Election 2016: some concerns

With the election set for July 2, we have to accept the effect that unions, the banking regulator and the property market have on our economic growth.

Summary: I have a few key concerns that investors should take note of prior to the federal election on July 2: the first is that the Greens and ALP will back union stances on policies, the second is that the APRA credit squeeze on our big banks has more affect on our prosperity than any politician, and in the face of the mining boom end, the property market has acted as a buffer and its strength affects our growth.

Key take out: I hear anecdotally that mid-sized companies are looking to expand, which is a good sign – but these longer term risks remain.

Key beneficiaries: General investors.  Category: Australian economy.

So we are to have an election on July 2. The prime minister was absolutely determined to take the nation to the polls on July 2. It may have been possible to reach a compromise with the cross benches on the legislation for the Australian Building and Construction Commission, but Malcolm Turnbull was in no mood to compromise. 

After the budget we will have a much better idea how to compare the investment policies of each of the parties. So at this stage I am not going to write a long essay on the plans that the ALP have put forward because I don’t know what the coalition has in mind and the budget is too close to speculate.

But at this early stage let me share with you some concerns.

Policies and unions

The first is that when it comes to any legislation involving unions both the Greens and the ALP seem to have no choice but to back the union stance. It was almost impossible for any logical person to support the horrendous acts of the proposed Road Safety Remuneration Tribunal. Even if you supported some of the aims of the tribunal, to set a two tier charging rate – one for owner drivers and the other for employed TWU drivers was just sheer lunacy, particularly as the owner driver rate was dramatically higher than what the TWU drivers would charge. 

Such stupidly would have bankrupted most of the 35,000 owner drivers and yet we saw both the ALP and the Greens support this horrible injustice and they did so because they rely on massive union funding for the upcoming election. That is a very sad situation for the Australian parliament. 

The power of APRA

The second concern is simply not being tackled by any of the politicians in Canberra or the general media.

Both the Coalition and the ALP are hawking before the electors that they will create more jobs and prosperity. The simple fact is they are not in control of the game. Rather, the groups who will play the biggest role in the economy are in fact the banking regulator APRA and to a lesser extent the Reserve bank. In previous Eureka commentaries I have described how APRA is restricting the banks’ ability to fund Chinese buyers of apartments at a time when it is now becoming much harder to bring money out of China (read my piece last week: click here). If that policy stance continues, then in about a year or 18 months into the new government term they will face a considerable downturn in the apartment building industry because off the plan apartments contracts may not be honoured because of lack of finance. Like it or not, the apartment building boom in Sydney and Melbourne has helped insulate us from the effects of the mining investment downturn.

Investors need to be very careful about buying apartments off the plan at this point because there is a chance that bargains will be available in about 18 months. Indeed in Sydney, Meriton’s Harry Triguboff says apartment values will fall 20 -25 per cent if APRA continues its latest stance and there is no relief from the money outflow clamps in China. Longer term we will need more apartments assuming current migration rates. 

But the APRA credit squeeze goes further than just apartments. They are putting a ceiling on how much banks can lend in funding commercial and industrial properties and at least two banks are very close to their limit. That means that money for commercial property lending will tighten, so once again be very wary about bidding up for commercial investment property because yields are now very low. The Reserve Bank obviously understands what APRA is doing, but does not comment on it.

What they do is warn Australia about the difficulty of Chinese investors have getting money out of China and the fact that our commercial property yields have fallen to what are perhaps unsustainable levels. 

In addition we have an APRA trying to limit further property loan growth by giving the banks very tough loan stress tests. I can’t help feeling APRA wants the banks to raise more capital by increasingly making life miserable for them until they do raise more. That is not good for bank shareholders or property investors because if banks raise more capital they will have to charge more for their loans to bridge the profit gap, or reduce their returns to shareholders: It is likely to be a combination.

What surprises me is that this situation in the banking community is not being widely discussed, yet we are seeing an extensive APRA attack taking place. And on top of that the ALP is proposing that you cannot negatively gear existing dwellings and also calling for a royal commission into banking.

I am in no way making election predictions but the opinion polls have the two parties neck and neck so is quite possible that Bill Shorten is the next prime minister. We then will have a cocktail of an APRA imposed credit squeeze, clamps in the flow of money from China, changes to negative gearing rules and a bank royal commission. Rest assured this will not create jobs.

I am sure that the downturn in demand that Qantas is now experiencing is partly because Australian income is not rising on a per capita basis. We felt better about life when dwelling prices were rising but now that they have stalled it is beginning to affect expenditure. But having said that, I had a yarn with the chief executive of a mid-ranking company that provides services to other middle ranking companies. (They don’t supply the large corporations nor do they supply the small businesses). My chief executive tells me he is seeing real activity in this area as middle-sized companies are beginning to invest and hire people. That is really good news for Australia because that is where our growth is going to come from.

I know we all invest our money in leading stocks and they have been great performers for many years. But the level of change taking place in the community is gathering momentum and middle ranking companies can be more flexible structured to benefit.

Finally, I think we can say our commodity slump is over. It is always possible we are going to get another correction. But it’s unlikely that oil and iron ore will go back to where they came from. I am very pleased that I started last week’s Eureka commentary with such an alert because the momentum has gathered. That means that the Australian dollar is getting very high and given all the activity of APRA it also that means the Reserve Bank is able to reduce interest rates without causing a housing boom.

I won’t enter into the month by month forecast game but I think there is a very good chance that official rates will come down, although they may not be passed on because banks are finding overseas borrowing more expensive.