Falling interest rates hit term deposits （转）

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By Tim Blue
The Australian
January 02, 2009 08:29am

SUPER fund losses and a crashing share market may have driven investors to put their money in the bank last year, but falling interest rates could change the equation in 2009.

Bank term deposits have expanded by more than 50 per cent in the past year -- the fastest growth rate in nearly 20 years, according to latest Reserve Bank figures.

But stashing the extra $100 billion cash in the bank might not be the best way to invest, with interest rates already at their lowest levels for 57 years and tipped to go lower next month, reports The Australian.

Official cash rates, now at 4.25 per cent, are tipped to 3.75 per cent early next month.

CommSec chief equities economist Craig James says this will be the next move to shore up the economy's defences against a world slowdown.

If that happens, rates will fall to the lowest level since November 1967.

RBA data shows that term deposits held an extra $9.4 billion in November to a total of $326.4 billion.

That's about half the value of all savings in the superannuation system, which is now heading for another year of losses after world financial markets lost close to half their value in 2008.

The median return in a balanced super fund is running just shy of minus 20 per cent for the year to November.

The bad news is that 2008 was the worst calendar year on record for the Australian share market, with the S&P/ASX 200 down 41.3 per cent and the broader All Ordinaries down 43 per cent.

AMP Capital Investors chief strategist Dr Shane Oliver said the previous two worst years were in 1930, when shares fell 33.9 per cent, and in 1974, when they fell 32.2 per cent.

"But the good news is that extreme falls are often followed by good rebounds: 1931 saw Australian shares rise by 11.3 per cent, followed by a 19.9 per cent gain in 1932 and in 1975 they rose by 48.5 per cent."

CommSec's Mr James suggests a rebound could be funded by cash moving out of term deposits.

"With interest rates now sharply lower, that extra cash (in banks) may end up moving back into the share market when the deposits mature over 2009."

Mr James said the slide in the Australian share market needs to be seen against the strength of previous gains.

From 2003-07 the Australian share market recorded its longest period of double-digit gains.

Over the past five years -- despite the recent downturns -- the All Ordinaries has still grown by 6.3 per cent.

"Over 2009 we expect shell-shocked investors to gradually drift back to the share market," James said.

"Valuations are historically cheap, but the risk is that share market recoveries will be slow and prolonged.

"The influence that large investment banks and hedge funds have exerted in the savage share market sell-offs over 2008 has damaged the trust that ordinary investors once held."

CommSec expects the ASX 200/All Ordinaries to rebound to 4700 by the end of 2009.