Clive Fernandes
Auckland, November 20, 2023
As the year 2023 nears its end, New Zealand’s economic landscape is characterised by a significant debate among economists regarding the future of interest rates.
The Reserve Bank of New Zealand (RBNZ) is poised to keep the Official Cash Rate (OCR) at 5.5% in its November meeting. However, the question of what happens post-February 2024 is a matter of contention.
Economists are split between those who foresee a need for rate cuts as economic activity slows and those who argue for sustained or increased rates due to factors like net migration and a revitalised housing market. This division reflects the complexity of the current economic scenario and the challenges it poses for investors and KiwiSaver members.
KiwiSaver in the Spotlight
In this fluctuating interest rate environment, KiwiSaver schemes are particularly affected. Different KiwiSaver funds, based on their risk profiles, react differently to these changes. Conservative funds, with their focus on bonds and cash, are likely to see varied returns depending on the OCR movements. Growth funds, with a higher stake in equities, could experience more volatility but also have the potential for greater long-term gains.
This highlights the need for KiwiSaver members to carefully consider their fund type in line with their volatility tolerance and retirement goals.
Wider Investment Implications
The broader investment landscape is also significantly impacted by these interest rate shifts. The stock market may experience increased volatility as businesses grapple with changing borrowing costs, which could affect their profitability and stock valuations. In the bond market, fluctuations in yields could impact those relying on fixed-income investments. Property investments could also be affected in a rising rate environment.
The economic debate sheds further light on this situation. Dovish economists believe that current monetary policies are sufficient to manage inflation, suggesting a potential easing of interest rates in response to a slowing economy. Hawks, however, argue for maintaining or increasing rates, pointing to factors like rising net migration and a recovering housing market.
Meanwhile, bond traders are carefully balancing different opinions, with a leaning towards the dovish perspective.
This uncertainty underscores the complexity facing investors, highlighting the need for a well-informed and adaptable investment strategy.
A glimmer of stability in Real Estate
The real estate market in New Zealand is showing signs of stability, with house prices potentially bottoming out.
Based on the QV House Price Index, the average value of New Zealand homes increased to $907,387 in the three months leading up to October’s end, marking a $18,388 rise (2.1%) compared to the three-month period ending in July.
This could indicate a turning point for property investors and homeowners. The future trajectory of the housing market, however, remains closely tied to the overall economic health and interest rate movements.
Practical Advice for Investors
In such uncertain times, the importance of diversification cannot be emphasised enough. Investors are advised to spread their investments across various asset classes to mitigate risks. Regular portfolio reviews are essential, particularly in light of the evolving economic conditions and interest rate changes.
For KiwiSaver members, aligning fund choices with their individual volatility tolerance and retirement objectives is crucial. Regular reviews and adjustments of their KiwiSaver strategy in response to the changing interest rate environment can help ensure that they remain on track to meet their long-term goals.
Furthermore, investors should be proactive in seeking advice from financial experts. Consulting with financial advisors such as National Capital can provide personalised guidance and insights tailored to individual financial circumstances and goals.
Staying informed through reliable financial news sources and analyses can also help investors make more informed decisions in these volatile times.
As we navigate the complexities of the current economic environment in New Zealand, understanding the dynamics of interest rates, inflation, and their varied impacts across different investment avenues is vital.
Investors and KiwiSaver members are encouraged to stay informed, adaptable, and strategic in their approach. By doing so, they can navigate these challenging times with greater confidence and success, ensuring their financial goals and retirement plans remain achievable.
Clive Fernandes is the Director of National Capital, a financial advisory firm that provides personalised investment advice, primarily focusing on KiwiSaver. Disclaimer: The views expressed in this article are the author’s views. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
