The Decline of Term Deposits: Your Cash is Cooked

Originally posted on pmgfunds.co.nz (August 2024)

By Matt McHardy, General Manager Investor Relationships

New Zealand's financial landscape is undergoing significant changes. The Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) in August 2024 bringing it down to 5.25%*, and the market is anticipating further cuts in the coming months, leading to lower deposit and borrowing rates. For the last couple of years, favourable interest rates have made term deposits and savings accounts attractive options. However, with interest rates already declining, keeping funds in the bank is becoming less appealing. This shift necessitates re-evaluating whether cash investments still hold value, especially given their historically lower long-term inflation-adjusted returns compared to other assets.

There were some economists who accurately predicted that interest rate cuts could occur as early as August 2024, marking the end of high cash rates for this cycle. Mark Lister, Investment Director at Craigs Investment Partners, made comments in July 2024 supporting the view that a decline of 1.5% returns on a six-month term deposit over the next 12 months, or an approximate 2% decrease over a period of two years, can be expected. This would result in a reduction of income from the rate change of between 25-35%. What does this tell us? It is now important for those with funds in term deposits or savings accounts to carefully consider their options for generating short-term income and to assess the potential reinvestment risks upon maturity.

Seizing market troughs

Despite uncertainty in the financial markets, investors have seen decent returns with fixed-term cash investments. However, it's time to rethink whether holding excessive cash is necessary. Maintaining cash reserves is essential, but it’s also important to ensure some of that cash is working for you. Inflation slowly erodes your money’s purchasing power, meaning your cash could be losing value over time.

Astute investors are making moves, and there’s still time to capitalise on the current market trough. Rather than waiting for the market to react, now is a good opportunity to invest in assets with longer-term horizons and attractive long-term yields. It’s easy to get caught up in immediate concerns and miss out on future gains. Therefore, having a long-term investment strategy and sticking to it through market cycles is crucial.

Exploring commercial real estate

Given the drawbacks of holding excess cash, commercial real estate becomes a compelling option. Historically resilient against interest rate fluctuations over the long term, commercial properties generate income through both rental earnings and capital gains, providing a steady revenue stream with long-term growth potential. However, the higher asset costs can make direct investment challenging for individuals. Commercial property funds, like those offered by PMG, provide an affordable way to own high-quality commercial real estate, diversify your portfolio, and spread risk across various assets.

PMG’s retail funds are structured as multi-rate Portfolio Investment Entities (PIEs), meaning investors pay tax based on their Prescribed Investor Rate, capped at 28%. Over time, these tax savings can compound and may provide investors with an advantage.

Looking ahead

It is fundamental to recognise that as interest rates continue to trend downward, the opportunity cost of holding cash will inevitably rise. Therefore, it’s important for investors to proactively explore and pursue options that not only preserve wealth but also strategically position their assets for potential growth in the upcoming economic cycle.

*14 August 2024

Disclaimer:

The information in this article is of a general nature and was current as at 19 August 2024.  It is not intended to be regulated financial advice for the purpose of the Financial Markets Conduct Act 2013, and does not take your individual circumstances and financial situation into account. PMG does not provide financial advice on whether or not an investment in one of its funds is right for you.  Please seek advice from a licensed financial advice provider before making any investment decisions.

Contact

Have you considered buying or selling a business or commercial property? Or do you know of a family member, friend or colleague who is considering buying or selling a property? Contact Bernard to experience next level service.

Bernard Linsley
M  022 183 2469
E  bernard.linsley@pb.co.nz

Send me your enquiry










ASAP  0-2 months  3-6 months 
Yes  No 













Privacy Statement




Property Brokers Ltd MREINZ acknowledges and complies with the provisions of the Privacy Act 1993 and its amendments. In particular Property Brokers policy covers the following specific points relevant to this topic and this website:


Any client information you provide to Property Brokers will be used only for the purpose for which it is given and will not be passed on to any third party except in accordance with the law, or with specific consent.


In the main, this will be to facilitate company communication with you in order to better meet your real estate objectives and expectations.


Information provided by you will remain confidential to Property Brokers Real Estate Ltd MREINZ. This particularly applies to your reasons for selling which we regard and treat as a personal and private matter.


Any information divulged by you to any other website linked to the Property Brokers website is given at your discretion alone, and Property Brokers takes no responsibility for any disclosures that might result.


Information provided on this website is copyrighted to Property Brokers and may be accessed, downloaded and used for personal use only. The material must not be modified, copied or reproduced for gain or commercial use without the consent in writing of Property Brokers Real Estate Ltd MREINZ.


 




Google disclaimer


This website uses Google Analytics to help analyse how users use the site.


The tool uses "cookies," which are text files placed on your computer, to collect standard Internet log information and visitor behaviour information in an anonymous form.


The information generated by the cookie about your use of the website (including your IP address) is transmitted to Google. This information is then used to evaluate visitors use of this website and to compile statistical reports on website activity.


We will never (and will not allow any third party to) use the statistical analytics tool to track or to collect any Personally Identifiable Information of visitors to our site. Google will not associate your IP address with any other data held by Google. Neither we nor Google will link, or seek to link, an IP address with the identity of a computer user.


You may refuse the use of cookies by selecting the appropriate settings on your browser, however please note that if you do this you may not be able to use the full functionality of this website.


By using this website, you consent to the processing of data about you by Google in the manner and for the purposes set out above.


This website uses Google AdWords


This website uses the Google AdWords remarketing service to advertise on third party websites (including Google) to previous visitors to our site. It could mean that we advertise to previous visitors who havent completed a task on our site, for example using the contact form to make an enquiry. This could be in the form of an advertisement on the Google search results page, or a site in the Google Display Network. Third-party vendors, including Google, use cookies to serve ads based on someones past visits to the [CLIENT NAME] website. Of course, any data collected will be used in accordance with our own privacy policy and Googles privacy policy.


You can set preferences for how Google advertises to you using the Google Ad Preferences page, and if you want to you can
opt out of interest-based advertising entirely by cookie settings or
permanently using a browser plugin.


Bernard Linsley
Rapid SSL Site Seal