Market News 21 July 2025

David Colman writes:

Losing wealth comes in many forms. Gamblers understand this well, expecting to win or lose based on immediate outcomes.

It might be a horse, a hand of cards, or a pokies machine that delivers a loss. In an instant, you're worse off.

By contrast, losing spending power gradually is harder to detect. Incrementally rising expenses chip away at the value of your income or savings.

Inflation is sometimes called invisible because it erodes value over time. Yet for New Zealanders, it is plainly visible in the rising numbers on rates bills, power bills, insurance premiums, and grocery receipts.

In the United States, the risk of inflation is increasing. Economists have consistently warned that tariffs, whether implemented or paused, lead to higher prices across the economy.

Recent US consumer price index data showed broad-based price increases over the past month, following a period of slower inflation earlier in the year.

This is a sign that US businesses have begun passing on a variety of tariffs to consumers.

Many companies initially increased inventories in anticipation of tariffs, absorbing some of the impact on their customers, but such a strategy can only delay price increases for so long without eventually hurting margins and profitability. Tariff costs look increasingly likely to be passed on to consumers which will only push prices higher.

The One Big Beautiful Bill Act will add to inflationary pressure with associated federal spending expected to be elevated by trillions of dollars funded by borrowing more.

Inflation which had eased from higher levels in 2022 now appears to be accelerating reducing expectations of a US Federal Reserve interest rate cut.

High inflation and high interest rates are closely related as central banks look to relieve inflation pressure with higher interest rates with the intention of limiting spending power.

Long term bond yields reflect these realities with US Treasuries now at levels not seen since before the GFC.

The 30 year US treasury yield is close to 5%, which can serve as a measure of various factors.

A higher US 30 year yield reflects concerns that the US government faces increasing difficulty repaying its ever-growing debt and risks destabilising financial markets.

It is also used as a benchmark to price long-term financing including corporate bonds, mortgages, car loans, student loans and credit card rates.

Sometimes there is no avoiding certain realities, even ones you wish were invisible.

World leaders have been realising at different speeds the following truths:

- Tariffs are inflationary and foster instability

- Debt-fuelled fiscal spending raises interest costs and undermines creditworthiness

- Country’s leaders on the other end of the telephone should be judged on their actions and not their flattery - sycophancy is likely harder to identify by the self-pretentious.

I am hopeful, probably naively so, that even the most powerful, even the self-aggrandizing in positions of power, can have a change of heart in the face of certain facts that shake, or shatter previously held beliefs resulting in them taking more pragmatic action.

My hope for improvement is slim - stretched household budgets seem to be better run than government balance sheets perhaps because too few in charge have ever run a household on an income that barely covers expenses while still trying to save for the future.

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Another gradual trend that could be described as invisible is demographic change which in New Zealand and many developed nations involves an ageing population.

Last week the Reserve Bank of New Zealand (RBNZ) published a report entitled ‘The Grey Wave’.

The report by Enzo Cassino and Anoushka Divekar was described by the RBNZ as a special topic considering ways that an ageing population could affect the New Zealand financial system.

It concludes that the economic impact of an ageing population is likely to be gradual but it is important for financial entities to understand and be prepared to manage the changes and any potential risks associated with an ageing population.

The report states that by 2050, nearly a quarter of the population is expected to be aged 65 or older resulting in a shrinking working-age population as a share of the total population.

The ratio of the number of older people to workers (the old-age dependency ratio) is expected to increase which is a common trend across high-income countries.

Population ageing is driven by two factors – life expectancy and fertility rate.

Life expectancy has increased steadily since the 1950s as healthcare has improved. People born in the 2010s on average can expect to live around 12 years longer than those born in the early 1950s and this trend is projected to continue to increase in the coming decades.

Fertility rates have fallen steadily due to factors such as higher education levels, lower infant mortality and increased female labour force participation.

Like many high-income countries, New Zealand’s fertility rate is expected to reach around 1.65 births by the 2030s - well below the population replacement level of around 2.1.

Population ageing can be delayed by inward migration with most migrants to New Zealand in the working-age group of 15-64 years and tending to be more highly qualified than the New Zealand-born labour force.

Migration numbers are not expected to be high enough to completely counteract the effects of an ageing population and in the longer term, migrants will also add to the ageing population.

Another offset is that older people are working for longer before retiring.

There are many potential factors associated with an ageing population that will likely change the nature of the financial system potentially exposing vulnerability.

As more people enter retirement, labour will become increasingly scarce, leading to shortages of workers in many industries.

Productivity growth may slow due to labour scarcity encouraging firms to substitute workers for more capital, such as machinery and new technology, possibly increasing investment demand.

The key findings of the report included:

- Overall savings are expected to increase as older workers prepare for retirement.

Increased national saving from an ageing population could improve the current account balance and the net international investment position, with foreign exchange implications but the size of this impact will depend on the rate of increase in national saving in New Zealand relative to the increase in savings in other countries.

Other countries are facing similar conditions.

- Changes in savings behaviour will impact interest rates.

An older population has contributed to lower neutral interest rates in recent decades and is expected to continue putting downward pressure on them in the near term.

Other factors could offset this impact, making projections of the neutral interest rate uncertain.

The size of savings drawdowns is difficult to estimate, as individuals may not have clarity over how long they need their savings to last, or whether some will be left as inheritance for younger generations.

Ageing populations have contributed to lower interest rates in recent decades, and this is expected to continue in the near term in New Zealand and other wealthy countries with interest rates here influenced by interest rates in larger economies.

Older investors are more likely to invest in lower risk assets, such as term deposits, or switching from higher risk to lower risk KiwiSaver funds due to the need for a steady income stream and to protect against having to sell assets at a time when prices are low.

Low interest rates might however encourage investors to undertake riskier investments or alter investor behaviour such as with older Japanese retail investors who borrow yen at low interest rates and invest in foreign currency that pays higher interest rates.

Beyond the next decade, the impact of population ageing on interest rates is more uncertain as more people retire, aggregate savings will eventually be run down, which will push interest rates up with any changes to interest rates dependent on the magnitude and pace of savings withdrawals, and how much deposits grow in the next few decades.

As life expectancy increases, individuals may become more inclined to explore other options to ensure a stable flow of income during their retirement, such as reverse mortgages or annuities.

Currently, only two New Zealand banks (Heartland Bank and SBS) offer reverse mortgages with around $1 billion in loans compared to the total value of housing loans of around $360 billion.

- The strength and speed of monetary policy transmission to the real economy may change. Increased expenditure on healthcare and superannuation will impact fiscal policy.

Monetary policy strategy may change with considerable uncertainty about the direction of future changes in the neutral interest rate.

If the neutral rate does decline, this may make it harder to provide enough stimulus through Overnight Cash Rate (OCR) cuts in situations where expansionary monetary policy is necessary.

As a result, the probability of having to use non-traditional monetary policy tools, such as large-scale asset purchases, in a business cycle may increase. The Bank of Japan for example has bought equity-based exchange traded funds for years to add to its asset base.

Older people are more likely to have paid off their mortgages and are less likely to be in employment which means that the negative impact of tighter monetary policy on household cashflow might be limited.

Fiscal policy may be more constrained with The Treasury projecting health expenditure to grow from around 7 percent of GDP in 2021 to over 10 percent by 2061 under a scenario based on historical trends.

Gross expenditure on superannuation is expected to increase over this period from 5% of GDP to 7.7% of GDP.

Tax revenue is expected to decline as labour force participation declines.

Withdrawals from the New Zealand Superannuation Fund (NZSF) will contribute to fund superannuation expenditure but most superannuation expenditure will still be funded by tax revenue.

The government may be forced to increase debt, increase taxes, or reduce expenditure.

As a result, there is a risk that the government’s ability to support economic activity with fiscal policy may be more constrained in response to an adverse shock, such as the COVID-19 pandemic increasing risks to macroeconomic stability perhaps requiring more stabilisation from monetary policy managed by the RBNZ.

The NZ Super Fund (NZSF) is described as playing a ‘tax smoothing’ role in funding superannuation expenditure. By 2060, the NZSF is expected to contribute only around 6.6% of the cost of superannuation, net of tax.

- Lower interest rates could increase prices of assets such as housing and equities, but lower risk appetite of older investors may increase demand for less risky assets. The types of houses in demand could change.

Changing demographics could impact on asset valuations and demand as consumer preferences change with age.

Lower interest rates would be expected to put upward pressure on house prices in the near term but in the future, as retirees begin to draw down on their savings, this may put upward pressure on interest rates and downward pressure on house prices.

Savers benefit from higher interest rates, but older individuals will still be impacted by the effect of interest rate changes on asset prices.

Preference for the types of housing may also change as the population ages as older households will likely prefer single storey dwellings, or smaller properties.

Slower growth in the working age population would lower growth in demand for larger houses potentially affecting the composition of new housing construction.

As more savings are shifted into more stable investments like deposit accounts, this may see reduced participation in equity markets perhaps offset by the impact of lower interest rates noting older investors may also continue to invest in equities to benefit from the better expected returns than in bank deposits.

- Banks’ lending and funding may be impacted. Deposit funding may increase, while credit demand for housing could decline. If demand for housing loans declines, banks may increase other types of lending or expand provision of other services, such as wealth management.

An ageing population could impact banks’ balance sheets as deposit supply increases and demand for credit declines with a shift of savings into bank deposits, this could see an inflow of funding for banks reducing demand for funding from overseas wholesale markets.

Older bank customers have less need to borrow as they are more likely to own their houses outright and are less likely to start a new business than younger bank customers.

Consumption may shift away from goods and towards the services sector as individuals get older, further reducing the need for credit.

Lower credit demand from households and businesses may mean that banks expand their purchases of other assets such as government bonds.

Banks may also increase their provision of other services and products to households and businesses such as increasing wealth management services to meet the demand from an older population.

As banks increasingly provide their services through digital platforms, older bank customers may find it harder to adopt new technology with older bank customers more inclined to use cash for transactions.

This may become less of an issue going forward as more people will grow up using digital banking technology.

The RBNZ is working on the future of money, including how access to cash will be impacted by technological changes, such as growth in electronic payments and closure of physical bank branches with a goal of encouraging innovation in payments systems while still supporting continued access to cash.

The report clearly indicates demographic change is a longer-term trend that will have implications for investors over the decades ahead.

Monitoring longer term indicators such as fiscal imbalances, household asset allocations and trends in sectoral credit demand will be important for analysing the impact of an ageing population on the financial system.

If significant vulnerabilities develop, the RBNZ will assess the potential impact on the financial system and consider whether changes to its prudential policy settings are needed.

The risk of inflation and the effects of demographic change will continue to be an important part of investment strategy - a strategy that will have to include the effects of the above trends and other factors relative to the specific investor.

Targeting returns at a rate above the Consumer Price Index (CPI) would not be an ideal strategy to cover a particular investor’s rising costs as in reality a household’s costs can often rise well above the RBNZ’s measure of inflation. 

Seeking to achieve returns that cover rises in costs, with investments that can adapt to changing economic conditions, for someone with their own specific needs will continue to be an important task.

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Transpower Bond Offer

Government-owned Transpower has announced its intention to launch a new senior bond offer to retail investors.

The bond is expected to offer a fixed interest rate of approximately 4.20 - 4.30% per annum, with a 5-year term.

Please note that Transpower will not be covering transaction costs for this offer, so brokerage will apply.

If you would like to be pencilled in for an allocation, pending further details, please let us know.

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Travel

Our advisors will be in the following locations on the dates below.  Please contact us if you wish to make an appointment:

23 July – Christchurch (AM only) – Fraser Hunter

24 July – Auckland – Edward Lee

25 July – Auckland – Edward Lee

20 August – New Plymouth – David Colman

21 August – Wairarapa – Fraser Hunter

28 August – Christchurch – Fraser Hunter

Chris Lee & Partners Limited