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Q: How To Prepare Your Finances For A Labor Government

Q: What should I do with my finances and investments to prepare for a Labor Government?

Kyle’s Answer:

Right now, nothing.

The polls and the bookies think that Labor will win the election with the Liberal National Party (LNP) currently paying $3.50. These odds have come down in recent weeks as polls have tightened and suggest an LNP win isn’t ridiculously unlikely and these odds are much lower than bookies were offering on Brexit and Trump.

Let’s put this uncertainty aside for a minute and assume Labor does win the election.

I’ve only voted in a few Federal elections. However I don’t recall there being such a large difference between the two parties in terms of their economic plans. The biggest changes proposed by Labor that will have a direct effect on some people are:

  • Removal of franking credit refunds from 1 July 2019
  • Removal of negative gearing on all assets purchased after 1 January 2020 including existing property but excluding new property
  • Reduction of the capital gains tax discount from 50% to 25% on all assets purchased after 1 January 2020

If implemented these changes will no doubt have a big impact on some people who may need to alter their strategies, however, I’d be very cautious doing anything with so much uncertainty as it could leave you worse off.

The problem is that even if Labor win the election they almost certainly won’t control the Senate (where the legislation will need to pass) due to differences with how Senators are elected – a Government has only controlled the House of Representatives and the Senate four times since the current system was adopted in 1949 and all of these times the LNP was in power.

Combining Labor and the Greens (who both agree on this legislation), experts predict there will be 36-38 of the 39 required to get legislation through so the crossbench will consist of One Nation, Centre Alliance, Cory Bernardi and maybe someone like Clive Palmer, Jacqui Lambie or Derryn Hinch could grab a spot.

So, basically, Labor will likely need the support of One Nation or Centre Alliance who are both adamantly against franking credit changes and One Nation are against negative gearing changes with Centre Alliance open to modifications.

In any case, there’s a lot of politics to play out before and after the election and where these policies will land is anyone’s guess.

But the share market will go down if Labor wins, right, so I should sell down my portfolio?

I have no idea what the market will do if Labor wins but I think it’s a risky game selling down your share portfolio to profit from the election.

The problem here is you have to be right that Labor will win the election, you have to accurately predict how the market will react and then you have to decide when to buy back into the market all-the-while increasing your investment costs in the form of additional brokerage and taxes.

I remember leading up to the US election in 2016 there were some investment experts predicting an unlikely Trump victory and positioning themselves anticipating the uncertainty to result in a falling share market.

On 9 November 2016, the Aussie market was open as the US were counting their votes.

Early on it was looking like Clinton was going to win and the market was up 1.1% and at one point when a Trump victory was looking likely it was down 3.9% before the market chilled out and finished 1.9% down with many predicting further declines the next day.

These experts were looking pretty clever as they were politically right and they’ve got some profits. The next day the market rose 3.3%, the biggest rise in over 5 years and has never reached that low again and the market is up 23% excluding dividends. I wonder when these experts decided to get back into the market or if they’re still waiting?

Source: Fairfax

So what’s my point?

Elections are unpredictable and markets are more unpredictable and the odds are stacked against you if you want to trade on all of this uncertainty.

Above are some headlines immediately before and after the election, how silly the market looks with the benefit of hindsight. 

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