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A new NZ Government: Market Implications

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Harbour Team | Posted on Oct 20, 2017

After a long period in opposition, we now have a Labour-led government in coalition with New Zealand First, and with support from the Green Party. The most significant initial market reaction has been a fall in the NZ dollar by around 2 percent and NZ share market by 1 percent on the open, as markets priced-in the possibility of a deterioration in business confidence and nervous overseas investors. This Navigator will set out our initial take on the market implications. In a fast moving political situation, there are still many policy details yet to emerge.

By global standards, the National Party and Labour Party are relatively centrist and mainstream. Both have a record and reputation for monetary stability, fiscal responsibility, and respect for the rule of law and role of markets. This provided confidence to investors, no matter which party ended up leading the next New Zealand government.

Now that a Labour-NZ First coalition has been formed, the key questions facing markets is how much of the ‘less-mainstream’ NZ First policy agenda will be implemented, and where Labour and NZ First have found common  round. At this very early stage, the key policy themes of the new government seem to be:

  • less net migration
  • restrictions on foreign buying of houses and land
  • increases in the minimum wage
  • the RBNZ with a dual inflation and employment mandate
  • an increase in fiscal spending, relative to a National-led government

Some of the more controversial policies during the campaign – Labour’s water tax and NZ First’s
policy for the RBNZ to target the exchange rate – appear to have been dropped or diluted through
the negotiations.

At a very high level, there are some relatively clear market implications from the Labour-NZ First coalition. The first is that on the margin, we are likely to see more fiscal spending, more government debt, higher inflation and higher long-term interest rates. Particular sectors of the equity market may also suffer, such as higher wage costs affecting the retail sector and weaker property prices potentially affecting the retirement village sector, despite the demographic changes that support long-term demand.

We will also be watching to see what impact migration policy has on the housing market, especially in Auckland where migrant demand is the most tangible. Sentiment is likely to deteriorate initially, but the magnitude of weakness is anyone’s guess. A more protracted correction is a possibility. While investors will make a connection to the exposure banks have to the property market, the macro-prudential measures put in place by the Reserve Bank should make this sector much more resilient than might have been the case 10 years ago.

Other impacts are potentially more ambiguous or likely to differ in time.

For example, GDP growth may slow in coming quarters, due to an initial fall in business confidence brought about by policy uncertainty under the new government. However, further into 2018 and 2019, GDP growth may be supported by a larger amount of fiscal stimulus than under National.

Similarly, we expect the NZ dollar to remain under pressure initially, as investors place a greater risk premium on investing in New Zealand in a new and uncertain environment. Over a more medium to long-term horizon however, we may see that the NZ dollar, supported by Labour-NZ First policies, leads to higher inflation and wider interest rate differentials. 

Heading into the NZ election, our actively managed portfolios have been positioned with a number
of views on relative valuations in mind. In particular, views that:

  • the risks to the NZ dollar are on the downside 
  • we favour globally-oriented stocks, over domestically oriented stocks
  • short-term interest rates are anchored, with scope to fall further
  • long-term interest rates are prone to rise higher with global yields
  • inflation-indexed bonds provide cheap insurance against higher inflation

In our opinion, the outcome of the NZ election negotiations reinforce these themes. We are in a fast moving political situation but there are still many policy details yet to emerge; some will appear quickly - others will evolve slowly after formal reviews and further negotiations. Prior to the election, some had suggested a Labour/Greens/NZ First coalition would be a many-headed beast, incapable of clarity and cohesion. But, with the Greens essentially providing supply and confidence, and with coalition negotiations focussed on policy, Winston Peters has given the coalition the best possible chance of overcoming the challenges of a three-party government. Early messages will stress compromise and shared views.

Last night, one of Peters’ strongest statements was in regard to the failure of neoliberal economics to deliver to the broader population. Under Helen Clarke’s leadership, Michael Cullen was a strong advocate for economic orthodoxy and fiscal prudence. While Grant Robertson is also relatively mainstream and set to take the Finance portfolio, given the influence of Winston Peters we see some scope for policy to be more adventurous over time.

We believe that the New Zealand political situation should continue to be a key focus of investors in the months ahead.


This Harbour Navigator is provided for general information purposes only. The information is given in good faith and has been prepared from published information and other sources believed to be reliable, accurate and complete at the time of preparation but its accuracy and completeness is not guaranteed. Information and any analysis, opinions or views contained herein reflect a judgement at the date of publication and are subject to change without notice. To the extent that any such information, analysis, opinions or views constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any persons. Investment in funds managed by Harbour Asset Management Limited can only be made using the Product Disclosure Statement, which should be read carefully before an investment decision is made. The price, value and income derived from investments may fluctuate in that values can go down as well as up and investors may get back less than originally invested. Where an investment is denominated in a foreign currency, changes in rates of exchange may have an adverse effect on the value, price or income of the investment. Reference to taxation or the impact of taxation does not constitute tax advice. The rules on and bases of taxation can change. The value of any tax reliefs will depend on your circumstances. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. No person guarantees repayment of any capital or payment of any returns on capital invested in the funds. Actual performance will be affected by fund charges. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this presentation or its contents.