For the first (oops, second) time in our history, we have a hung parliament.
Under a parliamentary system of government, a hung parliament occurs when no political party has an absolute majority of seats. Resolving a hung parliament will usually result in a minority government forming a coalition, with independents or other smaller parties to give it enough seats to gain ‘control’. This can be an unstable option as many vested interests can come to the fore. The other option is a fresh election.
Whatever happens, market participants (traders and investors) tend to consider these as periods of great uncertainty. In the initial stages following the election this revolves around who will actually govern the country, who will lead and how, and which policies will be implemented. If a minority government forms there will be concerns about vested interests and the roles and responsibilities of the independents and the smaller parties involved. All of this tends to have a de-stabilising effect on both the economy and the share market. Markets dislike uncertainty and this will be reflected in share prices in the short term.
If a minority government is formed, investor concerns will turn to policy implementation and direction. Will the minority government be able to pass new ideas and bills through the parliament? Or will it be continually hand-cuffed in its decision making by the simple fact that without a majority it cannot obtain a result in the parliament as members jostle for position and to protect their interests and those of their constituents? One party simply cannot pass any laws without the support of the other or others. It is a tricky and delicate situation that can result in a period of in-effective governance if such a situation arises.
What does it mean for investors?
Well, as we all know humans in general don’t like uncertainty and because humans constitute ‘the market’, it follows that the share market also doesn’t enjoy uncertainty. A hung parliament could result in a prolonged period of sideways price action if no definite action can be taken by the minority government. Will there be a resources tax? Will spending increase? Will tax changes eventuate? The unknown answers to these and a multitude of other questions could potentially have a negative impact on the market for some time to come. In the end all of this is ‘noise’.
During times like these, those without a strict set of processes and rules to follow may well find share investing and trading tough going. The market may play many tricks on these investors in the months ahead, as they try to predict what effect the noise will have. In the meantime, those of us using a mechanical approach will continue to follow the rules and processes of the system, ignoring the market ‘noise’ and progressing on our journey.
It will be interesting to watch how it all unfolds and to be able to look back in the years ahead and reflect on the fact that we have been a part of an historical event in Australia’s parliamentary history.