On Australia's Election 'Surprise' and Dodgy Narratives

Editors’ Note: Our political analysis is nonpartisan by design. We favor no party nor any candidate in any country and believe partisan bias is the road to investment error.

Surprising pollsters and political pundits globally, Australia’s incumbent Liberal-National Coalition, led by Prime Minister Scott Morrison, eked out a win at Sunday’s election. The count isn’t quite finished yet, but present tallies award them at least 76 seats, the exact number they would need for a majority. Almost everyone sees the result as a shocker. Depending on the political slant of the coverage you read, you might have heard that this was a victory of right-wing populism over a climate change agenda—or a victory of sensible economic policy over left-wing populism. That, to us, is merely a statement about the hyper-politicized nature of our world and the need to cut through bias when assessing political events. Best as we can tell, this is a story of how loss aversion—humans’ tendency to feel potential losses more acutely than potential gains—can hold big sway at the ballot box, as well as a lesson in the risk of leaning too much on polling numbers when considering politics’ impact on your investments.

Most pundits are couching Australia’s election as an epic showdown between the left and right—educated urban liberals in one corner and rural conservatives in the other. Green city-dwellers versus people whose towns and counties depend on mining income. Idealistic young people in favor of redistribution to tackle inequality, versus folks who favor tax cuts and job creation. We can understand the temptation to cling to these narratives, given the well-documented urban/rural political divide in America, the UK and much of Europe. That has been THE political story since non-urban voters swung 2016’s Brexit referendum. There may be something to all of those claims. Yet when you cut through the noise, it appears the most contentious issue was a provision known as “dividend franking,” where investors get a tax credit on dividends that are paid with companies’ after-tax profits. This system not only prevents double-taxation of corporate profits, but it helps individual investors reduce their tax burden, making life easier on retirees living off their investments.

The opposition Labor party made axing dividend franking for people who pay no income tax one of their key campaign pledges. Their argument, in a nutshell, much resembles the arguments against preferential rates for capital gains taxes in the US: Only “rich” people benefit, making them good for the few and bad for the many. Yet “rich” is a funny word with varied definitions. In Australia’s case, “rich” turned out to mean self-funded retirees with no earned income. Folks with six-figure net worths who took modest cash flow each year, counting on dividend franking to help make ends meet. If you google “Australia election, dividend franking,” you will find dozens of articles featuring retirees of modest means losing sleep over the prospect of their retirement cash flow falling by 30%. Some estimates suggested eliminating these credits could cost 1.1 – 1.4 million retirees an average of A$4000 annually.^[i]

Whatever you think of those numbers, an analysis from The Sydney Morning Herald suggests this issue decided the election in the end. A district-by-district analysis showed areas where a large share of the populace was over age 60 swung against Labor in a major way, particularly in Queensland and New South Wales.^[ii] While the former is relatively rural, the latter isn’t—it included sections and suburbs of Sydney. That doesn’t neatly fit the rural/urban divide narrative. It also doesn’t suggest climate change was at work. Not populist mumbo-jumbo either. Just plain old financial security and taxes, centrist campaign staples for generations.

Yet the polls—and, more importantly, pundits interpreting said polls—didn’t see this. The Liberal-National Coalition had trailed Labor for the past year and performed poorly in regional elections—particularly after Prime Minister Scott Morrison took power by toppling Malcolm Turnbull in an intraparty contest last August. Their loss was a foregone conclusion, despite polls on the election’s eve giving Labor only a 51 – 49 edge—within the margin of error. It looked like Gwen Blake, MarketMinder’s favorite Aussie small business owner, would have to release a second run of “Ban the Single Use Prime Minister” tote bags. Some financial pundits were urging Aussies to ditch domestic stocks as protection against a Labor government—much as the UK pundits have warned folks of the need to “protect” against a Jeremy Corbyn government for years. Bias was out in full force, leading anyone taking the warnings seriously into an error-filled trap.

But the polls were wrong. We suspect it will take a few rounds of navel-gazing for the pollsters to figure out why exactly. It could be failure to properly weight retirees in the sample, or even the “shy conservative” phenomenon plaguing US and UK pollsters. In an age when even sniffing the center-right can risk attracting accusations of bigotry, we suspect the temptation to avoid admitting a conservative preference is great. No one wants to be tarred and feathered.

We suggest investors bear this in mind as America hurtles toward next year’s election. Polls didn’t predict President Trump’s 2016 victory either. If the “shy Trump voter” phenomenon persists, polls could once again signal a Democratic victory—especially given polls merely hint at the national popular vote, not the Electoral College, and Trump won the latter without the former. Taking these polls at face value—and basing pre-election investment decisions on them—could very well be a mistake, especially with 24 Democratic challengers trying to out-flank one another on the left in order to appeal to primary voters. This time next year, we could be inundated with fearful headlines of an allegedly socialist administration set to take power. Or we could be buried in cheer at the prospect of an allegedly protectionist administration in its twilight. Acting on either premise would be folly. Not just because the status quo could be the surprise winner, but because such simplistic narratives usually fall flat, with reality and nuance surprising just about everyone.

So remember Australia, and remember to stay cool whether you love or loathe what the polls show next year. Second, when assessing politics, always cut through bias and political opinion to get to the heart of the matter. It is often far more benign than hyperbolic headlines suggest.