By Roger J Kerr
Decisions by fixed interest investors (wholesale and retail) on where to place their funds seem to have become harder of late.
Hordes of retail investors switched into the higher yields offered by listed dividend stocks when bank deposit interest rates collapsed to below 3.00% a few years back.
Those investors have done well to date with the impressive performance of the New Zealand sharemarket over the last three years. However, many will now be questioning how much equity market risk they want to have in their investment portfolio in 2018 with increased talk of a major equity market correction downwards sometime this year.
Recent financial surprises from listed companies Fletcher Building and CBL Insurance will not be adding to the confidence levels.
Selling out of dividend stocks and buying bonds instead may also not be that attractive at this time either.
As US bond yields increase (bond prices fall), the NZ Government Bonds will follow with the potential for the “double-whammy” lift of both underlying interest rate market yields from three to 10 years and the NZ:US spread or margin also set for a major re-adjustment upwards (refer to previous commentaries).
Seeking enhanced yield returns well above Government Bonds and bank deposit rates has traditionally led retail investors to finance company debentures, corporate bonds and syndicated property investments.
Well-run finance companies like Fisher & Paykel Finance are not borrowing from the public anymore and UDC (whose ownership is up in the air) only offer a few pips more than bank deposits from two to five-year terms.
The corporate bond new issuance scene appears to be dominated by listed property companies and the airports (largely property companies as well).
The major issue around syndicated property investments is the lack of liquidity should the investor want their money back early.
Given all the above, the fixed interest investment market in New Zealand would seem ripe for some longer-term, quality bond offering from parts of the economy we may not have seen before.
The ability of local government entities to offer separated “infrastructure bonds” seems limited given their financial ratio constraints.
Social housing projects and water-related infrastructure projects strike me as two new areas that would lend themselves to new bond offerings to both wholesale and retail investors.
Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets.