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.
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