Change at the Top: Italy and New Zealand

Source: Bevan Graham, AMP Capital

06 December 2016

Italy, New Zealand

In a year of political surprises, the biggest surprise (at least for us Kiwis) ended up being home-grown. John Key’s decision to resign the leadership of the New Zealand National Party after 10 years and the Premiership after eight years adds considerable colour to the 2017 general election. An election is due in New Zealand by November 2017.

By the afternoon of Monday December 12th, New Zealand will have a new Prime Minister. Having been burnt on a number of occasions this year by making what ended up being wildly inaccurate political forecasts, I will refrain from making a prediction. Thanks – the sigh of relief is audible.

Mr Key and Deputy Prime Minister and Finance Minister Bill English have formed a formidable partnership over the last 10 years. While Mr Key has managed the politics, Mr English has been the architect of many of this government’s reforms, importantly the investment approach to social policy. It is unclear whether he will put his hand up for the leadership. If he does and is successful, we will also have a new Minister of Finance.

The good news is that whoever wins the leadership next week we don’t expect any significant changes in the foundations of New Zealand’s macro-economic stability. We are in a strong fiscal position, the financial system is sound, and we rank highly in measures of ease of doing business and being corruption-free. In fact, the same goes if there is a change of Government next year. The Labour party, the likely nucleus of an alternative government, also support those foundations.

That’s not to say everything is perfect. The National-led Government was entering election year with a number of vulnerabilities. Chief among them is housing, particularly the availability of affordable housing. Not unrelated is the issue of immigration, an issue that appears top of the list of concerns leading to a number of political surprises (Brexit, Trump) in 2016. Likewise, rising income inequality is becoming an issue of increasing political significance.

One change we won’t be disappointed to see is to New Zealand Superannuation (NZS). We have long argued the continued commitment to current arrangements for NZS has become increasingly untenable in a fiscally constrained world. While political challenges to changing NZS arrangements will persist, the biggest barrier to change, Mr Key’s continued commitment to current arrangements while he remains Prime Minister, is now gone. Any good politician should be able to construct a credible case for changing current arrangements in favour of a plethora of more worthy causes than pension entitlement from the age of 65, regardless of financial need.

It’s too early to tell whether the change of leader is a game-changer for the 2017 election. Prior to Mr Key’s announcement and by virtue of a strong lead in the polls, National looked likely to head into election year as favourite to secure the Treasury benches for a fourth term, albeit likely needing support from coalition partners. That feat was last achieved by Sir Keith Holyoake’s National Party, which won four successive elections between 1960 and 1969 (under the old first-past-the-post system).

But as I’ve reminded readers many times this year a week is a long time in politics and the election is still the best part of a year away. As today just proved, and not for the first time this year, anything can happen and probably will.

The Italian Referendum

The result of the referendum in Italy was disappointing. The Italian people voted "No" to reform of their constitution and parliamentary system. This result has precipitated the resignation of reformist Prime Minister Matteo Renzi.

As we said in our preview, this was a once in a lifetime opportunity for Italy to change a fragile political system that has led to 63 governments over the past 70 years. Years of constant political change has contributed to a dearth of necessary reform that has left the Italian economy as one of the perennial underperformers within the Eurozone.

While the result was disappointing, it’s important to remember that this was a referendum on a constitutional issue unique to Italy. There are no direct connotations for Italy's membership of the Eurozone in the referendum result.

That said, and given Mr Renzi’s departure, an early election cannot be ruled out. In that case the performance of the Euro-sceptic Five Star Movement (5SM) would be keenly watched. Even if 5SM did well, an Italian exit from the common currency would be far from certain given a majority of Italians support continued membership of the Eurozone.

But the result is still a concern given the likely entrenchment of low growth expectations and little chance of serious economic reform. This will in turn see concerns about the strength of the Italian banks persist and raise doubts about efforts for their recapitalisation.

Finally, we tend to think of the Eurozone as a sum of the parts: the strength of the Eurozone and its ultimate sustainability will depend on the strength of the individual members. On that front Italy still has serious work to do, and as the third largest economy in the currency bloc, wields influence over what is acceptable policy-wise in France and Spain.

This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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