2016 election and impact on investors

Looking at most elections over the past 30 or so years it's hard to discern a major impact on the economy and investment markets. Sure, there are signs of investor caution in the immediate run-up to polls and there is relief once they are out of the way, with shares seeing an average gain of close to 5% over the three months afterwards.

However, the overall impact on shares, the Australian dollar and property from elections has been minor. This may have been because the policy differences between the two major parties have been relatively minor.

This time, though, the choice between the major parties is starker than at any time since the 1970s. While the coalition is more committed to smaller government, lower taxes and mild economic reform, Labor promises more public spending in areas such as health and education, a larger public sector, higher taxes and more intervention in the economy.

These significant differences in the policy outlook could arguably result in more uncertainty going into this election, which could cause greater than normal volatility in investment markets if it looks as if Labor will win.

This is particularly the case for property. While a change of government is unlikely to alter the interest rate outlook, Labor's proposed restrictions on negative gearing could have a big impact.

Over the long term this could dampen the outlook for established homes, which is a negative for prices. But against this some investors might conclude that they should get in now before the changes prevent them if the policy is introduced.

The outworking of these conflicting forces, combined with general uncertainty around the prospect of a change in government, are likely to see the property market relatively constrained over the next two months.

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