At the time of writing, the federal election is resting on a knife-edge. Sure, it seems very unlikely that Labor could form government, but it is also far from certain that the Liberal/National Coalition can form government without the help of minor parties such as Katter's Australian Party or the Nick Xenophon Team.
All that is certain is that Prime Minister Turnbull's claim that he could provide stability in government seems very unlikely. In fact, assuming the Coalition does form government, it faces a hostile Senate with a range of minor parties holding the balance of power. At this stage, it looks like the populist right — in the form of Pauline Hanson, Derryn Hinch, and the Liberals' own Cory Bernardi — will have much more influence than ever before.
So what does all this mean for investors?
It's no secret that government policy has a real impact on many companies. For example, many healthcare stocks suffered when the government announced proposed changes to Medicare reimbursement protocols, late last year.
And indeed, the government's aim of cutting taxes for large corporations isn't particularly likely to succeed given the likely make-up of the Senate. The populists holding the balance of power may not see the sense — or the votes — in giving tax cuts to large corporations. Equally, it's not unreasonable to suggest that the health industry is a little safer after the "Medi-scare" campaign.
It has to be said that Labor capitalised effectively on the government's decision to maintain the freeze on Medicare rebates at 2012 levels, especially when combined with the policy of reducing government subsidies of pathology and radiology.
If anything, the very close election result is probably a positive for healthcare stocks such as Primary Health Care Limited (ASX: PRY). Of course, the exception may be private health insurers, since the Coalition has typically been more supportive of their role in the system. That means there is probably little upside for Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF).
On the other hand, there is possibly some downside from this result for the big four banks. It's no secret that they did not approve of the Labor policy of holding a Royal Commission into their actions. Investigative journalism, published by Fairfax, shone the spotlight on misbehaviour by big bank financial planners, leading the Commonwealth Bank of Australia (ASX: CBA) to set up a compensation scheme for victims. However, actual payment of compensation was reportedly very slow.
Would a Banking Royal Commission hurt?
The closeness of the election result definitely increases the chance that a Royal Commission will go ahead. The next question, of course, is whether this should worry bank shareholders.
A Royal Commission into banking would likely be a slow and ineffective process, and the government may well design terms of reference that ensure there are no major revelations. After all, the government of the day doesn't really benefit from picking a fight with the big end of town.
A more idealistic view might be that a Royal Commission could root out any wrongdoing in the sector. That might cause some short term pain, but even then, I suspect that a potential Royal Commission is a minor risk, and one could readily suggest that any recommended changes are unlikely to materially impact their earning power, anyway. Other risks, such as falling property prices, are more likely to hit banking profits.
Foolish takeaway
We're lucky to live in a strong democracy with well-established rule of law. That means that a little uncertainty as to the government — or even instability — is unlikely to do long term damage to our country.
Of course, the Opposition is almost certain to emphasise the uncertainty and instability for political reasons. But the reality is that the last minority (Gillard) government passed much more legislation than most, proving that Australia has the ability to govern itself, even when neither of the major parties is a clear winner.
That means investors should not over-react to the current political situation. A "wait and see" approach is probably most prudent, especially given the historical sharemarket performance, despite far more serious disruptions than this.
