New Zealand’s next general election is fast approaching. Many assume our financial markets will take a hit in the lead-up to Saturday, October 14, but history suggests that may not be the case.
How is 2023 shaping up?
Labour had a decisive victory in the 2020 election, getting 65 of the 120 seats in Parliament, but the battle ahead is much tougher for the party. High inflation is clearly an issue for the government. As were several policies, many of which have subsequently been axed or delayed by the new prime minister, Chris Hipkins.
The election season will see further policies announced by all sides. Furthermore, negotiations with support parties inevitably mean some policies may end up being cut or altered to get the support needed to govern.
Labour and National both know the economy, health and housing are key. As such, each major party offers policies aiming to tackle these issues.
Labour is also focusing much of its pre-election policies on child poverty, climate change and working in partnership with Māori. On the other hand, National is focusing on building infrastructure, law and order and other more niche matters such as harnessing biotech, the welfare system, and agriculture.
Looking at the policies from both parties there is a clear drive for electrification of the New Zealand economy supplied from renewable sources. This will be welcomed by electricity generators and electricity distributors alike, and will likely have a positive impact on listed companies operating in this space.
Additionally, the focus on housing and building infrastructure is positive for the building materials and construction companies listed on the NZX.
Election’s impact on NZ financial markets
At any point in time there are typically multiple factors impacting New Zealand’s financial markets. Generally, elections pass with limited impact on them, but very occasionally there is an exception. The final election held under the first-past-the-post electoral system in 1993 resulted in a hung parliament with the Alliance and New Zealand First parties holding the balance of power. This uncertainty caused significant financial market volatility, particularly on the Monday following the election.
This was resolved when the Waitaki electorate swung from Labour to National, giving National a one-seat majority. Financial markets quickly returned to normal.
As short-term interest rates are driven by the Reserve Bank of New Zealand’s monetary policy settings, they are highly unlikely to be influenced by elections. Examining long-term interest rates, we observe a multi-decade decline in New Zealand and elsewhere.
Consequently, when examining long-term interest rates we see that they generally fell both before and after the past 10 general elections. This is not a surprise given the significant impact of global long-term interest rates on New Zealand’s long-term interest rates.
What may be impacted is the New Zealand dollar. Examining changes in the value of our dollar over the past 10 elections suggests modest New Zealand dollar weakness leading up to the election, typically due to uncertainty around who will form the government, and then strength once the uncertainty dissipates.
A closer look at the data shows the massive effect specific events, such as the global financial crisis around the time of the 2008 election, and easing monetary policy in 2015 after the 2014 election had on the New Zealand dollar. This completely overshadowed any election impact.
Average change in the NZD/USD in the months before and after the last 10 elections
In examining the impact of New Zealand elections, we’ve looked at each election since 1993 and compared the performance of the New Zealand equity market with that of our closest neighbour, Australia, and the world’s largest equity market, the United States.
For many of the years shown there is a significant difference in performance between the best and worst of those three equity markets. We observe that in the period ahead of an election the New Zealand equity market only underperformed three times, 2005, 2011, and 2020. Meanwhile, it outperformed five times and was in line or middle of the pack two times.
While the small number of data points mean it’s important not to read too much into this, it suggests that in the lead-up to the polls, elections are neutral-to-positive for New Zealand equity markets.
The impact in the three months post-election only shows one period of underperformance in 1999. Of the rest, three show outperformance while six show inline or middle of the pack performance. In this case the indication is the immediate post-election period is typically neutral for New Zealand equities.
In conclusion, we expect the upcoming election to have limited impact on long-term interest rates and effectively no impact on short-term interest rates. However, there is some evidence that in the run up to an election the New Zealand dollar weakens due to election uncertainty, but it quickly recovers post-election.For the New Zealand equity market, the history available suggests elections are neutral on equity market performance after an election and are neutral to potentially positive ahead of an election.
More important for New Zealand equities are the political party policies that have an impact on particular industries listed on the local stock exchange. Only time will tell what policies will have such effect this year.
John Norling is Head of Wealth Research at Jarden. The information and commentary in this article are provided for general information purposes only. It reflects views and research available at the time of publication, using external sources, systems and other data and information we believe to be accurate, complete and reliable at the time of preparation. We make no representation or warranty as to the accuracy, correctness and completeness of that information, and will not be liable or responsible for any error or omission. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Securities Limited is an NZX Firm. A financial advice provider disclosure statement is available free of charge at https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement