Where investors should be looking after the election

Which Australian sharemarket sectors perform well after an election?

The Australian sharemarket typically rallies after a federal election if you analyse the results of the last 23 elections. But what sectors do the best?

Resources have historically outperformed strongly after elections, explains the equity strategy team at UBS, including analysts Paul Winter and Pieter Stoltz.

Winter and Stoltz have charted the average and median performance of the All Ordinaries for 120 trading days after Australian federal elections for 23 elections since 1958.

The trend shows that typically there is a two-month rally in Australian equities after the election followed by a three-month pullback before the sharemarket kicks off for another one- and-a-half month rally.

The researchers found there has been a 0.2% election premium for investors holding Australian shares in the first trading day after going to the polls. However the change in the price earnings over the two weeks post-election hasn't been material, says Winter.

Industrial companies have underperformed after an election. "This observation is another negative for industrials impacted by consumer belt-tightening," says Winter.

There has been no clear post-election performance trend for financial shares such as banks and insurance companies.

Small cap shares have outperformed large cap shares typically after the ballot, adds Winter.

He says housing and Australian wealth in the short-term has been boosted by no changes to negative gearing, the capital gains tax discount and franking credits.

"However, we see the election result as having limited impact on our longer term credit tightening thesis."

Winter says that given the continued rollout of full expense verification, comprehensive credit reporting and debt-to-income limits, there is still a moderate downside risk from the "housing correction / credit tightening" scenario for the economy and the banking sector.

"We are particularly concerned about the outlook for construction given the decline in both residential and non-residential building approvals and the decline in construction job ads," says Winter.

Beyond construction, unemployment and discretionary income form the link between declining house prices from tighter credit and the performance of other sectors in the economy.

Winter notes that unemployment rose from 5% to 5.2% in April.

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