Commercial Market reacts sharply to higher interest rates

Press, 23 April 1979, Page 20

Commercial Market reacts sharply to higher interest rates

Bv

ADRIAN BROKKING,

commercial editor

The shareriarket took a* ' disappointing tumble last week, as investors reacted sharply to the evidence of higher interest rates by voting with their feet and getting out with surprising haste and in surprisingly large numbers. . However, the market should not have been taken Iby surprise: the signals for ia rise in interest rates were plain to see, and I predicted in these colums more than two months ago that interest rates would rise sharply in i the early part of this calendar year. Liquidity had been tight-' lening ever since the January announcement by Mr Muldoon that he would check the growth in the money i supply, and a subsequent

rise in money rates was only: to be expected. The finance company U.D.C. Group Holdings, Ltd, was quickly into tile market with an imaginative issue of S6M in unsecured three-year notes at 14 per cent. This filled in less than a month, and provided the finance house with a—as it turned out —relatively cheap source of funds, as well as broadening its financial base.

Just before Easter the Government announced a further cash loan for an indeterminate amount at very competitive rates of interest: 11 per cent for one year, 12 per cent for three years, and 13 per cent for five years. This issue is bound to be popular, and naturally will put pressure on interest rates generally. However, it is a logical consequence of the Government’s present monetary policy—not a satanic design to drive up rates and fuel inflation, as some readers have darkly hinted. The Government needs the money, and by borrowing in New Zealand rather than overseas it not only keeps it lin the family, so to speak, but also reduces liquidity (locally, which is its intention. [But to get the money in [sufficient quantity it has to i offer competitive and attraci tive rates.

A further result of the higher rate, and its effect to make rates rise generally, is a lowering of liquidity preference in the community, which again is what the Government wants. Of course, if people would like to invest in this issue more than they hold in cash balances, they would have to quit other assets—hence' the effect on the sharemarket. Apart from this “technical” effect on the market, there is the “fundamental” consideration that company liquidity is likely to tighten, and that it will become more expensive for companies to finance their stocks. And. there is no trading stock [ valuation adjustment this; year. Onlv if, and to the extent

that, companies are able tc pass on these higher costs can this pressure on interes rates be regarded as infla tionary—otherwise it is likely to have the opposite effect.

High interest rates will, ol course, have a bearing on investment decisions —although not as much as is generally supposed. One area, however, that might well be critically affected is the residential construction industry. Last week saw a spate of new prospectuses for debenture issues, all with increased rates, although because of the time factor involved most of these must have been already in the pipeline. Challenge Finance, Ltd, raised its top rate, for secured three, four, and five year stock, to 14 per cent, International Harvester Credit Company of New Zealand, Ltd, is offering 13.5 per cent for terms of three and four years, B.N.Z. Finance Company, Ltd, raised its top rate to 13 per cent, and Allied Finance and Investments, Ltd, set the highest pace with a rate off 14.25 per cent for three year! debentures. Allied lifted its rates fori I shorter term maturities but [shaved the return on in-l vestments between four and seven years. The new rates, with previous rates in brackets are:— call and three months, negotiable (no change): six months, 12 per cent (11.5); one year 13.5 (12.75) two years 14 (13.25); three years 14.25 (13.50); four to seven vears 13.5 (13.75) The Government also announced a second 11 per I cent “savings stock,” similar to the highly successful loan which raised almost S3OOM

it the end of last year,! which is likely to appeal to[ he private investor, because of the generous provision ’or early repayment. This stock can be cashed in at any time provided the investor gives the Reserve Bank a month’s notice. If redeemed before May next year (that is, within a year), the Reserve Bank will pay 8 oer cent interest; after May, 1980. the full interest of 11 per cent will be paid. This means that after a year investors in the 11 per cent stock are holding a one month savings stock which is gilt-edged but which will pay 11 per cent whether cashed in or held. The Government has also raised the top rate for local authority loans to 13.5 per cent — to give such loans their customary margin over Government Stock. Earlier, the sharemarket was boosted by a shortage of scrip and a lack of alternative investment, coupled with fairly high liquidity. This aspect has now completely changed.

However, investor sentiment was also influenced by some good company results (notably Watties), good [export prices for meat and wool, and the prospects of [higher, and in many cases [tax-free, dividends. ; These factors remain, although from now on the coming Government Budget is likely to overshadow even the most recent developments.