What does a tight election race mean for markets?

There’s just ten weeks until the New Zealand election, and things are getting interesting.

The rise of the Opportunity Party in the polls has added another layer of uncertainty to the range of potential outcomes.

So much so that prediction markets and some Australian bookmakers now have Labour as the favourite to lead the next government.

Opportunity has pushed above five per cent in six of the last nine political polls, hitting eight per cent in two of them.

If it can clear the five per cent threshold, this would have major ramifications for the election outcome.

The current coalition parties are tracking at a combined 48 per cent of the party vote, ahead of Labour, the Greens and Te Pati Maori on about 42 per cent.

That gives National and friends the clear edge, but things change if you believe Opportunity will get there.

Despite the fact it’s stealing some votes from Labour, when you add its recent polling to the three parties on the left the combined group jumps to almost 50 per cent.

It’s not quite as simple as adding up the party votes, especially if there’s an overhang created by electorate seat wins.

However, this is shaping up as a much closer race than some expected.

There’s no guarantee Opportunity would partner with Labour, of course.

It pitches itself as a centrist party, after all, and says it can work with anyone across the political spectrum.

However, many of its policies are to the left of Labour and a world away from where Act and New Zealand First are comfortable.

Consider things like a universal basic income, free public transport and extending the age of youth justice.

Its proposed 1.75 per cent land tax will spook a lot of New Zealanders too, but Labour is unlikely to entertain that.

Labour would still be by far the largest party in a potential left bloc, and it would prefer its targeted capital gains tax on investment property.

Caution and uncertainty are normal in the lead-up to an election.

Looking back at the 12 elections since 1990, New Zealand shares are typically subdued in the months before polling day.

Markets like to know where they stand and the post-election period is usually better, regardless of the outcome.

In the six months following the election, the sharemarket has gained 3.7 per cent on average, and been higher more than 80 per cent of the time.

When National has won, the average gain is a slightly stronger 4.9 per cent.

The average 12-month return after an election outcome is 9.3 per cent, and the 1999 election was the only one followed by a sharemarket decline.

That coincided with the bursting of the dotcom bubble in the US in 2000, so it would be unfair to blame the incoming Helen Clark regime.

The seven National victories have seen an average 12-month gain of 11.7 per cent in their wake, while winning Labour governments have presided over a more modest average of 5.8 per cent.

The New Zealand dollar has also shown signs of pre-election caution in the past, with the currency often a little softer as polling day approaches.

The moves in interest rates have been interesting.

On average, the wholesale two-year swap rate has declined after a National victory, while increasing when Labour has come away victorious.

Higher interest rates can reflect increasing inflation concerns and expectations of higher spending, but also stronger economic growth, so you can choose how you want to interpret that.

None of this necessarily tells us anything about the credentials or ability of previous governments.

Every election comes with its own unique backdrop, bringing different challenges and opportunities, and 2026 is no different.

What we can say with more clarity is that a cloud of uncertainty does hang over us as an election approaches.

When the dust settles and we know where we stand, markets tend to shake it off and push higher.

Buckle up. This is going to be a fascinating ten weeks.

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