NZ ELECTION 2017: TOO CLOSE TO CALL
Mark Lister, 8 September 2017
The two most recent Colmar Brunton political polls have the Labour party ahead of National for the first time in more than a decade. For anyone who hadn’t yet acknowledged that this months’ election could go either way, this should remove any doubts that be a change of government is a genuine possibility.
Change means uncertainty, which is unsettling for many. Regardless of the outcome, the election is unlikely to derail the economy in a significant way.
New Zealand is in a strong economic position. Growth is robust, unemployment is low, the dairy sector has improved substantially, and many parts of the economy are doing very well. Financial markets will ultimately put more weight on these fundamentals, rather than political change in Wellington.
At an economic level, a potential change of government adds uncertainty to the New Zealand story generally. If the polls remain close, or if we do indeed see a change on election night, further currency weakness is something we should expect (at least in the short-term). We already believe it makes sense to own companies with some international exposure and to be globally diversified, so this would only serve to support our view.
Unsustainably high house prices and the inequality they create are key issues for New Zealand, and therefore have been hot topics in this election campaign. Tax policy is one element of the Labour strategy to deal with this, and something that would likely be considered within the first term, should we see a change of government.
This should probably worry property investors more than share investors, as they potentially have more to lose. Over the past 20 years’ NZ shares have delivered a return of 8.5% per annum, although 71% of that return has been from dividends rather than capital gains. Importantly, the bulk of this return already attracts income tax at the investors’ marginal rate.
As local share investors are already paying tax on more than two thirds of this return, the impact of a CGT could more limited than people might think at first glance. If a CGT is on the cards, some of the higher dividend paying shares and sectors could benefit from this dynamic.
Conversely, property investors that are collecting relatively low rental yields and deriving a much greater proportion of their return from capital gains could face a higher tax impost relative to their current situation.
In the short-term, domestic economic growth could be impacted negatively. Businesses will naturally be more uncertain, and there could be a lack of clarity around the tax regime as working groups play their part. This could weigh on some of the domestically focused stocks.
A potential clampdown on migration would also have an impact on some sectors, including those in many regional centres and those in the agricultural and horticultural space. The potential for charges for the commercial use of water could also create some uncertainty for the farming sector, although this would probably be limited to those regions when irrigation is relied upon, such as parts of Canterbury.
A Labour government would likely provide further support to lower income groups, including beneficiaries and students. These segments tend to spend a much greater proportion of their income, as opposed to wealthier segments who are more likely to save any increases in their income. This could boost consumer spending slightly, and provide support for some companies exposed to this thematic.
With the election race looking very tight, we should be thinking about all these issues, although we don’t see the need for investors to panic. The economy is in good shape, as is the corporate sector (which the recent reporting season largely proved).
There could still be more twists and turns in this election campaign, and we should still remember that neither major party is in a position to govern alone. That means coalitions, which will likely see some concessions inevitably being made. Some of the policy changes we are hearing about may be watered down, delayed, or side-lined completely. For example, Winston Peters (who still looks to hold the balance of power under most scenarios) is strongly opposed to a CGT, and would be unlikely to support one.
We have long argued this election would be much closer than was generally expected, and that is playing out in recent developments. We should expect a little uncertainty to weigh on the market until there is clarity over exactly what shape our next government will take.