Investor inflation concerns persist following Labor victory

By Jon Bragg

May 30 2022
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Martin Currie sees the path of inflation rather than the new Labor government as the top issue for investors.

Investor inflation concerns persist following Labor victory

Following Labor’s election victory last week, Martin Currie Australia still believes that inflation ranks as the main issue for Australian investors.

The firm said that the change in government was not expected to have a significant impact on Australian stocks, but uncertainty remained about whether inflation would head out of control or subside in the future.

“As a team we have looked at the impact of the change in government on Australian stocks based on what we know about Labor’s policy positions,” said Martin Currie Australia CIO Reece Birtles.

“However, for us, inflation is the main issue. A change in government is certainly not the cause of this risk, as the pressures on inflation have been building for several years.”

Martin Currie noted that the climate policies of the new Labor government, which include a commitment for a 43 per cent reduction in emissions by 2030 versus a 26 to 28 per cent reduction under the previous government, could potentially have implications.

Labor is seeking for renewable energy to make up at least 80 per cent of Australia's electricity mix by 2030 and has pledged $20 billion to rebuild and modernise the grid with a stated boost to the economy of over $40 billion.

“There is also the $3 billion fund to help heavy industry decarbonise and support green energy development. The fine details of the revised ‘safeguard mechanism’ that works to cap/force reduction in industrial emissions still needs to be worked through,” noted Mr Birtles.

“Key questions on this are what level of reduction is targeted and what penalty if not met. Another implication is that energy is going to cost consumers more given ESG inflation, and there is a huge gap between the current market price for energy and what is in the existing budget.”

Beneficiaries of Labor’s plans may include gentailers like AGL Energy, engineering and construction companies including Worley and Downer, and financer and energy trading bank Macquarie, but Martin Currie noted that some companies could be both winners and losers.

Beyond climate policies, the firm said that Labor’s increased funding for childcare, along with the party’s stance on training and TAFE, should increase workforce participation.

“This is a plus for consumer spending and will also have a positive impact on the tenants of childcare centres and will provide indirect benefit for the childcare centre landlords,” said Mr Birtles.

“Labor is supportive of wage growth, and in the short term, any growth in-line with CPI should be positive to consumer-focused company revenue, but magnitude will depend on the ability of companies to pass through costs on the other side.”

On the impact of the new government on the banks, Martin Currie predicted it would be “relatively benign” due to the much less hostile environment between the two and improved relationships post-COVID.

“We see no obvious new taxes, and the key to banking growth is housing and the general economic backdrop,” said Mr Birtles.

“Labor housing policies do provide a slight boost to housing demand/prices but still likely to be overwhelmed by eventual rate rise impact on prices and eventual credit quality concerns.”

Martin Currie added that more information about the effects of the Labor government would be known once incoming Treasurer Jim Chalmers unveils his first budget in October.

“All in all, we see the impact on ASX-listed stocks as minimal, but we will be keeping a close watch as further policies come to light,” Mr Birtles concluded.

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