New Zealand’s financial landscape is undergoing significant changes. The Reserve Bank of New Zealand (RBNZ) has signaled that the Official Cash Rate (OCR) will likely decrease soon, and the market is anticipating that already, leading to lower deposit and borrowing rates.
For the last couple of years, favorable interest rates have made term deposits and savings accounts attractive options. However, with interest rates already declining, keeping funds in the bank is becoming less appealing. This shift necessitates re-evaluating whether cash investments still hold value, especially given their historically lower long-term inflation-adjusted returns compared to other assets.
Economists predicted that interest rate cuts could occur as early as August 2024, marking the end of high cash rates for this cycle. Mark Lister, Investment Director at Craigs Investment Partners, made comments in July 2024 supporting the view that a decline of 1.5% returns on a six-month term deposit over the next 12 months, or an approximate 2% decrease over a period of two years, can be expected.
What does this tell us? It is now critical for those with funds in term deposits or savings accounts to carefully consider their options for generating short-term income and to assess the potential reinvestment risks upon maturity.
Seizing market troughs
Despite uncertainty in the financial markets, investors have seen decent returns with fixed-term cash investments. However, it’s time to rethink whether holding excessive cash is necessary. Maintaining cash reserves is essential, but it’s also important to ensure some of that cash is working for you. Inflation slowly erodes your money’s purchasing power, meaning your cash could be losing value over time.
Strategic investors are making moves, and there’s still time to capitalise on the current market trough. Rather than waiting for the market to react, now is the perfect opportunity to invest in assets with longer-term horizons and attractive long-term yields. It’s easy to get caught up in immediate concerns and miss out on future gains. Therefore, having a long-term investment strategy and sticking to it through market cycles is crucial.
Exploring commercial real estate
Given the drawbacks of holding excess cash, commercial real estate becomes a compelling option. Historically resilient against interest rate fluctuations over the long term, commercial properties generate income through both rental earnings and capital gains, providing a steady revenue stream with long-term growth potential.
However, the higher asset costs can make direct investment challenging for individuals. Commercial property funds, like those offered by PMG, provide an affordable way to own high-quality commercial real estate, diversify your portfolio, and spread risk across various assets.
PMG’s retail funds are structured as multi-rate Portfolio Investment Entities (PIEs), meaning investors pay tax based on their Prescribed Investor Rate, capped at 28%. Over time, these tax savings can compound, giving investors a significant advantage.
Looking ahead
It is fundamental to recognise that as interest rates continue to trend downward, the opportunity cost of holding cash will inevitably rise. Therefore, it’s imperative for astute investors to proactively explore and pursue options that not only preserve wealth but also strategically position their assets for substantial growth in the upcoming economic cycle.
The information in this article is of a general nature and was current as at 5 August 2024. It is not intended as regulated financial advice under the Financial Markets Conduct Act 2013 and does not consider your individual circumstances and financial situation. PMG does not provide financial advice. Please seek advice from a licensed financial advisor before making any investment decisions.
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