A new low for the OCR: Interest rates and your portfolio
It’s an age old question: What are interest rates going to do? The answer to this question influences decisions for investors and borrowers alike. The chart below shows NZ and US official cash rates (OCR) as set by their respective central banks. After staying the same for two and a half years, the NZ OCR has now fallen to a new record low of 1.5%, as the Reserve Bank has responded to global economic growth prospects becoming more mixed, and inflation pressures appearing to have eased off for now. Compare this with the US rate, which has been lifted nine times since 2016 - although we may now have seen the last hike of this cycle. As a result, this is the first time that the US rate has been above the NZ rate since our OCR was launched in 1999!
This is good news for New Zealanders with mortgages and businesses looking to borrow, which lends some support to economic growth. And for savers, at least New Zealand’s rates remain well above those in most other developed countries around the world (especially Europe, where official cash rates are still stubbornly negative.)
What does this mean for how we manage your money?
For most investors, fixed interest investments (such as bonds) still play a very important role in smoothing the occasional volatility that comes from investing in shares. This is because bonds rise in price when market interest rates fall (as their existing income yield becomes more attractive compared to the new lower market rates) – and this tends to happen when economic growth, and shares, are weaker. However, as rates fall, it is also important to stay vigilant for any structural change in the outlook that might shift interest rates back up over time.
Thinking outside the box.
However, today’s lower rates create the challenge of sustaining the levels of investment income we’ve come to expect. This has been a key factor for the Booster KiwiSaver scheme who are now investing into income-generating, unlisted NZ businesses and productive land investments. Not only do these unlisted assets provide capital to keep successful NZ businesses kiwi owned, but they avoid the same level of volatility in returns that the share markets deliver.
Booster started investing into Private Equity back in 2017 with a stake in the award-winning Awatere River Wine Company, before adding Waimea Estates (Nelson), Sileni Wines (Hawkes Bay), Mahana (Nelson) and 50% of Sunchaser Avocados (Bay of Plenty). As a group, these provide a good level of scale in the NZ wine industry, while Sunchaser is able to harvest its Avocados earlier than most suppliers, and benefit from premium pricing as a result (so those $7 Avocados can at least support your investment balance!). There remain plenty of possibilities in the pipeline in areas that NZ does well, from kiwifruit to high-end engineering. These will help sustain investment income, despite the new low interest era that we now appear to be in.
Market & Portfolio Update – May
Most funds gave back a small portion of this year’s strong gains during May, with Balanced portfolios down around 1% (compared to a 7% gain over the previous 12 months). This was driven by world share markets as trade tensions were again in the headlines, and some indicators of economic growth eased a little further.
With market interest rates also moving lower, fixed interest investments performed well, with both NZ and global bonds rising in value by 1% which helped support overall results.
NZ and Australian shares also performed positively, with NZ share investments up almost 1%, and Australian shares buoyed by shares in the major banks. Banking shares returned 6% on average, after the Australian Liberal Party’s surprise election win cleared the way for continued favourable tax treatment on their dividends, and less regulatory pressure.
If you have any questions please feel free to email me at adam@compoundwealth.co.nz or phone +852 530 353 84.
PS - For a FREE KiwiSaver analysis and recommendations report please complete a KiwiSaver fact find here.