Mark Lister, 10 May 2017

We will get our own dose of political uncertainty this year.

The last 12 months has been a period of political surprise in just about every corner of the world. The election of Donald Trump in the US was the big one, while Brexit created similar waves on the other side of the Atlantic.

In contrast, over recent years New Zealand has been a bastion of political stability under the stewardship of the National government with John Key and Bill
English. Many had expected 2017 to come and go without fanfare, with the incumbent administration likely to make it four in a row. Approval ratings have been high and there have been limited genuine challengers.

That all changed late last year with the announcement that John Key would step down. His replacement, Bill English, is very well regarded by the business sector and the investment community, both domestically and offshore, and he represents stability and reliability.

However, we should expect political uncertainty to grow over the coming months, reflecting the higher potential for a change of government at the election on 23 September.

Make no mistake, it’s going to be close

The incumbent National Party remains well ahead in the party vote stakes. Polling over the last six months has seen National consistently in the 45-50% range,
out in front of the Labour/Green bloc, which has been around five percentage points behind, on average.


However, it’s not quite that simple. Under the MMP system, unless a party wins resoundingly they are almost always forced to form a coalition.


National performed extremely well at the last two elections, 2011 and 2014, winning 47% of the party vote. This was an outstanding performance and well above the best that Labour achieved under Helen Clark, who was an exceptional leader and very popular. Even so, National required the support of other parties to form a government.

This year, National is faced with the task of attempting a historic fourth term. We have only seen this happen two other times in New Zealand; with the first Labour government from 1935 to 1949 (14 years in power) and with the third National government from 1960 to 1972 (12 years). Under MMP, it has never happened and would be much more difficult to achieve.

Although the new Prime Minister, Bill English, is exceptionally capable, many believe the charismatic John Key was worth a few percent. If this is to be believed, National could be heading for a party vote in the low-to-mid forties without him. That would be a strong result, but it still might not be enough for them to govern.

Our analysis suggests that a 3.0% swing away from National to Labour would see them unable to form a government with the support of traditional partners United Future and ACT (assuming they both win one seat each).

The support of the Maori Party would get them over the line, but the return of Hone Hariwira adds a new dynamic and the Maori/Mana alliance will, quite sensibly, work with whoever gives their constituents better representation. In short, coalitions matter much more this time around.

So what’s the likely outcome?

It is highly likely that National will emerge as the most popular party, ahead of the combined Labour/ Green bloc. However, Bill English might well have to consider the prospect of working with Winston Peters and New Zealand First, which would inevitably mean conceding some ground to them.

New Zealand First could work with either National or Labour, as they have in the past. However, when put in a decision-making position, Peters has a history of siding with the group that has won the largest share of the vote (in 1996 with National and in 2005 with Labour).

This still puts National in the box seat as the more likely major party to form a government, but it could make for some uncomfortable negotiations with Peters as the Labour/Green bloc, more desperate to get into power, may be willing to give away more.


How should investors approach this?

A change of government certainly wouldn’t derail the economy, but it could mean some change in key areas of policy difference, such as housing. At this stage, there don’t appear to be any obvious sectors that will be held hostage to policy change, as was the case with the electricity companies in 2014.

However, we will need to wait for further detail to emerge during the course of the year, with the 25 May Budget shaping up as a key event to watch.

The upcoming election will also mean more uncertainty, given how comfortable financial markets and investors have been with the current regime for close to
a decade. Despite the strong economic position that New Zealand is currently enjoying, political nervousness could dent business confidence, putting hiring
and spending decisions on hold. It could be a headwind for the sharemarket, limiting returns and creating a bit more volatility.

This article was first published in the April 2017 edition of News & Views.