Markets: A post-election bounce, maybe

Will the election of Tony Abbott to the Lodge restore investor confidence?

Are the stars aligned for an Abbott stock market rally? It seems so. Business is positively kicking its heels with joy at the prospect of the boxing Rhodes scholar becoming Australia’s twenty-eighth Prime Minister. If confidence does return to the corporate sector, company spending may kick up a notch as record low interest rates encourage companies to expand or do deals, further fueling excitement among stock market investors.

That scenario may not be too far from reality. Few can quantify what effect sentiment has on markets but everyone seems to know when it is positive or negative. In the last 12 months it has been the latter, even as the S&P/ASX200 index has gained 20 per cent, with a gain of 11 per cent just since June 25.

Analysts, on the sell side at least, are forecasting earnings growth in 2014, especially for consumer and industrial stocks. The prospect of further dividend increases is real, especially if mining earnings rebound after a dreadful 2013. The banks and Telstra, because of their solid market share, are expected to maintain payout ratios as high as 80 per cent. In order to ensure such payout ratios, costs have been cut and spending programs have been disciplined. Much of corporate Australia is lean and mean.

But it’s hard not to escape the feeling the market is rather toppy. It’s trading above its 20-year price earnings multiple of 14 times future earnings. Earnings growth may occur in 2014 but will likely be modest, just eight per cent, according to Deutsche Bank.

Moreover, the international environment is not benign. Western military intervention in Syria will cause shivers in global markets and probably cause a spike in energy prices that would push shares down.  All this is hardly a harbinger of a bull market.

Any share price gains after September 7 may be short lived.