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No lemming rush as investors shuffle cards

By Peter V O'Brien

Friday 2nd May 2003

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The Reserve Bank's decision to cut the official cash rate (OCR) from 5.75% to 5.5% is unlikely to see more than a minor adjustment to yields on wholesale and retail fixed-term, interest-bearing securities.

Figures in the table show yields on April 24, the day after the bank altered the OCR, and the position a year ago. The "change" column for government stock yields was unadjusted for those securities moving a year closer to maturity but there was an effective decline after allowance for that factor.

Reserve Bank action came before ASB Bank released results of its latest investor confidence survey but after the institution's compilation of figures for the quarter ended March. The survey showed investors had moved from investment in shares and managed funds to bank deposits and property.

Changes in managed funds should be put in perspective. Reports that their investment fell about $560 million in the three months to March attributed the decline roughly half and half to withdrawals and to decline in asset value. Given a figure of about $17 billion in managed funds, the withdrawals were 1.65% of the total in the quarter, which annualised at 6.6%.

That was hardly a lemming rush, particularly as nobody knew the relationship between the number of investors taking out all, or part of, their money and the size of individual withdrawals.

There is a short-term disillusionment with equities worldwide and a move to other options, including fixed interest and property. That view also should be put in perspective.

New Zealand still has one of the developed world's highest fixed-interest rate-yields structures at wholesale and retail levels. No wonder people here shifted some money (emphasis on "some") from shares to interest-bearing securities.

A move to property investment would involve fewer individuals, unless they went to listed property companies, syndicates and other group schemes. Property investment requires more financial resources than, say, switching $100,000 from shares to deposits, even when mortgage availability is taken into account. That comment has less application to residential property where a reasonable deposit plus mortgage can buy attractive real estate, rents pay outgoings and there are prospects of capital appreciation. The last can also be cyclical, depending on supply and demand ratios.

Property booms have moved to busts over the years. There is no guarantee of a change to that situation. Supply and demand also applies to fixed interest.

The cut in the OCR last week came on April 23, two days after the Easter break and two days before Anzac Day.

Major registered banks and finance houses (a sample of which were used for retail yields in the table, excluding secondary institutions) were still to react as at April 24. Their revised offerings would be based on more than the OCR. Institutional borrowers balance demand for funds against supply and add maturity schedules and historical patterns of those factors into the equation.

A substantial increase in supply, when balanced against demand, would see an easing in retail yields. Demand relates to a combination of consumer requirements and provision of mortgage finance. The relationships are complex and vary between institutions. It is a matter of balance.

Anyone thinking otherwise would be advised to get in quick, before excess supply resulted in disappointment at available rates.

Movers from equities to fixed interest should also be aware of the "locked-in" factor for the appropriate period in the retail market if involved in term deposits as opposed to savings accounts and so on. That does not apply to the wholesale market ­ subject to marketable parcels ­ where one can buy and sell daily.

People who fled equities exposed themselves to counter-cyclical operators with the patience to wait until equities rebound, as they always do. Fixed interest is now attractive because the controllers of New Zealand's small economy are concerned ­ even obsessed ­ about inflationary and deflationary pressures. The latter includes Sars and its potential effects on exports and tourist inflows.

They will pass in time, so investors, as always, should remain flexible between equities, fixed interests and property.

Interest rate yields

Security Rate Rate Change

24.4.03 15.4.02 Apr-Apr


Government stock maturity April 2004 5.25 6.41 -1.16*
Nov 2006 5.44 6.84 -1.40*
Nov 2011 5.85 6.82 -0.97*

Bank bills

90 Days 5.54 5.77 -0.23

Retail rates Three months 5.0-5.2 4.55-5.15 N/A
Six months 5.25-5.5 4.7-5.5 N/A
12 months 5.05-5.5 5.4-5.75 N/A

OCR 5.5 5.0 -0.5

*Unadjusted for one year less to maturity

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