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Will a new Labor government “ruin the economy”?

Waving Australia flag in the air. Source: Getty Images
Waving Australia flag in the air. Source: Getty Images

The election is getting near – 18 May is when we go to the polls if the latest speculation is correct.

And, as is usually the case, the outcome of the election will have some important consequences for the economy, investment strategies and financial markets.

And for now, investors and the markets seem very relaxed, indeed very content about the prospect of a Labor victory.

Is a threat brewing?

All the public opinion polls have Labor well ahead of the Coalition in terms of current voting intentions. On those polls, it seems very likely that Labor will win.

Add to that the betting markets which have Labor a ‘Winx-like’ $1.15 favourite to win the May election.

It is safe to say that all of us, including those investing in financial markets, are preparing for the possibility that for the next three years at least, it will be Labor implementing its policy priorities for spending, taxing, regulations and representing Australia on the global stage.

Investors in financial markets decide to buy or sell a particular asset or bond or currency based on the risk and likely reward of that investment.

In simple terms, if there is a serious threat brewing in a particular market, you can be sure investors will press the “sell” button and the market in question will weaken.

If, conversely, they see an opportunity to make money in future, that some favourable news is on the horizon which will, for example, spur stock prices higher, investors will buy into a particular asset on the expectation that there is money to be made as the good news flows.

What’s happened in markets so far

This brings us to the strong gains in the Australian stock market over recent months as the election draws near.

The ASX 200 index of Australian share prices closed yesterday (Tuesday) at 6,222 points. This is up a strong 13.5 per cent or so from the low reached in December.

Perhaps more importantly, it is just 1.5 per cent away from being at a fresh 11 year high. The market, in any language, is strong.

The rise in share prices is a very positive take from the markets on the outlook for the Australian economic landscape, whichever way the recent moves are cut and pasted.

If investors were worried that a Labor government after 18 May, that they would “ruin the economy” as some extreme commentators are suggesting, investors would be selling Australian stocks, not buying them.

It is a similar story with the Aussie dollar which has traded in an orderly fashion, in a broad 70 to 73 US cent range, as the impact of commodity prices and interest rate differentials impact currency flows.

When one looks at the bond market, investors are similarly confident in the future of the Australian economy, with yields tracking in line with global trends and in anticipation what an independent RBA is likely to do with monetary policy.

To be sure, there are many factors other than government policies that influence share prices.

Commodity prices are obviously important for the mining companies, just as the health of the housing market is important for banks and other financial institutions. Global trends and the success of emerging companies are also important drivers of share markets.

But even some of these drivers of share prices would be overwhelmed if there was genuine concern that a change in economic direction driven by a change of government was in the offing.

Suffice to say, look at what the markets are saying about the prospect of a change of government, rather than relying on the overblown rhetoric of those who are suggesting a change of government would be bad for Australia.

And at the moment, those markets are trading as if a Labor government would be good news.

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