How Australia's Federal Election Could Sway the Stock Market

Australians are heading to the polls in the coming months to vote in a federal election, and investors may be wondering how this could affect the stock market. In this Fool Live segment from "What in the World," recorded on Feb. 11, Motley Fool contributor Scott Phillips explains what investors need to know about Australia's upcoming election. 

Margie Baldock: We have a federal election coming up here in Australia, it's got to be called sometime between now and May, how will that affect the stock markets and how should investors play the lead up to the federal election, if do anything at all?

Scott Phillips: Yet really great question. Again, for our American viewers, we don't have a fixed term elections in Australia, we have maximum terms, but not fixed terms, so the government of the day can decide when they call the election. It must be held by May, there's conjecture as to when it might happen, it might be as early as March, probably as late as May, that's political more than anything else the government try to work out when will be best for its political fortunes. So it'll happen at some point in the next few months and as you rightly say, we have seen the Australian parliament in sittings for the last week, I think for two weeks this week and next, before the election and we're seeing a clearing of the decks. I think that's probably a universal phrase.

The government is trying to get all those political problems out of the way, trying to give us off a clear run to the election. At the same time, we're obviously still in the midst of our hopefully toward the end of the Omicron wave of COVID, and so the getting back to business, it's a really key focus for the government. Assume for the sake of the country, we should give them the credit at least for that, but also for their own political cycle. I'm sure the faster the economy is growing, the more things rebound, the better people feel, the greater the chance for the incumbents to remain in power, so that makes some sense as well. In terms of how we invest toward the election, we've been through enough elections to know probably not put too much store in.

The first is the Motley Fool's own, Morgan Housel, you guys will know well when he was with the Fool, but wrote really compellingly about the fact that the administration, Democrat or Republican in the US it will be the same around the world, actually had almost no bearing on average on the stock market. So being a little bit careful about what you think you're going to invest in. He went a step further and said some of those companies, industries likely or perceived to benefit from a left-leaning government didn't do particularly well. The same is true of some of those right-leading governments and the businesses they would otherwise seem to be good for, also haven't done particularly well. So trying to read the tea leaves on politics and put it into the stock market is really isn't a good idea at all. Unfortunately, because it'd be nice if we could make little things nice and easy. But this is the problem because sometimes though the person you think is going to win doesn't win, we saw that with the Trump-Clinton election in the US. We saw it here in 2019, our last federal election. The opposition was expected to win and surprising literally everybody on election day, a little bit like the Trump election in the US, the government was returned. So again, you're seeing firstly, doesn't matter, probably not, secondly, could you forecast if it did? Probably not.

Then lastly, you simply don't know what, when, how, and why of the election itself and so you can try and guess, of course, except the market knows, it's already priced in and that's the other problem. You have to have a variant perception to beat the market, if everyone knows that party X is great for, pick an industry, I'll say tourism just for the fun of it, then that are getting processed tourism stocks before you get to the election. Equally, the same is true of the reverse, if party X is bad for tourism. You will see that reflected in the share prices. It's only the circumstance where you can say something different to the market because we're always looking for mispricings. If anything's price effectively and efficiently, there's no opportunity for individual investors. If the market is priced inefficiently or you can find those inefficiencies like for example, I think this will be great, but no one else sees it yet. Firstly, you got to be right of course, but secondly, that's where the opportunity is. So the stuff everybody knows, rarely, rarely, rarely is an opportunity for the average investor. We're more likely to be successful finding things that we think we see the others don't. That's where the opportunity tends to be and that's really going to be for better or worse, as I said, federal politics.