Paul Richardson CIO – 20th November 2017
With the new NZ Government now finally formed and with some clarity emerging on the all-important policies, we can narrow down the investment implications. The widespread view is that markets will carry on and will not be affected by politics, but this is not true all of the time - and especially not in periods of major policy change:
Industries and companies will have to adjust to new settings, initiatives, directives and constraints of any change in Government.
With this new coalition believing it has a "change" mandate, as investors we have to trim the sails to the wind and the waves we face (to use an appropriate America's Cup metaphor).
Any coalition Government - and the Western world currently counts many - will result in a mish mash of negotiated policies. The position statements made during the election campaign have to be taken with a grain of salt. Not all policies will be able to be executed in the first year of the new regime or maybe not even in a first term, so a long 'tail' of policy is likely.
As far as potential impacts or benefits to our investment portfolios go, it is becoming clear that the Labour led coalition is pursuing policies that can be grouped in four main areas.
Of course, these policies have been shaped by the necessity to gain the NZ First support, along with keeping the Greens satisfied.
- Low wage economy: the announcement of higher minimum wages were virtually the first cab off the rank. The likelihood of support for collective bargaining is also a high probability.
- House building and pricing: a NZ First focus on tighter immigration to stem demand, coupled with fiscal support for regional construction in an attempt to increase housing supply.
- Agri/water/green: the Greens "water tax" is dead thanks to NZ First's Peters but the array of environmental policies that are likely to emerge will place pressure on the primary sector, along with foreigner purchaser restrictions. Along with this there has been the rhetoric on re-nationalisation of assets which has been directed towards the electricity generation companies
- Financial direction: a hobbyhorse of NZ First has been a desire for the Reserve Bank of New Zealand to widen its scope from just monetary stability to the promotion of growth. Labour has agreed to a review of the targets. Whether this results in an alteration of the policy targets agreement, to focus on employment (hardly a demanding task given we are currently at record low unemployment!) is uncertain but the pressure is certainly on.
In addition, there is an inevitable effect on the NZ currency markets due to the combination of:
1/ the "shock" swing away from incumbent National which was the largest polling party on election night, to a leftist/populist coalition under MMP,
2/ and in reaction to comments made by the new Deputy Prime Minster not to blame the government for lower growth.
For us, the risk of a lower NZD is a major factor in assessing investment strategies.
Stocks and sectors with exposure to the swathe of policy moves and the weaker currency include:
- The retailers and retirement operators with relatively low wage workforces,
- Those with immigration reliance such as housing developers, and industries with skills shortages,
- Electricity generators and primary stocks with water usage,
- Cyclicals with a broad exposure to NZ growth.
Beneficiaries may include:
- Exporters (due the weaker currency),
- Those with large R&D spend (increased tax breaks on R&D), as well as those benefitting from NZ First’s Auckland Port move proposal.
Mint has spent some time in the run up to the election considering the risks and possible scenarios.
The Mint Trans-Tasman Equity portfolio settings were adjusted in order to reflect the risk of a Labour/NZ First/Greens outcome.
As a consequence, the fund has a relatively low exposure to policy risks in key sector thematics: the Electricity Generators, Retirement and Domestic Cyclicals /Consumer businesses and a relatively high exposure to policy beneficiaries: Exporters, Offshore earnings and R&D stocks.
This of course is somewhat broad-brush but we can report that this strategy has played out reasonably well. Fund performances through August to October have been positive, with the retail equity fund performing well during this period.
A higher-level question may be how stable is the NZ Government now?
A decade of reasonable stability under a National led coalition on the Treasury benches may be over. The first days of the Labour led coalition saw it struggling to get its numbers in the House and mixed messages being sent as it strives to push through its “first 100 days” policies. Trade, foreign policy and international relations are straight onto the front of the agenda with the backdrop of the contentious TPP agreement and geopolitical tensions.
The decade of NZ presenting a more stable picture of its economic management to foreign investors – versus say, the ongoing turmoil in the Australian government – may well be over and this may affect the asset allocation of foreign investors, as will relative changes in economic performance of NZ versus other investment destinations: time will tell.
Furthermore, with the NZ equity market having over 50% ownership by offshore investors, this is an important issue to deal with in the long run.