Bernard Hickey: Old savers drag on investment

Pacific Fibre failed to convince local investors to stump up $500 million needed to build a second optic fibre cable. Photo / Thinkstock

New Zealanders and their fund managers can't seem to stomach investing in big, hairy, risky long-term privately funded infrastructure projects.

The failure this week of Pacific Fibre to convince local investors to stump up most of the $500 million needed to build a second optic fibre cable to Australia and the United States is symptomatic of economies with ageing populations.

As savers get older they get more conservative, and they want their assets to be liquid. Retirees worry that they don't have a lot of time to make up for a slump in the value of assets. They also want to know that if they need a hip replacement they can pull their money out quickly.

That tends to drive older investors towards lower-risk investments such as bonds, especially government bonds.

This tendency of ageing investors is fine when they make up a small part of the investing population. But when the group has a heavier weight, and the markets for riskier assets such as shares are volatile for a long time, then the world has a problem.

This problem is bogging down economies around the world, stalling growth and increasing unemployment.

This drying up of investment appetite is structural. In demographic terms, the "pig" of the baby boomer cohort is moving through the "python" of the investment landscape. During the 1980s through to the mid-2000s, this generation was keener to invest in riskier assets because they were younger.

But now this "pig" is moving into the bond-investing part of the life cycle and has seen the volatility of the last four years as the catalyst for investing in the safest type of investments - government bonds or government-guaranteed bank deposits.

When investors buy bonds they drive up their price, which pushes down the yield. This bond-buying and term-depositing spree has driven our 10-year government-bond yield down from a high of 7 per cent in March 2002 to 3.5 per cent this week, and has lifted term deposits from $44 billion to $108 billion over the same period, even though one-year term deposit rates have slumped from 8.7 per cent in 2008 to about 4.4 per cent now.

This problem is also an opportunity. Countries such as China, which are serious about infrastructure investment, don't wait for investors to get their mojo back. 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 need.

New Zealand's leaders should do the same. The Government needn't rely on forcing interest rates on those bonds to artificially low levels. They are low already, thanks to the conservative pig in our investment python.