Dollar and stocks drop as 3-way government replaces certainty of 3 terms of National

UPDATE / 1.10pm: Stocks recovered in midday trading, with both the NZX50 (-0.16%) and the NZX10 (+0.02%) tracking back to even.

EARLIER: The New Zealand dollar fell as much as 2 percent and the benchmark stock index dropped more than 1 percent as the certainty of a three-term National government, under which the economy grew and equities rallied, was replaced by a coalition that may prove fractious and unconventional.

The kiwi dollar fell as low as 70.07 US cents from 71.29 cents before the announcement on the new government yesterday. The S&P/NZX 50 Index fell 1.1 percent to 8037.39, the lowest in almost two weeks, and swap rates fell in the wake of the NZ First Party's decision to team up with Labour, installing Jacinda Ardern as prime minister and handing ministerial positions to MPs from both NZ First and the Greens, which will support the Labour-NZ First government on confidence and supply.

"We've had a long period of certainty," said Greg Smith, head of research at Fat Prophets. "The economy has been very strong and the stock market has been incredibly strong during that time. You know what you get with the status quo. Now we've suddenly got a three-way coalition. That's been problematic in other countries. You've got two parties that don't see eye-to-eye in the Greens and NZ First. And you've got a younger leader as PM in combination with an elder statesman as well."

The stock market selloff was broad-based. Forty stocks fell, five gained and five were unchanged on the NZX 50 this morning. Retirement village operators led the decline on speculation property prices, on which retirement village units are benchmarked, will extend their decline. Summerset Group fell 3.4 percent to $4.91, Ryman Healthcare declined 3.3 percent to $9.26 and Metlifecare fell 2.5 percent to $5.88.

Among companies tied to the primary sector, Synlait Milk fell 2.6 percent to $7.60 and Fonterra Shareholders' Fund fell 1.6 percent to $6.12. Ardern told Morning Report today that a proposed water tax may not survive the coalition, as Peters had been opposed to a levy on irrigation, but the new government may step up efforts to reduce agricultural runoff into waterways and may slow the development of new irrigation schemes.

Labour campaigned on slashing net migration to an annual rate of 20,000 to 30,000 from current record rates of more than 70,000, suggesting the economic impetus from migrants both as consumers and a source of labour will reduce. That could exacerbate a shortage of workers and drive up wage costs, analysts said today. An increase in the minimum wage has also been mooted. Restrictions on sales of residential property to foreigners may accelerate the cooling of the housing market.

The new coalition has not yet named Cabinet ministers or set out its policy priorities but Peters surprised financial markets with comments that capitalism needed to regain its "human face".

"Peters' talk of fighting capitalism and his (and Labour's) more populist agenda don't sound market-friendly at face value, but the reality is that we'll likely see only a minor shift in economic direction," said Jason Wong, currency strategist at Bank of New Zealand, in a note. "A cloud will overhang the NZD until we get more policy detail over the coming week, but we'd expect the negative impulse from domestic political forces to quickly fade before more important global forces take over."

AMP Capital head of investment strategy Greg Fleming said now that the election outcome is known "investors holding New Zealand assets will need to re-examine some of their assumptions about domestic economic policy and direction, many of which have been taken for granted during the last decade."

He said the change of government is part of "a rising tide of impatience with the established order, and the probability that dissatisfied elements around the world would wield more influence in the political economy than has been the recent norm."

"The UK Conservatives, the US Democrats, the German Christian Democrats and even NZ's National Party have suffered electoral setbacks above and beyond what was expected, given the reasonable - if not stunning - economic performance of their economies," he said in a report today titled: 'Expect the unorthodox: what could New Zealand's new Government mean for investments?'

"Investors should not underestimate the degree of disenchantment, and should appreciate that the incoming New Zealand government is not wedded to the conventional economic consensus, and may well experiment more profoundly with alternatives than some have expected," he said.

For New Zealand stocks, which have made gains of 18 percent this year, Fleming says that barring an unlikely sharp rise in interest rates, the share market "is likely to retain a good part of those gains."

Demand for New Zealand shares "is strong, both because of domestic retirement savings and international support driven by yield and diversification," he said. "While the market is expensive by most historical measures, a change in political direction is more likely to lead to a change in market leadership, than to an outright correction."

A weaker New Zealand dollar should benefit tourism companies such as campervan operator Tourism Holdings and exporters like Fisher & Paykel Healthcare. While retirement village operators fell today, healthcare and elderly care companies "are potentially major beneficiaries from higher social spending and a focus on older citizens' needs," from the new government. Labour and NZ First may also increase spending on infrastructure, in a boon to companies ranging from telecoms and IT to utilities and construction firms, Fleming said.

Fat Prophets' Smith said the new government arrangements "are going to be a real test of the MMP system over the next two-to-three years" and if the coalition implodes, there could well be a referendum on repealing MMP at the next election.

"It will be interesting to look back at this," he said. Have we reached the peak in economic growth and the stock market?"

(BusinessDesk)