Election 2016: A Labor win must be considered by investors

As the campaign kicks off, the Turnbull camp could be in trouble over its super changes.

Summary: Glenn Stevens’ remarks in last week’s economic outlook indicate that further rate cuts could be on the horizon, while former prime ministerial chief of staff Peta Credlin’s comments to Andrew Bolt this week suggest that the retrospective nature of changes to the super system, as outlined in the budget, could seriously damage the coalition throughout this election campaign.

Key take out: Investors should stick to their long-term plan in this climate, but keep in mind even though bookmakers see Turnbull as the likely winner of this election, there is a chance Bill Shorten – and his policy suite – could come through.

Key beneficiaries: General investors.  Category: Shares. 

Reserve Bank Governor Glenn Stevens and former Tony Abbott Chief of Staff Peta Credlin changed my mind as to how I would frame this week’s commentary.

I had planned to write a detailed commentary of all the non-superannuation alternatives those saving for retirement need to consider in the light of the budget. Then I watched Peta Credlin on the Bolt Report on Sky News this Monday. And her remarks came in a remarkable setting established by Glenn Stevens.

While looking at alternatives is a worthwhile exercise, there are more important things to consider because I think the “final budget” will be very different to what Scott Morrison proposed on May 3.

More than one rate cut ahead?

At the week’s end, the Reserve Bank put out a special statement on the economic outlook. Central bankers are not always great forecasters but their forecasts have an enormous impact on interest rates. Glenn Stevens is in essence saying that it might take another two years before Australia’s underlining inflation rate gets back to two per cent. Accordingly, without specifically making the statement he was signaling that interest rates are not going to stay at their current level and there is at least one, or probably two, interest rate reductions ahead. If inflation stays low there could even be more.

So what the Reserve Bank Governor is signaling means that short-term cash carries an extra risk. That’s why we are seeing bank and high yielding shares rising, but, as I explain below, there is a new dimension coming to risk. Fascinatingly Stevens expects the GDP growth rate to be 2.5 to 3 per cent – which is quite remarkable given the low inflation. Conventionally, the only way for that to take place would be for our mineral and agricultural exports to continue strong and wage growth and domestic activity in Australia to remain low. But technology-driven lower costs and better productivity is helping to restrain wages, and that has a big impact in inflation.

Retrospective changes and the campaign

Now to Peta Credlin, who was chief of staff to former Prime Minister Tony Abbott.

I have never met Peta Credlin and that interview with Andrew Bolt was the first time I had heard her speak. She may be a very difficult person to get on with and there is no doubt she was a key reason why Tony Abbott lost his job, but she certainly has an incredibly sharp mind that focuses on the issues.

She explained that in her view the Turnbull/Morrison government would need to re-examine its budget superannuation policies during the election campaign because of the damage they will cause to the voting intentions of the community. She understood the disaster they were creating for the Turnbull government’s re-election prospects. If Peta Credlin is right, then the chances of Malcolm Turnbull being prime minister on July 3 is greatly diminished. And add that to the fact that Bill Shorten is campaigning very well and you have the real possibility of a change in government.

Let’s be clear: I am not an ALP supporter but at this point the ALP superannuation policies look better for retirees and have certainly been better thought out. And it is not so much what the coalition has done, but the way they have done it that has had such an impact. They have taken away confidence in superannuation via retrospective legislation and damaged the entire retirement sector. And that includes the small business sector, whom the coalition anticipates will drive them back to power.

There is not a great deal of difference between the ALP plan to tax superannuation income above $75,000 in the pension phase at 15 per cent and the Liberal’s plan to base their 15 per cent pension tax on assets above $1.6 million. But for ordinary people the ALP plan is far simpler and much more easily understood. Just how will that $1.6m figure work and what happens when the market goes up or down? These are all questions to be decided. The $1.6 m dollar plan was never canvassed in the market so that the wrinkles could be ironed out, but rather slapped on the community without warning. The ALP has had its base superannuation policy since it was in government although in opposition it lowered the income level at which the pension mode tax cuts in. But the coalition’s real damage to trust came when it limited after tax contributions to superannuation to a lifetime sum of $500,000 back dated to 2007 and applying from May 3 at 7.30 p.m. It is true that not many people are affected by this, but everyone saw what Scott Morrison did and realised that it was grossly unfair. The retrospective nature of the changes was indefensible. Bill Shorten picked it in one and Peta Credlin makes the point that even those not affected by the measure now have a deep-seated fear that one day the coalition may attack them. Trust has been broken.

And the coalition has made a huge play on small business, yet a large number of small businesses sell their property into their superannuation fund and the superannuation fund makes the payment each year from contributions made by the business owner. Now these superannuation funds can’t find the money to complete the purchase. This graphically describes the evils of retrospective measures. Many small businesses aspire to selling their business property into their fund. The contribution caps now make that strategy impossible. If Bill Shorten becomes prime minister, the existing property transactions can proceed. While relatively small numbers of people are involved, small businesses talk to each other and every small business will know somebody hit by this and it makes Malcolm’s pitch to small business look hollow.

I am not in the business of forecasting election results, but it is important that Eureka readers be aware that although a lot of bookmakers are saying that Turnbull is a certainty to win you need to have in the back of your mind the real possibility, that the ALP will win particularly with the Greens backing the ALP.

If Shorten becomes prime minister then there is a real possibility that there will be a sharp fall in the stock market. Banks need to prepare for a Royal Commission, which will distract management at a difficult time. Bank shares are likely to be affected.

And so we have Glenn Stevens telling us to expect rate reductions, so endangering cash, and Peta Credlin is warning us that the coalition is in trouble in the campaign over superannuation – which I agree with. If she is right then cash is a lot better than a falling share market.

My view is that in all situations like this, stay with your long-term plan but at least keep some money on the side and don’t be over exposed to the share market in case the election goes the Shorten way. But in the longer term, Stevens is telling us that too much cash continues to carry a very high risk.

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