Pensioner pinch

Holy cow. Have you seen how much a term deposit pays these days? No apology for the bolt of bovine astonishment, because many of us forget to pay attention to the world of compounding interest.

There is now no hiding from the fact that fixed deposits in New Zealand currently give savers a big fat zero return. That’s right, zippity-nothing.

The big Aussie banks sit at 2.5 per cent for a range of terms. Pay your tax at 17.5 per cent and it leaves a net rate of 2 per cent. Check out the Consumer Price Index and 1.9 per cent of that is being eaten up by price rises – good old inflation. We are left standing still. Those on higher tax rates are going backwards.

In retirement, things are getting painful. Investing in term deposits means you are protecting the purchasing power of your money and no more.

In stark contrast to this, New Zealand shares shot up over 30 per cent in 2019 (including dividends), the only place you can get a cash return of one tenth of this (3 per cent) is at the Indian multinational,

Bank of Baroda (branches in Auckland and Wellington) for a term of four years.

The better-known ASB, Westpac, ANZ, BNZ and Kiwibank are all clumped around 2.5 per cent. Local building societies like the Heretaunga can take a bow for its 3.2 per cent two-year fixed rate.

Kiwis have $185 billion stashed in deposit accounts. Quite a proportion of our 750,000 pensioners will rely almost entirely on term deposit income, so if you are one of those feeling the pain you’re not alone.

Asset price boom worldwide

It’s no surprise that asset prices in shares and property have continued to rise in the last decade. There have been intensely low interest rates all over the world as governments sought to stimulate growth after the Global Financial Crisis of 2008. It’s been a big driver.

When largely risk-free deposits have low returns, it sets a benchmark. Risky assets that are in limited supply (such as property or good profitable companies) keep producing the same cash. The only way their returns can fall into line is for a big swoop of capital gains to occur. Investors start paying more and more for shares or houses, until there’s alignment with the lower cash benchmark plus a risk premium.

It’s likely this next decade will see far more measured capital gains and no relief for depositors.

Traditional monetary policy is largely broken as a tool. Globally, central banks can’t pull the interest rate lever down and stimulate growth – there’s nowhere to go at these levels, or the impact is muted.

Fiscal policy is now the lever to generate growth. Tax cuts, higher spending or printing money.

New Zealand’s retirees have been hit by low rates, but the uplift in capital gains is reflected in their house prices. Perversely, their +31.6% NZ Equities

+26.9% Global Equities (with currency risk) +26.7% Global Equities (no currency risk) +25.4% Global Small Caps (with currency risk) +23.7% Global Listed Infrastructure (no currency risk) +22.5% Australian Equities (with currency risk) +21.4% Global Listed Property (no currency risk) +17.7% Emerging Market Equities (with currency risk) +13.1% Emerging Market Debt (with currency risk) +11.8% NZ Direct Property

+9.4% Global Private Equity (no currency risk) +7.5% Global Bonds (no currency risk)

+6.2% Commodities (no currency risk)

+4.9% NZ Government Bonds

+1.7% NZ Cash

+1.2% Hedge Funds Defensive (no currency risk)

wealth is quite healthy, but they’re cash-poor and suffering.

It’s very difficult for someone to change their thinking and become comfortable with sharemarket volatility if they’ve relied on term deposits until this point.