Indecision the election's biggest threat to markets

Arthur Lim

Economists and market pundits say the only election outcome likely to have a serious impact on the markets and affect your investments is an indecisive one.

Our largest investors certainly don't see much effect on the sharemarket from either a Labour or National win.

"We don't expect much market impact associated with the election," says Tore Hayward, chief investment officer of AMP Capital Investors. "We don't have the preconditions for a major market reaction.

"To put that in perspective, markets are most likely to respond to elections when there's a really marked difference in policy one way or the other and I think viewed from an international perspective we're not looking at that kind of historic difference here."

Hayward points out the most recent elections that were followed by significant market movements were during the eighties and early nineties - periods characterised by bitter ideological wars and radical economic reforms. "That's an awfully long time ago now."

Since then elections have largely been accompanied by muted market responses. "I think that's the relevant period of our history," says Hayward.

"I think we're pretty representative of most investors who when we look hard at the election, we don't see that it's likely to be much of a driver of the markets, certainly not compared with the other kind of things that will move markets, for example movements in international markets and significant pieces of economic data and news."

Ralph Stewart, chief executive of Axa NZ, says the tone of market noise around election time is set by prevailing conditions.

"Since 1990, the data suggest that by and large, markets are worried about other things.

"I would argue that since 1990, in four of five elections the market trend has continued post-election regardless of the outcome."

Figures prepared by Stewart show the sharemarket's benchmark index was falling in the three months leading up to the 1990 election and continued to fall in the three months after National's victory at a slightly faster rate. Leading up to National's 1993 re-election the market was rising fairly strongly and continued to rise at a slower rate afterwards - albeit after a brief period of uncertainty because of the inconclusive result.

In 1996 the market was somewhat flat - small pre-election gains were matched afterwards, with the market largely taking in its stride Winston Peters' vacillation over which party he would form a coalition with.

In 1999 when Labour assumed power a market decline in the three months leading up to the election continued afterwards. Only in 2002 were strong pre-election gains followed by losses afterwards.

Macquarie Equities investment director Arthur Lim said the market's decline after Labour's 2002 re-election should be seen in the wider context of the vulnerability of the global economy through the fallout from the Asian financial crisis, the dotcom crash and the looming US invasion of Iraq.

Since 2002, however, our sharemarket has enjoyed spectacular gains. More recently the sharemarket's headline index has risen about 12 per cent in the last three months, though much of that has been ground it regained after a two-month "correction" beginning in March.

Much of the market's most recent gains have been largely down to an injection of cash resulting from a flurry of corporate activity - in spite of signs of a slowing economy.

Axa's Stuart believes the market is now more concerned about the impact on growth from rising oil prices, whether our leading stocks are realistically priced and the low current level of net migration. He characterises the prevailing mood as one of "positive caution".

"Arguably the trend would be the same post-election. If I was taking a punt on it, it could be similar to 1993 where there was a relatively large rise before the election which there has been recently, and a considerably slower continuation of the same post-election."

Lim believes the sharemarket has already begun digesting the main parties' policies, having found little to fear. "There doesn't appear to be anything in the economic agenda that they are pushing that's likely to have a very disruptive impact," he said.

"If anything, National's tax cuts and Labour's relief policies for families and students are likely to result in some stimulus going into the economy at a time it's slowing down, so I think that will be read as a positive."

Lim believes National's tax cuts may mean a little more money is saved and invested while Labour's plans would lead to families spending more.

"Whichever way there's going to be a fair bit of money pumped in."

AMP's Hayward would not comment on the market friendliness of the policies, perhaps mindful of the savaging Westpac chief economist Brendan O'Donovan suffered after questioning the economics of Labour's student loans interest write-off.

ANZ chief economist Dr John McDermott, having demonstrated that he's game to risk a "political pasting", recently produced a review of the four biggest parties' policies.

The upshot was: "National's policy platform looks to offer marginally more economic upside in terms of overall living standards, while Labour offers more social support. Beyond that, when we step back, there are few fundamental differences between the red and the blue hue."

McDermott said while election periods were generally periods of nervousness for markets, especially when polls indicated a close race, this time around there were few signs of jitters.

"A clean result with either Labour or National with a stable coalition is not going to bother the markets at all."

And while business might grumble about regulation and its tax burden another Labour-led government would at least be "a known quantity".

On the other hand, if National triumphed, "business would probably look forward to some tax relief and some more business-friendly legislation".

While the ANZ favoured National's approach of using tax cuts as opposed to Labour's expenditure-based Working for Families scheme to redistribute cash, "When we're talking about a little bit of extra spending or some tax cuts that impact on the household sector predominantly, at this point, the markets are not particularly nervous. The important thing is whether these things are affordable or not, given we've got such large surpluses these promises haven't spooked the markets at all."

Virtually everybody spoken to by the Business Herald, including McDermott, said market reaction to election results was minimised these days by the strong key economic policy framework.

"We're talking about the big things here, the independence of the central bank, the Fiscal Responsibility Act, the Public Finance Act. These things are well and truly embedded. None of the parties are talking about changing any of this and from most of the market's perspective, that's a great thing."

If investors both here and overseas saw signs a new government was going to make changes in those areas, "that would be really scary".

But a far more likely scenario, one that could affect investor sentiment, is an indecisive result.

Market reactions

1990: Market falling before the election. It continues falling after National's win.
1993: Market rising. After a brief period of uncertainty National is re-elected. Market resumes its upward trend.
1996: Market is flat. It remains largely unaffected by the uncertainty despite Winston Peters keeping the nation waiting before backing National.
1999: Market in decline before the election. Continues trend after Labour wins power.
2002: Market makes gains before the election but dips after Labour is re-elected.