Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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Gone are the days when investors can receive adequate income by merely relying on term deposits and bonds. The speed at which this has changed has been dramatic. But for those investors with term deposits, the change may have just begun with term deposits having lagged other interest rate declines, until recently.

If we think about where the Official Cash Rate (OCR) may go, the Reserve Bank of New Zealand’s (RBNZ) Governor Adrian Orr is already mentioning “negative interest rates”, so it seems highly likely the future direction is lower, not higher.

Other factors influencing interest rates include Bank regulation changes in Australia and the likely implementation of higher Bank capital changes in New Zealand, which will also act to slow bank lending. To counteract this, the RBNZ would need to lower interest rates further.

Higher yielding bonds have already tracked New Zealand Government bonds lower. However, corporate bonds are also correlated to equity risk. Accordingly, should interest rates head even lower, some of these bonds are likely to reflect the higher earnings risks to which the underlying company is exposed, and may therefore not perform as expected. As a result, both International Bonds and higher-yielding equities may see more inflows.

Remembering low-interest rates reflect a lack of inflation and economic growth concerns, “bond refugees” need to be conscious of earnings risks. For this reason, companies with Defensive Yield characteristics are likely to provide the best refuge.

We can back this up statistically looking at returns during periods of low-interest rates and how different segments of the equity market perform during periods when rates are increasing or decreasing. In the current environment, equity market sectors offering defensive characteristics look like the place to be.


Brian Stewart
Senior Analyst, Strategy

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