In little old NZ, term deposits have traditionally been a cornerstone investment choice . Particularly among retirees and conservative investors seeking perceived safety and regular income, they’re often seen as ‘safer’ investment options .
The scale of this preference is staggering: New Zealanders collectively hold approximately $455 billion in term deposits, dwarfing the entire market capitalisation of the New Zealand Stock Exchange at $165 billion . [i]
Even more telling, household term deposits alone stand at $250 billion . There’s a deeply ingrained cultural preference for this investment vehicle .
Moreover, our overwhelming national dedication to term deposits raises serious questions about NZ's investment efficiency and risk exposure . The stark contrast between term deposit holdings and stock market capitalisation reveals a significant structural imbalance in New Zealand's investment landscape .
When a nation's term deposits triple the size of its entire stock market, it suggests a potentially problematic overreliance on a single investment type . We’ve got too many eggs in the one basket, guided only by fear of other avenues .
This reflects NZ’s conservative investment preferences . For a country known for adventure tourism and giving things a go, we’re not so daring when it comes to investments . Playing it safe is not inherently a bad thing (hot-headedness is also not an ideal trait for investors), but blanket fear of diversification leads to missed opportunities for both individuals and the broader economy .
Speaking of our economy...
GDP growth has moderated to approximately 1.5% annually, and inflation is now finally back within the Reserve Bank's target band .
Within this context, the Official Cash Rate (OCR) reached a peak of 5.5% in 2023, but economists now forecast approximately 300 basis points of cuts over 2024-25 . The first reductions have started and further significant cuts are coming .
With a negative yield curve, return from term deposits and cash instruments will drop . So that nice, tidy number you’re expecting back from your term deposit… may not be as much as you think .
Then there’s the role of inflation itself to consider when it comes to term deposit returns .
During periods of above-average inflation, short-dated fixed income investments, including term deposits, have consistently failed to preserve real wealth after accounting for tax and inflation effects .
This pattern has repeated itself across multiple economic cycles, most notably during the high-inflation periods of the 1970’s-80’s . During these times, investors who relied on term deposits experienced significant erosion of their purchasing power despite seemingly attractive interest rates .
If I had a dollar for every time I am told by someone how their (or their relative’s) term deposit in the 1980s was a fiscal recipe for success, I’d have a sizable money jar – even allowing for inflation and tax .
For example:
A 5% term deposit rate, after applying a 33% tax rate, yields a net return of just 3.35% . In an environment where inflation runs at 5%, this translates to a real return of -1.65% (essentially, you’ve gone backwards by that amount) . Should inflation surge to 7%, as in recent times, the real return plummets to -3.65%. Ouch .
This gets even more alarming when examining historical episodes of high inflation . During the 1970s and 1980s, despite term deposit rates reaching as high as 17%, investors often experienced negative real returns after accounting for inflation and tax .
This period serves as a crucial lesson for today's investors: High nominal rates don't always translate to high real returns .
Now, let’s look at the organisations holding the term deposits – the banks. Our banking sector’s structure takes on new significance when considered alongside the enormous term deposit holdings .
The concentration of almost a half-trillion dollars in term deposits (mostly within the "Big Four" Australian-owned banks) creates a significant systemic exposure; this is particularly noteworthy as term deposits to the tune of $250 billion represent a massive part of NZ’s household wealth . While recent regulatory changes have created some protection, including a proposed but not yet implemented deposit guarantee, this will only cover a fraction of these holdings .[ii]
Then, finally, there’s the tax factor of term deposits to contend with . Term deposits face straightforward but potentially punitive tax treatment, especially during high inflation . By comparison, other options like PIE funds offer more favourable tax treatment. That means you get to keep more of your returns .
The huge cumulative value of term deposits in NZ shows a need for change in traditional portfolio construction, to encourage more diversified allocation strategies . This doesn’t have to be dramatic - even a modest shift of term deposit holdings toward other investments could give an economic boost where it’s needed while providing returns for individual investors .
Navigating investment decisions isn’t just about understanding numbers . Our disproportionate reliance on term deposits ($455bn in total, with $250bn from households, vastly outstripping NZX’s $165bn in stock market value) shows that many investors don’t see the value in diversification yet .
That’s where professional financial advice can be a boon . Experienced counsel (not your mates or relatives who swear by term deposits alone) can help to balance emotional and financial considerations while crafting a strategy aligned with personal goals . A skilled adviser serves as both technical expert and behavioural coach, helping investors avoid common pitfalls like excessive conservatism or panic selling during market volatility .
This balanced perspective and personalised guidance can be particularly valuable when considering how to optimise returns while maintaining appropriate security - a delicate balance that raw numbers alone can't determine .
If you have been thinking about getting your investment portfolio sorted, consider contacting a trusted financial adviser rather than making judgement calls based on nominal rates – so you can get a plan that accounts for market volatility and inflation, not one that only works under the right conditions
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 380.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://en.wikipedia.org/wiki/NZX
[ii] https://www.rbnz.govt.nz/statistics/series/registered-banks/banks-liabilities-deposits-by-sector
