INSIGHTS

MARKET SUMMARY: 25 TO 29 SEPTEMBER

Research Team, 29 September 2017

The New Zealand market had a slow but positive start to the week as uncertainty following the election lingered. At the moment, we do not have a winner from the election with neither the National Party nor the Labour Greens bloc getting enough seats to govern alone. As was widely predicted Winston Peters has become the King or Queen maker and in true Winston style, he will not be rushed. At his press conference during the week, Winston Peters made it clear that he would not make a decision until after the special votes are counted, which is expected to be completed by October 7.

So how are we placed following Election Day, with special votes still to be counted? The National Party earned 58 seats with 46.0% or the vote, while the Labour Party, with 35.8% of the vote gathered 45 seats. New Zealand First earned 9 seats although Winston Peters lost his electoral seat in Northland. The Green Party also missed out on an electorate seat but got 5.9% of the vote, above the threshold to remain in parliament. David Seymour held on to his electorate seat but the Act Party only managed to get 0.5% of the vote. The Maori Party failed to get an electoral seat and, with only 1.1% of the vote, will not be involved in the formation of this government. United Future also missed out on their regular seat following Peter Dunne’s departure, while the Opportunities Party managed to get 2.2% of the vote, not enough to get into parliament but not a bad first election result.

Based on the above, there are two likely scenarios. There are a number of other possibilities, however, they are all highly unlikely. The first probable scenario is that Winston will side with National, giving the coalition a clear majority. This would be the most market friendly outcome, and we would likely see the New Zealand dollar rise and a bump higher in the local bourse.

The second scenario is that New Zealand First teams up with Labour and the Greens forming a coalition with 61 seats, although this could increase when specials are counted. This would be a little less market friendly and could see some short-term weakness in both the equity market and the dollar, due to policy uncertainty. However, in the long-run, a material decline in our economic position is unlikely with financial markets putting more weight on the strength of the economy as opposed to a political change in Wellington.

There has been plenty of other data to keep investors interested this week, including a busy corporate schedule. Fonterra’s full year result was largely in line with expectations and was taken positively by the market. Importantly, the company reiterated the current forecast for the farmgate milk price of $6.75 per kilo of milk solids. Kathmandu’s result was also received well and saw the share price rally. Importantly for Kathmandu, it bucked the recent retail trend and gave a positive outlook for the coming year.

The Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged again this month at 1.75%, as it has been since November last year. This was the first meeting with acting RBNZ Governor Grant Spencer. The rhetoric was largely unchanged from the previous meeting with the central bank stating that economic growth has continued to improve with GDP for quarter two in line with expectations. It acknowledged that risks remain with the global economy and monetary policy will remain accommodative for a considerable time.

Globally, there has been further iterations of the war of words between Donald Trump and North Korean Leader Kim Jong Un as both volatile leaders continue to trade threats. Also in the US, Janet Yellen, Federal Reserve Chair, reaffirmed the Fed’s current stance and that interest rates will continue to rise steadily. The share market received a boost later in the week as Republican leaders began tax reform discussions that could significantly lower taxes for individuals and companies.

Heading to Europe, there has been some uncertainty following the German election. Although, Angela Merkel’s Christian Democratic Union party was elected for a fourth term, however they received less votes than expected. Surprisingly, the far right AfD party received 13% of the vote and gained seats in Parliament for the first time. This caused some uncertainty in the region and saw the euro drop.