Mark Fowler: The shift from borrowers to investors

This is a nervous time for mortgage holders as the cost of servicing debt continues to go higher. Photo / Ted Baghurst

Opinion

OPINION:

This week the second quarter consumer confidence numbers in New Zealand printed at their lowest level since the series began back in 1988, and is a sobering reminder of the challenges that lie ahead for many households.

On the face of it, this is a nervous time for mortgage holders as the cost of servicing debt continues to go higher around the constant commentary of escalating cost pressures and the need for the central bank to move far quicker than anyone anticipated to combat inflation.

However, this forms only one half of the equation. For investors reliant on income, this latest "leg up" in interest rates becomes increasingly beneficial. In simple terms, if banks are lending money at 6.19 per cent (Kiwibank's current standard 2-year fixed mortgage rate), then they are borrowing at more elevated levels, which in turn leads to better returns for retail bank term deposits.

However, Mum and Dad investors are still only faced with gross yields of ~3.00-4.00 per cent for term deposits (this interest rate return does not allow for any tax deduction of income or inflation), and so in "real" terms isn't overly compelling.

So where do investors turn? Residential property market buoyancy has been a key driver of investor sentiment in New Zealand this cycle, but the outlook has changed. Investor returns in this sector are likely more challenging going forward, and with investor tax deductibility being removed, this is adding another layer of uncertainty.

Investors are having to think more about their allocation to growth assets. Conventional wisdom or portfolio theory recommends reducing your allocation to growth assets as you reach retirement age, thereby preserving your capital at risk. The recent de-rating of growth assets (US technology companies as an example) has been a reminder of those risks.

Fixed income (bonds) as an asset class is now looking more interesting. I wrote an article back in March 2022 about the case for investing in bonds now and locking in some of these more elevated yields not seen for some time. ASB bank was in the market recently, issuing senior debt at 5.52 per cent for a period of five years.

This instrument's security ranks in line with bank term deposit holders and has the added benefit of being tradeable throughout the life of the bond. Vector Limited, which distributes electricity and gas in New Zealand, has just refinanced its capital bonds for a further five years at an interest rate of 6.23 per cent which was positively received by its existing bondholders, further highlighting evidence of returns in the sector not thought possible only 12 months ago.

At the bottom of the recent interest rate cycle many pundits were calling into question portfolio theory and the value of holding defensive assets, they may now want to have a re-think.

• Mark Fowler is the Head of Investments at Hobson Wealth. This article contains market commentary and factual information only and does not constitute financial advice.