May 15, 2019 / 8:15 AM / 4 days ago

The big Shorten: Investors in Australia position for a Labor government

SYDNEY (Reuters) - As Australia’s real-estate prices fall at the fastest rate in a generation, some investors are buying property stocks in a bet that the opposition Labor Party will win Saturday’s national election.

Australian Opposition Leader Bill Shorten is seen with workers at Civmec Construction and Engineering in Perth, Australia, April 30, 2019. Picture taken April 30, 2019. AAP Image/Darren England/via REUTERS

Other investors fear a profit squeeze on health insurers after Labor promised to cap how fast premiums can rise. Short positions in the country’s biggest private health insurer have jumped.

Opinion polls are tightening but they show the center-left Labor Party, led by Bill Shorten, is ahead of the incumbent center-right Liberal-National coalition led by Prime Minister Scott Morrison.

In a country where elections rarely move stock prices or significantly impact the business outlook for either listed or private companies, investors are watching the vote closely. ((For a FACTBOX, click here))

The election falls as Australia’s 28-year run of economic growth is sputtering, and with policy differences between the major parties at their widest in years.

Attention has focused on Labor’s agenda in particular given its leading position in polls and because it has promised interventionist reforms, from lifting wages to closing tax loopholes, while the Liberals are promising to maintain the status quo.

“There’s normally not that extreme a difference between the two major parties in terms of their policies, usually it’s adjustments around the edges,” said Geoff Wilson, chief investment officer at Wilson Asset Management.

“(This time) one is big taxing, big spending, (compared) to a sort of steady-as-she-goes,” he said.

DIVIDEND SWITCH

Some property developers are seen benefiting from Labor’s housing plans while others in the sector, structured as trusts, stand to gain from an unwinding of tax breaks on corporate dividends.

The thinking is that winding back dividend rebates on corporations would remove a modest price discount previously applied to REIT payouts because they never attracted the rebates. This has in part contributed to parts of the real-estate investment trust (REIT) sector outperforming the wider market.

“It makes a big difference for income investors ... it absolutely makes them better positioned than before,” said Jun Bei Liu, portfolio manager at Tribeca Investment Partners, which has modestly increased its exposure to REITs.

Another Labor plan would remove broader tax breaks on property purchases, except on new homes. While the proposal is expected to weigh on overall home prices and sentiment, it could boost developers.

“Businesses like ours, that produce new, will probably see a net increase in demand,” Mark Steinert, chief executive officer at major developer Stockland Corp Ltd said.

Given the broader downturn in the housing market, the Labor plans have not translated into a rise in share prices at developers.

Labor had announced the tax and dividend changes in recent years, but financial markets only took notice in recent months as the prospect of a Labor government firmed.

The share prices of Australia’s five biggest REITs have, on average, gained a third more than the broader market since the start of the year. The REIT index has risen in May while the market has been falling.

A victory for the Liberals, the dominant force in the coalition, could unwind some of the trades.

The party’s campaign has focused on opposing and resisting Labor’s proposals, offering few ideas with price-sensitive implications for listed companies, analysts said.

SHORT ON HEALTH

Other factors beyond the election are driving the overall stock market this year. Rising commodity prices for example have helped fuel the 11% rise in the A$1.8 trillion S&P/ASX 200 index since the start of the year.

But for sectors particularly exposed to government policy, such as healthcare, which is heavily subsidized in Australia, the vote is shaping up as crucial.

Private health insurers would be limited to increasing premiums by 2% a year for two years under Labor, which Craig Drummond, the chief executive of Australia’s largest private health insurer, Medibank Private Ltd said could have major consequences.

“If there’s a change of government ... we think 50% of the industry will go into underwriting loss,” he said. “It will definitely make life harder for all of us, but it will make it intolerable, I think, for some of the smaller and medium-sized players that don’t have the scale.”

Short positions, or bets that a share price will fall, remain low in Medibank at 2.5%, but have surged fivefold since October.

“There is an implied margin squeeze,” said Rohan Walsh, investment manager at Karara Capital in Melbourne, who declined to comment on his funds’ holdings in the sector.

“To buy the stocks, I’d want a bigger discount.”

On the other side of the equation, a Labor promise to subsidize diagnostic scanning for cancer patients sent shares in medical imagery firms soaring.

“It’s a real benefit for cancer patients and as a byproduct of that, the industry will also benefit,” said Ian Kadish, chief executive officer at Integral Diagnostics Ltd, which has climbed to a record high since the policy was announced.

Reporting by Tom Westbrook; Editing by Neil Fullick

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