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.
For the first time in our history – well, since 1940.
See http://moadoph.gov.au/blog/article/hung-parliament/
Thank you..really informative!!
Gary, you seem to have a preconceived notion that a government “doing things” is a good thing. I think that the more restrictions placed on government action, the better. Or, in simpler terms, if they can’t do anything it means they can’t stuff things up!
I tend to agree somewhat with Graham. In theory a hung parliament ‘should’ create more stability. The reasoning behing this, is that everyone – as in the politicians – will have a lot to lose if things get sticky. They’re not going to be out there pushing through unpopular bills, spin won’t be tolerated. Whoever gets in, will always have to depend on the independents to stay there,- for the next 3 years! This should theoretically serve to keep things out in the open, more ‘honest’, and less spin.
We might actually be heading for a better system of governance if the two majors lose their polarised influence. Time will tell I guess.
Terrific work! This is the type of information that should be shared around the web. Shame on the search engines for not positioning this post higher!
Thank you Gary,
I cannot agree more. Greatly appreciated your comments.
Hana
On the bais of what you say, Gary, I would have thought this uncertainty would create a ‘happy hunting ground’ or ‘target rich environment’ for a stock-picker like you!
As Graham and Alex have intimated, this may be the opportunity to get away from Coles / Woolworths or Blue / Red branded politics and create something better. Have you considered this from a long term wealth perspective?
I cannot believe this political system is the best we can do. Maybe if they were all Independents, elected for a 10 year term, they could actually achieve something positive?
And maybe some real leaders may emerge? If ever there was a time society needed leaders, we need leaders now!
It never fails to amaze me how the English speaking world tends to ignore experiences of the rest of the world. The Westminster system is not the most common form of government by far and in my opinion not the fairest either.
The majority of other countries have parliaments with multible parties which form coalitions to achieve certain goals with no de-stabilising effects.
Particular government action might influence the market by amplifying the current mood, but in the long run,other factors govern the market.This can be demonstrated by the strengthening of the bears on all major world stock indices except the DAX.
If you have a good trading system, never let the newspapers interfere with it!
This is the most influential blog that I read this year 😛
Eva