New Zealand stocks cheered the governing National Party's emphatic election victory over the weekend, but analysts warned the 'rock star' economy faces mounting headwinds.
Prime Minister John Key gained 48 percent of the vote and 61 of the 121 parliamentary seats available - the first time one party has secured a majority in New Zealand in over 20 years. The news pushed the NZX 50 index up 1.25 percent in early trading Monday.
While some analysts view the stock surge as a sign of confidence in how the incumbent government is handling the economy, others warn the good times may soon end.
"New Zealand's extraordinary outperformance in recent times is behind us," Sung Woen Kang, analyst at Morgan Stanley, said in a note published Monday.
New Zealand was labeled a 'rock star' economy this year due to its outperformance of other developed markets. It grew 3.9 percent on year in the second quarter,the fastest rate since the second quarter of 2004. However, growth slowed to 0.7 on quarter, suggesting a peak in the current growth cycle.
According to Kang, the 100 basis points of rate hikes that the Reserve Bank of New Zealand (RBNZ) has carried out this year are starting to make their mark on the economy, while subdued global growth is set to suppress demand for the nation's major exports.
Kiwi dollar strength is another headwind, Kang said; the currency gained around 7 percent against the greenback in the first half of the year, boosted by the high interest rate differential between New Zealand and other advanced economies, he said.
"[Domestic headwinds] have included negative momentum in dairy export prices and payouts, the cooling housing market and lower-than-expected inflation prints, partly due to the elevated exchange rate," said Kang.