Amidst yet another raid on the Prime Minister’s office with Malcolm Turnbull emerging victorious, the country is presented with a fresh crop of promises and the image of a brighter tomorrow under the new government. Safe to say, the Australian public have every right to be sceptical of the words that come out of our Prime Minister’s mouth given the history of Australian politics. However, it isn’t ridiculous to imagine a larger boost in the economy than usual, particularly with Turnbull’s incredibly strong resume and a history in international business circles. While there is no doubt that global factors such as concerns over China and US interest rates will continue to be the major elements in the market, the Australian investor can be quietly confident that the Turnbull government has the potential to sway the economy in their favour.
It is widely known that Turnbull is independently successful as a result of a prosperous career in investment banking, including his own investment banking firm Whitlam Turnbull & Co Ltd and most notably as a partner of Goldman Sachs. The Prime Minister also has exhibited a deft ability to master policy detail, and is known to ‘favour business friendly policies such as a smaller NBN and an emissions trading scheme,’ as noted by chief market strategist Michael McCarthy. Needless to say, Turnbull’s credentials provide authenticity to his plans to build a positive economic climate.
The newly inducted Prime Minister plans to do this via a more positive economic reform agenda, which consists of a largely inclusive approach in terms of his cabinet ministers, a concept that is contrary to Abbott’s approach. This in effect could already have a positive play on local share prices. However, and perhaps at an even larger level, the belief in a government’s ability to manage the economy can thoroughly boost consumer and business confidence, which in itself will boost the economy.
The result of consumer and business confidence is evident in a rise in spending and investment in their own businesses, two factors that can lead to an increase in employment. This prosperity can prove to be infectious, with greater spending leading to higher business revenues, which as a result brings about more investments. As stated by McCarthy, ‘This virtuous circle then repeats, and growth in the economy increases with each cycle, driving further improvement.’ While whether or not Turnbull is able to implement his cohesive policy approach remains to be seen, the sentiment that he has the ability to do so is a great thing in the eye of the investor.
Compare this to a lack of confidence, as we have seen over the past 2 years, it can have adverse effects in terms of consumer and business spending as well as everything that follows. Whether true or untrue, the belief that a leader is incompetent can create an environment in which businesses and individuals alike are reluctant to part with their earnings amidst the fear that the government is unable to pilot the Australian economy out of a spiralling nosedive if it were to happen.
Such a boost in confidence in not unheard of. As noted by ANZ chief economist Warren Hogan, ‘A similar surge in business confidence was evident when the Coalition won government in late 2013.’ While expectations of Turnbull are high, it must be observed that he does not have the necessary resources to pump prime the Australian economy immediately, given that federal budget is largely in deficit. His task will be to carry out the promised economic management policy and sow the seeds of long term growth. As investors, while we can revel in the perks of consumer and business confidence, whether Turnbull’s seeds will grow to bear fruit only time will tell.
Source: Michael McCarthy (CMC Markets), David Bassanese (Betasharesblog), Mark Mulligan (Sydney Morning Herald)