Finance company shakeout had to occur: Brighouse
Fallout from recent finance company failures could include an even less diversified approach to savings, warns Arcus chief investment officer Mark Brighouse.
Tuesday, July 18th 2006, 5:24AM
by Rob Hosking
But he says one of the worst aspects of the question-marks hanging over the sector is it will drive New Zealanders who are already wary of the entire financial sector back into their default investments – bank deposits and real estate.
Brighouse warns about investor perceptions of risk, and how wrong those perceptions often are.
"Because it had been some time since a large finance company had collapsed, this risk was mistakenly believed to be very small," he says.
With a well-publicised economic cloud hanging over the finance sector, the perceptions of risk is likely to change the other way – investors’ perception of “agency risk”, become unrealistically high, says Brighouse.
And so there is a danger many Mum and Dad investors will plump for those investments in property and bank deposits which minimise those agency risks.
The wider wealthy effect of the shakeout in the finance company sector is likely to be fairly small, he says – the economic equivalent of a bad day for Telecom on the NZX.
Brighouse says the shakeout had to occur.
"The finance company sector plays a very useful role...but many of them are the equivalent of junk bonds. There are some rated finance companies but most are at the junk bond level.
"We think we have only seen the beginning of the shakeout."
Investors looking for a one-year investment on a speculative grade finance company should expect - as an "adequate" interest premium – about 4-5% above the comparable bond rate.
At current levels that means a one-year investment should be getting a minimum of 11-12% to compensate for the extra risk involved.
Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.
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