Coalition victory tipped to boost economy as banks surge

The Coalition’s victory is tipped to boost the economy as the ASX adds $26bn amid bank surge.

Australian bank shares have staged some of their best single day gains since the GFC in early trade. Picture: AAP

The Australian economy will be boosted by a slight growth dividend as Scott Morrison’s tax cuts start to drive spending, as shares in the country’s biggest banks surge on the prospect of loosened regulation and the absence of negative gearing reform after Labor’s shock federal election loss.

At the open of trade on the local stock market on Monday, ANZ shares surged 5.6 per cent, while National Australia Bank rose 7.7 per cent. Westpac shares rose 8 per cent, while Commonwealth Bank surged 5 per cent.

The overall sharemarket rallied 1.6 per cent to an 11-year high of 6464 points amid the lessening of uncertainty after the Coalition unexpectedly retained power in the federal election.

The surge in the financial sector is providing most of the boost, with the major banks driving the gains.

While both Labor and the Coalition had promised swift action in implementing the recommendations from Kenneth Hayne’s banking royal commission, the government has taken a slightly less aggressive posture in adopting the inquiry’s proposals.

With Bill Shorten now blocked from legislating a clampdown on negative gearing and reducing the generous capital gains tax discount, Morgan Stanley analyst Richard Wiles said the federal election result had reduced the “tail risk” in the $1.7 trillion mortgage system that could have eventuated if there was further downward pressure on house prices and steeper regulation was applied to the banking sector.

“We think the election result makes the status quo a more likely outcome and reduces some tail risks,” Mr Wiles said.

The Prime Minister, who was returned with a majority government following the weekend’s national poll, has proposed a string of measures to encourage the banking sector to lend more vigorously, including a number of interventions to help bring down interest rates for small business borrowers, fewer restrictions on property investors, and first home buyers scheme that will help a small number of borrowers access loans.

JP Morgan economist Ben Jarman said the Coalition’s budget proposals to cut personal income taxes and drive infrastructure spending would add an extra 0.15 per cent to economic growth a year over the coming period.

However, he said workers would likely face the prospect of lower wages growth over the near term, with Labor’s electoral failure meaning little chance of a reversal of penalty rate cuts or the introduction of the so-called “living wage”. He said wages would likely now rise up to 0.2 per cent less under a Coalition government, which would be a positive for corporate profits.

“With negative gearing now off the table, the medium-term outlook for housing is a little less negative,” Mr Jarman said. “We wouldn’t however expect much of an immediate lift, as the economics of that investment strategy are still challenged while prices are falling.”

House prices have fallen 10 per cent across the nation since mid-2017, with steeper falls in Melbourne and Sydney, and analysts believe values will continue to decline for some time.

Mr Morrison’s win was “a victory for employers of labour and owners of capital”, said Josh Williamson, an economist with investment bank Citi.

“The election result means an end to potential Labor policies such as removing negative gearing and preferential tax treatment of investment properties, ending excess franking credits to shareholders and raising the minimum wage to the level of a living wage,” Mr Williamson said.

“Despite opinion polls claiming that taxation was not an election issue, we suspect that some of these issues cost the Labor party seats. The more contentious taxation policies towards investment capital may never be resurrected by the Labor party. The election result is therefore an incremental positive development for the housing and equity markets,” he said.