In the lead up to the Australian election, we were asked by many clients what, if any action they should take to prepare themselves for the certainty of a Labor election victory. Here, we dissect the election result and look at why predictions based on polls are a folly.
Australia’s recent federal election result not only confounded the pollsters, the pundits and the punters, it provided another lesson about the dangers of using political news headlines to guide your investment strategy.
By just about every measure, the Australian Labor Party was seen as the overwhelming favourite to defeat the six-year-old Liberal-National Coalition government in the May 18 election by securing a majority in the 151-seat House of Representatives. In the weeks leading up to the election, every major opinion polling company—from Newspoll to Ipsos to Galaxy to Essential to Morgan—had Labor ahead either at 52-48% or 51-49% on a two-party preferred basis.
As well, the view of most media pundits was that Labor would almost certainly get across the line, with only the margin of victory in doubt. The bookmakers were so confident of the outcome they had the ALP at odds as skinny as $1.16 in the days before the poll. Before polling day, Sportsbet was so confident it paid out $1.3 million to gamblers who had backed Labor early in the process.
As we now know, the election outcome defied them all. The Coalition secured a slight majority in the House of Representatives. The overall result was almost the exact opposite of what the pollsters predicted, with the Coalition ahead 51-49%.
While others comb over the political implications, the lessons for investors are familiar. Those who made investment decisions based on the ‘certainty’ of a Labor win, will now be reviewing their decisions.
News is quickly built into securities prices and unless you can predict what tomorrow’s news will be, you will struggle to do better than just accepting market pricing and building a diversified portfolio around the long-term drivers of higher expected returns.
For instance, in the months leading up to the election, some investors predicted that Labor’s announced policies on franking credit refunds, negative gearing and capital gains taxes would have a negative impact on property prices, banks and financial services stocks, while its plan to cap annual health insurance premium increases might hurt listed health insurers.
When the election result confounded just about everyone’s expectations, the pricing of stocks in those sectors adjusted to reflect the outcome. The lesson is that markets are constantly changing their assessments about expected returns based on new information. Trying to second guess prices requires getting two things right—what will happen next and how the market will react to it.
We should expect that markets will continually weigh the implications of political, economic and other news on expected returns. While people can make predictions about political outcomes, we have seen that this is a haphazard occupation. And even if you did anticipate what would happen, there is still no guarantee the market will move in the way you expect.
That all suggests the best approach is to focus on your own investment goals, build a diversified portfolio aimed at getting you there and let markets deal with the news.
Our thanks to James Parker for his assistance in preparing this article.