Coalition ‘Miracle Win’: Bank Shares Drove ASX Higher

In a miracle win, the Coalition is set to be re-elected in Australia’s federal election. The Labor Party lost seats in Tasmania, Queensland and New South Wales and failed to make more than minimal gains nationally. This came as a piece of unexpected news and resulted in substantial share market gains when the ASX opened today.

The stocks of the banks and private health insurers surged on the Australian Securities Exchange (ASX) on the back of the Coalition win. The financial stocks drove the Australian share market to a near 12-year high and powered the ASX200 to a 1.7 per cent gain closing at 6476.1 points today.

The below table features the closing price (as on 20^th May 2019) and the respective percentage gain (relative to the last close) in the stock price of the leading banks of Australia on the ASX:

As shown in the above table, there was a significant improvement in the stock price of leading banks with the Coalition win. The financial sector witnessed a gain on the ASX with the S&P/ASX 200 Financials surging up by 5.53 per cent. NAB and WBC were among the top five gainers on the ASX today.

The banks gained as market perceived some of proposed Labor's policies as detrimental. This includes changes in franking credit policy, reducing the capital gains tax discount, limiting negative gearing, the possibility of higher bank levies and tougher restrictions on mortgage brokers than proposed by the Coalition.

The Labor’s policy of ending cash refunds for franking credits was one of the major possible reasons for the loss of the party. The party faced an internal revolt to dump its signature 14 billion dollars franking credit policy. Any chance of franking credits changing has gone in the wake of Labor Party’s stunning election loss to the Coalition. The franking credit policy would have stripped tax refunds from retired investors who had not paid tax.

Investors have been considering the banks as a staple investment and hope for reliable dividends with decent dividend yield from them. But the changes to the franking credit policy would have hampered the banks’ reputation as a reliable investment. The royal commission enquiry had already put the banks’ status at risk due to which banks moved towards the dividend cut. The change in the franking credit policy would have reduced the return of some investors through taxation, which would have encouraged them to pay less for the banks.

Mortgage brokers celebrate, as the Coalition will not adopt the banking royal commission's recommendation to end trailing commissions and limit other commission payments. With the Coalition’s surprise election win, the investors are heaping again into the highly franked dividends that the banks offer.

The market analysts highlight the following Labor policies that would have worked against investors:

• Asset and sectoral re-allocations (franking credits)
• Margin compression (higher wages)
• Pressure on house prices (negative gearing and capital gains discount changes)
• Further pressures on the banks (increased levy, royal commission recommendations)

The unexpected victory of the ruling Coalition government melted the wall of worry facing Australian investors. The market analysts view the result as a net positive for economic growth that will add another 15 basis points to GDP.

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