prior to Labor taking office. But a Labor
Government would grant no new uranium mining licenses after
that point.
The outcome of this approach would see one set of firms,
those already mining or that have received approval, continue
to benefit from operations while those firms yet to complete the
approval process would be cut off from opportunities in
“This makes the prospect of Labor forming government following the state election in March 2013 more plausible than many have assumed.”
Investing in an election year
25
Western Australia, which has some of the world’s largest
uranium reserves. Accordingly, investors exposed to uranium
mining in Western Australia need to be clear about which
category of investor they fall into – locked in or locked out.
Conversely, there is good news from Queensland and NSW.
In Queensland the Newman Government has overturned the
previous Labor Government’s ban on uranium mining and the
NSW Government has announced plans to allow uranium
exploration as part of a broader review into uranium mining in
that state.
The election of an Abbot led government may also hearten
investors in the sector with the Conservatives far more strongly
disposed to allow and encourage the mining and sale of
uranium.
Financials – another inquiry as pendulum swings towards consumer protection
Issue: Banking reform
Political risk: ‘Too big to fail’ guarantee removed or
extended to other deposit taking
institutions
Increased regulation and compliance
costs arising from new consumer
protection laws
As in most jurisdictions the banking sector remains at the
forefront of community and political debate and that debate is
“ … investors exposed to uranium mining in Western Australia need to be clear about which category of investor they fall into – locked in or locked out.”
Investing in an election year
26
unlikely to cool in the lead up to a federal election. The sector
is already the subject of a Senate inquiry whose report is due
at the end of November but the far bigger challenge confronting
the industry is the proposal by the Conservatives for a Wallis
style inquiry if they win government next year. Such an inquiry
presents both threats and opportunities for the sector.
The Wallis inquiry was critical to introducing greater levels of
competition in banking. While more intense competition was
not necessarily welcomed by the then incumbents the effect
was to increase the overall size of the market by encouraging
innovation and thereby increasing the range of products and
services the sector could offer. The current profitability of
Australian banks is in part testament to the benefits of
competition.
However, those reforms, and the ones to follow such as
establishing the Australian Prudential Regulatory Authority,
also arguably limited some of the market opportunities for
banks. While the Australian sector is oft-cited for avoiding the
worst of US style sub-prime lending this was arguably a result
of tighter and more effective regulation and limited wholesale
funding access than the preferred lending practices of the
sector. While it is hard to quantify the impact of this regulatory
structure on earnings it is reasonable to assume that they
limited earnings by preventing riskier lending in the boom years
but also limited the downside of the global financial crisis to
Australian lenders.
Another comprehensive banking inquiry could have a similar
effect. The immediate effect may be to increase competition in
Investing in an election year
27
the sector making the market more attractive to new global and
domestic players but could also increase the size of the market
through another burst of innovation thus increasing the
opportunities for all participants.
One way in which this may occur is through the removal of
what is effectively the ‘too big to fail’ guarantee provided by the
Government. This guarantee of unlimited support is available
to those institutions whose failure would constitute a systemic
crisis, one that would threaten the broader financial system.
This focus on stability by the Commonwealth Government
results in cheaper access to funds for those institutions
covered by the guarantee. According to critics the result is less
than optimal competition in both personal and business
lending.
A future government may level the playing field by either
removing the guarantee or extending it to a wider group of
lenders. Investors should note that this is likely to lead to
increased pressure on margins as the level of competition
intensifies and becomes more sustainable.
The inquiry could also bring increased regulation and costs.
The flavour of the current debate is heavily weighted to
consumer protection particularly in the home mortgage and
credit card markets. A major inquiry is likely to impose new
costs and limitations on the sector particularly in areas of
customer disclosure and consent, and resolution of hardship. It
is also likely that current calls from consumer groups for
enhanced customer switching mechanisms will also feature
heavily in forthcoming inquiries.
“A future government may level the playing field by either removing the guarantee or extending it to a wider group of lenders.”
“The flavour of the current debate is heavily weighted to consumer protection particularly in the home mortgage and credit card markets.”
Investing in an election year
28
The effect of these decisions will not emerge in the next 12
months. Nonetheless, investors are confronted with decisions
about the sector that will be dramatically affected by the
outcome of a Coalition initiated inquiry anticipated in the first
half of 2014.
Telecommunications – politics and the online economy
Issue: National Broadband Network (NBN)
Political risk: Extended period of uncertainty until
the feasibility of Coalition plans to
adjust the NBN model are tested
Earnings risk for Telstra shareholders
if Coalition seeks to renegotiate
contracts
The greatest political risk for the telecommunications sector
over the next 12 months is the uncertainty surrounding the
National Broadband Network (NBN), which derives largely from
an expected victory for the Conservative parties and their
stated intent to cancel the NBN roll out and transition to a
private sector solution.
At first glance investors in Telstra are confronted with the
greatest risk. If taken at face value a Coalition win would result
in a review and renegotiation of existing contracts with the NBN
Co, which would affect expected returns on funds already
invested. However, Telstra may be entitled to compensation if
Investing in an election year
29
the Coalition seeks to discontinue current arrangements
although any compensation under existing agreements will be
dependent on a level of progress / completion (e.g. 20%) that is
unlikely to be achieved by the time of the next election.
The good news for Telstra investors is that the Coalition is
committed to an NBN, albeit one that is more reliant on the
private sector. It is difficult to imagine that such a
telecommunications infrastructure project could be pursued
without access to Telstra copper, duct or fibre networks. This
means that any future plan is most likely to require the
renegotiation of existing contracts with Telstra rather than
cancellation.
For other players in the sector there may be opportunities
arising from a Coalition win. The biggest opportunity would
arise if the Coalition elected to broadly continue the rollout but
switch to an alternate dominant technology or a variety of
technologies. Providers of wireless connections in particular
could benefit from such a shift. However, as with the threats
the opportunities are clouded in uncertainty and dependent on
the extent of the rollout at the time of the next election.
“The greatest political risk for the telecommunication sector over the next 12 months is the uncertainty surrounding the National Broadband Network (NBN) ...”
Investing in an election year
30
CONCLUSION
Elections create the very thing investors’ dislike the most
– uncertainty. Unfortunately, this is exactly the outlook for
investors in the Australian market over the next 12
months. While a Coalition victory is highly anticipated at
the next federal election there is always an element of
doubt in the democratic process.
However, even a Coalition victory will bring with it new
uncertainties, particularly if minor parties retain control of the
Senate. Stated intentions to make fundamental changes to
laws such as the carbon tax and NBN will count for nothing if
passage through the Senate cannot be assured. This in turn
may create more uncertainty if a Coalition Government decided
the deadlock could only be broken by another election, in this
case a double dissolution.
The uncertainty of elections will also emerge in the resource
rich state of Western Australia. Mining companies will be most
attuned to changes in policy if Labor were to win office but that
state’s revenue challenges expose all firms to some form of
risk, particularly new and / or additional taxation.
In response investors will need to actively monitor political
events and trends over the coming year and prepare for a
number of scenarios. They should also be mindful that as with
all types of risk, the emergence of political risk over the next 12
months creates opportunities as well as threats.
“In response investors will need to actively monitor political events and trends over the coming year and prepare for a number of scenarios.”
Investing in an election year
31
DISCLAIMER, COPYRIGHT & TRADEMARKS
Political Monitor is a business name registered by DCK Holdings Pty Ltd ATF DCK Family Trust (“Seller”). Disclaimer Information in this document is subject to change without notice and does not represent a commitment on the part of Seller. Seller does not warrant the accuracy, completeness or timeliness of any of the data and/or programs (“Information”) available within the report. The Information is provided “as is” without warranty of any kind, express or implied, including, but not limited to, implied warranties of merchantability, fitness for a particular purpose, title or non-infringement. In no event will Seller or its affiliates be liable to any party for any direct, indirect, special, consequential or other damages for any use of or reliance upon the Information found within the report, or on any other reference documentation, including, without limitation, lost profits, business interruption, loss of programs or other data, even if Seller is expressly advised of the possibility of such damages. The disclaimer is in addition to the specific terms and conditions that apply to the products or services offered by Seller. Copyright Copyright © DCK Holdings Pty Ltd ATF DCK Family Trust 2012. This document is copyright and contains confidential information that is the property of Seller. Except for the purposes of executing or applying this report, no part of this document may be copied, stored in a retrieval system or divulged to any other party without written permission. Such rights are reserved in all media.
Intellectual property rights associated with the methodology applied in arriving at this document, including templates and models contained there in, reside with DCK Holdings Pty Ltd ATF DCK Family Trust, excepting client information it contains that is demonstrably proprietary to the client or covered by an agreement or contract defining it as such.
No part of this report may be reproduced, transmitted, stored in a retrieval system, or translated into any language in any form by any means, without the written permission of DCK Holdings Pty. Ltd ATF DCK Family Trust.
© DCK Holdings Pty. Ltd ATF DCK Family Trust. 2012 All Rights Reserved ACN 137 934 386 ABN 60 509 131 934 Trademarks The Political Monitor logo and products referenced in the report are trademarks, service marks, registered trademarks, copyrights or other intellectual property of DCK Holdings Pty Ltd or its affiliates.
Investing in an election year
32
ACKNOWLEDGMENTS
1 Francis, D, 2012, US News, What the Presidential Election Means for the Stock Market, 19
April 2012.
2 Anderson, H, Malone, C & Marshall, B, 2004, n.d., Investment returns under right and left
wing governments in Australasia.