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Keeping portfolios afloat when interest rates are sinking With downwards pressure on interest rates even stronger than it has been for the past couple of years, Investment Specialist, Shannon Murphy, sat with Head of Fixed Income, Mark Brown, to discuss how he approaches the challenge. BY SHANNON MURPHY AND MARK BROWN
Murphy: The industry has been keeping an eye on low interest rates for a while now, but increasingly mum and dad investors are becoming aware of the downwards pressure on interest rates. What’s your take on the interest rate outlook at the moment? Brown: New Zealand’s rates were at all-time lows in 2019. The Reserve Bank (RBNZ) had been trying to get inflation to lift higher after being persistently below target. Then Covid-19 hit, and suddenly the weakening economy and rising unemployment meant the RBNZ has had to act aggressively. It has various 28 | ASSET NOVEMBER 2020
tools to push interest rates downwards; cutting the OCR into negatives has had a fair amount of media coverage recently. There has been a little less coverage of the funding for lending scheme concept, where they would offer cheaper loans to banks, who could pass lower funding costs onto clients. Used in tandem, these two initiatives would likely prompt lower term deposit and mortgage rates in New Zealand. What is not yet certain, is whether it will be necessary to cut rates in 2021. Regardless, interest rates are likely to remain low in the short to medium term.
Murphy: A lot of advisers I’ve been meeting with recently say clients have been flooding to them with maturing term deposits, and are worried about the low interest rates on offer. Many are around retirement age and need a portfolio which supports their lifestyle. Brown: Term deposits have been a safety net for investors for a long time, and so it has been quite confronting for some people seeing them decline to below 1%. It does mean we are facing some serious challenges helping retirees to generate income from the savings they have built up over their lifetime.
