Cash bank deposits globally are at an all time high, as wary investors have stayed clear of market turbulence. The bounce in markets over the last six months has rewarded those strong enough to make a bet on the market recovery, or in most cases those, whose portfolios looked just too dismal to cash up, and remained invested.
Well done to them. ! Irrespective of another drop in the global markets the point has been clearly made that markets can and do recover.
Many cashed up investors however don’t care. They are in the bank and that suits them just fine. They have felt safe. A government guarantee outweighs any discussion on modern portfolio theory. The problem has been that up until now the rewards for cash, after allowing for tax, have been tracking not far above inflation, which over the last 12 months has been 1.7%. Incomes are down as a result. Those relying on investment cash to boost NZ Super payments have gone without jam on their toast.
It was somewhat of a surprise then to see a term deposit war commence this month after the Mr Bollard kept the OCR at 2.5%. The ANZ bank which has the biggest deposit book of about $33 Billion, out of the blue, raised their term deposit rates for 12 months and longer. A driver of this behaviour appears to be the forthcoming prudential requirements and the need for banks to shore up their retail funds.
The rate being offered is now 5% for 12 months, with rates of 6% and 6.75% for three and five year terms. What investors now need to look out for is an increase in rates from cash funds which have a PIE status.
Remember that in general terms if an investor has total income under $60,000 and at least $22,000 of this is sourced from PIE funds then they qualify for a PIR tax rate of 19.5%. A husband and wife can each achieve this status with significant tax savings as a result. Even without these PIE benefits I have no doubt that there will be many canny cash investors happy enough to split their nest egg into a range of term deposits for up to five years.
Many elderly folk are more interested in a sure thing than worrying about future growth at this point in their lives. Recent market events and upheavals have ensured they will never change their minds. For them cash is king.
Richard Hurley, director Auckland City Brokers Ltd. Disclosure Statement is available on request and free of charge – richard@acbrokers.co.nz
