Saturday’s resounding victory for the National party will lead to a strong performance for the New Zealand sharemarket in the short term.

We see four key drivers for this:

  1. The result is a strong positive for electricity sector. This is because the sector will avoid the large negative impact on profits and company value that would have resulted from the implementation of the Labour/Greens electricity policy. Meridian Energy and Mighty River Power, the operators with the highest exposure to hydro electricity, are the largest beneficiaries from this result.
  2. The outcome on Saturday was decisive, and markets like certainty. Investors do not have to wait through a period of several weeks or months before they know who will govern New Zealand. Similarly, there is no need to worry unduly about which policies minor parties may focus on as so-called ‘bottom lines’ in coalition negotiations.
  3. There won’t be a wider-ranging capital gains tax on shares, as Labour had proposed at a 15% rate. While the precise impact was hard to quantify, we believe such a tax would have, over time, led investors to allocate more to income-oriented investments such as bonds and term deposits, compared to shares and investment property which would have been subject to the tax.
  4. Partly related to the above factors, the result is likely to boost business confidence, the housing market, and overall economic activity in the short term.

Away from the sharemarket, the other notable short-term market impact of the election result is on the New Zealand dollar. This has risen modestly today, by around 0.3%

Looking beyond the next few days, we expect financial markets to move on relatively quickly from the election. Markets will again be influenced again by non-political factors, such as Wall Street earnings, interest rates, and the economy. Slowing growth in China and weak dairy prices will remain prominent among these factors. Indeed when we look at post-election trends in the NZ sharemarket since 1972, we see no clear pattern of strong or weak performance in the months following an election.

There will be some interest in the results of special votes due October 4, and there is a small chance that these may see National lose the ability to govern alone. Given the apparent strength of its coalition, we do not think this will materially change any of conclusions above. 

Taking a longer-term view, the other notable positive for NZ markets from the elections relates to KiwiSaver. National is planning a closer link between KiwiSaver and housing policy, notably assistance for first home buyers. We have some concerns relating to these types of changes to KiwiSaver (see A clear political divide on Superannuation policy remains but is there a solution?). However we believe that the KiwiSaver policies proposed by other parties, including linking KiwiSaver contributions to monetary policy, were more problematic.

 

David Lewis

Portfolio Manager