Harbour Asset Management's Christian Hawkesby sees some scope for policy to be more adventurous over time under the new government

By Christian Hawkesby*

After a long period in opposition, we now have a Labour-led government in coalition with New Zealand First, and with support from the Green Party. The most significant initial market reaction has been a fall in the NZ dollar by around 2% and NZ share market by 1% on the open, as markets priced-in the possibly of a deterioration in business confidence and nervous overseas investors.

This Navigator set outs our initial take on the market implications. In a fast moving political situation, there are still many policy details yet to emerge. 

By global standards, the National Party and Labour Party are relatively centrist and mainstream. Both have a record and reputation for monetary stability, fiscal responsibility, and respect for the rule of law and role of markets. This is something that has provided confidence to investors, whichever party ended up leading the next New Zealand government. 

Now that a Labour-NZ First coalition has been formed, the key questions facing markets are how much of the ‘less-mainstream’ NZ First policy agenda will be implemented, and where have Labour and NZ First found common ground. At this very early stage, the key policy themes of the new government seem to be: 

 less net migration,
 restrictions on foreign buying of houses and land,
 increases in the minimum wage,
 the RBNZ with a dual inflation and employment mandate, and
 an increase in fiscal spending relative to a National-led government.

Some of the more controversial policies during the campaign – Labour’s water tax and NZ First’s policy for the RBNZ to target the exchange rate – appear to have been dropped or diluted through the negotiations. 

Clear implications

At a very high level, there are some relatively clear market implications from the Labour-NZ First coalition. The first is that on the margin we are likely to see more fiscal spending, more government debt, higher inflation and higher long-term interest rates. Particular sectors of the equity market may also suffer, such as higher wage costs affecting the retail sector, and weaker property prices potentially affecting the retirement village sector despite the demographic changes that support long-term demand. 

We will also be watching to see what impact migration policy has on the housing market, especially in Auckland, where migrant demand is the most tangible. Sentiment is likely to deteriorate initially, but the magnitude of any weakness is anyone’s guess. A more protracted correction is a possibility. 

While investors will make a connection to the exposure banks have to the property market, the macro-prudential measures put in place by the Reserve Bank certainly should make this sector much more resilient than might have been the case 10 years ago. 

Other impacts are potentially more ambiguous or are likely to differ through time. 

For example, GDP growth may slow in coming quarters, due to an initial fall in business confidence brought about by policy uncertainty under the new government. However, further into 2018 and 2019, GDP growth may be supported by a larger amount of fiscal stimulus than under National.

Similarly, we expect that NZ dollar to remain under pressure initially, as investors place a greater risk premium on investing in New Zealand in this new and uncertain environment. However, over a more medium to long-term horizon, we may see the NZ dollar supported by Labour-NZ First policies leading to higher inflation and wider interest rate differentials. 

Heading into the NZ election, our actively managed portfolios have been positioned with a number of views on relative valuations in mind. In particular, views that:

 the risks to the NZ dollar are to the downside,
 we favour globally orientated stocks over domestically-orientated stocks,
 short-term interest rates are anchored, with scope to fall further,
 long-term interest rates are prone to rise higher with global yields, and that
 inflation-indexed bonds provide cheap insurance against higher inflation. 

A fast moving political situation

In our opinion, the outcome of the NZ election negotiations reinforces these themes. We are in a fast moving political situation. There are still many policy details yet to emerge: some will appear quickly; others will evolve slowly after formal reviews and further negotiations. Prior to the election some had suggested a Labour/Greens/NZ First coalition would be a many-headed beast, incapable of clarity and cohesion. But with the Greens essentially providing supply and confidence, and with coalition negotiations focussed on policy, Winston Peters has given the coalition the best possible chance of overcoming the challenges of a three-party government. Early messages will stress compromise and shared views. 

Last night, one of Peter’s strongest statements was with regards to the failure of neoliberal economics to deliver to the broader population. Under Helen Clark’s leadership, Michael Cullen was a strong advocate for economic orthodoxy and fiscal prudence. While Grant Robertson is also relatively mainstream and set to have the finance portfolio, given the influence of Winston Peters we see some scope for policy to be more adventurous over time. 

We believe that the New Zealand political situation will need to continue being a key focus of investors in the months ahead.

*Christian Hawkesby is executive director of Harbour Asset Management.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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32 Comments

I just hope the export and particularly the rural sector appreciate how a lower exchange rate is a net gain for them despite a few import costs for equipment.
Maybe even some property speculators from abroad will take a bath.

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... I do hope those property speculators from abroad take a bath ... I'm sure they're laundering their dirty money through our open borders housing market ...

Time to clean up this scam !

... NZ houses for NZ residents & citizens , only !

All I can say -- Good Luck, New Zealand.

Thanks ! ... same to you , Mr x ...

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.. if our GDP growth depends so heavily upon the most massive increase in immigration since the first shabbily attired sea-sick Brits tumbled off the wooden boats and onto our shores 200 years ago ... then there's something seriously wrong with our underlying economy ...

Why isn't the GDP growing off increases in production , services , and exports earnings ?

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because its easier to make money buying and selling houses to one another than making a real good, plus you get tax free gains.

Yes indeed there is - there is no serious IP in NZ outside a handful of companies like FPH because of NZ tax laws. The laws mean most money in NZ is old money or 'spoonfed' money - which results in people without skills holding the resources & eventually losing it to the self made with the skills generally from offshore. The spoonfed don't learn the consequences of their decisions & misallocate resources as they dont understand risk.

Empirical evidence shows that 70k immigrants is equal to 3% GDP to NZ which makes sense as 1.75% NZ population setting up from scratch. So cut that to 35k & cut NZ gdp by 1.5%. Cut foreign ownership & cut the hot money too. The other reason NZ is about to face the music is because of global monetary policy. NZ are a risk on currency & the global QE tap is about to get turned off.

IF I HELD $NZD NOW - I WOULD BE SENDING OFFSHORE ASAP AS WHEN THE REST OF THE WORLD WORKS OUT NZ GDP IS GOING TO DIVE - THE NZD WILL PLUMMET. People fret about a 2% drop but I think it will be 20% on TWI within 12 months

I wish 3 years is not long enough to transform NZ into Venezuela... good luck to us!

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... if a small number of property speculators or off-shore foreign owners of Kiwi residential real estate take a financial bath on their investments , then I'll still manage to sleep soundly at night ... knowing that on the flip side , a vast multitude of young Kiwi workers , families , first home buyers , will finally be able to afford to buy the roof over their heads ...

Well it didnt happen after 9 years under HC, so I think its pretty un-likely...

Property speculators have taken their profit and gone.

as soon as Kiwi Dollar goes weaker, all imports
Such as PETROL/Diesel which farmers rely on, among many other components, will rise in price.
As soon as dollar goes weaker, Everything will cost kiwis more than before.
Devaluation only feeds inflation and reduces purchase power, especially to the poorer.

Go Jacinda+Winston+Greens, crash everything, we'll have to fix it from 2020 onwards.

... ye Gods ! ... and I used to think that Bernard " Chicken Little " Hickey was the arch hickeysterical gloomsteriser ...

Wow ! ... a star is born ... heee heeeee heeeeeeeeeee .... Want to buy a fall out shelter , beans , a rifle , and a tin-foil hat ?

I foresee a huge increase in Inflation, cost of goods (mostly food and petrol)
Interest rates will go up (we all knew this was coming)
Deficit will show up from 2019... debt will raise..unemployment will raise..
NZfirst... sucks

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The last Labour government, supported by NZ First, paid off debt. Something our recent National-led administration chose not to do, preferring instead to borrow more in order to hand out tax-cuts.

If you want to make predictions you'd do well to learn your history.

lol, last labour Gov did not have a GFC and two earthquakes to pay for ... you better start reading history a bit more seriously .. :) .. they are good at splashing cash around and this time they hit the jackpot and will still borrow money ...
NZ was on the brinks of recession in 2007 before the GFC and Labour was sleeping at the wheel ...

If National managed Christchurch so well, why did they switch from National to Labour at the election? It's almost as if National had a narrative saying how well they were doing, without actually doing anything.

It's even more than almost.

E.L. Addio - you do appreciate that the last Labour Govt was in power during a global boom period which by the end of it, and just before the GFC, they had us near recession. A monkey could have made surpluses and paid down debt in that period - the one's who didn't were the general public under Labour that went berserk and increased their debt to income from 100% to 160% (170% now). This one will be a much better test, and one that Peter's and Adern are already making excuses for - Prime Ministers and Deputy PMs are mean't to talk up the economy, not talk it down and through negatively make it self fulfilling - they have to realise that they are now the ones responsible going forward and their time for blaming others is now past. The country now relies upon them, they wanted it, and they've now got it.

> A monkey could have made surpluses and paid down debt in that period

But a monkey wouldn't throw apostrophes around with such gay abandon.

And that is exactly what some politically blinded people refuse to see until it hits them hard in the face and pocket - people believe that Labour will make them better off and scramble away some crumbs to make them look better .. well good luck , take note of the cost of living today ( include all your outgoings) and revisit that every quarter , see if you are better off? ....
Yes, lower $$ is good for export, but we import more to either live on or help us grow things and that is added cost that some like to ignore...

Labour will make me worse off actually, hopefully I'll have higher taxes, I'm also hoping that will be mitigated by cheaper housing. I'm hoping those whose only money making scheme is buying houses, will be forced to take a bath, where those of us who actually have productive skills will be able to buy a home, so our skills are retained.

Dont forget lower immigration and no foreign buyer's.

Some say we cannot have an economy relying on selling houses to each other ... agreed, but that money is eventually coming from somewhere, properties do not and can not appreciate in poor countries no matter how frequently you buy and sell, in fact they decline as there is not enough money going around ... At the end of the day Who cares how GDP is calculated ... One thing is sure, if there is access money and wealth ( weather cash or borrowed) then there is appreciation and a well oiled economy.
BTW, liking debt is a matter of affordability and taste, not a political opinion - no one loans money without guarantees of paying it back !

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You realise they can and are "printing" infinite amounts of money and they cant seem to find inflation anywhere. So why arent we all billionaires?

Or are you missing something... Is it that wealth isnt money at all.

You clearly are not aware how Ponzi's work, nor pyramid scams, nor bubbles. Google them.

properties do not and can not appreciate in poor countries no matter how frequently you buy and sell, in fact they decline as there is not enough money going around

Nonsense. Land in central Hanoi is more expensive than Ginza.

http://dtinews.vn/en/news/018/37564/land-in-hanoi-old-quarter-over-vnd1-...

Inflation will rise but maybe a tax on cannabis users may help but the damage on recreational use will cost the health system more
How long will it take James Shaw to upset people as he's acting as the Prime minister elect .
James cant keep his trap shut
Peters will upset someone in his first couple of years, new election with high inflation , the country almost will liquidated due to high spending promises

We have removed some comments on this thread, the ones that are just cheap, pointless insults. Please contribute to the conversation in a civil way. Partisan epithets not needed.

you voted national

A glorious day to wake up and discover we have taken our country back!

If the blip in the economy comes as predicted by Mr Peters,The piggy bank will be empty , we will have print MORE money lots more inflation, lots more people out of jobs ,and rusty rivers, MORE TAXES , less jobs