ETF industry not expecting Labor pains after change in government

Australian ETF providers forecast minimal impact from change in federal government
Forecasts of greater focus on renewable energy and climate change policies
Strong support from both sides of parliament for ETF sector in Australia

Australia’s new Labor PM Anthony Albanese has been sworn in and the markets are reacting reasonably positively, having avoided a hung parliament and uncertainty with no major sell-offs.

BetaShares chief economist David Bassanese told Stockhead resolution of the uncertainty and the idea that it may be some time before Australia has a clear result from Saturday’s federal election has provided clarity for investors.

“There’s been no sell-offs with the ALP winning and so it has sort of been in line with expectations,” he said.

“Markets have taken it pretty well because the risk of a drawn out period of uncertainty has been removed along with the possible scenario of a hung parliament.”

Economic headwinds face new treasurer

Australia’s incoming 41st treasurer Jim Chalmers has said surging inflation remains the major challenge for the Australian and global economies. On Sunday he was briefed by Treasury secretary Steven Kennedy at his Logan home on Brisbane’s southside.

Chalmers will be charged with curtailing a budget facing a combined $224.5 billion in deficits over the next four years and record debt approaching $1 trillion, after an emergency Covid-19 spending spree.

The RBA increased the cash rate for the first time this month since 2010, with forecasts it could reach 3.5% by mid 2023 after inflation in the 12 months to March 2022 was reported to have grown by 5.1%, above expectations and well above the RBA’s 2-3% target.

Furthermore, real wages have risen 2.4% over the past year according to the latest ABS figures, definitely not keeping up with inflation.

The only positive is unemployment at 48-year-low of 3.9%, but this can also bring about challenges with labour shortages. Chalmers could be forgiven for wondering if he’s inherited a poison chalice with his new job.

But it seems the new Treasurer has taken heed of the Benjamin Franklin quote, “If you fail to plan, you are planning to fail”, and has a five-point plan economic plan designed to help control that pesky inflation, get wages growing and make investments to grow the Australian economy.

He said the new government will start going “line by line” through government spending, declaring budget repair has to start now.

“It was a very early reveal that Chalmers and the federal Treasury do seem quite concerned about the inflation outlook,” Bassanese said.

“Sometimes new governments get briefed by Treasury and say the outlook is worse than we thought and can’t do what we promised so there is that potential risk.

“But I think the government will be relying on the Reserve Bank to raise rates and keep inflation contained.”

Focus on renewable energy

Overall, Bassanese is confident the government change to the ALP won’t have a major impact on the markets or economy.

“Their policy changes to the previous government aren’t that different so I don’t think it will have a major shift in the economic outlook so the impacts should be pretty limited,” he said.

However, Bassanese did say investment and policy in renewable energy might gain more clarity and momentum.

“There’s been a lot of investment held back in the energy sector and as a result we are facing capacity problems because businesses haven’t known how to invest for the future,” he said.

“Hopefully, this government will now provide more clarity for the direction of renewable energy policy,” he said.

He said there was still lingering talk of keeping coal-fired power plants running for longer and providing subsidies, which was holding back investment in renewable energy.

“That’s one clear implication and policy shift for the new government particularly if they need to do deals with the Greens, which look like having balance of power in the Senate,” he said.

VanEck’s CEO and managing Director (Asia Pacific) Arian Neiron told Stockhead he also expects a renewed focus on climate change and environmental policies with the new government.

“We are likely to see more discussion of climate change given Labor has also committed to net zero emissions by 2050, along with a 2030 target of a 43 per cent cut in emissions,” Neiron said.

“Labor policy surrounding carbon pricing/policy is yet to materialise but given the ‘teal wave’, we could see high GHG emitters impacted.”

Neiron said VanEck would welcome a government push to put a price on carbon in Australia.

“Any pricing of carbon could support responsible investing and incentivise pollution reduction schemes and policies as governments work harder to meet global climate agreements,” he said.

Forecasts of minimal impact to ETF sector

Vanguard’s head of ETF Capital Markets (Asia-Pacific) Minh Tieu told Stockhead its annual Index Chart shows how changes in government in Australia and the US had minimal impact on long-term market performance.

“The best thing ETF investors can do as a new leadership forms in Australia is to not react to the market noise. Focus on the factors within your control and reassess your investment plan only if it is no longer serving your long-term goals,” Tieu said.

“In times of heightened volatility, looking back on past events can put things into perspective as history will show that even the most controversial changes in government and unnerving geopolitical events had little impact on long-term market returns.

“Vanguard research has found that markets will consistently trend upwards in the long-run, even in the face of changing governments and political uncertainty.”

Neiron also expects minimum impact on the ETF sector with “markets more focussed on inflation regime and central bank hawks”.

“The election outcome won’t affect asset prices directly, as international macroeconomic factors have more impact,” he said.

ETF Securities head of distribution Kanish Chugh told Stockhead there’s been strong support for the ETF sector from both the Coalition and ALP.

“Support for the ETF industry has been bipartisan, with both major parties pushing the funds management industry towards lower cost and greater transparency,” Chugh said.

“We’d note that Labor was crucial in introducing the Future of Financial Advice (FOFA) reforms 10 years ago, which was really the shot in the arm that got the ETF industry booming.

“And we’d note that the Liberals were crucial in developing the framework for crypto ETFs, which were launched last fortnight.”