By Bernard Hickey
New Zealanders and their fund managers just can't seem to stomach investing in big, hairy and risky long-term privately funded infrastructure projects.
The failure this week of Pacific Fibre to convince local investors to stump up most of the required NZ$500 million to build a second optic fibre cable to Australia and America is symptomatic of economies with ageing populations and shriveling appetites for riskier, long term projects.
As savers get older they get more conservative and they want their assets to be more liquid.
That's understandable. Savers nearing or in retirement have to worry that they don't have a lot of time to make up for any sharp slump in the value of any asset.
They also want to know that if they need a hip replacement or to draw down quickly on their savings that they can pull their money out quickly.
That tends to drive older investors towards more liquid and lower risk investments such as bonds, and particularly, government bonds.
This tendency of ageing investors towards investing in governments and government guaranteed deposits is all fine and dandy when they make up a relatively small part of the investing population.
But when the relative size of this population starts to have a heavier weight and the markets for riskier assets such as shares are volatile for a long time then the world has a problem.
All around the world this problem is bogging down economies, driving down growth rates and increasing unemployment.
Companies and the investors behind them are reluctant to invest in longer term risky projects, and it's not just because they are uncertain about the economic outlook.
This drying up of investment appetites is structural. In demographic terms, the 'pig' of the baby boomer cohort of the population is moving through the 'python' of the investment landscape.
During the 1980s through to the mid-2000s this generation were keener to invest in shares and riskier assets because they were younger and less risk averse. That helped fuel the stock market booms of the mid 1980s and the late 1990s.
But now this 'pig' is moving into the bond-investing part of the life cycle and, even more frustratingly, have seen the intense volatility of the last four years as the catalyst to begin investing heavily in the safest type of investments, either government bonds or government guaranteed bank deposits.
When investors buy bonds they drive up the price, which pushes down the yeld.
This bond-buying and term depositing spree by New Zealand has driven New Zealand's 10 year government bond yield down from a high of 7% in March 2002 to 3.5% this week and lifted term deposits from NZ$44 billion to NZ$108 billion over the same period, even though 1 year term deposit rates have slumped from 8.7% in March 2008 to around 4.4% now.
But this problem is also an opportunity.
Countries like China that are serious about infrastructure investment with long investment horizons don't wait for investors get their mojo back or wait for a new generation to move through the 'python'. China's leaders simply borrow the money from its people at artificially low interest rates and invest in the roads, airports, houses, motorways and broadband infrastructure they needs.
New Zealand's leaders should do the same.
And the government doesn't even have to rely on forcing interest rates on those bonds to artificiallly low levels. They are already low, thanks to the new old conservatism of the pig in our investment python.
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This column first appeared in The Herald on Sunday.
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