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New Zealand Equity Strategy 31 July 2017
Portfolio Considerations
The World Ignores Trump, They Will Ignore the NZ Election
In 2014, the policy agenda on the left provided concerns, this time around
a National-led coalition is the most likely scenario with the concern the
coalition mix. Regardless of the election result, we expect a moderate
fiscal stimulus from spending on housing and infrastructure as well as
concessions to more significant coalition partners than previous
elections. New Zealand should maintain its relative advantage in political
stability compared to the rest of the world, making a capital flight from
international investors unlikely.
National-led government most likely
While surprises have occurred in a number of international elections we don’t
expect this to apply in NZ. The most likely scenario remains a National-led
coalition.
The uncertainty is around whether National needs NZ First or not, rather than
whether National forms a government.
Figure 1. Probability of various coalitions forming government (polling 2016–2017)
Source: Forsyth Barr analysis
Misery index reinforces no impetus for change
Electoral swings normally require a catalyst. We have used NZ’s misery index to
outline the likelihood for this to occur in this election. Normally change has
occurred when the index has been high and rising. Currently, the index is low.
This suggests change is less likely. Several parties are pursuing policies in an
attempt to increase voter participation; however, we doubt sufficient numbers
can be motivated to change their behaviour. In-fighting amongst left-leaning
parties also suggests disaffected voter choice shifts to be between NZ First and
The Opportunities Party (TOP). The more the latter gets, the better it is for a
National–led coalition.
Whatever happens, expect more spending
The issue this election is expected to revolve is the level of investment in
housing and infrastructure. Welfare policies are not expected to have sufficient
currency to see a significant swing to the left, given the low level of NZ’s misery
index. However, higher spending is likely with the anticipated inclusion of more
significant minor parties in any coalition and more groups needing to be
satisfied. Given tighter monetary policy (via credit conditions) more fiscal
spending should be positive for companies exposed to NZ Inc.
Brian Stewart
brian.stewart@forsythbarr.co.nz
+64 4 495 8209
John Hughes
john.hughes@forsythbarr.co.nz
+64 4 495 5268
0%
30%
55%
15%
0%
0% 10% 20% 30% 40% 50% 60%
National
Current
National/NZF
Lab/NZF/Green
Labour/Greens
Probability of successful Alliance forming a government
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 2 31 July 2017
Executive Summary
Be greedy if others become fearful
Uncertainty is something markets do not like, and following the surprises delivered in the
US Presidential election, UK referendum on Brexit and subsequent UK general election,
some investors may be concerned as the NZ election draws closer.
In this report we outline our view on the outcome of the New Zealand general election in
September. We maintain our view that the NZ economic cycle should extend longer and
that there are potential upgrades to companies exposed to NZ Inc. Valuation is still the
main issue, but given our interest rate outlook we believe investors should buy any risk-
off dips that could occur because of election concerns.
What we think happens
A National–led coalition still most probable
A status quo National led collation is increasingly likely, especially with “Left leaning”
parties competing for the same voting base, effectively splitting the left vote.
The policy attacks to gain voter share should also be viewed as making the
formation of a left-leaning coalition post-election more difficult.
NZ First remains the probable king-maker, but for a left-leaning coalition to form a
government it would require a minimum of Labour, The Greens and NZ First. The
dichotomy of the latter two party’s policy positions certainly poses challenges.
There is no evidence to suggest things would be worse under a left-leaning
coalition
Academic research shows the difference in NZ equity market performance slightly
favours National-led governments; however, the differences are statistically
negligible and in terms of absolute returns these are more dependent on the
economic cycle.
This is reinforced by NZ’s MMP style government which favours coalitions and policy
outcomes around the median voter. While this is likely to result in higher government
spending, without revolutionary change even a surprise result is unlikely to be
viewed externally as a bad outcome.
Performance data for NZ equities in election years since the implementation of MMP
is limited, but shows only two elections in five have transpired with the market
performing poorly (net of global market changes) post the result. In 1999 when a
change in government to a Labour-led coalition occurred, and in 2011 when a
National-led coalition was re-elected.
Policy risks in 2017 are fewer than in 2014
There is less to worry about this time around. The radical policy implications for
industry seem to be the Greens desire to charge for water and all parties on the left
implementing higher minimum wages (+5 to +13% increases proposed).
We don’t believe TOP will get parliamentary representation so don’t see non-cash
implied rentals being included in the tax system.
To contrast this lack of policy certainty with 2014:
The value of the then newly listed SOE Electricity generators were under threat,
facing re-nationalisation and a NZ Power buying model which removed pricing
power from the companies.
Sky City was also under attack with its Convention Centre deal being
questioned.
There were the usual calls for living wages by the left.
The uncertainty in this election is the coalition mix and what concessions NZ First
demand in any government.
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 3 31 July 2017
Election uncertainty hasn’t been discernible historically
Tracking equity markets over time (holding global conditions constant), there is no
evidence to suggest that election uncertainty triggers equity market underperformance.
The NZDUSD weakened significantly in two of the last three elections; 2008 representing
an extreme period of global risk-off post the GFC. The 2014 change does not appear to
have been election related given there was no change in the direction post the election,
despite this removing the threat of the lefts anti-business policies.
Figure 2. NZ Equity performance less MSCI local currency
Source: Forsyth Barr analysis, Bloomberg
Figure 3. …as has the currency
Source: Forsyth Barr analysis, Bloomberg
Reviewing international ownership of the NZ equity market, we have seen ownership
increase since the 2012 election of a National-led government; but equally, ownership fell
during the risk-off periods post the GFC.
We think any association between international ownership and electoral outcomes is
coincidental rather than linked.
Figure 4. Election results and international ownership
Source: Forsyth Barr analysis
-15%
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1999 20022005 20082011 2014
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Offshore Ownership (NZ$) Offshore ownership (% S&P/NZX 50) +1/-1 stdev
Election periods highlighted
Right-ledLeft-led
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 4 31 July 2017
Election Overview
National retains majority of the popular vote
Over the last three years National has consistently led polls with the largest proportion of
the popular vote (average 47.3%). Even the retirement of John Key was insufficient to
knock National from this position with National average polling year to date 45.8% of the
popular vote.
However, National is unlikely to be able to form a government on its own. Since New
Zealand adopted MMP, no single party has achieved a majority in parliament. In 2014
National got close but that was because of the large wasted vote.
Wasted Vote: Expect it to be lower in this election
The level of wasted vote in NZ elections is determined by the percentage of the overall
vote that non-parliamentary parties received (these parties failed to achieve 5% of the
party vote or win an electorate seat). This vote is then reallocated amongst successful
parties.
The level of wasted vote is largely determined by the number of higher profile parties that
fail the electoral hurdles.
In 2008, NZ First’s failure to achieve the 5% threshold exaggerated the level of wasted
vote, while in 2014 high profile campaigns by Kim Dotcom promoting Internet/Mana and
Colin Craig’s Conservative Party added +5.4% to the usual level of wasted vote.
The underlying level of wasted vote by single issue parties has settled in recent elections
to be ~1.0%.
TOP is the only high profile new party contesting this election but currently only polls
around ~1.0% We have been impressed with TOP’s digital presence; but making the 5%
hurdle will be a tough ask. Should TOP just miss the mark we still see the wasted vote
being lower than it was in 2014.
Figure 5. Votes for non-parliamentary parties
Source: Forsyth Barr analysis, Electoral Commission New Zealand
TOP
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
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8.0%
1996 1999 2002 2005 2008 2011 2014 2017E
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ote
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Small Parties <1% Parties >1%
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 5 31 July 2017
Cobbling together coalitions
As always coalitions will be the name of the game.
Simulating coalition groupings using polling data over the last year, the current coalition
has a 30% chance of being able to form a government.
A Labour/Green coalition would almost certainly need NZ First to have a chance at
governing. In all polls over the last two years National could have formed a coalition with
NZ First, and we believe this is still the most likely outcome.
Figure 6. Probability of coalition groupings forming a government (polling data 2016/2017)
Source: Forsyth Barr analysis
Left vs. Right positioning
While we talk left and right coalition groupings, the voter perspective of where parties are
on this spectrum is noteworthy and may be different to investor expectations.
Figure 7 calibrates where exit polls in the 2014 election placed the various parties on this
spectrum.
The current make up in parliament has a centre-right coalition in government but the
majority is only 4 seats.
Figure 7. Voter perception of Party position on Left-Right Spectrum
Source: Forsyth Barr analysis
Figure 8. Current Parliamentary mix
1 1
1 1
4 4 1
1 1 1
4 4 4 4
1 1 1 1
4 4 4 4
1 1 1 1
4 3 3 3
7 1 1 1
3 3 3 3
6 5 1 1
3 3 3
5 1 1
3 3 3
1 1 1
3 2 2
1 1 1
2 2 2
1 1 1
2 2 2
1 1 1
2 2 2
1 1 1 National
2 2 2
1 1 1 ACT
2 2 2
1 1 1 United Future
2 2 2
1 1 1 Maori
2 2 2
1 1 1
2 2 2
1 1 1 NZ First
2 2 2
1 1 1 Labour
2 2 2
1
1 1 1 Greens
Source: Forsyth Barr analysis
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Internet
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First
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National
Extreme Left Left Centre Right Extreme Right
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 6 31 July 2017
NZ First King Maker
As we move into the 2017 general election polling suggests that despite being the fourth
most popular party, NZ First is the likely king-maker.
Historically, NZ First has benefited from voter swings to the right with NZ First’s vote
negatively correlated to votes received by the left.
Following the decline in the Labour vote, NZ First’s polling is most negatively correlated
with the Green vote. Add in the prominence of welfare policies being put forward by the
Greens, the left vote looks set to be split between more parties.
Deals don’t mean coordination
Labour/Green Memorandum of understanding means nothing
The Greens and Labour have entered into a MOU to work together to change
government. However, policy positioning has been anything but coordinated.
In our view both Labour and the Greens are cannibalising the left rather than capturing
new votes. In fact the Green party has positioned itself further to the left of Labour.
Maori/Mana: Doing it for themselves
Maori and Mana Parties have an agreement not to run against each other. This improves
Hone Harawira chances at regaining Te Tai Tokerau, provided Maori tactically vote.
Maori also have increased chances of gaining Tāmaki Makaurau and potentially Ikaroa-
Rawhiti electorates. Again tactical voting is required, but this could give Maori 3 seats vs.
2 based on the current level of polling.
This represents Maori/Mana attacking the Labour electorate vote (rather than the party
vote) but we don’t think it stops there.
Right more co-ordinated
National, United Future and ACT have also agreed to work together, with Bill English
publically endorsing Peter Dunne (United Future) and David Seymour (ACT). This is not
unusual and the voters are used to reading the messaging from the parties.
Epsom: Masters of the tactical vote, expect ACT to keep its seat
National voters have voted tactically in this electorate since 2005, giving ACT this seat.
This is unlikely to change in 2017 but ACT needs to poll higher to allow a party list
member to join David Seymour in parliament.
Ohariu: United’s Future to be tested
This electorate is now more open after the Greens opted to clear the way for the Labour
candidate. National have tended to contest this seat but have advocated more for the
party vote. Given the 3:1 party vs. electorate vote for National in the last election, tactical
voting appears to be in place and to avoid confusion National’s candidate has already
declared that he will be voting for Peter Dunne.
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 7 31 July 2017
Issues: Housing and Welfare
In our report “We Don’t Know How Lucky We Are” (6 July 2017) we highlighted that
migration issues would most likely be played out through housing policies. This is playing
out as we expected, with the other major differences in policy platforms is welfare
spending.
Housing — everyone agrees to spend more
The 2014 NZ Electoral Commission study into voter attitudes showed nearly all voters
were in favour of spending more on the housing issue regardless of party bias.
Figure 9. Voter attitude to Public sector Housing spending (2014 study)
Source: Forsyth Barr analysis, Electoral Commission 2014 post-election study
All parties have responded. How much is proposed to be spent differs but more houses
needing to be built is the common element to all policy measures.
Labour proposes establishing an Affordable Housing Authority to work with the
private sector to cut through red tape and get new homes built faster. It proposes
partnering with private developers, councils and others to build affordable homes.
The initiative would have $2bn of funding which would be recycled as the homes are
sold to first home buyers. Any capital gain, if sold on within 5 years would be handed
back to the government while various initiatives would also be introduced to reduce
speculation driving up values. These include banning foreign speculators, removing
the ability to utilise tax losses and making capital gains on homes sold within 5 years
(currently 2 years) subject to capital gains tax.
Green priorities are initially an increase in emergency housing, but also include
government building 10,000 homes which could be available under a rent-to-buy
initiative and where rents would be capped at 30% income. Given the speed of
recycling is much slower, this potentially tie-ups twice the capital of the Labour policy
proposal.
NZ First proposes acquiring land and selling this to first home buyers, on extended
repayment and low interest rates (initially 2% p.a. for at least 5 years). Non-residents
who are not New Zealand citizens would be ineligible for home ownership except if a
genuine need could be demonstrated. Because only the land is being acquired these
initiatives should be less expensive, albeit because the sections are sold to First-
home buyers rather than developers the speed of any implementation looks
challenging.
National already proposed a $1bn housing infrastructure fund alongside Housing NZ
initiatives to redevelop its portfolio.
Interestingly TOP stands out from the rest, attacking housing affordability not through
subsidies and spending but via taxing home owners the estimated rent savings from
this ownership.
With all parties proposing higher spending we don’t expect voter bases shifting,
particularly given National voter attitudes towards welfare spending (Figure 10).
0%
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Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 8 31 July 2017
Welfare: Just a swapping of votes
Figure 10 outlines voter attitudes by party to Welfare spending. This shows that there
may be some appetite for more spending by left leaning voters but little appetite from
National voters. Accordingly, unless there is a swing to the left, this does not appear to be
a voter rich segment where the left can increase voting support.
Figure 10. Voter attitude to Welfare spending (2014 study)
Source: Forsyth Barr analysis, Electoral Commission 2014 post-election study
For the record all left leaning parties propose lifts in the minimum wage. Labour is
the least aggressive proposing a +~5% increase to $16.50 minimum, while the
Greens propose a massive ~12.5% increase to $17.75. NZ First pushes into the
middle ground at $17.00.
In other welfare measures Labour proposes increasing Working for Families by
introducing winter payments for beneficiaries/super of $470–700 pa, as well as a
$3,120 baby grant.
The Greens propose +20% lift in all welfare benefits to be paid for by adding another
marginal tax bracket (40%) for those earning over $150k. This positions the Greens
increasingly as more of a welfare party with green policies. This runs the risk of
reducing some of the “green” vote but if successful attacks Labours voting base.
TOP is also attacking the Labour vote, proposing a $10,000pa 0–3yr baby and
beneficiary grant, and introduction in time of an Unconditional Basic Income (UBI).
Beneficiaries and over 65 year olds are phased in first before this is then extended to
18-23 year olds, a clear attempt to attract youth votes as well.
Increasing the likelihood that these policies just split the Labour vote between the left
parties are voter attitudes to government narrowing income differences, there are not
many National votes to be lost and when we look at how we rank in the OECD there
appears little ammunition to push a higher minimum wage campaign.
Figure 11. Government should do more to narrow income differences
Source: Forsyth Barr analysis, Electoral Commission 2014 post-election study
Figure 12. Yet NZ minimum wages/median better than most (2015)
Source: Forsyth Barr analysis, OECD
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Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 9 31 July 2017
The Youth Vote…the car was going the other way
Getting greater Maori and Youth participation in the electoral process has been an aim for
some time. The prize (realistically) is attracting the youth vote, with this the largest
category of non-voters based on the 2014 election.
In 2014 the 2nd largest registered voter age group (after the 70+) was 18–24 year olds.
Unfortunately, this grouping had the largest representation of non-voters with a total of
126,000 of those registered not casting a vote.
This has prompted a number of parties to propose packages to target picking up and
increasing the number in this grouping that vote.
Figure 13. The missing million (730,000) voters in perspective — by age grouping
Source: Forsyth Barr analysis, Electoral commission
In terms of packages aimed directly at this demographic:
Labour is proposing 3 years of free post-school training be introduced from 2019.
NZ First proposes introducing a universal student living allowance as well as loan
write-offs where training has been in areas of skill shortages.
TOP has also entered the fray marketing a $10,000pa Unconditional Basic Income
for 18-23yr olds, albeit this only takes effect when funding is available and after
similar initiatives for families with very young children and over 65 year olds have
been implemented. Policy raising the drinking age to 20 and upping the cost of
alcohol may also be counterproductive.
The Greens offering appears weak in comparison, with a Student Green Card
offering free off-peak public transport plus deferral on paying back loans if saving for
a house, the only new initiatives.
Given the delays in implementation of most of the policies and obvious trade-offs required
in any coalition negotiation, changing the voting behaviour of youth voting looks a long-
shot but if social media messaging is anything to go by TOP may surprise.
0
50,000
100,000
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450,000
18 - 24 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49 50 - 54 55 - 59 60 - 64 65 - 69 70+
Reg
iste
red
vo
ters
(20
14)
Age group
Non-Māori didn't vote
Māori didn't vote
Voted
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 10 31 July 2017
Outcome: National For the Win
Most likely scenario remains the exiting National led coalition. The uncertainty is probably
more around whether they need NZ First or not, rather than whether they get in.
At the same stage in 2014, opinion polls overstated the actual outcomes for Labour, the
Greens, and to a lesser extent, National. NZ First polling was understated in the final
result. This time around, given the policy positioning we believe both NZ First and TOP
should gain but believe it will be at the expense of the Labour and Green vote.
We also point out that swings to the left or right normally require a catalyst. To illustrate
this we have utilised a misery index for NZ (an average of unemployment, inflation and
the degree to which growth levels are below trend). When the misery index has been high
and rising this has provoked voters to seek change. The one exception was in 2011 when
left leaning parties were once again attacking each other.
Currently, the index is low and with limited voter currency for welfare we don’t believe
there is sufficient incentive for voters to seek change at this election.
Figure 14. Change usually coincides with high misery indices, this measure is low at present
Source: Forsyth Barr analysis, Statistics NZ
0
2
4
6
8
10
12
14
1987
1991
1995
1999
2003
2007
2011
2015
Mis
ery
Ind
ex
Misery Index National Labour Election
First MMP election
NZ First & Greens split Labour vote
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 11 31 July 2017
Investment Implications
The investment implication from the election is further support of our view that the NZ
economic cycle continues to extend. Should we see a NZ centric sell-off because of
election concerns, buy it, otherwise we see status quo as the outcome with a little more
stimulus helping NZ Inc.
We don’t believe international investors will bat an eye in regard to the outcome and
recent ASX ownership data confirms Australians continue to gather NZ equities.
Even if these investors consider that there was a chance that there would be a change in
government, NZ’s MMP framework does not promote revolution; incremental change at
the policy margin is much more likely.
In the case the left triumphs (our least likely scenario) we would expect:
More spending on welfare and an increase in the minimum wage (probably by +5%
rather than the more extreme proposals). This would most likely be passed through
in increased pricing. Any larger increases would potentially be counterproductive.
We have already outlined, in our migration report, that mix changes in immigration
should offset any declines in numbers.
The most likely scenario is a NZ First/National coalition.
National would still be the largest participant and the concessions to NZ First are
expected to most likely centre around housing and infrastructure policies.
Don’t count out the status quo
A number of polls still show National being able to govern with its current support
partners, either explicitly or within the margin of error. We do not believe that the
status quo should be ruled out as a scenario; especially if the cannibalisation of the
left vote continues.
Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 12 31 July 2017
Forsyth Barr Model Portfolio
Figure 15. Portfolio Construction by Thematic
Source: Forsyth Barr analysis
Figure 16. Thematic Bias
Source: Forsyth Barr analysis
Figure 17. Portfolio holdings
Code Thematic Rating Last Price Forsyth Barr ETR FB Weight Forecast PE* Div Yield Bias
Aged Care 10.6%
OW
ARV Structural Growth OUTPERFORM $1.30 24% 2.0% 15.8x 5.0% OW
MET Structural Growth OUTPERFORM $5.58 14% 2.6% 13.8x 1.3% OW
RYM Structural Growth OUTPERFORM $8.80 11% 6.0% 20.9x 2.4% OW
Consumer 1.5%
UW
EVO Value OUTPERFORM $1.00 40% 1.5% 9.9x 7.2% OW
Energy 8.5%
OW
NZR Value OUTPERFORM $2.45 26% 3.1% 14.1x 9.6% OW
ZEL Defensive Yield OUTPERFORM $7.73 14% 5.4% 12.7x 7.7% OW
Financials 7.0%
OW
ANZ Value $31.71 14% 4.9% 12.2x 5.3% OW
CBL Structural Growth OUTPERFORM $3.56 16% 2.1% 11.9x 3.5% OW
Health Care 13.6%
OW
ABA Structural Growth RESTRICTED $10.30 6% 2.8% 17.0x 4.8% OW
EBO Structural Growth NEUTRAL $17.94 10% 3.3% 17.3x 4.2% OW
FPH Structural Growth OUTPERFORM $10.94 6% 7.5% 31.1x 3.0% Neutral
Industrials 7.3%
OW
ATM Structural Growth NEUTRAL $4.26 -1% 3.0% 28.1x 2.6% Neutral
CVT Structural Growth NEUTRAL $6.03 37% 2.2% 19.6x 3.1% OW
SAN Value NEUTRAL $7.26 8% 2.2% 14.0x 5.6% OW
Info Technology 0.0%
UW
Materials 6.0%
Neutral
FBU Cyclicals NEUTRAL $7.90 0% 6.0% 12.1x 7.3% Neutral
Property 4.0%
UW
PCT Defensive Yield OUTPERFORM $1.25 7% 4.0% 19.6x 6.7% OW
Retail 5.0%
OW
KMD Cyclicals OUTPERFORM $2.24 12% 2.6% 12.0x 8.2% OW
MHJ Structural Growth OUTPERFORM $1.30 31% 2.4% 13.0x 6.3% OW
Media/Telecoms 0.0%
UW
Transport 14.2%
UW
AIA Defensive Yield UNDERPERFORM $6.82 -10% 4.9% 31.8x 4.4% UW
FRE Structural Growth NEUTRAL $7.96 -7% 1.9% 18.7x 5.6% Neutral
MFT Structural Growth NEUTRAL $24.14 -2% 4.8% 19.8x 2.8% OW
THL Cyclicals OUTPERFORM $4.26 13% 2.7% 12.6x 8.5% OW
Utility 20.3%
OW
CEN Defensive Yield NEUTRAL $5.32 3% 5.4% 15.2x 6.4% Neutral
GNE Defensive Yield NEUTRAL $2.43 -3% 4.0% 13.1x 9.1% OW
IFT Defensive Yield OUTPERFORM $3.07 14% 2.1% n/a 7.6% Neutral
MEL Defensive Yield NEUTRAL $2.86 -1% 5.6% 20.3x 8.3% OW
TLT Structural Growth OUTPERFORM $2.14 9% 3.3% 14.3x 2.1% OW
Cash 2.1%
OW
Source: Forsyth Barr analysis
Growth, 43.7%
Value, 11.6%
Cyclical, 11.2%
Defensive Yield, 31.3%
Cash, 2.1% 13.0%
8.8%
-0.8%
-23.0%
2.1%
-25%
-20%
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Portfolio Considerations New Zealand Equity Research
The World Ignores Trump, They Will Ignore the NZ Election 13 31 July 2017
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