Aussie investors in flux as unclear election casts doubt on AAA

Australian government bond yields climbed on Monday after an election Saturday left neither of the major parties with enough seats to form government in their own right, potentially increasing risks to the country’s top credit rating. Investors have been left in limbo by the unclear result, with Prime Minister Malcolm Turnbull’s Liberal-National coalition and the opposition Labor party both currently short of the 76 seats needed for a majority in the 150-member House of Representatives. Vote counting resumes Tuesday, and Turnbull said the result may be known by the end of the week. The potential for a minority government may damp confidence and the new administration may struggle to push through fiscal policy measures. Australian bond prices fell on Monday even after the U.S. market rallied at the end of last week, pushing the yield on the benchmark 10-year note up by 3 basis points to 1.98 percent as of 12:52 p.m. in Sydney. That’s 54 basis points more than equivalent U.S. debt. While the Australian currency initially fell as much as 0.8 percent to 74.41 U.S. cents, it recovered to be little changed at 74.94 cents. The country’s benchmark equity index, the S&P/ASX 200, was up 0.2 percent. “It looks like another three years of de facto minority government, which is not a great outcome for the economy and investment markets,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which manages more than $110 billion. The nation’s central bank, which meets Tuesday, will need to consider the impact of the result on the economy as uncertainty emanates from a range of global woes, from slowing Chinese growth to Britain’s shock decision to leave the European Union. The Reserve Bank of Australia, which has cut interest rates to a record low, is seeking to shield a local economy already struggling with a decline in capital spending and disinflationary pressures. A mounting budget deficit has put the AAA credit rating under pressure. Moody’s Investors Service, S&P Global Ratings and Fitch Ratings all currently have Australia at the top grade with a stable outlook. “The electoral outcome would affect the sovereign credit profile only if it changed broad policy priorities and the effectiveness of their implementation,” said Moody’s analyst Marie Diron, who expects fiscal consolidation to remain a key policy objective for the new government. “Short-lived political uncertainty would have limited credit implications for Australia,” she said in an e-mailed statement Monday. Fitch said while the country’s current credit profile remained consistent with a top credit rating, the close contest could mean a “significantly different” fiscal outlook and set of policies to what was presented in the May budget. “Fitch will assess the government’s ability to manage public finances prudently following the election result, as well as flexibility in responding to a volatile global economic environment,” analyst Mervyn Tang said in an e-mailed statement Monday. “Political gridlock that leads to a sustained widening of the deficit would put downward pressure on the rating, particularly if the economic environment deteriorates.” S&P spokesman Richard Noonan declined to comment on Australia’s sovereign credit rating outlook when contacted by telephone Monday. “Markets don’t like uncertainty and this will impact sentiment in the short term,” Niv Dagan, Melbourne-based executive director at Peak Asset Management LLC, said by phone. “The big factor is consumer and business confidence and in this environment, that will remain fragile. The uncertainty will rattle markets.” Corporate Outlook With the government in limbo, Turnbull’s promise to cut company tax rates is under threat. The inconclusive vote compromises the prospect for a boost to corporate earnings from fiscal stimulus, according to Chris Nicol at Morgan Stanley. He said he maintained a cautious stance on Australian equity-market returns. “This result will come as a shock to the market,” said Nicol, a Melbourne-based analyst. “The election outcome diminishes the prospect of a smooth legislative agenda, leaving fiscal policy options constrained. Uncertainty and instability associated with a more fragmented Senate will likely weigh on consumer sentiment and business confidence.” Bloomberg