"The reports Pascoe Barton provide are great. The taxation reports save our accountant a lot of time."

R & J

Geo Political Risk

As investment advisers, we try to understand the different forms of investment risk. One risk that we try and avoid is Geo Political risk. Most developed countries are politically stable, and their capital markets behave in a manner that you would expect.

New Zealand has long been considered as a politically stable country, with very little in the way of governmental interference in our capital markets. Judging by last week’s joint Electricity announcement by Labour and the Greens and the subsequent reduction in the value of electricity related stocks, there is potentially massive geopolitical risk to now be considered when investing in New Zealand’s capital markets.

The government has been forced to amend the offer documents for the partial sale of Mighty River Power to take into account the risk of a Labour-Greens coalition winning the next election and enacting its proposal to slash the price of electricity.

Having a centralised purchasing office for electricity produced by the major generators is effectively state control. It is akin to something that would have been associated with communist countries. That is something that Greens Co-Leader Russel Norman may be very comfortable with given his Socialist Workers Party background prior to moving to New Zealand. The majority of New Zealand’s power is already generated by state controlled power companies, something that does not change under partial privatisation.

Labour and the Greens are comparing this to the Pharmac model acting as the buying agent for pharmaceuticals. Sure it has succeeded in reducing the drug bill, but it impacts on the ability of New Zealanders to receive the best drugs. The prognosis for a number of breast cancer patients would not be as good, if it had not been for Herceptin.

Within a matter of hours of the joint Labour and Greens announcement, there was a profound impact on the New Zealand Capital markets. Electricity related companies saw hundreds of millions of dollars of market capitalisation wiped out. This will have impacted on the Cullen Fund and many of the 2.1 million KiwiSaver account holders. Many KiwiSaver funds hold investments in Contact Energy, Trust Power, and Infratil.

We know that the actual “power component” of a power bill comprises about 30%. The balance is made up of transmission costs, and the retail distribution. Transmission is effectively a state owned lines company monopoly for national distribution, then a regional monopoly for the local network. This area is already regulated. There is plenty of competition in the retail distribution system.

Consumers can readily use the www.whatsmynumber.org.nz to ascertain if they can buy their power from another supplier at a cheaper price. The website claims that the average household can save $175 per year by switching. That works out at around a 7% saving. Given that it is already possible to make quantifiable savings by a few simple key strokes, why would two political parties consider destroying the International and Domestic credibility of New Zealand’s capital markets for a gain that would be a cost to the tax payer?

Some of us are old enough to remember the fortress days of import licences and protectionism. Not only did prices fall when the markets were opened up, but we had choices.  We also had competition, not state control.

Rates throughout New Zealand continue to rise at well above the inflation rate. If Labour and the Greens are looking for savings for all New Zealanders they should really take aim at Local and Regional Government. And of course the other big ticket items for most households are groceries and fuel. Would food and fuel costs come down if these were also nationalised?

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.