Mark Lister: Rate cuts are coming, here’s what investors should do

The Official Cash Rate could soon be lowering, so savvy investors should act soon, rather than sit on their hands, writes Mark Lister. Photo / 123rf

THREE KEY FACTS:

• The Reserve Bank might cut the OCR next month.
• Income-focused investors shouldn’t be too complacent.
• OCR cuts could mark an important turning point for domestic shares, in spite of a fragile economic backdrop.

Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision, Craigs Investment Partners recommends you contact an investment adviser.

OPINION

The Official Cash Rate (OCR) will soon be headed lower, and this will have important implications for savers, borrowers and investors.

Financial markets have taken a bolder view than most economists, and they now see at least two (but possibly three) 0.25% cuts before the end of the year.

A move in October or November seems assured, while there’s half a chance the Reserve Bank might take a more proactive approach and cut the OCR next month.

Its most recent estimate of the short-term neutral OCR (the level where it’s not speeding up or slowing down the economy) is just under 4%.

That means there’s plenty of scope to begin the easing process soon, while keeping policy settings restrictive (albeit to a slightly lesser extent).

It’s equally important to note that it can take several months for policy changes to begin filtering through to the economy.

If the Reserve Bank wanted to provide some relief in the first half of 2025, it would need to make a move soon.

The Reserve Bank. Photo / RNZ

Whether it happens in three weeks or three months, the upshot is that the monetary policy landscape is about to change markedly.

One group that shouldn’t ignore this are the income-focused investors sitting back and enjoying highly attractive term deposit rates.

They’ve had a great run, but the clock is ticking. Loudly.

If this group is too complacent, they’ll not only miss opportunities elsewhere but face hefty falls in income.

Six-month term deposit rates are sitting at about 6%, the highest in 15 years.

If market forecasts for the OCR are correct, these will fall to 4.5% within 12 months and could start with three a year after that.

That equates to a 25% fall in income over one year, and a 35% decline from current levels within two years.

Savvy investors should act soon, rather than sit on their hands.

There are still opportunities to lock in reasonable yields from high-quality fixed income securities (or funds) with maturities that stretch out years, rather than months.

The local sharemarket, out of favour in recent years amidst high interest rates, has also started attracting more attention.

It’s rallied more than 5% in July so far, which puts it on track for the strongest monthly gain since November last year.

While indices in the US, UK, Europe, Australia and Japan have all hit new record highs this year, New Zealand is still almost 20% below its January 2021 peak (excluding dividends).

Our market isn’t as frothy or highly priced as some others, while investor sentiment has been much more subdued.

That isn’t surprising, given the NZX is more sensitive to changes in interest rates than many global peers.

Sectors that dominate our market tend to perform well when rates are stable or falling, and suffer when monetary policy is tightening.

The prospect of OCR cuts could mark an important turning point for domestic shares, in spite of a fragile economic backdrop.

Many of our listed companies are stable, resilient businesses paying reliable dividends that will look increasingly attractive as interest rates steadily decline.

Even some of the beaten-up, more challenged parts of the market could start to be viewed more favourably, despite the lacklustre earnings releases we’re all expecting in August.

Share prices look ahead, which is why they’ve been in the doldrums these past three years.

Investors have been correctly anticipating the recessionary conditions and economic malaise we’re in the depths of right now.

It’ll be the same on the way up. The market won’t wait for a recovery to be upon us, it’ll move well ahead of that.

Investors would be wise to do the same and start positioning now for an extended period of declining interest rates.