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Market review: Roll out the (pork) barrel...

By Anthony Quirk

Friday 9th September 2005

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Election Day Draws Near!
As election day draws nearer it is worth reflecting on possible outcomes and market impacts from various election night scenarios. Post-budget in May this year we had the rather strange sight of a very fiscally conservative Labour Party Finance Minister, contrasting with a more free spending National Party.

My, how times have changed from previous decades when the roles were often reversed! Dr Cullen deserves praise for being a fiscally frugal Finance Minister. He has been a wonderful foil to Helen Clark, much like Roger Douglas was to David Lange over 1984-87.

Dr Cullen now appears to have been swamped by the desire of the wider party to be re-elected. Unfortunately, I am old enough to remember the “dancing Cossack” election of 1975, where National made some spending promises in Superannuation that saddled New Zealand with higher debt levels than was necessary or desirable.

I wonder if Labour's current promises could also lead to undesirable fiscal and economic outcomes, due to the student loan concessions and the welfare-type payments to middle New Zealand. National has not been immune from what appears to be pork barrel politics, although its tax cuts appear more economically sound, whatever your view on the social policy preference of targeting versus tax cuts.

As an aside, New Zealand is very fortunate to have such high calibre Finance representatives from the two major parties in Dr Cullen and John Key. For a small country we are very well off in this area.

Market Discipline to ensure Policy Direction remains Orthodox
A key principle to stress up front is that the transparency of Government reporting on fiscal policy, an independent Central Bank and the discipline of markets means rogue or “flaky” policies are unlikely to be implemented. At the first sight of unorthodox economic policies overseas investors would demand a higher interest rate to invest here. Under even the strangest coalition outcome no party wants to preside over the significant increase in interest rates (and therefore mortgage rates) that would result from an increase in our country’s risk premium.

This is a great hand brake on left-field policies – witness Jim Anderton's relatively restrained policy positioning now he has been part of a Government. So expect relatively mainstream policies, under even a seemingly unstable coalition scenario. Thus investors should not panic and sell out if the election throws up significant uncertainty. If they do, this does provide a buying opportunity for the longer term investor.

Possible Scenarios
Let’s consider some possible scenarios. Obviously a key issue is whether Labour or National gets sufficient votes to effectively govern alone or with support from United Future (and also Progressive for Labour). The markets would be comfortable with such an outcome as it would be very much “business as usual”.

Another interesting aspect will be whether or not NZ First and the Greens get over the 5% threshold. If the Greens do get over 5% then a Labour/Greens coalition would be viewed as a slight negative by the markets as there would undoubtedly be policy slippage at the margin. For example, moves to make the Resource Management Act more business friendly (which is currently holding up much needed infrastructure spend) could be stifled.

If the Greens don’t get over 5% this would leave Labour or National probably having to deal with NZ First or acting as a minority Government that might just survive a three year term.

National could cobble together a rather makeshift NZ First/United Future combination (particularly if the Greens don’t get over 5%) but in some ways that could be worse for the markets than a clear Labour victory as this would be a volatile mix. More likely than this, is National trying to govern as a minority Government if they get sufficient votes.

Watch out if the Greens and/or NZ First don’t make it to 5%! With the recent polls, there is a chance of this occurring as some Greens voters may now move to Labour to shore it up and thus the Greens could slip below 5%. NZ First could also get less than 5% with Winston Peters not certain of winning his seat. In this case, the chances of a majority Government increase greatly but some strange coalition scenarios are also possible.

The wild card in all this is the Maori Party, who could be a significant party in Parliament (if the NZ First and Greens vote collapses in the run in to election day). And yet no-one appears to want to deal with them! Labour may well get into bed with the Maori Party and this would be the worst case scenario for the markets as this combination is untried, untested and potentially volatile.

Whatever the result, it is clear that there will be a fiscal expansion, which will boost a flagging New Zealand economy but does increase the risk of interest rate rises from a rather hawkish Central Bank Governor.

Savings & Investment Policy
Looking at savings, whatever your view on the merits of their policies Labour have been prepared to proactively move in this area. In contrast National appears likely to “kick for touch” in terms of any significant private superannuation policy initiatives in their first term.

The most interesting aspect of the election outcome in this area might be whether Labour has to work with NZ First to get Kiwi Saver legislated as it could easily be turned into the individualised compulsory scheme that Winston Peters would love to see implemented.

Conclusion
So it shapes up as being a fascinating race for the Treasury benches with the markets keenest on a majority Labour or National Government but also able (in the longer term at least) to deal with most coalition scenarios election night might hoist upon us.

To see how the numbers stacked up for various markets around the world in the past month and over the year, visit our Monthly Market Review here

Anthony Quirk is the managing director of Tyndall Investment Management New Zealand Limited (Tyndall).



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