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Economic conservatism

One of the greatest election lessons I’ve learnt is that a new government can have serious implications for your investments. And if you don’t believe me, look at the move of banks into wealth management after Labor made superannuation compulsory in the early ’90s!

Drawing parallels

So, as a little courtesy to help your lateral thinking on a new Rudd Labor Government, I thought I’d share CommSec’s Craig James’ view on what might lie ahead for our investments in a new Labor-led Australia.

James quickly dispels fears that Labor will be drastically different.

“Financial markets will notice few if any major differences with the Labor Party at the helm of government,” he argues. “Policies from both sides of politics were remarkably similar going into the poll, especially in terms of the ‘big picture’ drivers of the Australian economy.”

What’s in store

Rudd is committed to keep the budget in surplus by approximately 1% of GDP and if  he keeps his word - I reckon that’s certain in his first term - then the Reserve Bank, which controls interest rate settings, will have the same kind of job to do as it would have under another Howard Government.

In the second term, a Labor Government could get easier on wage outcomes but by then inflation and interest rates could be way down from current levels with the likelihood of a recession being on the horizon.

Ruling the roost
For those who fear Labor, James makes a good point.

“While the new government has a healthy working majority, the stumbling block is the Senate,” he explains. “The Coalition controls the Senate for the next seven months. And even after July 2008, Labor may still need Coalition backing to get new measures approved. The chances of significant reform from the new government is much reduced given the state of play in the Senate.”

Three strikes

Small business owners who see their business as their investment will have to have a better employment policy. While AWAs will be phased out and only businesses with less than 15 employees will be exempt from unfair dismissal laws, and only for a year, everyone else should think about going back to the old three warnings process to justify a dismissal.

Labor will make life easier for employer investors, but give more certainty to employee investors.
The commitments
James is comfortable with the promised giveaways and their impact on interest rates.

“One of the biggest furphies of the election campaign was that spending promises by either side of politics would add stimulus to the economy and therefore add upward pressure on interest rates,” he says. “That claim could never be verified without recourse to the revenue side of the balance sheet and the latest information on ‘big picture’ parameters such as economic growth, inflation, wages and unemployment.”

It might be worth highlighting areas that could have investment implications.

Labor is committed to an ‘education revolution’, scrapping the workplace relations system, expanding access to broadband and signing the Kyoto protocol.

Taking care of business

Eddie Groves and ABC Learning has always done well out of childcare changes in a federal Budget, and so those businesses involved in training apprentices should be looking at blue sky.

Businesses in ethical areas and environmentally-friendly areas should have more upside but the trick is to work out what businesses have the inside running to cash in on the new government’s priorities.

Sol survival

Telstra’s position is interesting. On one hand, the Howard Government and Telstra’s boss Sol Trujillo were always fighting and so you would expect Labor would be good for the company. However, the smaller competitors must have some high hopes for more affordable telco services given Mr Rudd’s ambitious plans for more broadband and loads faster at that!

Bricks and mortar

The Rudd team had plenty to say about initiatives on immigration and housing affordability and this could be good for recruitment firms and businesses struggling in the construction area.

Labor now has all governments around the country and it means problems such as land zoning at the state level should be more beatable.

Strength to strength
Despite Labor’s victory, CommSec is still upbeat about the outlook for shares.

“CommSec currently expects the All Ordinaries/ASX 200 to reach 6800 by end year and 7250 by June 2008,” says James. “The end year forecast may prove a touch too high given the recent correction and continued uncertainty about the outlook for the US economy and global credit markets. But we expect that continued strength of both the domestic and global economies will drive the Aussie sharemarket to fresh record highs during 2008.”

The point is that well-trained people such as Craig James is not spooked by a new Labor Government and that’s why the dollar did not dive to 83 US cents when Labor won.

Smart investing

Rudd is an economic conservative as he wants to conserve his place in Australian political history. Your job is to work out what industries and businesses will do well under Labor and invest accordingly.

Ironically, the new PM’s wife, Therese Rein, worked this out under the Howard Government and created a great recruitment business, which made her a lot of money.

Published on: Thursday, November 29, 2007

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