A search for yields: We’ve been here before
The finance company failures of 10 years ago should be a warning to retirees, writes Tim Fairbrother.
As interest rates in New Zealand head toward record lows and a quarter of global government bonds hit negative returns, the ‘‘search for yield’’ is a hot topic.
Put simply for the 15 per cent of Kiwis aged over 65; How do I get more return to top up my pension?
Bank term deposits have always been a popular vehicle for retirees, but with the official cash rate (OCR) at 1 per cent, they are losing their appeal pretty fast. And with a major bank predicting last week that the OCR will hit 0.25 per cent by March 2020, getting a return from the bank to supplement ongoing income will be a very difficult proposition to stay patient with.
Very soon Mr and Mrs Retiree will be asking – where do we invest next?
It was this same search for higher yield that drove many people to finance companies a decade ago, with disastrous results.
Now, with New Zealanders notoriously good at sticking with what they know, our fear is the termdeposit money will find its way into the New Zealand sharemarket.
Our sharemarket has had one of its best upward phases over the past 10 years, up a phenomenal 13.3 per cent per annum. An astute investor would have done very well from the Government asset sales in 2013-2014 with Meridian, Genesis, Mighty River and Air New Zealand all scooping significant gains since this time. With massive parcels invested from the NZ Super Fund and ACC Investment Fund into the local sharemarket, New Zealanders also pour an average of $500 million into KiwiSaver each month. However, by far the largest inflow of funds has been from overseas owners who now make up almost 40 per cent of our market.
But when a market goes up so continuously for so long, one must start to wonder when the fairytale will end. And the warning is in the data; our annual gross domestic product (GDP) growth, a major leading indicator of sharemarkets, has plunged in the past 18 months from 3.5 per cent to 2.5 per cent. What’s most concerning is that New Zealand’s price to earnings ratio – what a company is valued at relative to its earnings – is excessively overvalued. It’s at a staggering 27.4 times, versus a global average of 14.9 times.
Whilst a small portion of your retirement savings would probably go well with some investment into the New Zealand sharemarket, history shows us that if you diversify and don’t put all your eggs in one basket, you’ll hang on to your hardearned money. With a bit more understanding about how to invest and not chasing returns with little knowledge of risk, we can all build a stronger, more educated future for New Zealand.
As investor Warren Buffett said: ‘‘If past history was all that is needed to play the game of money, the richest people would be librarians’’.
Tim Fairbrother is a certified financial planner and authorised financial adviser with Rival Wealth, where a disclosure statement is available on request and free of charge. These views are of a general nature and should not be considered personal financial advice.
When a market goes up so continuously for so long, one must start to wonder when the fairytale will end.