In the absence of productivity gains, our economy has relied on more people, working more hours. Net migration provides a conveyor belt of fresh labour, but it comes with attendant bottlenecks in housing and infrastructure. The profitability windfall for these sectors has not arrived, with earnings warnings from all the major listed construction companies this year. An economic growth model that is reliant on pushing the capacity envelope can be prone to mishap. Against that, our key sources of demand: agricultural commodities, tourism and net migration, are volatile and have a habit of evaporating at short notice. Moreover asset prices have become a vulnerability: both housing and equity markets in New Zealand are priced for perfection.It is election season in New Zealand but from an asset allocation perspective we are voting with our feet ahead of the big day. Irrespective of election outcome, we are recommending clients reduce their exposure to the NZ equity market by about a quarter.

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