• Market reaction to the result has been measured thus far. This does not surprise us especially – global financial markets have dealt with far more substantive political surprises than this over recent times. The New Zealand dollar has weakened to 70 cents versus the USD and 89 cents versus the AUD. NZ equities have softened slightly.
  • Notwithstanding the quiet reaction today, we still see scope for near term underperformance of NZ equities over coming months. Prior changes of government suggest 5-7% underperformance versus global equities over the next quarter is a useful yardstick.
  • We remain comfortable with the underweight recommendation in NZ Equities that we established earlier this year. Our two major concerns are not political:
    1.With the local market on a PE ratio of ~20x earnings, valuations leave little margin for error;
    2.The economy faces capacity constraints, suggesting economic growth is more likely to decelerate than accelerate over the next three years.
  • Policy detail will emerge over coming months. Of particular interest will be the implementation of tighter immigration controls, which has the potential to influence the economic cycle, something that bears close attention from investors.

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