Investors begging for more local bonds

TERRY HALL
Last updated 05:00 02/07/2012

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OPINION: British comedian Lenny Henry can't tell the difference between Aussies and Kiwis. To his ears – and he is a good mimic – we sound the same. We say words like "Yiss" instead of "Yes" in a way he seems to think is side-splittingly funny.

His show on Wednesday night was designed for an Australian rather than a Kiwi audience: he lost me with his frequent allusions to Tasmania and the presumably odd, backward folk who live there. As a gesture to locals he cleverly mimicked the bip-bip-bip noise at Wellington controlled pedestrian crossings.

To be fair it takes years to figure out the differences: even for those of us with close Australian friends and family living there. A key one – and I've only just worked this out – is that we are more risk averse when it comes to investing. Aussies prefer investing in shares to fixed-interest investments: the opposite of here.

Last week broking firm First NZ Capital was rushed off its feet by clients seeking to invest in a line of three-year Warehouse bonds that it was selling on behalf of an institutional investor. The interest rate was 6.1 per cent: had the buyers looked at the newspaper sharemarket table they would have seen that they could have got nearly double the return that day from the ordinary shares that were yielding 11.75 per cent.

At a time of steadily falling interest rates – which are really starting to hurt many retired people and charities – many brokers are urging them to invest more in shares rather than fixed-interest investments to get a higher return.

I gather that in most cases their suggestions are being ignored. "There are only two sorts of investors," a seasoned fixed-interest dealer asserted.

"People who want the certainty of fixed interest, and expect to get their original investment back in a given number of years with regular returns over that period. They think the sharemarket is too risky.

"Then there are those happy to take a risk. Often they have a sensible portfolio of both shares and bonds." It seems odd to me that some of the people who only invest in bonds must include those who lost heavily in the crashes of supposedly secure finance companies. Over the past decade or so – apart from a rare exception like Feltex – the Kiwi sharemarket has performed well.

In contrast, across the Tasman the sharemarket has been the big winner, attracting a massive and regular influx of money from both small investors and major financial institutions, while the Australian fixed-interest market has remained comparatively undeveloped. This is changing: with the Australian sharemarket in the doldrums, real efforts are being made to develop a healthy bond market. Some big corporate bond issues have been made and more are expected.

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For many years New Zealand has had a much deeper, and sophisticated, fixed-interest market – presumably because the demand was here for it. This included an active local-body bond market that was immensely popular with ratepayers who liked to invest and support their own councils. This has recently been re-established, and is growing strongly, supported by institutional investors. Today, though there is nothing to stop small investors investing in their local council, the returns are unexciting: at last month's June auction, the New Zealand Local Government Funding Agency paid just 3.74 per cent for five years and 4.08 per cent for bonds maturing in 2019. Mind you, ratepayers should be happy their councils can borrow so cheaply.

Up till the late 1980s, when major Rogernomics reforms were made, we also had a healthy sharemarket. This served dozens of pension funds, with most companies offering staff pensions.

Most of these were wound up after a libertarian government removed tax support, saying that people should have enough sense to save for their own retirement. The argument was that on such an important issue people shouldn't be offered a "carrot" (tax support) or a "stick" (any form of encouragement or compulsion) to save for their retirement. Winding up these schemes – and not replacing them – was another chapter in this country's sorry history of failing to encourage people to save for their old age.

Unquestionably, the 1987 sharemarket crash – in which millions were lost by small investors – soured attitudes to equity investing here. Australian investors were also hurt in 1987, but government support, such as actively promoting compulsory superannuation and tax incentives, encouraged wider participation in their stockmarket, despite periods of often extreme volatility and weakness as is happening there now.

The wheel is turning. While Australia is increasing the number of corporate bond issues, so far this year New Zealand hasn't had a single one. Here, trading banks and offshore lenders, bursting with money to invest, have taken over this role.

This is distorting the local capital market. With no new bond markets available, people are being forced to deposit their money with their bank for the best returns. While acknowledging the Australian-owned banks appear secure – compared to the gruesome international problems elsewhere in the sector – many people would feel safer directly investing in sound local company.

- BusinessDay.co.nz

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