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Cullen Speech Notes: Financial Services Directory

Michael Cullen Speech Notes: Launch of the Financial Services Directory

Another year and another Financial Services Directory is launched. I don’t know whether the organisations listed in the Directory ought to thank the publishers or increase their in-house security. You may know that the government is doing a lot of work on why people save and how to incentivise better savings habits.

In the course of that work we are looking at a number of the psychological studies on savings behaviour. One of the results is that savers have twice the adverse reaction to investment losses than positive reactions to equivalent investment gains. As the longest bear run in the last half century continues, publishing a directory of finance service providers is the capitalist equivalent of issuing the nightly sleeping arrangements of the Baath party executive!

On a more serious note, there are some real issues that the finance sector needs to confront. On the one hand we have banks reporting record profits. On the other there are massive losses being made on portfolio investments.

Let me give you a quote from an unnamed annual report from an investment trust to its shareholders.

“2002 was another dismal, uncertain, volatile and depressing year for stockmarket investors….

“Almost all stockmarkets fell in 2002 and in most countries the bear market is now the longest for over fifty years. After the declines in 2000 and 2001, the falls in 2002 were larger and more widespread, exacerbated by deteriorating global economies, ongoing corporate malaise and the spectre of terrorism and war.””

You can just see the punters rushing into that!

The risk is that retail savers withdraw from certain forms of investment, and herd into others: safe fixed interest securities and residential housing.

Where do deposit takers lend in order to pay the interest on deposits? To those who are buying residential properties!

It is interesting that at the same time that retail savers see the value of their portfolios in things like investment trusts plummet, banks are reporting record profits. Not only are their profits growing, but despite increased competition, the margins on lending have also grown in the last year.

These things are linked: the withdrawal from more conventional balanced portfolios, the shift into residential property, growing bank lending volumes and rising bank lending margins.

The danger is that another asset bubble starts to fill, and once again capital values get out of line with their underlying earnings potential. Another correction bruises yet another generation of savers, and sours attitudes to saving.

The one bright spot on this landscape is that we didn’t really have the tech stock and equity bubbles that many other countries had in the 1990s, so the confidence sapping wealth impacts have not soured investor confidence to the same extent here.

I don’t have any solutions. In some ways we are all victims of the uncertainty that still surrounds global equity markets. Until there is more certainty, a clearer direction and more momentum – until global finance markets regain liquidity if you like – we are all a little constrained in our options.

What I can say is that once the world of finance starts to look a bit more familiar, there is a strong obligation on all participants in the market to educate and communicate and to rebuild the confidence of the retail saver. This means that there has to even greater emphasis on ethics, on good practice, on transparency and on disclosure.

In the meantime I have around two billion dollars of liquid superannuation funds looking for a good home. Maybe the directory will give me inspiration!

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