REGULARS | INVESTMENT COMMENTARY
Interest rates going to near zero for … many years David van Schaardenburg asks: what’s the implications for investors and how does this affect retirement strategies? BY DAVID VAN SCHAARDENBURG
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’ve been investing or advising on client funds for over 35 years. In that time I’ve seen a lot of financial records set; be it sharemarket highs, falls, extreme volatility, etc. The new financial record set in 2020 is the trend for interest rates on bank deposits and Government bonds falling towards zero. I have never seen such low returns on offer for low risk assets. At the time of writing, the top five NZ high street banks are now offering on average under 1.0% for one-year TDs. And with the Reserve Bank’s new “Funding for Lending” programme (low cost “helicopter money” for the banks to lend) soon to start, interest rates are set to go further lower. Interest rates in NZ have been trending down gradually over the last 10 years. However like many things, the pace of change has been accelerated by the economic recession triggered by Covid-19 and the resultant relaxation of monetary policy plus introduction of “unconventional” monetary policy tools. Not only do we believe 2020 is the year of record low interest rates but based on overseas experience near nil interest rates may be around for many years.
What does this mean for investors? Between August 2019 resident household deposits with banks rose from $182 billion to $197 billion. So despite returns declining, with all the uncertainties of Covid households were prepared to squirrel away more of their savings into a secure investment (the bank) but one which would increasingly return less. Makes sense in an uncertain world and over the short term the opportunity cost will usually not be too high. However this cost can rise to become
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Take the US. After bank rates fell dramatically in the GFC between 2007 and 2009 (3.7% to 0.8%), the average US one-year bank CD rates have ranged between 0.2 to 1.0% over the last decade. This is despite a good rate of economic growth between 2010 and 2020. Similarly, in the UK their central bank base rate, which was 5.75% at the start of the GFC (late 2007), has ranged between 0.1 to 0.75% since 2010.
a material gap over medium to longer periods. To highlight the cost over the medium to long term I provide clients a simple example of a 50-year-old couple who have invested $500,000 for their retirement and are highly concerned about the Covid recession so they’ve stuck it all in the bank for short-term capital security. This is compared to another couple who are at the same age and stage, that choose to invest for retirement via a balanced portfolio as they presume they won’t be touching it for a long time – ie when they retire.
In each instance, general inflation has remained suppressed despite reasonable to good economic growth. So no requirement to raise interest rates. Given the present weak medium-term economic outlook for New Zealand I see no reason the same will not occur in New Zealand for much of the next decade.
Each are hoping to draw $50,000 a year on their savings for retirement income needs from the age of 65. End of year one1 – versus the balanced portfolio couple, the bank couple are only $20,000 behind in their portfolio value. Not great but not a disaster. End of year five – the difference is starting to get painful. The opportunity cost between the two accounts has risen to $110,000 or 21% of original capital. End of year 10 – the difference in accumulated wealth between the bank couple and their balanced portfolio friends has risen to $251,000 or 48%.
