Labor majority: Watch for policy changes that will affect your investments (afr.com)

With global inflation at uncomfortable levels, cash rates on the rise and a new appetite for reform, it’s wise to stay alert.

Government policy is always something that investors keep a watchful eye on as a sudden change in the regulatory landscape can have a significant impact on the profitability and even viability of individual investments. With a change of government in Australia, investors will be keenly watching the appetite for reform and likelihood of policy changes that could impact investment valuations.

Economic activity often slows down as elections approach and campaigns begin. Big projects that have a multiyear investment case can be delayed as regulatory change can result in significant changes to the economic case for projects. Consumers will often defer purchases until they can fully assess the inducements from both sides as the politicians compete for their votes.

During this campaign, the relative closeness of the two major party’s platforms probably limited any economic slowdown. However, the election has resulted in more independents in the lower house, a challenging Senate, and a clear mood for change.

The new government has already announced its intention to release a revised budget in October, giving them an opportunity to reset spending priorities and potentially address the issue of budget repair. Speculation about changes to the tax base are already surfacing. In 2010, the Rudd Government attempted to introduce the Resource Super Profits Tax which was eventually watered down after a politically damaging fight with the mining industry. With the desperate need for fiscal repair following the pandemic, there has already been calls to extend the mining tax from just coal and iron ore to other commodities and increase its effective rate. Such a change has the potential to dramatically change the flow of investment dollars into the sector and the current valuation of existing mining stocks.

On the personal tax front, the new government’s commitment to deliver the “Stage 3” tax cuts to the wealthy will be challenging, especially given the added number of Greens politicians in the new parliament, who campaigned hard on taxing ‘billionaires and big corporations’. Tax changes are always contentious and would likely have differing impacts on confidence and overall spending patterns.

Monetary policy featured heavily in during the election campaign, with the cash rate increasing during an election campaign for the first time since 2007.

While the independence of the RBA is unlikely to be under any real threat, the new Treasurer has committed to a comprehensive review of the RBA “to make sure we are making monetary policy in this country in the best possible way and considering the interaction with fiscal policy as well”. In New Zealand, the Reserve Bank mandate was changed in 2021 to directly take into account the Government's objective to support more sustainable house prices, including the dampening of investor demand for the existing housing stock. It won’t just be bond traders watching the review of the RBA, investors in the housing market should also pay very close attention.

Will the new government bring an end to the climate wars?

While both major parties campaigned on very similar energy policies, the rise of the Teal independents and the improved primary vote for the Greens has clearly signalled an electorate keen to move faster on climate change policy and a transition to net zero. The flow of capital into energy related companies has been severely hampered over the years by the lack of clarity and certainty on energy policy. A bi-partisan commitment to the path to net zero has the potential to unleash significant capital into energy production as well as industries that are heavy energy users.

The lack of real wages growth was also a key issue during the election campaign, further exacerbated by the sudden return of inflation. Industrial action is on the rise and there are increasingly ambitious wage demands being pursed across many sectors. While the government has signalled its intention to hold an Employment Summit in September 2022 with business and unions, wages growth without improvements in productivity would impact inflation and the damage the margins of companies with large workforces.

Business will be hoping that microeconomic reform will come back on the agenda. Productivity growth averaged just 1.2 per cent annually since 2010. Treasury’s 2021 Intergenerational Report hopes that productivity can converge to our historical average of 1.5 per cent. While this doesn’t sound like much, it has huge implications to for the ability of future generations to support increasing numbers of retirees.

With global inflation at uncomfortable levels, cash rates on the rise and a new appetite for reform, the investors should be alert as policy changes can undermine investment valuations overnight.