Strategy:

With a federal election on the horizon, investors should not underestimate the political factor, especially in a pandemic If you’re counting on the economy to fall off a fiscal cliff this year, it may pay to think again

Imagine for a moment that Australia wasn’t led by upstanding model citizens with an eye solely on the welfare and prosperity of our country no matter the political impact. Imagine that we were led by deeply self-interested politicians. People supremely focused on maintaining political power.

In this fanciful scenario, what would they be thinking come September? That’s the date the current JobKeeper payments are set to end (13 fortnights from their introduction on March 30).

Would it not be tempting to extend stimulus measures another three months or even more? What might that do for an ambitious polly?

It would underwrite a more positive Christmas trading period for the retail sector (around 17% of the Australian economy). It would also turbocharge the December quarter GDP numbers. And, for our fictional politicians, allow them to point to year-over-year growth from the bushfire-impacted December 2019 quarter.

Roll forward to March 2021 and the economic data for that quarter is quite likely to be better than the Covid-19impacted March 2020 quarter. The same goes for the June 2021 quarter. So, in the second half of 2021, these politicians would have three strong quarters of comparative economic growth to point to. Might that be an appealing scenario for them to construct for themselves come the second half of 2021 when they’ll be in campaign mode for the 2022 federal election?

We all hope that our real-life Australian politicians are not cynical enough to make calculations solely on a political basis. Yet, as Jack Lang told Paul Keating: “Bet on self-interest, it’s a horse that’s always trying.”

POLITICAL BLIND SPOT

When I was growing up, the main topic of conversation around our family’s dinner table was business, not politics. And I’d say I discuss politics somewhat less than the average Aussie.

This may have led to a blind spot. Early in my investing career I underestimated the impact government decisions can have on the economy, individual sectors and companies. And I didn’t think deeply enough about the political imperatives driving those government actions. I suspect some investors may be suffering from the same blind spot at the moment.

The government’s JobKeeper program and its impact has been a central talking point among the economically conservative investors I tend to associate with. I sent a message to one of these greybeards on the Monday of the June long weekend noting an incredible influx of tourists around where I live in the Blue Mountains, west of Sydney.

“It definitely doesn’t feel recessionary here,” I wrote. “Of course, there will almost certainly be a technical recession but I’m more interested in confidence (consumer and investor). And it is rebounding strongly.”

His reply: “You are seeing the first half of early release super and JobKeeper windfalls being spent. Second wave of super coming in July. When super dries up and JobKeeper stops, party will be over.”

This was consistent with what I’d heard from other smart, sceptical types.

It’s certainly true that the government has taken extraordinary measures to support the economy (sensibly, in my view), from the JobKeeper and JobSeeker payments to allowing the early release of superannuation and a range of other measures to soften the blow delivered by a global pandemic.

It’s possible that come late September, the Australian economy will be mostly carrying on under its own steam. It’s also possible – perhaps more likely – that it won’t be. But the implicit assumption of those who believe the “party” will end at that point is that the government will abruptly remove its stimulus measures no matter what. This column’s thought experiment provides a different perspective.

THE POLITICS OF PROPERTY

Another area where I’d previously underestimated the political factor was in my assessment of the Sydney property market. I’d been wary of it for a long time, concerned about its seemingly high valuations and fragility should something go wrong with the economy. I could (and have had, at times) make rational arguments supported by numbers and data to back up my concerns.

As Reserve Bank of Australia (RBA) governor Philip Lowe said in a speech to the AFR Business Summit last year, “Australians watch housing markets intensely, perhaps more so than citizens of any other country”.

The housing market has become pivotal to the economy. Apart from the people the sector employs directly and indirectly, property prices are a huge determinant of consumer confidence. For many Australians, their home is their largest investment. Not to mention those doubly exposed by owning one or more investment properties. Many small business owners also use their homes as a source of collateral to borrow against to invest in their business.

With this set-up, what is the impulse from our governments and central bank if they see the property market taking a turn for the worse? They understand the importance and they’re able and prepared to take action to avert a savage downturn.

Recently we’ve seen the RBA doing its bit to support the property market and economy by reducing the official cash rate to a record low 0.25%. The federal government has also been leaning into the challenge, announcing its HomeBuilder program, which gives eligible Australians $25,000 to build or substantially renovate their homes. I make no judgement on these measures or their potential longterm consequences. I simply use them to illustrate the impact governments can have to temper market forces, at least in the short term, that may be pushing in a politically unpalatable direction.

OTHER POLITICAL POTATOES

Investors have also been put on alert in recent years in regard to other issues that might have meaningful impacts on them. The refund of franking credits became a surprisingly hot potato in the 2019 federal election and, to a lesser extent, so did the potential taxation of trusts.

Then there was the royal commission into misconduct in the banking, superannuation and financial services industry last year. Shock waves were sent across the mortgage broking industry when Kenneth Hayne’s recommendation was unequivocal: “The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.”

This was a simple recommendation and one that I’ve heard no serious objections to outside the mortgage broking industry. The share price of Mortgage Choice fell from $2.50 in December 2017 to a low of 80 cents soon after Hayne’s report dropped in February 2019. Yet the mortgage broking industry was able to effectively mobilise and lobby the government not to accept that powerful recommendation and Mortgage Choice’s shares had virtually doubled by October that year.

Australia’s relatively strong financial footing compared with many other nations affords our government the means to offer significant financial support when it desires. That position, combined with that old nag, self-interest, may well see Australian consumers and companies benefiting from government largesse beyond the currently envisaged September 2020 end date.

So if you’re like some of my pessimistic friends and are counting on the economy to fall off a fiscal cliff later this year, it may pay to think again.

Greg Hoffman is an independent financial educator, commentator and investor. He is also a non-executive director of Forager Funds Management (not involved in Forager’s investment process).