Devon Funds 17Sep27-28
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BILL, WINSTON, JACINDA, JAMES AND THE 2020S The Investment Store and Devon Funds Management clients Colin James, 27-28 September 2017 1. A very brief word on the context • Through the 2010s the globe has got more turbulent in a number of ways. • Geopolitics are disordered: China's territorial claims; Russia's destabilisation of Ukraine and eastern Europe; trans-Atlantic populist upheavals (Brexit, Trump); and the Arab chaos, which reverberates in bordering countries. Emmanuel Macron's astonishing wins in France from outside the traditional party/political structure offer hope for reform in France and a stronger Europe (with Merkel) but can he hold his new force together? This is compounded by terrorist and anarchist disruption. There is increased insecurity, requiring heightened intelligence activity. For tiny New Zealand this political globalisation could be difficult to navigate. • Demographic remixing is weakening national identities and cohesion. This demographic globalisation is a major source of populism and a threat to economic globalisation. • Global issues – notably climate change, energy, water and untreatable pandemic diseases – are becoming more prominent and pressing and require international cooperation. • Economic globalisation faces growing opposition in advanced economies, notably the United States, and thus to state-to-state agreements, particularly where they focus on regulatory convergence. But digital connectivity will remain a globalising force. The global economy is growing more slowly, in part reflecting changing demography. Old orthodoxies aren't working, provoking a first-principles political economy debate. • Disruptive technological change (technological globalisation, "crowd" activity) is transforming communications, finance and capital-raising, manufacturing and services, education, health care and social assistance, connecting previously national or local markets, intruding deep into private lives and aiding insurgency and terrorism. This builds huge power centres and undermines them: some consumers are choosing to "go local". • Disorder makes a disjunctive shock a very real possibility. That would alter the landscape. The global financial crisis was such a shock. World War I was a far bigger one. • In northern democracies younger generations are increasing their influence in business and politics: note support for Bernie Sanders (United States, 2016), Jeremy Corbyn (Britain, June), Justin Trudeau (Canada) and Macron (France) – they want a change from post-1980s orthodoxies (as do many middle-aged and older who have not done well). • New Zealand is in a little bubble: no terror attacks (yet), no refugee flood, economic output ticking along (though on a per capita basis in recession in the December/March quarters) and business and consumer confidence firm – and a bicultural settlement. But very high immigration, ultra-high house prices, seriously high household debt and low productivity give cause for concern. Longer-term issues are mounting, including climate change and future superannuation costs, embedded inequalities of wealth and income and life chances and regional disparities in population and economic growth. Also, as a very open society and economy, New Zealand is highly vulnerable to a global shock. And this election has reflected a version of the younger-generations' wish for change. P O Box 9494, Marion Square, Wellington 6141, 021-438 434, [email protected], www.ColinJames.co.nz 2. The new Parliament: a big shift is under way • This election marks the beginning of a generational shift in politics and policy. The specifics of the coalition negotiations will make some difference in timing and speed of policy change but will not stop it. There are strong exogenous influences which will force change and the three cohorts up to around 45 have different experiences, mentalities and value sets from the over-50s cohorts. These differences are particularly marked in the under 30s and under 25s, who have grown up in the digital era. • The last big generational shift was the coming to power in 1984 of the generation that grew up after the second world war. This generation brought very different values to the cabinet table from those of its parents. There was a profound policy shift in economic, foreign, social, indigenous and environmental policy: New Zealand opened to the world, became truly independent and set down a path towards being bicultural. • That generation has now largely departed but has left a long shadow reaching down to those in their 50s. So the 1980s policy settings have broadly persisted, adjusted first by Clark governments' "third way", then by circumstance during the present government. Innovation, notably "social investment", has so far been broadly within the 1980s context. • The election has near-doubled the last Parliament's 12 under-40s to either 22 or 23, depending on the final count, which is a fifth of the new Parliament, and has similarly boosted the 40-45s. Overall, somewhere around a third will be under-45. Labour's Jacinda Ardern, at 37, is Y-generation. One other on her front bench is under 40. Altogether, nine of her MPs now are under 40 and a similar number are 40-45. National has eight under 40 (one under 30) and a similar number are 40-45, including a potential future leader, Simon Bridges, 40. The Greens have at least three under 40 (one under 30), four if the final count gives them one more seat. Leader James Shaw is 44 and his likely next co-leader, Marama Davidson, is 43. New Zealand First has Darroch Ball, 35, and Fletcher Tabuteau, 43, in its current caucus. ACT leader David Seymour is 34. These lower-X/Y cohorts will likely dominate governments through the 2020s. • As noted above, in the population at large this lower-X/Y cohort and the next cohorts, the millennials and younger, have different life experiences, in part driven by digital technology and connectivity, and different perspectives, particularly on the natural environment. Their upbringing has been in a more stratified society, including in home ownership. Work and income are less secure and likely to be still less so in the 2020s. These endogenous and exogenous influences on the younger cohorts do not automatically translate into a 1980s-type radical policy shift because in some ways they are "conservative" (whatever that means in the modern context). So the big responses to the deep exogenous changes may not come until those now under 30 – the millennials – take power, which will not be until well into the 2020s. But business should expect from the early 2020s and through the 2020s significant and probably major rethinking of policy and implementation, to adjust to 2020s realities. Obvious candidates for rethinking include tax (wealth/assets in, environmental impacts in, offset by lower taxes elsewhere, including income?), environmental stewardship, the means to assure social cohesion and stability and how to incorporate international 2 realities into domestic policy and manage/adjust to exogenous influences. This will affect the business operating environment. 3. Parliamentary mathematics and government equations • Bill English has said stitching up a government will likely take two to three weeks. Winston Peters has said he wants to wait till the return of the writs on October 12 but may have meant the final count, due 2pm October 7. Jacinda Ardern has given a similar timeline. Negotiations could start earlier but will likely be influenced by the final count. • The final count, which includes 384,000 special votes not counted on election night, is likely to change how many seats each party gets. On election night the seats went National 58, Labour 45, New Zealand First 9, Greens 7, ACT 1. In 2014 National's election-night score of 48.1% dropped to 47.0% in the final count. A similar adjustment this time would cut National's percentage from 46% to 45% and cost it one seat and, if the adjustment is greater, it could cost it two seats. The Greens need only a slight lift (which is likely) to take its seat total to 8. If the 2014 pattern applies, Labour may also get a lift to 46 seats. In that event National would lead a Labour+Green combination by only 56 to 54. This could be a factor in Winston Peters' and New Zealand First's decision which side to back because a Labour-Green-New Zealand First combination would have 63 seats, two clear of a majority and so with some leeway. On election night figures a National- New Zealand First combination had 67 seats to the three-way combination's 61. • Which way New Zealand First will go is not a confidently predictable. Possible factors in the decision include: Favouring National: –National is the largest party and can do a straight two-party deal. –Peters chose National as his political vehicle in 1975 and was National until he was thrown out in 1993 and until then thought of it as "family", as Michael Laws put it. –English has more leeway than Labour/Greens to compromise. National is more pragmatic and more focused on power over principle, so can more readily make concessions, as in the 1996 bidding contest. So National can perhaps indulge Peters' "bottom line" of a binding referendum on abolishing Maori seats (and campaign against it). Labour and Greens cannot. –Labour's surge since July has probably stripped out most of the Labour-leaning support that had gone to New Zealand First, leaving a support base that is nearer National than Labour. New Zealand First's support was over 13% on average in July, nearly twice its election night result. A complication is Peters' intense dislike of Steven Joyce. Favouring Labour –A Labour-led government would be in its first term with good prospects of re-election. –A binary Labour/National assignment of New Zealand First conference delegates would class more as Labour-ish than as National-ish. The some goes for the policy platform, though Labour cannot agree to a binding referendum on Maori seats.