Heading into election weekend, Ron Shamgar, Head of Australian Equities and Portfolio Manager of the Small Cap Income and All Cap portfolios, takes a look at some of Labor's key policies and analyses some winners and losers should they win .
Elections are upon us and if the bookies are to believed Labor remains a shoe-in with the spread blowing out to $1.14 vs. $7.00 for a coalition win. At this point, I think they might be onto something here. With that in mind, we thought this week we would look at some key Labor policies and their impact upon certain sectors and stocks. As a disclaimer, we are not suggesting that policies taken to elections are necessarily the ones we end up with but it might be a good idea at this point to be at least aware of how portfolio’s might be impacted if some of them were to come to fruition. After all, we would contend that investing is not necessarily about picking the winning horse but identifying mispricing in the odds.
The first and potentially most controversial Labor policy is the elimination of excess cash refunds by way of franking credits. Should the policy go through, there will almost certainly be a change in the composition of the markets and market structure. The most obvious of these being SMSF investors who close down their accounts and transition towards industry funds as a way to benefit from collective group tax (vs. franking credits). Some industry estimates point to $100B of funds transitioning to industry super. While it is beyond the scope of this particular article to delve into how this might impact public markets and corporate governance, we can say with a certain degree of confidence that one sector to be disproportionately impacted will be banking. A significant component of the bank investors are self-funded retirees who are incentivised to do so and stay put thanks to franking. Conversely, high-yield pockets such as property and infrastructure trusts could benefit since their tax free trust structure means their distributions don’t carry franking credits.
The second aspect to look at is healthcare, which remains one of Labor’s key agendas. Their proposed cap on premium increases at 2% is not likely to receive much resistance even should the senate numbers look less than amicable for Labor’s agenda. Over the past few years, insurance premiums have continued to increase in an order of 3-4% p.a. With a proposed cap, this makes it increasingly unlikely that companies within the sector maintain margins. In our view there are a few key stocks to avoid in the wake of this policy; NIB (NHF.ASX) and Medibank (MPL.ASX) spring to mind. On the other hand, policies to increase targeted spending on radiology and pathology services as well as, increased expenditure on new hospitals will see some clear winners. This includes stocks like Capitol Health (CAJ.ASX) which could be a significant beneficiary from additional MRI licenses/cost subsidies. Private hospital operators like Ramsay (RHC.ASX) could, on the other hand, see increased competition.
Next we look to Labor’s proposed tax cuts for lower income earners and increases to the minimum wages/penalty rates. The most impacted sector here will be retail which is already out of favour with investors. However, we would contend that these policies are a double-edged sword. Firstly, the increase in discretionary incomes especially at the lower end of the income bracket should give a much needed boost to consumer spending. From a purely economic perspective, the marginal propensity to spend increases as you move down the income scale. For example, a low-income earner on a minimum wage is more likely to see a significant impact from an additional $1000 in income both as percentage and from a living standard perspective versus a high income earner (who also has a propensity to save). Such policies are likely to create a much needed boost to consumer demand. On the other hand the increases to minimum wage and penalty rates will also increase the staff costs on retailers who are already struggling with ever shrinking margins and the effect of online retail. Nevertheless, on a net basis we still contend that certain retailers will benefit if they boost efficiencies such as optimised workforce rostering. In addition, retailers that have a focus on specific demographic trends and dominate their respective categories will continue to beneficiaries from increased spending. Companies such as City Chic (CCX.ASX), Baby Bunting (BBN.ASX) and Noni B (NBL.ASX) come to mind first, these companies also (not so coincidently) have a high proportion of their sales online.
Childcare costs are another key policy in the spotlight and Labor here is proposing a substantial increase in subsidies with free childcare for low income earners. Key operators in the sector are G8 Education (GEM.ASX) and Think Education (TNK.ASX), which will both benefit here from more affordable care for their customers. We own TNK in the All Cap portfolios and the TAMIM Fund Small Cap Income unit class.
Finally one of the hottest, and maybe the most controversial, topics of the election is negative gearing. Labor is proposing to limit negative gearing to new developments only from January next year. In addition the capital gains tax discount for investments held longer than twelve months is also proposed to halve. Both policies will have a detrimental effect on property prices from next year as many investors won’t find the sector as appealing for tax benefits and returns from property in general will be lower as prices may continue to fall. From a medium term perspective we think property prices for new developments will struggle as there won’t be as many buyers for these new properties in the secondary market. The players to suffer the biggest impact are residential property developers like LendLease (LLC.ASX) and Stockland (SGP.ASX). Over the long term, property will become more affordable and a new property cycle will begin, albeit off a lower base.
In summary, for every government policy there are always winners and losers and over time businesses make adjustments. Although a Labour government may be negative for investors in general, some of their policies should provide stimulus to the broader economy. Finally, these proposed policies ultimately need to pass the senate and it may not be as straightforward as some expect. Hence key proposed policies such as changes to franking credits and negative gearing may never see the light of day or will differ greatly from what is currently proposed. Time will tell. So don’t forget to vote !!
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