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Monday, January 4, 2010

The big issues for 2010-Part 2

Federal Election

A Federal Election must be held by April 16, 2011. And the earliest date for a simultaneous half-Senate and House of Representatives election is August 7, 2010. But there is the risk of an early poll given that the trigger for a double dissolution of both chambers exists – the carbon pollution reduction scheme bill being twice rejected by the Senate.

On current opinion poll shows the Federal Government would easily be returned to power. The key issues to be debated by the major parties will be climate change, industrial relations and the size of the government economic stimulus measures. Taxation and superannuation may also emerge as key issues for debate.

There are also state elections scheduled in South Australia, Tasmania and Victoria in 2010.

Financial markets hate uncertainty so expect sharemarkets to trend sideways and perhaps under-perform other global markets once a poll is called.

What's out for 2010

Recessions have already ended in a number of major economies and we expect more countries to emerge from intensive care and move into the recovery ward in 2010. As we noted above, the path of recovery will be uneven – with emerging nations in Asia and Latin America offering best prospects.

While the US is expected to experience a 'U-shaped' recovery, there is always the potential for surprises, as shown in the latest employment result. Once jobs start growing again, this will translate into increased confidence and consumer spending, creating momentum for the economy.

Certainly we are likely to see fewer references to the GFC or global financial crisis. The GFC came as a major shock to companies and consumers across the globe, but now with the healing process underway, people are gradually getting back to business.

With the GFC receding into the background, investors will have less need to be pre-occupied with all things US.

The US really did dominate attention in 2009, its financial crisis spreading across the globe, causing sharemarkets to move in lock step with the US Dow Jones and S&P 500 indexes. Now investors can pay more attention to what's happening in their own backyards. As a result the tight correlations that existed between major share indexes and US share gauges should ease markedly.

While the correlation ratio between the All Ordinaries and US Dow Jones was regularly near 0.95 in 2009 (where a perfect relationship would equal 1.0) it's important to remember that back in 2005 that ratio was around 0.50.

With recessions ending and recoveries taking hold, clearly there will be fewer references to rate cuts or superlow interest rates. But here is where it becomes interesting – central banks must gradually lift interest rates and sell assets without derailing fledgling recoveries. Clearly the process is not without significant risks.

One change that has already happened as a result of the GFC is that consumers and businesses are reassessing their views on debt. It's not that debt will be shunned in 2010, rather people have long memories – companies will tend to favour equity over debt. Consumers will use their own funds rather than credit cards for regular purchases. It takes a shock for the GFC to change behaviours, and it will take some time before debt is regarded more positively.

Arguably more settled financial markets might lead to less volatility. But clearly this can't be predicted with any great certainty. All it needs is something new from left field such a new geopolitical crisis and volatility will return with a vengeance. Still, there has already been a sharp drop in the number of days that the All Ordinaries rises or falls by more than 1%.

One of the interesting developments that has followed from the GFC is even greater labour market flexibility.

Companies have become more accustomed to using a mix of full-time and part-time staff. And they have also become more amenable to changes in work-hours and workweeks.

There are numerous anecdotes suggesting that those employees that have been forced to work fewer hours or different work hours like the change. While all this doesn't spell the death of the 9-5 work-day or perhaps 8-5 work-day, employers recognise that different practices can prove more successful, reduce worker turnover and improve flexibility and productivity. The ageing population will require employers to adopt different practices with more senior workers requiring part-time rather than full-time positions.

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