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Timing right to borrow our way to a stronger economy

Timing right to borrow our way to a stronger economy in 2020

The Government’s announcement of its intent to invest significantly in the county’s infrastructure could turbo charge an economic recovery that was already showing positive signs for 2020, says Nikko AM NZ’s Head of Bonds and Currency, Fergus McDonald.

“While New Zealand has it’s share of global debt – recently estimated at equivalent to around US$32,500 for every man, woman and child on earth – we may be one of the lucky countries that can increase our debt levels to invest in our future,” says McDonald.

“With interest rates close to all-time lows and Government net debt to GDP around 20%, the country can afford to borrow and invest. This should provide a growth dividend that will ultimately pay off the increased debt burden.”

The likelihood of continued low interest rates holds good and bad news for investors.

“The bad news is that having possibly reached the low point for the OCR at 1%, we’re not going to see lower rates drive additional gains for risk-oriented assets. The good news, though, is that the stimulus provided by low interest rates is not going to be withdrawn anytime soon and the cost of financing will continue to be affordable to most, especially organisations that can access debt capital markets and issue bonds to hungry investors.”

McDonald believes mortgage lending will remain attractive through 2020, while sounding a note of caution for SMEs and highly indebted pockets of rural NZ who rely on bank lending.

“These customers may face paying higher lending margins as the banks progressively move into more selectively pricing their loan books.”

Fergus McDonald’s picks for 2020 and beyond include:

• Short term interest rates will stay low and stable.
• Longer term rates will be more volatile - however any increases will be modest as global economies will struggle under the burden of higher rates.
• The NZ economy will have a strong finish to 2020 as monetary and fiscal stimulus combine with strong commodity and export prices to give incomes and confidence levels a boost.
• Auckland residential property prices will join the regions in growing strongly, which should add to confidence levels and stronger retail spending.
• Financial market volatility around the US Presidential election, but not around the NZ election.
• A more diverse range of NZ organisations will issue corporate bonds as bank debt becomes more expensive.
• Equity and property prices will remain at elevated levels and move higher as more investors look for alternatives to low interest rate returns.
• The NZ dollar will stabilise and move higher as the economy improves later in 2020 and 2021.

Ends

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