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Elections will cast their shadow over the 2022 bull market

Paul Rickard
16 December 2021

As we exit from lockdowns and live in a “Covid norm” environment, stronger economic growth combined with still very low interest rates by historical standards should be good for company profits which in turn should be good for share prices. We may have to learn to live with higher inflation, but barring omicron getting out of control or some other “black swan”, 2022 looks pretty good for share markets.

But a risk to this scenario is elections – the federal election in Australia in May and the mid-terms in the US in November.

Markets hate elections for three reasons. Firstly, they are not good for consumer confidence which leads to a deferral of major lifestyle and spending initiatives. Home sales, new car sales and other discretionary purchases tend to be put on the backburner as consumers wait to see what happens. Because discretionary retailers and other consumer-facing companies are vulnerable to a small change in sales, any deferral can have quite a material impact on their immediate profits.

Next, in an election campaign, Politicians can and do make “crazy” promises and undertakings. These can work for a particular company as much as they can work against it, but the risk is focussed on the downside. For example, a new tax on the banks, or the abolition of the diesel fuel tax rebate (impacting resource, transport, and manufacturing companies). The risk is enough to make share investors wary.

Finally, there is the risk that there might be a change of government and the baton passed to the “left leaning, socialists” of the ALP. Australians know that in government, there really isn’t that much difference between the ALP and the Liberal/Nation Party coalition, it’s more a question of leaning and orientation. But that is not the way it is always viewed by offshore investors, who tend to look at Australian governments as either “left” or “right”.

The critical thing to remember about offshore investors is that in many cases, they don’t have to invest in Australia. We are too small to have an impact on portfolio performance, so they are either ‘overweight’ Australia or not invested at all. There is rarely a halfway position. And to be overweight, they want to be sure that the political and economic environment is favourable – so the possibility of a change of government to a party from the left is a negative.

Opposition Leader Anthony Albanese is already campaigning and seems to be adopting a ‘small target’ strategy. He is leading in the opinion polls, with the latest Newspoll putting the two party preferred count at 53% for the ALP and 47% for the Coalition. The primary vote for the Liberal/National Party Coalition is just 36%, down from 41% in 2019.

The Morgan poll was even worse for the coalition, putting the ALP’s lead on a two party preferred basis at a staggering 56.5% to 43.5%.

While it is easy to dismiss opinion polls on the back of their failure with Brexit and in 2019 to predict a win for Scomo, the ALP has been leading in the polls since June and the margin has been widening. Perceptions that Scomo stuffed up the vaccine rollout (“it’s not a race”), division over climate change, sports rorts and a general malaise with a government coming towards the end of three terms in office are contributing to voter dissatisfaction.

According to the bookmakers, the favoured election date is May 7, narrowly ahead of May 14 or the latest date when a normal election can be held with a half-Senate election, May 21. There is still the outside possibility of a March 5 election or even pre-Easter on April 9, but it looks like Scomo’s strategy is an early Budget with tax cuts followed by a May poll. In any event, it means that for the first half of 2022, the Australian share market will be distracted by the election.

Mid-term elections in the US will be held on November 8. This will see all 435 seats in the House of Representatives and 34 out of the 100 seats in the Senate contested. There will also be 39 state and territorial gubernatorial elections and numerous other state and local elections.

With the right of centre Republicans expected to win back control of both houses, on paper, this could be a positive for the US share markets. However, with a weakened Joe Biden in the White House, arguably something of a “lame duck” President for the next two years, ongoing gridlock in Washington is likely. A perceived inability to deal with key issues such as the budget deficit, social inequality and climate change could be an overall negative.

2022 should be a good year for share market investors but elections here and abroad will generate sufficient uncertainty for investors to be wary. When investors are wary, a buyers’ strike becomes a distinct possibility. It might not stop the bull market, but it may cap gains and lead to higher volatility. Factors to consider when investing in 2022.

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