Tuesday, December 2, 2008

OCR cut puts pressure on investors seeking better returns

The OCR rate cut coming this Thursday varies from 1-1.5% depending on which financial media commentator you are following but what is clear is that this cut isn't going to immediately stimulate any sector of the economy because most people have put their wallet away thinking there are cheaper bargains to be had.

What it will do is put pressure on many who have money to invest to go out and find a better return than the gross 6% (and dropping) interest rate they maybe getting for a term investment and the meager real returns still to be found in residential real estate for rentals-values for that sector still have a long way to fall and then will become more attractive return-wise.

I would contend that there are many good stocks on New Zealand's NZX that will find an attractive home for the vast amount of billions currently tied up in term investments in our three major banks.

With a 1.5% point cut on December 4 the OCR rate would be 5% and another likely cut early in 2009 would see our OCR fall below 5% putting pressure on investors coming back from holiday to go hunting for better returns in the stockmarket.

Look for higher yielding and safer large capital stocks to benefit from rate cuts.

A dozen or more Kiwi stocks are paying more than a 10% gross yield and companies like Telecom NZ [TEL.NZ] should do well from those bailing out of banks.

Eventually the rate cuts will work to stimulate our economy, just as tax cuts do.

I am hoping against hope that since the previous Government has guaranteed finance companies that no more term deposit money goes after their higher rates.

Related Share Investor reading

Time for OCR intervention by Dr Cullen
Alan Bollard's indecision over OCR a worry to NZ INC
Bollard sits on his hands

Related links

Labour backs dodgy finance companies

Related Amazon reading

Interest Rate Models: An Introduction

Interest Rate Models: An Introduction by Andrew J. G. Cairns
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c Share Investor 2008

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