Market reaction to election result likely to be muted

By NZPA

Monday 19th September 2005

Financial markets are expected to react calmly to Saturday's indecisive election result that gave Labour one seat more than National's 49 seats.

"I wouldn't expect the market to react very much to the election result. In many respects, the close outcome was reasonably expected," said Neil Paviour-Smith, head of sharebroking firm Forsyth Barr.

The benchmark NZSX-50 gross index showed no pre-election jitters, climbing to a record close of 3434.87 on Friday.

Similarly, currency market reaction is expected to be muted.

"I'd anticipate there may be some mild weakness on Monday morning, just a knee-jerk reaction to the fact that at this point we haven't got clarity on who is going to be in the treasury benches," said BNZ chief dealer Mike Symonds.

The kiwi closed in New York on Friday at US70.40c.

"But I think it will only be small and mild. When all is said and done, this is part and parcel of MMP and people will come to understand that."

Symonds said opinion polls had clearly pointed to a close election and the kiwi dollar had remained stable ahead of the key poll.

Markets were confident that framework policies affecting markets were not going to be tampered with, "so from a policy perspective the markets are going to take this with some ease".

However, failure to sort out a Government within a week or two of when special votes are counted on October 1, could see an adverse reaction.

"Markets don't like uncertainty and if things drag on a bit and there is no sign that either party is having much joy in forming a government, then that could raise concerns," said Paviour-Smith.

"If it's all too hard with the small parties not wanting to go in with each other and so on, then that's something we will look at."

The most important thing was the government was stable, whatever the policy platform is.

He said it was clear whichever party formed a government, "it is going to have a strong centrist component which will moderate any policies that business may be concerned with".

Paviour-Smith said business and company earnings were affected by confidence that in turn would be influenced by stability.

He said that the sharemarket would have rallied on had National won the most seats and been in a prime position to form a government.

The likely loosening of fiscal policy as a result of spending promises would put pressure on interest rates, which would be a concern.

"The big question around this coalition is, will the spending that will occur be of sufficient magnitude that it will force interest rates up and we get a harder economic landing that we might have otherwise expected," said stock exchange chief executive Mark Weldon.

Markets would carefully watch whether the Green Party got 4.5% of special votes to ensure it stayed over the 5% threshold.

The influence of the Greens, which won six seats, on infrastructure, transport and energy policy was important.

"In terms of the larger companies, that need to make big investment calls, and whether those are inside or outside of New Zealand, that's a pretty material indicator for large parts of the construction and other sectors."

Weldon said a lot of Labour's planned initiatives would benefit markets significantly.

"Markets over the last three or so years have done very well under the existing set of conditions. People have managed some pretty successful results in today's environment."

Ironically, Weldon argued a political stalemate could be beneficial for business.

"In a funny way, a parliament which has absolutely no mandate to do anything -- which is one way of looking at what we've got -- you would have to bet against any major tax changes and you would probably have to bet against major changes in the families package and the student loans package, because those are big items which are unlikely to get through because they are so polemic."

"You are not going to see a whole lot of fiscal stimulus on either side of the ledger, whether it's tax or spending, and in some ways that's not a bad outcome."

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