by Mark Fowler
As the political landscape has become less certain in the past month, I've been reflecting on what the election could mean for New Zealand markets.
Initially, my sense was that any local financial market reaction would be muted, despite significant shifts in the polls indicating a potential change of Government could be on the cards.
While a Labour-led Government may tend to be more fiscally liberal than a National-led Government (relative to global alternatives), the New Zealand economy is still likely to be considered comparatively low-risk regardless of the balance of power.
Similarly, our two major parties have a shared commitment to the Reserve Bank of New Zealand (RBNZ) having a flexible inflation targeting regime (1-3 per cent target), with Labour making some noises about bringing RBNZ governance into line with overseas practices, but essentially at the margin.
However, on further investigation, my initial hypothesis doesn't quite stack up.
In fact, the research data clearly shows the New Zealand equity market has typically underperformed against the US and Australia in the three months following a leadership change.
In 1997, when Jenny Shipley led National to power, the NZX50 was down 5 per cent (S&P500 +12 per cent, ASX200 +6 per cent).
Similarly, the NZ equity market was down approximately 3 per cent when Helen Clark came into office in 1999, and 7 per cent lower for the three months after John Key took power in 2008.
The data, therefore, suggests a trend contrary to my original hunch.
Given the full pricing of the New Zealand equity market, it wouldn't be a stretch to expect both increased volatility and price discrepancy in markets later this year, if we do see a change in Government.
Potential tax changes have been a hot topic in the lead-up to this election and have the potential to impact listed property stocks - positively or negatively, depending on the outcome.
However, Labour has been very noncommittal on the subject of tax, and is now effectively kicking the issue of reforms further out until 2020.
Furthermore, when you consider that more than half our equity market is now foreign owned, there's no doubt international investors will be keeping a close eye on the outcome.
Without suggesting there will be a mass exodus of capital if we were to see a shift to a Labour-led Government, it's important to understand the dynamic and acknowledge that a stable Government makes our country an attractive place to invest.
I subscribe to long-term investing and see domestic political "noise" as a short term driver which could potentially provide an opportunity if we were to see some kind of pullback.
Markets have been very stable throughout arguably larger political events, but if Jacinda Ardern and Labour prevail tonight, we could possibly expect a bumpier ride.
Mark Fowler is head of the portfolio strategy group & fixed income at Hobson Wealth Partners. This article should not be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction.