Tim Larkworthy

As we move towards the election this Saturday I am having difficulty recalling a time when people were less enthused about the process with hardly any “water cooler” discussions with regards to outcomes and possible impacts.

Admittedly it has been a long drawn out affair with little real controversy or excitement from either of the major parties. This was highlighted with the almost total lack of interest in the leader’s debates. Also the Brexit vote and its outcome has dominated investors thinking over the past couple of weeks pushing the Aussie election onto the back burner.

The smart money has the Coalition odds-on to be returned. That being said, it was only this time last week that you could have picked up 10:1 on leave winning the Brexit vote! The likelihood is that the Governments substantial majority in the lower house could be dramatically cut. This could be as a result of seats going to the independents, such as the Xenophon Party and others, in combination with the ALP wining back some of the seats it lost in the rout of 2013. This has the potential to provide a much more challenging environment for the Government than has been the case in the recent past.

However, this is nothing in comparison to what is potentially awaiting the new Government in the Senate. Thanks to the Double Dissolution, Senators will only need to gain half a quota in order to be elected. Rather than limiting the chances of a myriad of independents being elected it opens up the very real risk of an increase in their numbers introducing an even greater mix, each with different agendas that they will be trying to push.

If the previous Senate was like herding cats this has the potential to change the cats into a basket of snakes.

Another factor that has the potential to make life very difficult for the Government is the new interpretation of the meaning of “mandate” by everyone outside the Government.

In the not too distant past, after an election the party that formed Government was deemed to have been awarded a mandate by the electorate to implement its policies as articulated during the campaign. As such, to block the Government’s attempts to pass legislation required to implement its policies would have been seen as going against the wishes of the majority of the electorate.

However, in today’s confused new world every opposition party or independent claims that they have a mandate from the people who voted for them to oppose legislation that is counter to their individual manifestos. Even if their primary vote was from immediate family and a few friends.

As such, the government could face an enormous task to have anything but the most generic and bland legislation passed.

The recent government has had great difficulty pushing its budget savings through the Senate. Keep in mind that the 2016-17 budget may have passed the lower house but it is yet to pass the Senate and could well run into trouble depending on the Senates final make up.

So what does this mean for markets?

There is a strong possibility that attempts to implement genuine budget savings in order to try and slowdown the staggering trajectory of government spending could be very challenging indeed.

This will have serious consequences for the fiscal position of the government and the subsequent impact on the wider economy. It will clearly have implications on economic growth and on the currency and interest rates. The most likely outcome is a negative drag overall pushing rates lower for longer and a putting downward pressure on the AUD.

Tim Larkworthy

Director – Fixed Income Sales D +612 9697 8747 | F +612 9697 8799 | M +61 439 791 702 | E Tim.Larkworthy@fiig.com.au | W www.fiig.com.au

Level 20, 126 Phillip Street, Sydney, NSW, 2000 | GPO Box 718, Sydney, NSW, 2001

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Tim Larkworthy

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