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Why a Rudd Revival Spells Bad News for Aussie Stocks

Australia Prime Minister Kevin Rudd
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Australia Prime Minister Kevin Rudd

The freshly-instated Prime Minister of Australia, Kevin Rudd, may be winning over voters ahead of the keenly-contested Federal elections, but his increased popularity is raising the prospect of political uncertainty which could be bad news for stocks, analysts say.

An influential Australian poll on Monday revealed that Rudd, who ousted his predecessor Julia Gillard in a dramatic leadership vote last Wednesday, has revitalized support for the ruling Labor government.

The survey by Newspoll in The Australian newspaper showed Rudd's return as prime minister had lifted the party's vote by six percentage points from 43 percent to 49 percent over the past week. Meanwhile, support for the conservative opposition party, led by Tony Abbott, slumped to 51 percent from 57 percent.

(Read More: Can Rudd Stop the Rout in the Aussie Dollar?)

Rudd's individual popularity as prime minister also surged. He overtook Abbott as the preferred prime minister, the poll also showed, with 49 percent support compared to Abbott's 35 percent.

But what's turning out to be a comeback story for the ruling party could become a stumbling block for markets.

Market watchers tell CNBC that if Rudd gains further support, one potential outcome would be a hung parliament – a two party system of government which occurs when neither major political party achieves a majority – a scenario which will lead to further uncertainty for Australian businesses and a dampener for stocks.

"The 'Rudd revival' has brought back the potential for a hung parliament which would be the worst case scenario for markets," said Evan Lucas, market strategist at trading firm IG's Melbourne office.

(Read More: What Bust? Australia Set for Huge Boom, Report Says)

"For the Labor party to gain a majority, they would need both to retain the seats they already have, and pick up new ones, which doesn't seem as likely, so a hung parliament would be more realistic. But the last thing the market needs is another three years of uncertainty, with a government which continually struggles to get its agenda pushed through," added Lucas.

Stocks have given a mixed response to the recent political shake up. The Australian Stock Exchange rose 1.47 percent on the day Rudd was instated as prime minister. However, the index was down near 2 percent on Monday as investors struggled to interpret the fresh political uncertainty.

Up until recently, Gillard's falling popularity had led most analysts to conclude that an opposition win was almost certain at the election, initially scheduled for September 14. However, the recent shake-up has introduced a new element of uncertainty for investors; even the date of the election is no longer certain, with Australia newspapers reporting that Rudd is looking to push back the vote to August.

According to Ray Attrill, senior FX strategist at BNP Paribas, the scenario most investors had priced in a few weeks back – for a win by the opposition – is now potentially off the table, which will inevitably make markets nervous.

"What it does mean is that there is an element of political uncertainty that didn't exist a week ago, when it looked like Miss Gillard would remain in place and markets could continue to confidently travel without the uncertainty about what the election outcome would be," said Attrill.

(Read More: Big Rally in Aussie Stocks a Mere 'Dead Cat Bounce'?)

Matthew Circosta, economist at Moody's Analytics, said the political "drama" that has underscored sentiment in recent months and is likely to continue up until the election is over.

"It is clearly weighing on business confidence, general sentiment and hurting the performance of equities as a result. We need to get past the hurdle of the elections before we can see businesses having the confidence to start investing and hiring again," said Circosta.

Attrill added that political uncertainty would also prove a negative for the Australian dollar in the future as well.

(Read More: Dreaded R Word Catching Up with Australia)

The Aussie has taken a battering in recent times alongside heavy falls in the price of gold, slumping near 12 percent over the past six months to 0.91 to the dollar.

"Now we've got that uncertainty at the margin it is a factor that could add a little bit of weight to the Australian dollar, which is already in a down trend," he added.

During Gillard's tenure, which lasted three years and three days from June 24, 2010 to June 27, 2013, the benchmark S&P ASX 200 stock index rose about 7 percent.

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