Article written by InvestNow – 29 September 2023

This October most New Zealanders will be glued to their device-of-choice anxiously awaiting the outcome of a pivotal event in the nation’s history. 

But the rugby World Cup isn’t the only big media event scheduled for the month with the general election also expected to rival sport for one night at least. 

The October 14 election is shaping up as an interesting one for pundits amid ever-changing scenarios framed largely around the potential influence of various minor parties post-vote. 

If the latest opinion polls prove accurate, NZ will probably see a change of government this year, although the numbers leave enough wriggle-room for alternative theories to squeeze through. 

Markets, however, are likely to be unfazed by whoever emerges triumphant from the political process on election night based on historical precedent. 

Academics have long puzzled over the impact of elections on investors, with typically ambiguous conclusions. 

For example, a 2010 Waikato University study cites earlier global research that found “investors were often shocked by election results, even when they were almost certain they knew who the winner would be, thus presenting some opportunities for arbitrage around election effects”.  

For counterpoint, the paper references another analysis that concluded “any irrational trading [around elections] was found to be relatively insignificant, often less than 1% of total returns, and believed any arbitrage present within the market will be exploited by rational investors”.  

“Thus such inefficiencies should only occur in the short run and any inefficiency that may occur around election effects will be relatively small.” 

Despite its title – ‘Effects of New Zealand General Elections on Stock Market Returns’ – the Waikato study found “no evidence of an election effect in the New Zealand stock market”. 

While elections have zero discernible impact on the NZX, the 2010 research suggests the flavour of each government was correlated with different market outcomes over their respective terms. 

“Nominal returns on the market index are found to be 0.048% higher when the National party is in government compared to when the Labour party is in government,” the Waikato paper says. 

It’s not the result (it’s how they play) 

NZ fund managers would, of course, welcome an extra 0.048 per cent return but the theoretical marginal political boost to portfolio performance is hardly enough to swing investment strategies in anticipation. 

Other studies show the colour of government does have a larger effect on local share returns including a Forsyth Barr analysis of 65 years of NZX data cited by Greg Smith, Devon Funds head of retail. 

“National governments have presided over returns for the NZX50 Index of around 8% per annum, whereas those for Labour have been a quarter of that,” Smith says. 

“To give some perspective though, on average, the market has been stronger heading into an election when Labour has been in power, more so than when National has been at the helm (the market has been weak this time around).” 

Furthermore, he says the Forsyth Barr research shows the NZ share market has finished the first three months post-election up 1.5 per cent following a National win and down 3 per cent if a Labour government comes to power. 

Any election dividend, if it exists, is likely to be short-lived based on another number-crunching exercise carried out by Pie Funds. 

Mike Taylor, Pie Funds founder, says the boutique manager found no link between election results and NZX performance in all elections since 2000 – except the fact that the local share market “has been positive 12 months later on every occasion, regardless of the winning party”. 

“The direction of the NZX is more closely linked with what’s happening in global markets than local politics, noting that both parties are relatively centrist,” Taylor says. “Going into the 2023 election, with the country already in recession, the best outcome we can hope for is that the new government (National or Labour-led) is formed quickly and that political uncertainty is put to bed as quickly as possible.” 

Mint Asset Management portfolio manager, John Middleton, is similarly hoping for a clear result in the October 14 poll. 

“In general, markets do not enjoy uncertainty and tend to underperform in election years,” Middleton says. “The recent trend in elections worldwide is rhetoric beats policy, so it is getting harder to work out what each party intends to do when in power. Furthermore, the NZ electoral system is less about which party wins but who they team up with to get a majority, and hence the policies of the smaller parties take on a greater significance.” 

Nonetheless, he says “occasionally” specific policies can have a direct sway on markets such as tax changes (especially property-related” and “incentives in general”. 

“But individuals, corporates, and markets tend to adjust to changes in government quickly,” Middleton says. 

Devon’s Smith also notes policy differences such as the Labour plan to remove GST on fresh fruit and vegetables and National’s mooted tax bracket relief will have some consequences for the broader economy – with flow-on for investors. 

He says while there could be “some significant market impacts” regardless of which party comes to power this year, the National-Labour policy divide is more defined by details than fundamentals. 

“Many of Labour and National’s policies are aligned (there won’t be any major changes to the tax system for instance), and many of the goals are the same, but there are clear differences in how they want to get there,” Smith says.  

Game on 

Bevan Graham, Salt Funds Management economist, is equally sanguine about a smooth power transition for investors whatever the October 14 outcome. 

“We are fortunate to live in a stable democracy, so we don’t often see wild swings in policy,” Graham says. 

He says Salt is more concerned that long-term policy settings be designed to improve NZ productivity while maintaining monetary and fiscal stability.  

“If politicians can get all of this right, we end up with better public services, higher wages, and a generally more prosperous society,” Graham says. “As investors we benefit from a faster, sustainably growing economy as companies experience increased sales, profitability, and market expansion.” 

Salt will be analysing the policies of the next NZ government (to be assembled in the 54th parliament before year-end) rather than worrying about “the election itself”. 

“The election is just an event we need to get through,” he says. 

All of the fund managers we approached, though, acknowledge that the NZ economy is delicately poised ahead of the imminent vote with slow growth (recently revised up slightly from a recession) along with consumer unease amid high inflation and interest rates at levels not seen for more than 10 years. 

The ingredients have probably raised the stakes for investors as Kiwis get ready to vote in 2023, according to Chris Di Leva, Harbour Asset Management portfolio manager. 

“Typically, I would say that elections have little impact on financial markets, but this time I think it might be different,” Di Leva says. “Why? We are currently in a technical recession, and we think there is some softness to come as consumers are feeling the pinch.” 

NZ governments usually have the latitude to stimulate the economy as growth slows or goes negative, he says. 

“However, we are already running deficits and household debt is very high (though government debt is manageable by global standards),” Di Leva says. “Without a credible economic plan, we may start to encounter things like credit rating concerns. So this election comes as a pivotal moment for New Zealand.” 

 Historical turning point or not, both academic studies and common sense suggest that timing portfolio decisions around election results generally makes for a poor investment strategy. 

Investors should keep on top of changes to government policies and economic conditions as well as tracking how the funds in their portfolio might be responding in turn. We’ve recently upgraded our fund manager pages on our website to help members more easily access fund data and links to other materials including, analytical articles. 

As per our 10 investment principles, though, investors are encouraged to stay informed but design their portfolios according to individual goals and risk tolerance – and stick with the plan regardless of who wins or who loses an election or a game.