Investors are edgy, but it’s the long-term that counts: Milford
The election build-up and the eventual result will have a dampening effect on investments, right? Well, yes and no – there are far bigger forces than the election that will impact investors in the long term.
The state of the New Zealand economy and which way it’s heading — into recession or recovery — is a hot topic as the election approaches. But, despite the prospect of a change of government often affecting movements on the New Zealand share market, other forces will probably have more sway on investors.
Milford Portfolio Manager Mark Riggall says it is uncertainty which makes investors nervous — something an upcoming election often generates.
“If you’re an investor, you want to know what the political situation is, what the policies are, what the regulatory framework will look like, so you can make decisions,” Riggall says. “If there is uncertainty around that framework, investors don’t like it. They will want a higher return, i.e., a lower starting price to invest at, and we see that impact prior to the election.”
Riggall says equity investors currently seem to be less fearful around which parties might take office after October 14 and more concerned about the possibility of a protracted period of coalition negotiation post-election. “Business decisions will be put on ice as a result; investors won’t like that.”
However, he notes this year New Zealand is approaching the election with a greater degree of certainty than in some previous years. Both the major parties have clearly signalled their intentions in some areas — both offering tax relief, for example — and there are no significant policies offered by either National or Labour likely to dramatically change the economic direction of the country.
“Some of the policies are very precise — for example, both Labour and National have said they plan to remove the tax depreciation for commercial property. That’s removed uncertainty around it — we know it’s likely to happen either way. So we know that in the property sector that will have some negative impact as a result,” Riggall says.
“But for some policies, we don’t know what changes they might lead to – for example, any detailed legislation that may impact certain industries. But at this stage we don’t know the likelihood of those sorts of policies being enacted.”
Recent analysis has shown that, since 1957, the New Zealand share market has produced positive capital returns of an average of 1.5 per cent in the three months after a National-led government won an election. Labour-led governments coming to power has seen capital returns in the following three months averaging a drop of 3.3 per cent.
Average capital returns over the full term of each government have also been higher under National than Labour. But Riggall says these statistics need to be taken in context.
“You’ve got to be a bit careful with the historical data, because Labour has been unlucky with the periods they have been in power, including the 1987 share market crash, the end of the dotcom boom in the early 2000′s and the start of the GFC in 2008. You can’t, therefore, attribute all the market’s performance to what party was leading the government locally” Riggall says.
“There is evidence, however, that shows that businesses generally prefer it when there’s a National-led government. That’s not unique to New Zealand — we see exactly the same thing in the US, where businesses prefer right-leaning, Republican governments.”
Riggall says the vast majority of our asset prices are driven by international factors and influences beyond what a change in government here in New Zealand would affect: “These factors are there irrespective of who’s in power in New Zealand. The fact we have raised interest rates, and what has happened to the economy as a result, is a bigger factor than who will lead the next government.
“The release of the PREFU highlighted the issues the country is facing — no matter who gets into power, they’re going to face a tough challenge.
“There’s not a lot of room to increase spending or pursue pet projects, especially when there are lots of commitments such as the need for infrastructure spending.”
Riggall says the New Zealand share market has been going through “a long period of tougher times compared to what it enjoyed pre-Covid”. In the last three years the market has pretty much gone nowhere.
“It means it’s not a political issue and, post-election, there is unlikely to be a wholesale change. There are lots of issues, not least high inflation, rising interest rates, and low demand in the economy. There are also other international factors at play, and we see exporters like a2 Milk struggling with low growth in the Chinese market. There are lots of other factors beyond the election impacting the share market.”
Riggall says while elections always gather a lot of media attention and a potential change of government is a hot topic right now, investors need to focus on bigger factors and the longer term.
“Investors know that there will probably be some short-term moves in share markets, or they could be long-term, depending on the detail of policies. They need to be focused more on the bigger factors.”
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This article does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Past performance is not a reliable indicator of future performance. Investment involves risk and returns can be negative as well as positive. Milford Funds Limited is the issuer of the Milford KiwiSaver Plan and Milford Investment Funds. Please read the relevant Milford Product Disclosure Statement at milfordasset.com. Before investing you may wish to seek financial advice. For more information about our financial advice services please visit milfordasset.com/getting-advice.
