Here's how you can trade Australia elections

STR | AFP | Getty Images

As Australia faces the most hotly-contested federal election in recent memory, financial markets are looking to position their trades ahead of a vote that could see the end of three years of a minority government.

The September 7 vote pits the conservative opposition party - the Liberal-National Coalition - headed by Tony Abbott, against the incumbent Labor Party led by Prime Minister Kevin Rudd. Opinion polls give a slight lead to the Coalition, in an election race centered around employment and management of Australia $1.5 trillion economy.

Shane Oliver, head of investment strategy at AMP Capital said historically Australian stocks tend to experience some downside ahead of the election before rising after the vote.

"I certainly wouldn't be adding to shares at the moment," Oliver said. "It [Australian equities] is vulnerable or facing a period of flat lining over the next month or so in the run up to the election and that would suggest foreign investors may want to avoid the Australian market over that short period," Oliver said.

"But history also suggests we get a rebound after the elections so as we get closer to the election, it would be case for investors to buy in," he added.

After suffering steep falls in June, in tandem with the broad selloff in commodities on the prospect of the U.S. Federal Reserve winding back monetary stimulus and a slowdown in China, Australia stocks rebounded 5.5 percent in July to become one of the best performing stock markets in the Asia-Pacific region. The benchmark S&P ASX 200 is up about 8 percent for the year.

(Read More:Australia's stock market is on 'fire')

Strategists say Australia stocks are due for further gains from more certain policy making, should the opposition party win.

"I think the market at the moment is priced on assumption that there will be a change of government and Coalition will win," Ric Spooner, chief market analyst at CMC Markets told CNBC.

This week, opposition leader Abbott made his first major election promise, vowing to cut company tax rates by 1.5 percentage points if he took office. The cut will affect about 750,000 companies, and it's a move that could support stock markets in the event of an Abbot victory, Spooner said.

(Read more: Why a Rudd Revival Spells Bad News for Aussie Stocks)

Ben Clark, portfolio manager at wealth management firm TMS Capital, said a clear election outcome as opposed to a the hung parliament that Australia has had for the last three years would be beneficial for stocks.

"The certainty of knowing what the policies are going to be either way should create some confidence in the market. I tend to think if the Liberals get in there'll be a bit more positivity towards that than if Labor get in," Clark said.

Stocks to watch

According to AMP's Oliver, "the main beneficiaries from the change in government would be the mining stocks, heavy carbon emitters and small companies if the carbon tax rate gets cut under the Coalition (Liberal) government."

The ruling Labor Party has long been criticized for implementing the unpopular tax on carbon emissions, which the opposition has blamed for pushing up electricity prices. Last month, Prime Minister Rudd moved to scrap the carbon tax and replace it with an emissions trading scheme that would save big businesses billions in costs in an attempt to win over voters.

(Read More: Australia plans to scrap carbon tax, bring forward trading scheme)

However, an Abbott win could be negative for companies dependent on government spending.

"The losers will be potentially Telstra if there is a wind back in the spending on the national broadband system and consumer discretionary stocks if there is a move to cut back government spending," Oliver said.

In the short-term, however, the elections will not be a "massive" driver for the market, according to Clark, who says there bigger factors at play.

"Earnings season that we're in now is a much bigger factor on the short term direction of the market than the election is," Clark added.

—By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu