As we navigate a complex global economic landscape, a convergence of significant events is shaping the financial landscape. The recent Reserve Bank of New Zealand (RBNZ) decision to cut the Official Cash Rate (OCR) has provided some relief to borrowers, while the milestone of KiwiSaver surpassing 100 billion New Zealand dollars in Funds Under Management (FUM) underscores the growing importance of retirement savings. Meanwhile, the looming US elections and their potential impact on trade policies and global markets, coupled with the ongoing conflict in the Middle East, Ukraine, and the possible impact on oil prices, can add further layers of uncertainty to the economic outlook. Amidst all this uncertainty, global equities, global infrastructure, and global property asset classes have performed well over the last few months, providing sound returns to investors.
New Zealand interest rates
The 0.50% cut to the New Zealand official cash rate (OCR) this Wednesday is welcome news for many. This brings the cash rate down to 4.75% from 5.25%, the first time the cash rate has been less than 5.00% since March 2023.
The central bank believes that inflation is now within its target range and that the economy has excess capacity. This decision follows a 25-basis point cut in August and comes despite economists' expectations for a smaller cut. Financial markets reacted positively to the announcement, with the stock index rising and the Kiwi dollar falling. While inflation is expected to be on target, economic activity and the labour market have continued to weaken, raising concerns about unemployment and deflation. Economists have differing views on whether interest rates are still too restrictive. The RBNZ remains confident that its current policy stance is appropriate and will continue to monitor the economy to determine future rate changes.
It’s important to note that lower interest rates resulting from the OCR cut can significantly impact savers. Savers may experience reduced returns on their savings accounts, term deposits, and other fixed-income investments. This can lead to diminished purchasing power, due to inflation outpacing lower interest rates, and potentially increased financial risk as investors seek higher yields. These factors can make it more difficult to grow wealth and achieve financial goals in a low-interest-rate environment.
KiwiSaver surpasses $100 billion in funds under management
This milestone underscores the scheme's role in securing New Zealanders' financial futures and promoting long-term savings habits. The $100 billion mark represents a substantial increase from previous years (up 19.3% from last year), reflecting the increasing number of KiwiSaver members and the consistent growth in contributions. This milestone is a positive indicator of the scheme's success in encouraging individuals to save for their retirement and to make prudent investment decisions.
Despite this, KiwiSaver still lags behind Australian Super, both in terms of fund size and average account balance. Where the average KiwiSaver balance is around $33.5k, the average Australian Super balance is about $250k*. This is largely due to Australia's longer history with superannuation, its compulsory nature, and higher contribution rates (employer’s contribution currently 11.5% per annum, increasing to 12.0% per annum in 2025).
While KiwiSaver has made significant strides, catching up to Australian Super's maturity and size will require deliberate action. Increasing mandatory contributions progressively—perhaps from 3% to 4% and then to 6%—can significantly boost savings. Encouraging employers to match contributions and simplifying the KiwiSaver system can also enhance its appeal. By prioritising financial education and offering a wider range of investment options, KiwiSaver can better cater to diverse savings goals and potentially achieve growth comparable to Australia's established superannuation system. However, this will necessitate sustained commitment and a focus on continuous improvement.
*(Deloitte Average Balances to 30 June 2023, rounded to the nearest $100. People with zero superannuation are not included in average data.)
Positive NZ Business Outlook
The latest ANZ Business Survey results for September 2024 indicate a positive outlook for the New Zealand economy. Business confidence surged by 10 points to +61, while expected own activity rose by 8 points to +45. These positive indicators suggest that businesses are more optimistic about the future and anticipate stronger performance in the coming months.
However, challenges remain. While experienced own activity rose slightly, it remained negative at -19, indicating that businesses are still facing short-term difficulties. Employment intentions fell by 5 points to -20, suggesting a cautious approach to hiring. Additionally, pricing intentions rose for the second consecutive month, indicating persistent inflationary pressures. Despite these challenges, the overall survey results suggest that the worst is over and we can be cautiously optimistic about the New Zealand economy.
US elections
The US presidential elections are as tight as ever, and at this point in time, there are only a handful of of key ‘swing’ states that could decide the next US President. These states are: Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin. It will be interesting to see what policies each candidate can bring to the table to win these states over.
It’s important to acknowledge that economic policies implemented by different administrations can have varying short-term and long-term impacts. For example, some economists argue that certain economic policies, such as tax cuts or government spending, can stimulate growth, while others may raise concerns about debt and inequality.
Ultimately, the performance of the U.S. economy is a result of a complex interplay of factors, and attributing it solely to the party in power can be misleading. On the whole, the US stock markets have performed okay during either administration in recent history.
US markets
The US stock markets have been experiencing a period of volatility, reflecting a complex interplay of economic, geopolitical, and corporate factors. While there have been some positive developments, overall sentiment remains cautious. However, the US markets have been very strong over the last 12 months. Major indices, like the S&P 500, have experienced a significant upward trend over the past year. Many US corporations have reported strong earnings in recent quarters, often exceeding analysts' expectations. Additionally, many companies have maintained healthy balance sheets with strong cash reserves and manageable debt levels. This financial stability has positioned them well to weather potential economic challenges.
The Fed Reserve cut its benchmark rate by 0.5% last month and is expected to cut interest rates further. Falling interest rates are usually good news for borrowers, banks, and governments as the cost of borrowing comes down. The Fed has indicated it might reduce interest rates by another 25–50 basis points in the next Federal Open Market Committee (FOMC) meetings (November, December).
Oil prices
The ongoing geopolitical tensions in the Middle East, particularly the escalating conflict between Israel and Iran, pose a significant threat to global oil stability. The region is a major oil producer, and any disruption to production or transportation routes could lead to supply shortages and price spikes. The ongoing conflict has the potential to escalate, further exacerbating these risks.
Additionally, the lingering geopolitical implications of the Russia-Ukraine war continue to influence oil prices. While the direct military conflict may have subsided, the ongoing tensions between the two countries, as well as their broader geopolitical rivalries, can impact oil supplies and prices. Russia is a major oil producer, and any actions by the Russian government that could disrupt its oil production or exports could have a significant impact on global markets. Moreover, the ongoing conflict has led to increased geopolitical uncertainty, which can deter investment in the energy sector and contribute to price volatility.
As a net importer of oil, New Zealand is heavily reliant on international markets for its fuel supply. Higher oil prices would lead to increased costs for fuel, impacting transportation, energy generation, and manufacturing sectors. This could result in higher prices for goods and services, including food, as transportation costs are passed on to consumers. Additionally, the increased cost of living could put pressure on household budgets and potentially impact economic growth.
Key Takeaways
Markets often operate in cyclical patterns, characterised by periods of growth and decline. Understanding these cycles can help investors make informed decisions and avoid impulsive reactions to market fluctuations.
We believe anyone who is over the age of 18 and below 65 should be in KiwiSaver to harness the benefits of the scheme (e.g., annual government contributions, employer contributions, tax efficiencies, etc.). If you are not already in KiwiSaver, just give us a call and we can help you get it setup.
Even if the cash rate is falling, there are still attractive investment options available. Talk to us for more information about the best options to take advantage of the current economic environment.
If you're investing for the long term using a dollar-cost averaging strategy, volatility can actually work in your favour. Volatility can create opportunities to purchase assets at discounted prices, which can enhance your long-term returns.
A goals-based investment approach, which involves breaking down your investment goals into short-, medium-, and long-term horizons, can help reduce risk and improve your chances of achieving financial success.
With declining interest rates, if you are thinking about taking on or refixing your mortgage, now is a good time to talk to our Mortgage Specialist, Adrian Dale (adrian@trilogyfs.co.nz). Adrian works with all the major banks, and non-banks, and can provide good advice to meet your future requirements.
If you have any queries or concerns about your financial, investment, and retirement planning matters, please feel free to give our office a call on 09 553 8928 or email us at info@trilogyfs.co.nz.
Kind regards,
Trilogy Team
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