Why your KiwiSaver balance is looking good
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Why your KiwiSaver is looking so good
Q: I see markets have fully priced in a 50 basis point OCR cut in for November and are already pushing 50% odds of a 75 basis point cut. Why are they always so keen to see interest rates come down? - L. Forrest
A: If you haven’t checked lately you might be pleasantly surprised by the state of your KiwiSaver balance. That’s one of the upsides of falling interest rates. Sharemarket investors get excited by lower rates because they shift the weight of investor money from cash investments like bank accounts towards equities.
US sharemarkets have been on a roll lately, buoyed by the first US Federal Reserve’s 50 basis point interest cut in September and expectations of more to come.
Even the local NZX50 has seen some good growth after about two years in the doldrums. As Mark Lister – head of private wealth at Craigs Investment Partners – wrote for the Herald this week, the local NZX 50 index has rebounded strongly since June and is up 9% so far in 2024.
“That’s close to the long-term average, and it’s much better than we’ve seen in recent years. The market eked out a gain of just 2.6% last year, after declines in 2021 and 2022,” Lister said.
The most basic reason for the renewed strength is that if bank deposits are heading lower then people who want a better return have to try their luck elsewhere.
Sharemarkets might be a bit riskier but the risk-reward equation starts to look better by default if the returns for safer investments decline.
Lower interest rates are also good news for businesses looking to borrow and grow. So there’s a boost that comes from listed companies paying less for debt and generally having more funds to use for other things. Finally, lower interest rates also give consumer confidence a boost. If consumers spend more then that should also flow through to business profits.
So lower rates usually translate to higher sharemarkets. Great news for share investors but also many more of us via our KiwiSaver accounts.
Not surprisingly the companies that benefit the most from lower rates are traditional businesses that sell things.
In the past couple of years – while rates have been high – we’ve seen a tech sector boom keep things elevated.
The big tech stocks aren’t so directly connected to economic conditions because their investors tend to be less concerned about short-term profits and more interested in long-term growth.
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We are now seeing a lot of investment money shift from high-tech stocks to more traditional retailers, power companies and utilities. That’s good news for the NZX.
It also creates a bit of risk. Thankfully we haven’t seen a tech crash – the way it did back in 2000 – but as the interest rate and economic landscape change we’re seeing a big rebalancing on markets.
Wishful thinking?
When we talk about the “market expectations” for what the next OCR call will be, what we are referring to is the price that financial investors are prepared to lock in rates at a certain date (based on speculation about where they think the OCR will be sitting).
The Overnight Indexed Swaps market effectively provides a live proxy for the Official Cash Rate. But because it is speculative and based on assumptions about the state of the economy in the future, it is extremely volatile. The odds move around every day and can turn on the smallest piece of news or shift in market sentiment.
The bets traders place should be based on carefully thought-through analysis of where the economy is headed. The banks and financial institutions that make these trades have economists producing forecasts to inform their decisions.
So market expectations shouldn’t be driven by wishful thinking. But it does sometimes seem to be the case that market enthusiasm for lower interest rates drives momentum in the swaps market.
In the US it feels like the Federal Reserve and traders are playing a giant game of poker. Investors anxious for insight into Fed thinking will overreact to the slightest shift in the language used by any of the Federal Reserve Governors (there are seven, representing different regions of the US) in speeches and media conferences.
Sometimes a few words are enough to trigger a Wall Street sell-off. So the Fed has to push back and sometimes the governors (or chairman Jerome Powell) will attempt to manage expectations with a specific speech or statement.
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