A labour-led coalition government would end the near decade-dominance of the National Party and potentially bring significant policy change, Milford senior analyst Frances Sweetman said.
Importantly, the underlying New Zealand economy was still strong and probably resilient. For active investors, market volatility could present as many opportunities as threats, she said in a market note.
Changes in government policy influenced the economy both directly and indirectly.
Raising the minimum wage would deliver wage growth — a direct and predictable impact.
Wage growth could push inflation higher and increase the likelihood of rising interest rates but they could also push unemployment higher if companies felt they could not afford the higher wage bill, Ms Sweetman said.
"These impacts are indirect and much less predictable. Even harder to predict is the impact policies may have on confidence, spending and investment, which are arguably more important for the economic outlook. The upshot is changes in government policy create uncertainty."
In general, sharemarkets did not perform well in periods of higher uncertainty, she said.
It was difficult to ascertain whether election uncertainty had started to creep into the performance of the NZX but the NZX50 index underperformed most global markets in the three weeks from August 25 to September 8, when Labour was leaping up in the polls.
The underperformance was despite solid company earnings updates in the August reporting season and continued strong economic data.
The risk to the performance of the NZX was exacerbated by the substantial rise in foreign ownership over the past few years. Ownership of New Zealand shares by offshore institutional investors had increased from 30% to nearly 50% in the last five years, Ms Sweetman said.
The increase in foreign ownership had been driven by New Zealand’s high economic growth and political stability, relative to other developed countries.
Should the political environment become less stable and the economic outlook less certain, it might reduce the demand from offshore investors which had supported the local equity market in the last few years, she said.In general, both major parties had tabled policies that were relatively moderate and fiscally responsible.
A National-led coalition would deliver little change. Changes to the income tax thresholds — an effective tax cut — would help household budgets and support spending and confidence, Ms Sweetman said.
Additional first-home buyer grants and refreshed urban planning laws should support the construction of new homes. In conjunction with the promised infrastructure spending, that should be beneficial to the construction sector.
Assessing the outcome of a Labour-led coalition was more complex, she said.
The commitment to build 100,000 homes, removal of urban growth boundaries although with additional infrastructure commitments, should also be supportive to the constructive sector.
However, the policy to ban sales of existing dwellings to offshore buyers, increasing tax on investors through the extension of the Bright-Line test, and the threat of a capital gains tax on housing could also reduce the demand for housing, at least in the short-term, Ms Sweetman said.
Labour’s policy to raise the minimum wage and reduce net migration by 20,000 to 30,000, focused on low-skilled workers, would drive wage growth and could stimulate inflation over the longer-term.
In theory, that should lead to higher interest rates and a strong New Zealand dollar, which was beneficial to importers and negative for exporters.
But rising house prices and high immigration had been important to New Zealand’s economic growth in the past few years.
Polices affecting immigration — National also proposed reducing immigration — and house prices could have an impact on economic growth and suppress currency strength, she said.
