Newsletter October 2008

October 1, 2008

The Global Credit Crisis

Currently as each month passes we hope for a catalyst in the financial markets that will provide some sort of return to normality. Unfortunately as each month passes we get more bad news from overseas. Investor confidence is probably at its lowest levels since 1987. The U.S Government has bailed out Freddie Mac, Fannie Mae, and AIG, Lehman Brothers has filed for bankruptcy, Lloyds is set to buy the Halifax Bank of Scotland, and Merrill Lynch has bought the Bank of America. Now the U.S Treasury is contemplating a $700 billion bailout of the financial markets. The proposed plan would have the Treasury buy up bad mortgage-related debts from financial institutions, and is designed to restore confidence in the markets. I wonder how the recently-ejected U.S homeowners feel about their tax dollars being used to help rescue the very institutions that have just kicked them out of their house.

Any return to normality needs to start with the lending practices of the banks. Over the last few years we have seen the US banks prepared to lend 100% (sometimes more) to fund the purchase of property. This is fine if you can guarantee the value of the asset being funded will keep going up, but not so good when values are falling. Anyone who has owned property over a long period knows values can and do fall. Sure, the long-term trend is one of rising prices; however property is just as cyclical as most other assets and we are currently experiencing a correction. The increase in property values over the last six or seven years has led to a certain amount of complacency amongst bankers and consumers. Homeowners have been funding new cars, overseas holidays and increased personal expenditure on the back of the value of their home. What happened to the days when you saved up to buy something?

I don’t believe this complacency is limited to homeowners. In my opinion, the prices being paid for farmland are far removed from their capacity to generate income. Borrowing millions of dollars to generate a one to two percent (income) return seems very risky to me, and there seems to be an inbuilt presumption of continued capital gain amongst some farmers and farm lenders.

KiwiSaver

The Government’s KiwiSaver scheme has been in place for over a year now, and in its current form, should be taken advantage of. The incentives offered by the Government are too good to ignore and anyone under sixty-five should sign up if they haven’t already done so. Here are some of the key points of the scheme:

  • Participation is voluntary
  • The Government will give you $1,000 when you join
  • The Government will pay $40 per annum towards your scheme’s fees
  • The Government will match your contribution up to a maximum of $1,043 per annum, provided you are over 18 years of age
  • Employees must contribute either 4% or 8% of their gross pay
  • Employers are required to contribute to an employee’s account, starting at 1% in 2008, building to 4% in 2011
  • All contributions are locked in until you are eligible for government superannuation (currently 65), or for five years, whichever is the later
  • Withdrawals may be allowed – financial hardship, serious illness, emigration
  • After three years you are allowed to make withdrawals to contribute towards your first home
  • Housing New Zealand will offer a first home deposit subsidy of $1,000 for each year in the scheme, up to a maximum of $5,000
  • You can take unlimited contributions holiday after you have been a member for one year

I advocate using KiwiSaver solely for the Government benefits on offer. I suggest people contribute the minimum amount required ($1,043 per annum) to get the maximum benefit from the scheme.

Those of you who are employees need to weigh the advantage of the Government and employer subsidies against the requirement to contribute 4% of your wages to the scheme each year. Once your gross earnings are over $26,000 the incremental benefit of contributing to the scheme is limited to the contribution you are receiving from your employer, because the Government will only match your contributions up to $1,043 per annum.

If you are unsure of the implications for you, please call the office and I can go through it with you. We have KiwiSaver investment statements for ING, Gareth Morgan, and Fisher Funds.

Fixed Interest

Yields continue to fall with the expectation of further rate cuts by the Reserve Bank. Most commentators are predicting the Official Cash Rate to be at 6.50% by the New Year. Unfortunately there have been no new high quality fixed interest offers in the last couple of months, so the secondary market or the finance company debenture market has been the only means of sourcing longer-term fixed interest at better than bank rates. My advice to those who are holding larger than normal amounts of cash in bank call or term deposits is to look at seeking some long-term fixed interest before the end of the year. Fisher & Paykel and Ports of Auckland may be seeking to raise some money, so I will let you know if and when that happens. Other opportunities include:

Security                                              Maturity             Rating              Yield          Price/$100

Kiwi Bonds                                        6 months               AAA                6.00%

                                                               1 year                   AAA                6.00%

                                                               2 years                 AAA                5.75%

UDC Telephone Call A/C                  At Call                   AA                 7.85%

UDC Term Maximiser (PIE)             1 year                     AA                 7.80%

South Canterbury Finance              3 years                  BBB-            10.00%

BNZ Income Securities (PIE)      Perpetual                  A+                                            $105.40

ANZ Perpetual Bonds                   Perpetual                  A+                                            $105.00

Rabobank                                        Perpetual                 AA                                              $99.20

Origin Energy                                  Perpetual               BBB-                                           $94.00

Shares

The volatility in the US and European markets is reflected in our market on a daily basis. For those of you brave enough to enter the markets my advice is to buy in stages – don’t try and time the absolute bottom of the market.

Man Investments (OM-IP) and Liontamer offer capital guaranteed investment opportunities, and have both gained a very good reputation based on past performance. We will look at these opportunities in more detail next month and explain how they manage to offer a capital guarantee. For anyone interested in these investments in the mean time please phone the office.

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