Hedge Clippings | Friday 05 April, 2019

Impending election, RBA uncertainty and ASIC's sharpened teeth

Although we don't know the exact date yet, after this week's budget, and Bill Shorten's response, we're all set for a full scale "promise-athon" prior to the election. Apart from the usual handouts falling from the sky like confetti - or at least being promised that they'll fall from the sky - expect claim and counter claim around "they can't be trusted to run the economy" and "how can they manage the country if they can't manage their own party". And if it looks like it's getting really close (which at present, based on the polls, it's not) then we can expect some last minute scare tactics, even if this does entail dealing leniently with the truth.

However, the economy keeps rolling on - or maybe that should be grinding on, depending on which section of it one is most interested in. Our best estimate is that the RBA will keep rates on hold for the balance of the year, but if they should cut then it will be a clear sign the economy is in trouble. Factors which may influence the RBA's decision include the continuation or worsening of the property downturn (possibly due to post-election changes to negative gearing), or a contraction in consumer confidence, particularly among the self-funded retiree sector. Wages are likely to remain subdued (assuming there's not a Shorten/TWU led handout), as is inflation.

The concept of the yield inversion led recession may be topical or possible for the US economy, but the same correlation is not necessarily as strong in Australia, provided of course the US or China don't drag us down with them. Meanwhile, markets have undergone an extraordinary six months - the last quarter of 2018 saw falls of -13.52% and -8.24% for the S&P500 and the ASX200 respectively, while the first quarter of 2019 saw a reversal of +13.65% and +10.89%. Against that, fund managers in the AFM database found the going tough - particularly as no one was really expecting an overnight FED/Jerome Powell reversal from tightening to easing.

In previous Hedge Clippings we've described Brexit as a shambles. In keeping with this theme, we believe Mrs. May's advances this week can be most aptly described with use of the French saying "Plus ça change, plus c'est la même chose", although that may be rubbing salt into English wounds.

On the regulatory front, ASIC were given some welcome teeth in the final days of the current parliament, with product intervention powers over financial products equipping them with the power to intervene where there is a risk of significant consumer detriment. That's effective immediately, whilst design and distribution obligations will, according to ASIC's website, "bring accountability for issuers and distributors to design, market and distribute financial and credit products that meet consumer needs". Phased in over two years, this will require issuers to identify in advance the consumers for whom their products are appropriate and direct distribution to that target market.

On the surface that's good news, as long as it doesn't create more or excessive burden for quality products.