Political risk – New Zealand next?

The last eighteen months have been a particularly fascinating time to be following political events.

Monday, August 14th 2017, 9:35AM

by Jamie Young

At Castle Point, we spend most of our research time on individual companies and their industries, but we do keep an eye on macro events to ascertain potential risks lurking in the overall investing environment.

While the Brexit vote in June 2016 certainly surprised, what really stuck in my mind was the aggressive “marketing” tactics of the Leave campaigners, particularly around immigration and the costs of EU membership. One of the most effective Leave campaign messages was the bold claim that instead of sending 350m pounds a week to the EU, it could be retained and be used to fund Britain’s National Health Service.

This was a blatant lie. Although it is difficult to determine its ultimate impact on the vote, given the closeness in the result it is arguable that it could have been the difference. Having travelled to the United Kingdom recently, it does appear that many of those who voted Leave did so on the back of the topics discussed above and believed the campaign slogans without checking the facts.

Interestingly, there appear to be no repercussions from lying to the public. While some are now trying to raise this issue (Lord Sugar, for example, has called for Boris Johnson to be put in prison), the referendum is over.

This is interesting from a Game Theory point of view. If lying helps you win people over to your point of view and has no repercussions, then you will do it. Game Theory predicts that the other side will then follow suit. Lies were also made by the Remain campaign. The winner then becomes the one that can lie the most effectively. Playing on people’s concerns over the status quo and giving an unattainable but rosy upside is a lot easier to do than telling the disgruntled public to stick with it.

The Trump result was next and so much has been written on that that I won’t dwell on it here, but the success of the Trump campaign appears to support the approach of saying anything to get a vote and worry (or more likely in Trump’s case, don’t worry) about the consequences later, as (setting impeachment aside) you are in for the term.

And then there was the more recent snap election in the United Kingdom. Theresa May tried to strengthen her hand but was left looking more like the Knight from Monty Python, who exclaimed “It’s just a flesh wound!” after losing both arms. Following this event from New Zealand, I observed many more Facebook posts promoting Jeremy Corbyn (Labour). That seemed to make a difference in terms of the 25-year high in young voter participation (which had been in decline for multiple elections) – which mostly went to Labour.

Source: https://www.theguardian.com/politics/datablog/ng-interactive/2017/jun/20/young-voters-class-and-turnout-how-britain-voted-in-2017

Labour and Corbyn had, among other things, “promised” to deal with student debt in an interview. This quickly got taken to mean write off the debt and abolish tuition fees. No surprise that Labour made strong gains in this area, and then backed away somewhat post election.

Now lying in politics in hardly new. For centuries, politicians have been caught out for lying. Hitler’s propaganda strategy was based on the premise that people believe even huge lies, provided you repeat them enough.

But, at least in recent history, the propensity to lie in politics appears to be increasing. The Oxford Dictionaries Word of the Year 2016 was “post-truth” – an adjective defined as relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief! According to Oxford Dictionaries, the concept of post-truth has been in existence for the past decade, but it has seen a spike in frequency in the context of the EU referendum in the United Kingdom and the presidential election in the United States. It has also become associated with a particular noun, in the phrase post-truth politics.

Taken to extremes, is this a test for democracy as how can you make an objective vote based on fake news or alternative truths? And what will stop this trend if politicians can not only get away with it but actually get rewarded for it?

Closer to home we have the Greens in turmoil over Metiria Turei’s benefit fraud and a new Labour leader, Jacinda Adern. As we look ahead to the NZ election later next month, we believe investors should be wary. Whether it be due to an increasing proportion of younger voter participation, an increasing voter desire for politicians who appear to be non-establishment, or the increasing prevalence of political lying, polls have recently been poor predictors of the final result.

In the investment community appears to be a general view that National will remain in power and nothing will affect the comfortable status quo. As recent history has very clearly demonstrated, little politically can be taken for granted these days. Be ready for some curve balls!

The following commentaries represent only the opinions of the authors. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest. All material presented is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Castle Point may or may not have investments in any of the securities mentioned.

Jamie Young is a co-founder of Castle Point Funds Management.

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