Brian Gaynor: Election could prove history wrong

If the opinion polls are accurate, this Government will be the first to bere-elected in 30 years after a sharemarket decline during its term.

The market is usually a good barometer of economic and business confidence, and the 1972-75 and 1984-90 Labour Governments and the 1990-99 National Government all suffered defeats after negative sharemarket performances.

But Helen Clark's Government has a number of factors in its favour. The NZSE-40 Capital Index is down just 1 per cent since the November 1999 general election and could be in positive territory by election day.

International markets have been very shaky during her tenure, with the Dow Jones Industrial Average off 14 per cent and the Nasdaq down a huge 57 per cent but, more important, the NZSE-40 Index has risen 3 per cent since the beginning of the year while most international markets have struggled.

There is a feeling of stability and cautious optimism in the business community, whereas many previous Administrations went to the polls when the outlook was far less certain.

The last two Labour Governments experienced the full range of boom and bust conditions. The NZSE-40 Index (then called the Barclays Index) rose 30 per cent during the first 19 months of the 1972-75 Government but went into a tailspin as the oil price crisis deepened.

The 1984-90 Government was re-elected on August 15, 1987, just 34 days before the NZSE-40 Index peaked at 3969. If the election had been held on the traditional November date, there might have been a different result because the market was in meltdown by then with the Lange-Douglas partnership showing early signs of disintegrating.

The sharemarket, which normally reflects the performance and confidence of the business sector, also failed to fire during the third term of the 1990-99 National Government. The Shipley Administration suffered as a result, particularly as overseas economies and markets were booming.

The only occasion when election results were totally out of line with the sharemarket was in 1984, when David Lange thumped Rob Muldoon. The NZSE-40 Index surged 117 per cent in 1983 but ran out of steam in 1984. Between January 27 and July 13 - the day before the election - the NZSE-40 Index fell 5 per cent.

The business community turned its back on National because of all the rules and regulations Muldoon brought in.

One would expect investors to be nervous before an election but, on historical evidence, this is not so.

There are just six weeks to the July 27 election, and before the past ten elections the NZSE-40 Index has risen eight times and fallen only twice during this period. In 1978 the index declined just 1.7 per cent and in 1990 by 8.4 per cent, mainly because the Bank of New Zealand was in serious trouble and there were concerns over the stability of the financial sector.

The market has generally performed well in the six weeks before the re-election of an existing Government. This suggests that the market could run into positive territory before Helen Clark's first term is completed, although there will not be a repeat of the 20.2 per cent rise in the six weeks before the 1987 election.

The economy is unlikely to be a major issue during the campaign, with the possible exception of tax and the Reserve Bank's influence on the rapidly appreciating dollar.

Real gross domestic product grew by 3.1 per cent in the year to March, and the Institute of Economic Research is forecasting 2.4 per cent in the present year and 3.1 per cent in 2003-04. These figures are steady, if not spectacular, and are high enough to keep the economy off the main agenda in pre-election debates.

Finance Minister Michael Cullen made it clear in Auckland this week that Labour would not be proposing tax cuts.

He argued that there was no quick fix to New Zealand's long-term economic decline and his vision, as reflected in Budget 2002, was a solid underpinning of good fiscal management, quality expenditure on social services and a series of targeted investments aimed at changing those economic fundamentals over time.

The rapidly appreciating dollar and the appointment of a new Reserve Bank governor could be election issues, particularly as the previous governor is standing as a National Party list candidate.

There is no doubt that the strong dollar during the mid 1990s had a negative impact on the economy and sharemarket and contributed to the National Government's election defeat in 1999.

Although the trade weighted index (TWI) has risen just 3 per cent since the last election, it has been extremely volatile in this period, falling by just over 13 per cent between November 1999 and last September, but climbing 19 per cent since then.

A volatile and appreciating dollar puts huge pressure on the export sector and it could lead to another blowout in the balance of payments deficit. The Government will have toensure that the next Reserve Bankgovernor does not take a fanatical approach towards the bank's inflation targets.

The outlook for the sharemarket is encouraging. More individual-friendly securities regulations, particularly the Takeovers Code, are beginning to attract investors back to the market. Many are realising that high-yield property bonds are extremely risky and the sharemarket offers more secure returns.

The mood at company meetings is positive, with most reporting favourable trading conditions, and, based on economic forecasts, these trends should continue. A number of small to medium-sized companies including CDL Hotels, Designer Textiles, Force Corporation, Otter Gold and Pacific Retail have risen by more than 30 per cent since the beginning of the year.

Fletcher Building surprised the market on Tuesday by upgrading its earnings outlook for the June year.

Chief executive Ralph Waters said that the improved outlook was due to an improved underlying performance in most operations supplemented by recent favourable trading conditions.

This bodes well for other building and construction-related companies.

The only concern is that the market will be adversely affected by a corporate disaster - that another Air New Zealand is waiting in thewings. There is no obvious one on the horizon, but the Central North Island Forest Partnership receivership saga isdenting investor confidence.

A logical joint bid by Fletcher Challenge Forests and Hancock Timber Resources Group of Boston has been abandoned and replaced by a proposal involving Fletcher Forests, Citic of China and Rubicon.

The latest deal makes far less sense for Fletcher Forests' shareholders, and there are signs that Rubicon is having the same negative influence over Fletcher Forests as Brierley Investments had on Air New Zealand. The New Zealand sharemarket can do without this type of development.

An analysis of the NZSE-40 Index in the three, six and 12-month periods after a general election does not give any clear indication of the sharemarket's performance after July 27 although, in general, the market rises rather than falls after polling day. The big exceptions were after the 1987 election, when the market crashed, and at the beginning of Muldoon's second term.

The last three parliamentary terms have been lean pickings for New Zealand investors with the NZSE-40 Index down 3 per cent since the November 1993 election.

But the outlook is much brighter and there are several positive features indicating that the market's performance during the next parliamentary term should be more similar to the first term of the 1990-99 National Governments than the last three.

* bgaynor@xtra.co.nz

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