Talking to a number of people (customers, colleagues and people in the street) one challenging issue right now is, with bank deposit rates so low, how can I generate more income or capital growth and from where?
Before I tell you what appear to be the tactics of the smart and savvy investor, just a quick explanation as to why bank retail deposit rates are so low.
Banks typically raise their funds from two key sources – other banks either onshore or offshore (the wholesale market) or from their local branch customers (retail market). The current world economic and financial situation ("credit crisis") has had the following consequences:
- Money in the wholesale markets is more expensive. This reflects that banks don’t trust each other as much as they did in the "old world" and therefore are charging each other more to lend to each other. Plus, they are each probably holding on to money so are also demanding a higher premium to lend it.
- Because of the above, banks are turning to their retail markets to raise funds, and in some case are even willing to lose money in doing so provided that loss is less than the loss they’d make raising funds in the wholesale market.
- But, in order to stimulate their economies, central banks and governments are using monetary policy (in NZ’s case reducing the Official Cash Rate) to try and make funds cheaper for those that need to borrow (at least at variable rates). This results in retail deposit rates becoming lower (the cost differential between deposit and borrowing rates still applies it’s just that both sets of rates have dropped).
So what are investors doing to counter this reduction in retail deposit rates?
Firstly, and despite the fact that they are not covered by the retail deposit guarantee, the recent capital raising issues from the likes of Fonterra, Contact, BNZ etc have all been very well supported and, more often than not, over-subscribed. My read on this is that it’s very much a conscious decision by investors to take up a better return/yield/dividend than what they’d earn from having their money on deposit with their bank. Particularly people who are seeking an income from their investments look at these offers and see them as an opportunity to significantly "earn" more than they would from their bank.
Rabo Capital Securities Limited, a New Zealand subsidiary of our Rabobank parent company, has also recently announced a similar offer in the market – the PIE Capital Share Offer with a minimum dividend of 8.00%. A combination of the situation I’ve described above and the success of the last Rabobank issue in 2007 (the then largest single non-government capital raising in NZ @ $900m NZD) should also see those seeking a significantly higher “return” also flocking to it.
If you want to download the offer Investment Statement & Application Form you can do so here.
The other area where we have seen activity, and others external to RaboPlus have also witnessed this, is the interest in either direct equities or managed funds. There are some people saying that there has never been a cheaper time to invest in either and that, whilst we may have not yet “hit the bottom”, historic experience is that they will both appreciate in value over time. Investors are looking at direct equities and managed funds, as an alternative to bank deposits, for capital gain or income through dividends.
Take a look at the range of Managed Funds available through RaboPlus. Here you’ll see that there are funds, across numerous asset classes, from AMP, AXA, Asteron, Brook, ING and Tower.
Here are some useful links: