This morning many investors are wondering about the impact of a change in Federal leadership on the economy, and their investments. Politicians regularly exaggerate and understate their impact on the economy. It’s understandable – taking credit for good news and shifting blame for bad news is as old as politics itself. The problem is that it increases the difficulty of understanding the overall influence of politics on the economy. While in most cases politics matters a lot less to the economy than politicians claim, this latest shift in Canberra may mean more to investors than usual. There are two main reasons – competence and confidence. In politics (in life?), perception is reality. Whether or not the following about Abbott or Turnbull is true, the perception is enough to drive their respective fates. And the big issue for supporters of Mr Abbott is a perceived lack of competence, especially in economic matters. Contrast Mr Abbott’s blotted copy book with Turnbull’s credentials. A strong record of performance in international business circles. A stellar career in the genteel, but not gentle, investment banking world of Goldman Sachs, complemented by outstanding success as an investor. Independently wealthy, deeply connected to business and politics, and with a demonstrated ability to master policy detail, he is also known to favour business friendly policies such as a smaller NBN and an emissions trading scheme. While Turnbull has enemies, and his social policies are more controversial, he is likely to receive support from the business community. In short, Turnbull promises to bring a cohesive policy approach to economic management, moving away from populist policies engendered on the run. This may lift share prices immediately. However, the broader potential impact could come from a “secondary effect”. If individuals and businesses have confidence that government economic management is about to improve, they may act on these perceptions. More confidence can lead to higher spending, by individuals and businesses. Companies may increase their investment in their enterprise, or hire more workers. This can lead to more confidence, and higher spending, driving higher business revenues, and justifying more investment. This “virtuous circle” then repeats, and growth in the economy increases with each cycle, driving further improvement. Traders remark “no-one is bigger than the market”. In other words, no-one can control the market. This is as true of government as any other economic player. Despite attempts by politicians to portray themselves as having their hands on the levers when a good GDP number drops, government policy is only one of the influences on the share market. Yet there are good reasons to suspect a higher than usual influence on the market with this change at the top. Australian shares, as measured by the Australia 200 Index, have generally underperformed over the last two years. China exposures generally and commodities in particular are part of the reason. Despite some grounding in reality, fear has also dragged on local share prices. Fear of a hard landing in China, fear of a meltdown in Sydney house prices, fear of a potential deflationary spiral. Fear is much harder to dispel than a down trend – the downtrend is a product of numbers, and a change in trend is hard to dispute. Fear can persist despite “rational” contradiction. This is why Mr Turnbull’s elevation may have a stronger impact on the share market than normal. The change of leadership, one year out from an election, may act as a “circuit breaker” for currently persistent negative sentiment. Recent numbers suggest the transition from mining led growth to a broader impetus is under way, but is hampered by a lack of business spending. The change of leadership may have the effect of holding charged paddles to the chest of Australian business, and jolting it back to life. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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