Australia Stocks Lagging US Most Since ’98 Face Vote Boost (2) – Businessweek

Investors say a change of government
in next month’s Australian election would revive business
confidence, bolstering a stock market that is lagging U.S.
equities by the most in 15 years.

Victory by Tony Abbott’s Liberal-National coalition would
boost earnings at utilities companies and construction firms
that have suffered from uncertainty under the Labor party’s
minority government, said Don Williams, chief investment officer
at Platypus Asset Management Ltd. A change of government at the
Sept. 7 vote will encourage firms to resurrect spending plans,
according to David Cassidy of UBS AG.

“Business confidence is as dreadful as I’ve ever seen
it,” Williams, who helps oversee about $1 billion at Platypus
in Sydney, said in an interview. “Assuming there is a change of
government, you’d expect that to improve. Investors have
something to look forward to.”

Prime Minister Kevin Rudd’s Labor Party, which for the past
three years has been reliant on independent lawmakers to pass
legislation, trails the opposition in opinion polls after
political turbulence helped keep a National Australia Bank Ltd.
index of business conditions near a four-year low. History
suggests the election will boost stock prices, with Australia’s
All Ordinaries Index climbing an average 5.3 percent in the
three months following the 11 national votes since 1983, data
compiled by Bloomberg show.

The All Ordinaries index this year has returned about half
the Standard & Poor’s 500 Index and remains 25 percent below its
record high in 2007 as a raw-materials investment boom wanes.
The gauge’s 8 percent advance in 2013 through July 31 trailed
the S&P 500 by the most since 1998, according to the Bloomberg-compiled data.

Resources Bonanza

The All Ordinaries index traded yesterday at 14.9 times
estimated earnings, compared with a multiple of 15.3 for the S&P
500 on Aug. 12, the data show.

Australia’s economy and currency have been bolstered in
recent years by the biggest resources bonanza since a gold rush
in the 1850s as Chinese-led demand for iron ore, coal and
natural gas created an investment pipeline the government last
year estimated to be worth A$500 billion ($457 billion).

That number is now dwindling, with the value of planned
business investment projects and those under consideration or
possible falling 14.3 percent as of June 30 from the prior
quarter, a Deloitte Access Economics report showed last month.

A lack of business confidence is hampering the economy from
growing in non-mining sectors, Reserve Bank of Australia
Governor Glenn Stevens said in a July 30 speech. “There is no
such thing as a confidence policy lever,” said Stevens.

Election Lever

For shareholders, that lever may be the election, bringing
greater clarity about how companies will spend and invest, said
Cassidy, a Sydney-based equity strategist at UBS.

“A change in government would be positive for the market,
giving a lift to business confidence,” said Cassidy, who
forecasts Australia’s S&P/ASX 200 Index will rise 4.7 percent to
5,400 by June 30, 2014. “A lift in business confidence will
spur some degree of business investment and borrowing, helped by
a lower currency and low interest rates. We care more than usual
about this election.”

At stake in the election is the management of the world’s
12th-largest economy. Abbott has pledged to cut the company tax
rate by 1.5 percentage points, adding to previous promises to
abandon Labor’s carbon emissions trading program and a 30
percent tax on coal and iron-ore company profits (AS51) introduced by
Labor in 2012. Rudd has also said he would scrap the world’s
highest carbon price by moving to emissions trading in mid-2014,
a year earlier than previously planned.

Poll Predictions

Labor trailed the opposition by four percentage points in a
Newspoll published in the Australian newspaper Aug. 12, compared
with a 14-point deficit under former Labor Prime Minister Julia
Gillard. Australia’s first female leader lost her job to Rudd in
a June spill, their third leadership showdown in three years.

“Australia has a long tradition of pretty stable
politics,” Stephen Halmarick, Sydney-based head of economic and
market research at Colonial First State Global Asset Management,
which manages more than A$160 billion, said in an interview.
“This isn’t any different. The key issue will be getting a good
majority from whoever wins and they can proceed with their
election platform.”

Aussie Parity

While Labor steered the nation through the aftermath of the
U.S. sub-prime crisis without a recession, business sentiment
has suffered as the nation’s resources boom fades and
manufacturers struggled with a local currency that traded above
parity with the U.S. dollar from mid-2012 to May, the longest
such stretch since it was floated in 1983.

The local dollar has dropped since April, slipping as low
as 88.48 U.S. cents on Aug. 5 and boosting earnings at
Australian exporters that repatriate profits. Since the Aussie
began declining from a three-month high of $1.0582 reached on
April 11, the stock price of Arrium Ltd. (ARI), Australia’s fourth-largest iron-ore producer, surged 31 percent, compared with a
2.6 percent gain on the All Ordinaries Index.

Arrium Chief Executive Officer Andrew Roberts said last
month that every 1 cent decrease in the Aussie against the
dollar will probably deliver a benefit of between A$10 million
and A$12 million for the company’s earnings before interest,
tax, depreciation and amortization.

Australian employers unexpectedly cut payrolls in July and
the unemployment rate held at an almost four-year high of 5.7
percent. The Reserve Bank has cut borrowing costs by 2.25
percentage points since November 2011 to a record-low 2.5
percent as the local dollar’s strength dragged on growth.

Slowing Growth

The U.S. economy grew more than projected in the second
quarter, with annualized gross domestic product rising 1.7
percent from a 1.1 percent gain in the prior three months.

The RBA on Aug. 9 lowered its growth outlook to 2.25
percent in the year to December 2013, compared with 2.5 percent
forecast three months earlier.

“In contrast to the U.S., Australia’s growth rate is
slowing,” said Matthew Sherwood, head of investment markets
research in Sydney at Perpetual Investments, which manages about
$25 billion. “The rise in equities has not been backed by
increased earnings. The key question remains whether cost-reduction drives by companies will outweigh the slowing domestic
economy.”

Profits at companies in the S&P/ASX 200 index will rise 10
percent to 11 percent in the year through June 30, 2014,
trailing the current market consensus for a 13 percent increase,
according to UBS estimates.

Stock-market returns increase as business confidence
measures pick up, according to a study of 31 countries over a
period of more than 20 years by Vichet Sum, an assistant
professor at the University of Maryland-Eastern Shore.

Minority Government

Labor has had to rely on the support of independents and
the Greens party to pass legislation since forming a minority
government after the 2010 election. Labor holds 71 of the 150
seats in the lower house — where government is formed. Abbott’s
coalition has 72 seats, with seven held by independents or
smaller parties.

“Once you get a government that’s not a minority
government, you get clarity,” George Boubouras, Melbourne-based
chief investment officer at Equity Trustees, where he helps
oversee about $28 billion, said in an interview. “With clarity,
you’ll see business-confidence conditions can improve and
therefore households can be a bit more comfortable. When you get
that certainty, combined with the other two pre-conditions of
lower rates and a stabilized Aussie dollar, all that helps
earnings.”

To contact the reporter on this story:
Adam Haigh in Sydney at
ahaigh1@bloomberg.net

To contact the editor responsible for this story:
Sarah McDonald at
smcdonald23@bloomberg.net