Opinion: Signs that Kiwis are eyeing safer havens

By NZPA

Friday 14th September 2007

Ongoing investor nervousness about the global credit crunch has brought a silver lining to the world of defensive investments.

Gold, top quality bond issues, term deposits and government-backed securities are all looking good to those shell-shocked by the collapse of several local finance companies and fears of a US economic slowdown.

While "investor flight" is too strong a phrase, several signs of risk-averse mentality are starting to emerge.

Indication number 1: Anecdotal reports that term deposits are receiving a flood of cash, largely from former finance company investors.

Banks are reportedly "up to their necks" in term deposit cash, Andrew Dinsdale, chief of KPMG's banking and finance group, says.

That was backed recently by Kiwibank CEO Sam Knowles, who estimates "hundreds of millions of dollars a week" were flowing from finance companies to banks.

Actual statistics on term deposits are gathered from banks and non-bank lenders by the Reserve Bank, but figures for the telling month of July are not yet out.

Indication number 2: This week's decision by international bank Rabobank to go ahead with its $400 million bond issue, which is expected to be gobbled up by a nervy market.

The offer is backed by Rabobank's triple-A credit rating by Standard and Poors -- equal to New Zealand's sovereign rating -- and is one of the few avenues for retail investors to access very secure bonds.

Contrast this with the scrapped $150 million bond issue from the purchasers of the Yellow Pages, who cited the current climate in their decision.

Demand has also risen for Government retail bonds, or "Kiwibonds," in the past month, up $3.5million, which officials say is "a clear reversal" of the usual situation.

The credit crunch has also seen wholesale buyers, usually banks, showing strong interest in Government bonds and Treasury Bills .

This week the Debt Management Office was offering $250 million in Treasury Bills, $50 million higher than usual and $150 million higher than before the credit crisis. It was over-subscribed three time over.

Government bonds are also in short supply. Last month the August tender of bonds was increased from $200 million to $300 million and although only $225 million was issued, demand has prompted the DMO to bring this month's $250 million tender forward a week.

While banks have a different motivation to safe haven-seeking investors -- they need to ensure they have enough liquidity -- Debt Management Office Treasurer Philip Combes says the re's a common theme.

"Because there's a flight to quality , and government securities are at the highest end of the security scale, both [retail and wholesale investors] are holding onto them."

Indication number 3: Gold prices are rising and demand locally is growing.

Gold prices have broken the psychological barrier of $US700 ($NZ992) an ounce, on the back of rising oil prices and fresh concern about the potential for a US recession.

Gold is seen as "anti-inflationary", making it a good hedge against inflationary oil .

New Zealanders aren't traditionally big buyers of physical gold, but private gold trader New Zealand Mint says it's seen an upturn in people buying and selling coins.

"Definitely," head bullion trader Michael O'Kane says, declining to give figures.

"We're also seeing people looking to hedge against the exchange rate. A couple of months ago when the exchange rate was up around the US81c mark, one ounce of gold cost you about $910 locally. Currently we're looking at $1110."

On the sharemarket, there's no evidence that people are cashing up their shares to reinvest in safer havens.

However, they do appear to be sitting on the sidelines, and brokers are advising people to concentrate on proven performers and defensive stocks, such as energy and utilities.

"I've not seen any wholesale selling ... but where there is new money being invested, it's certainly being invested toward the very high quality stocks," Kerry Porter of Macquarie Equities says.

"There's just quite a hesitancy to take any market risk at this point in time," James Miller, a research manager at ABN Amro Craigs, adds.

He says investors are holding their blue chip shares but cashing up riskier stocks and sitting on the cash, keeping an eye out for cheap opportunities.

The market is also "in some instances" in uncharted territory, Porter warns.

In particular, he says, gold prices didn't react when the markets were performing poorly two months ago and have only recently gone up, possibly because central banks have started to hold onto their gold instead of selling it.

"I think in this environment, some of the normal connects that one would expect aren't necessarily playing to the normal scripts."

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