Likelihood of continued low interest rates holds good and bad news for investors
Fund manager Nikko Asset Management (Nikko AM) New Zealand believes that this is the best time for New Zealand to borrow its way to a strong economy.
It explained that the government’s intention to invest significantly in the country’s infrastructure could further drive an economic recovery that was already showing positive signs for the coming year.
“While New Zealand has its share of global debt – recently estimated at equivalent to around US$32,500 for every man, woman and child on earth – we may be one of the lucky countries that can increase our debt levels to invest in our future,” Fergus McDonald, head of bonds and currency at Nikko AM, said.
“With interest rates close to all-time lows and Government net debt to GDP around 20%, the country can afford to borrow and invest. This should provide a growth dividend that will ultimately pay off the increased debt burden.”
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McDonald said that continued low interest rates hold good and bad news for investors.
“The bad news is that having possibly reached the low point for the OCR at 1%, we’re not going to see lower rates drive additional gains for risk-oriented assets. The good news, though, is that the stimulus provided by low interest rates is not going to be withdrawn anytime soon and the cost of financing will continue to be affordable to most, especially organisations that can access debt capital markets and issue bonds to hungry investors,” he said.
He also predicted that mortgage lending would remain attractive through 2020, but issued a warning to small and mid-size enterprises (SMEs) and highly indebted pockets of rural NZ who rely on bank lending.
“These customers may face paying higher lending margins as the banks progressively move into more selectively pricing their loan books,” McDonald explained.
