James Kirby: Can the ASX withstand the crisis in Canberra?

Bubbling under the resilience of the ASX is one outstanding threat. Picture: AAP

Turmoil in Canberra, a housing slowdown, a drought and now the termination of any hope for business tax cuts … can the Australian share market survive the blows?

So far the mood is resilient — we’ve seen a drop of about 1 per cent two days in a row.

The Canberra crisis — a crisis of a centre-right government — is not upsetting the market. But the prospect of a left wing ALP government planning tax changes that directly affect the housing market is another thing altogether.

Bubbling under the resilience of the ASX is one outstanding threat — it’s the real and present danger of an extended slowdown in house prices, a further drop in housing starts and ultimately the pain that will cause across the economy from lost construction jobs.

The ALP intends to scrap negative gearing on all but new properties, there is also a stated plan to roll back the current Capital Gains Tax concessions — this will cut the current discount investors receive on CGT after one year from 50 per cent to 25 per cent.

Neither can we underestimate what analysts call the ‘multiplier’ effect of a housing downturn — A recent RBA report revealed that we now have the highest percentage — 9.6 per cent — of the entire labour force in construction this century.

What’s more, three quarters of those workers are literally building houses.

As Guy Carson of Tammin Asset Management suggests ‘The market is overlooking the risk in the weakening residential property market … in our opinion the property market is about to have a significant effect on the equity market’.

For now, buoyed by positive sentiment from Wall Street, the local market is underpinned by a positive interpretation of the results season which is still only in its second week.

It’s not that the results season is exceptional — it is the most predictable for years — the number of stocks that have reported in line with expectations is roughly double previous profit seasons.

To put it another way the market is focusing on the best news: Solid to strong results from the new market champions such as CSL and Treasury Wines; Uptempo outlook comments from CEOs at results presentations and accelerating takeover action — which can also temporarily buoy sentiment in any market.

On Tuesday alone we had the news of two potential takeover deals — telcos Vodafone and TPG along with property companies Charter Hall and Folkestone. We also had the sight of one of the world’s biggest financial institutions Blackrock coming back for a second bite at the Investa Office Fund.

Also in a market where the ‘leads’ come almost exclusively from the US, the leads this week have been as strong as they could possible be — the US market just broke another record. On Wednesday afternoon (Australian time) the S&P 500 touched a record intra day high signalling Wall Street was about to sign off on the longest bull run in its entire history — a period of 3,452 days without a 20 per cent fall.

In short the local news has not been bad enough to knock the local market off a faithful replication of Wall Street sentiment — but anything that promises a sooner-than-expected arrival of an ALP regime or the slightest setback on Wall Street may turn sentiment from relaxed to negative at the drop of a hat.