On Australia’s Election ‘Surprise’ and Dodgy Narratives

We see a few lessons for global investors from the Land Down Under.

Editors’ Note: Our political analysis is nonpartisan by design. We favour no party nor any candidate in any country and believe partisan bias is the road to investment error.

Surprising pollsters and political pundits globally, Australia’s incumbent Liberal-National Coalition, led by Prime Minister Scott Morrison, eked out a win at Sunday’s election. The count isn’t quite finished yet, but present tallies award them at least 76 seats, the exact number they would need for a majority.[i] Most coverage we have seen portrays the result as a shocker. Depending on the political slant of the coverage you read, you might have heard that this was a victory of right-wing populism over a climate change agenda—or a victory of sensible economic policy over left-wing populism.[ii] That, to us, is merely a statement about the hyper-politicised nature of our world and investors’ need to cut through bias when assessing political events. Best as we can tell, this is a story of how a behavioural concept known as loss aversion—humans’ tendency to feel potential losses more acutely than potential gains—can hold big sway at the ballot box, as well as a lesson in the risk of leaning too much on polling numbers when considering politics’ impact on financial markets.

In our review of news, most pundits we saw couched Australia’s election as an epic showdown between the left and right—educated urban liberals in one corner of the proverbial boxing ring and rural conservatives in the other. Green city-dwellers versus people whose towns and counties depend on mining income. Idealistic young people in favour of redistribution to tackle inequality, versus those who favour tax cuts and job creation. We can understand the temptation to cling to these narratives, given the well-documented urban/rural political divide in America, the UK and much of Europe. That has been a consistent political story since non-urban voters swung 2016’s Brexit referendum. There may be something to all of those claims. Yet beneath the noise, we think the most contentious issue was a provision known as “dividend franking,” where investors get a tax credit on dividends that are paid with companies’ after-tax profits. This system not only prevents double-taxation of corporate profits, but it helps individual investors reduce their tax burden, making life easier on retirees living off their investments.

The opposition Labor party’s campaign pledges included abolishing dividend franking for people who pay no income tax. Their argument, in a nutshell, much resembles the arguments against preferential rates for capital gains taxes in the US and the UK: Only “rich” people benefit, making them good for the few and bad for the many. Yet a deeper look shows this is too simplistic. In Australia’s case, “rich” turned out to include self-funded retirees with no earned income. People who saved diligently to accumulate six-figure net worths and take modest cash flow each year, counting on dividend franking to help make ends meet. A Google search for “Australia election, dividend franking” turned up dozens of articles featuring retirees of modest means losing sleep over the prospect of their retirement cash flow falling by 30%. Some estimates suggested eliminating these credits could cost 1.1 – 1.4 million retirees an average of A$4000 annually.[iii]

Whatever you think of those numbers, an analysis from The Sydney Morning Herald suggests this issue decided the election in the end. A district-by-district analysis showed areas where a large share of the populace was over age 60 swung heavily against Labor, particularly in Queensland and New South Wales.[iv] Whilst the former is relatively rural, the latter isn’t—it included sections and suburbs of Sydney. That doesn’t neatly fit the rural/urban divide narrative. It also doesn’t suggest climate change was at work. Nor populist rhetoric. Just plain old financial security and taxes, centrist campaign staples for generations, in our view.

Yet the polls—and, more importantly, pundits interpreting said polls—didn’t see this. The Liberal-National Coalition had trailed Labor for the past year and performed poorly in regional elections—particularly after Prime Minister Scott Morrison took power by toppling Malcolm Turnbull in an intraparty contest last August. Their loss was seemingly a foregone conclusion, despite polls on the election’s eve giving Labor only a 51 – 49 edge—within the margin of error. We found financial pundits commonly urging Aussies to ditch domestic dividend-paying shares as protection against a Labor government—much as the UK pundits have warned investors of the need to “protect” against a Jeremy Corbyn government for years.[v] Bias was out in full force, in our view leading anyone taking the warnings seriously into an error-filled trap.

But the polls were wrong. We suspect it will take a few rounds of navel-gazing for the pollsters to figure out why exactly. It could be failure to properly weight retirees in the sample, or even the “shy conservative” phenomenon plaguing US and UK pollsters. Only time will tell.

We suggest investors bear this in mind as America hurtles toward next year’s election and pundits parse the possibilities of a snap election in the UK. Polls didn’t predict President Trump’s 2016 victory either. If the “shy Trump voter” phenomenon persists, polls could once again signal a Democratic victory—especially given polls merely hint at the national popular vote, not the state-based Electoral College. Trump lost the national popular vote but won enough states to win the election. In our view, taking national polls at face value—and basing pre-election investment decisions on them—could very well be a mistake, especially with 24 Democratic challengers trying to out-flank one another on the left in order to appeal to partisan voters in next year’s party primaries. This time next year, global investors could be inundated with fearful headlines of an allegedly socialist administration set to take power. Or there could be abundant cheer at the prospect of an allegedly protectionist administration in its twilight. We think acting on either premise would be folly. Not just because the status quo could be the surprise winner, but because, in our experience, such simplistic narratives usually fall flat, with reality and nuance surprising just about everyone.

So remember Australia, and try to stay cool whether you love or loathe what the polls show. Second, when assessing politics, always cut through bias and political opinion to get to the heart of the matter. It is often far more benign than hyperbolic headlines suggest.

[i] “2019 Australia Election: Liberal-National Coalition Secures Majority,” Staff, BBC News, 21 May 2019.

[ii] “An Electoral Brush Fire in Australia,” Editorial Board, The New York Times, 20 May 2019. “Australia Has Shown the Tories How to Defeat Jeremy Corbyn,” Matthew Lynn, The Telegraph, 20 May 2019.

[iii] “How People Power Put Labor’s Franking Credits Policy to Rest,” Robert Gottliebsen, The Australian, 21 May 2019.

[iv] “Labor’s Franking Credits Blamed for Huge Swings in Booths With Older Residents,” Eryk Bagshaw, The Sydney Morning Herald, 21 May 2019.

[v] “Labor Election Win to Hurt High Dividend Stocks,” John Kehoe, Financial Review, 13 September 2018.

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