Pie Funds Founder and CIO Mike Taylor joins NZ Herald Business Editor at Large Liam Dann to talk about how much risk investors should be taking in this current climate.
Video / NZHerald
With interest rates riding high, is it time for investors to reduce risk and head for cash?
There’s no getting around the fact that bank deposits are looking attractive with long-term fixed rates around 6 per cent, PIE Funds chief investment officer Mike Taylor says.
It’s always adifficult topic for an active fund manager, Taylor concedes.
“I run a funds management business that invests in stocks, you know, and don’t get me wrong, I still believe investing in the long run for stocks is the best way to generate good returns,” he said.
“But at the moment you’ve got this really fine balance where property prices are still high - even though they’ve come back. It’s the same with stocks relative to where interest rates are sitting.
“So when you’ve got borrowing costs for a mortgage at 7 per cent and you can get a term deposit with a six in front of it you have to ask yourself: do I need to take the risk?”
Ultimately holding cash and investing in cash is not a good long-term investment strategy, Taylor said.
The statistics show you’ll barely make a return above inflation over the long term.
“But right at the moment, with inflation coming back down, you know, and some concerns around the world, cash does look like a reasonable place to pipe funds. In our funds as well, we have a reasonable amount of money in cash and we’re taking advantage of the high deposit rates there as well.
“We assume, and we would probably hope, that this situation, especially for borrowers, is temporary,” he said.
Ultimately it comes back to looking at the timeframes we expect to see inflation coming out of the economy and interest rates rates coming down.
The comments coming out of Jackson Hole - the big annual meeting of the world’s central bankers - were softer than last year, Taylor said.
US Federal chairman Jerome Powell was very hawkish last year and sent markets tumbling to new lows in September and October.
This time, there were no surprises and the message was just that interest rates remain on hold.
Unfortunately, no one is yet prepared to call victory over inflation.
The implication was that rates would stay high until they bring inflation back to 2 per cent.
“It seems the only way you can bring it back to 2 per cent is to really hit the brakes, whether we call soft landing, or recession, whatever it is, it feels like we won’t be able to get inflation down to that level without causing some something to break in the economy.”
Equity markets would need that tailwind of lower rates to really get back into bullish territory, he said.
“Eventually that will come, whether it comes by a recession or whether it comes via deflation.”
But at the moment, GDP growth in the US was still accelerating.
Federal Reserve chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on February 1, 2023 in Washington, DC.
“So whilst we have that markets will continue to track sideways, even while volatility is still not that high. We’re just kind of grinding around current levels and equity prices.”
It would be nice if the transition was achieved in an orderly fashion.
But, said Taylor “to the best of my knowledge, it hasn’t been done before and it would be bold to say that this time is different”.
“It’s very difficult or impossible to predict where the next calamity is gonna come from. So I’d be foolhardy to do so now,” he said.
“But there’s one thing I’ve learned, it’s that there’s always a surprise that comes along.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
The Market Watch video show is produced in partnership with Pie Funds.
