Five years after the global financial crisis, risk aversion
remains a dominant feature of the financial markets, with
investors in New Zealand and the world still tending to be
"over-weight" in cash or short term fixed interest
securities, investment experts told a recent CFA conference
A common theme raised by speakers at the conference was that
companies, like investors, were loath to take on risk, which
was acting to hobble economic growth throughout much of the
Fund managers voiced their fears that investors who took an
overly conservative approach would not achieve the kind of
growth needed for their retirement.
In New Zealand, the trend towards greater bank deposits
accelerated in the wake of crisis.
In 1998, about $38 billion in household savings was tied up
in bank deposits -- a number that has swelled to $117 billion
today. Investment in shares has also grown, but not nearly at
the same pace - from $33b to $61b.
The recent string of mostly successful sharemarket floats has
shown that Kiwi investors are looking more favourably towards
risk, but the numbers suggest that cash is still king.
Across the Tasman, Australia's compulsory retirement system
is worth a whopping A$2 trillion - but the proportion if that
money sitting in cash is at historically high levels, thanks
to lingering effects of the crisis.
Reserve Bank of Australia deputy governor Philip Lowe said
the unwillingness of companies to invest in the non-mining
sector was the biggest "structural headwind" facing the
Australian economy -- and was far more important than any
changes the RBA might make to its cash rate.
"It is possible that one of the really enduring legacies of
the crisis is that businesses just decide that they do not
want to take on risk, or that they apply a high premium to
taking risk," he told the conference. 'If that's the case,
then we could all get stuck in a low-growth world and that's
obviously bad for everybody," he said.
Its a similar story in the United States, where non-housing
investment is still nowhere near its 2007 peak.
William Poole, a senior fellow of the Cato Institute and a
former president of the Federal Reserve Bank of St. Louis,
said the corporate sector in the US continued to hold back,
despite being in much better shape.
"We have companies that have huge amounts of cash on their
balance sheets," he told APNZ. "We have banks that are
stuffed with cash, so the issue is not the availability of
finance -- the issue is with the entrepreneurs who have not
been prepared to take the risks," Poole said in an interview.
Paul Smith, CFA's Hong Kong-based managing director of for
the Asia Pacific , said the crisis had completely altered the
shape of the investment industry globally.
The institute's membership is made up of asset managers and
financial analysts and Smith said the financial community was
still suffering from the reputational damage brought on by
"The reality is that we can't escape the general contempt
that the public felt for financial services in general --
primarily occasioned by the behaviour of the big banks,"
Smith said in an interview.
He said the financial markets were not performing their
traditional role of acting as a channel between savings and
Too much money was going into fixed income and not enough
into equity investment, which was primarily due to the lack
of confidence, which he said had not been helped by seemingly
endless headlines showing another bank facing a major fine,
or another ponzi scheme being uncovered.
"As the tide has gone out for the financial services
industry, a lot of these aberrant behaviours have been
exposed," Smith said. "I don't see any end to that cycle at
the moment and I think it's worrying from that perspective."
- Jamie Gray attended the CFA Australia Investment
Conference in Melbourne courtesy of the CFA Institute.