(Bloomberg) -- Whoever wins next month’s general election in New Zealand will inherit one of Asia Pacific’s worst-performing stock markets, with more downside likely ahead.

The country’s equity benchmark has slumped heading into the Oct. 14 vote as high interest rates and China’s slowdown damp its outlook. The S&P/NZX 50 Gross Index has fallen 6.2% this quarter, on track for the second-biggest drop among major indexes in the region, according to data compiled by Bloomberg. 

The Reserve Bank of New Zealand’s 525 basis points of tightening since October 2021 has weighed on stocks and the economy. The central bank kept rates unchanged for a second straight meeting in August but signaled that it may need to hike again to tame inflation. Its meeting on Wednesday will serve as the next big pre-election test for the market.  

As households reel from a cost-of-living crisis and a real estate slump, the main opposition National Party claims increased government spending from the ruling Labour Party has stoked inflation and driven up interest rates. Labour is trailing in opinion polls ahead of the vote.

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China’s economic downturn has also curbed demand for commodities such as meat and milk, hampering the stock market’s consumer sector. Fonterra Cooperative Group, the world’s biggest dairy exporter, has slashed its projected payment to New Zealand suppliers twice in August by a combined 15%.

Weaker milk prices have dented dairy shares this year, with a2 Milk Co Ltd. losing about 40% and Synlait Milk Ltd. shedding more than 60%.

The commodity’s decline will “lead to a continued deterioration in the outlook for the New Zealand economy,” said Hebe Chen, an analyst at IG Markets Ltd. As for the nation’s stocks, consumer shares will continue to crumble, she said.

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Softer-than-expected forward guidance in last month’s earnings season also positioned the market as a global laggard, according to UBS Group AG. Outlook concerns from cost inflation, interest-rate pressures and company-specific issues overshadowed solid results, analysts led by Vignesh Nair wrote in a note.

China’s slowing economy and jitters over the outlook for US interest rates have also weighed on the local currency this year, adding to market pressures. 

Still, the upcoming election has the potential “to breathe new life and hope into the investment markets, providing much-needed forward-looking optimism,” said Chen.

--With assistance from Matthew Burgess.

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