Prime minister resigns

52nd New Zealand Government

Background

26 days after the General Election, an agreement has been reached for a coalition government to be formed between Labour and New Zealand First with the Green Party holding a confidence and supply agreement with Labour. This marks the end of nine years of government led by the National Party.

Ministerial and cabinet appointments are still be announced and formal policies haven’t been released yet   - these are expected to follow the formalities of completing the agreements and the establishment of the new government. However, it was announced that NZ First will get four Ministerial positions within Cabinet and an under-secretary.  Greens will get three ministerial positions outside of Cabinet and an under-secretary role. 

Potential key policy changes that financial markets and businesses will focus on are:

  • An expected reduction in immigration
  • Modifications to the Reserve Bank of New Zealand Act - to include full employment as a target alongside low inflation – which is similar to both the Reserve Bank of Australia and the US Federal Reserve
  • Easier fiscal policy (more government spending)
  • A higher projected bond programme
  • Increase in the minimum wage.

Market reaction

As we indicated ahead of the election, markets tend not to like uncertainty. While one important uncertainty has been resolved – who will form the government – uncertainty still remains because it’s a new government with new leaders and new policies – change brings uncertainty.

Although it is early days, initial market movements have been relatively modest in the context of some post-election moves we’ve seen overseas over the past year – the NZ dollar fell around 2%; NZ shares opened around 1% lower, but look likely to finish the day higher; while there was little movement in interest rates.

Mercer's view

We are looking for further detail on the new government’s policies, but are not making changes to our investment strategy as a result of the new government. We know our New Zealand managers are also looking at what policies might emerge and what if any impact it might have on which companies they should buy or sell.

Our portfolios are well diversified with the aim of minimising the impact from events like elections. We are conscious that long-term investing requires a long-term perspective. Factors such as demographics, technology and climate-change are likely to have a far greater impact on long-term returns than the New Zealand government. For example, our global infrastructure investments will not be affected, nor will our investments in emerging market economies. We are comfortable maintaining our focus on the long-term, while others might get worried about short-term market “noise”. This approach has helped us generate consistently strong returns in the past and we expect it to continue to do so into the future.

Our portfolios have been positioned for weakness in the New Zealand dollar for some time (from before the election was even announced) via a lower level of hedging than normal. As a result, they will benefit from any falls in the New Zealand Dollar (as unhedged offshore assets rise in New Zealand dollar terms). However, it’s too early to tell whether the movements on Friday (20 October) are just part of normal market volatility or a more permanent position.

As always, we recommend individuals seek financial advice, but we see little in the news that, on the face of it, should create cause for investor concern.

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