06/11/2019 - Investment Themes : Long-term low interest rates


The change from interest generation to tangible assets generation

Trade conflict, punitive tariffs, Brexit, fears of recession - these are the topics that dominate the headlines. Therefore equity investments appear to be difficult to place now. However, there is no way around this asset class in search of returns. Because the interest level will in all probability be around or even below zero percent for an unforeseeable period.

Since the outbreak of the financial crisis in autumn 2008 the major central banks have been pumping enormous amounts of liquidity into the market, around 10 trillion US dollar. First, to prevent an economic meltdown and to protect states and currencies such as the euro. Interest rates remained low in order to stabilize the economy, facilitate lending and push inflation, which was barely noticeable in the direction of the target value of two percent. Finally the European Central Bank (ECB), in particular, has remained in crisis mode with key interest rates of 0.0% since March 2016 to support the countries of Southern Europe, which from the ECB's point of view are threatening to fall back into the crisis without money at zero cost.

In July 2019 the US Federal Reserve began to bid farewell to its monetary policy normalization and began to lower interest rates again despite a solid current economy. In September 2019 the ECB decided to stimulate the economy with a new, indefinite program to buy government bonds worth EUR 20 billion a month - which would put additional pressure on interest rates. In addition, the ECB lowered the deposit rate, the so-called penalty interest rate for banks, by 10 basis points to -0.5%. These decisions clearly show one thing:

In the near future will be more significant interest on savings.

It costs almost nothing more to take up debts. What is cheap for debtors such as states is a never-ending nightmare for savers, investors and creditors.

On a descent since the 1980s: yields on 10-year government bonds

Interest rates have been falling since the '80s. In the one-third mix of 10-year government bonds from the USA, Japan and Germany, a yield of just under half a percent can still be achieved. Without US bonds, the value would be negative

No way back for now (?)

The ECB is deliberately keeping interest rates in the euro zone at zero percent and is de facto providing public finance through the bond purchase program. A return to normality, i.e. higher interest rates would cause major problems in Southern Europe, which could endanger the euro. That is why manipulative monetary policy has no alternative for a long time to come.

Inflation: the danger of the new monetary system

In principle, central banks can be indebted indefinitely. Governments can then use the money created to stimulate the economy. It only becomes problematic when inflation rises because of the limited supply of liquidity. If inflation were to occur, the central banks would be prevented from continuing to pump money into an economy at risk of inflation, as they are not allowed to abandon their mandate of monetary stability. Now, however, inflationary pressure remains unnoticed. Inflation in the euro zone was 0.80% in September compared to the same month last year and the core rate (excluding energy and food) was 1.0%.

Normalization now? Better not!

The large economic areas, USA, China, Japan and the euro zone are currently being doped. In order to boost the economy China has been running a state deficit of five to ten percent per year for around 30 years. This is a level of debt that used to exist only in extraordinary crises and in times of war. By way of comparison: the countries of the euro zone agreed on a deficit ceiling of three percent in the Maastricht Agreement. Japan's and the USA's government deficits are similarly high at around five percent or are moving in this direction and both countries are also pursuing expansive fiscal policies and lowering or zero interest rates. The euro zone is therefore doping with its zero interest rate policy, the bond purchase program and a currency that is undervalued for the more efficient euro countries. If these measures were omitted the crisis that we want to avoid would be just around the Corner.

If the ECB were to initiate a turnaround in interest rates in the coming months and end its permanent crisis mode this would have an almost immediate negative impact on the economy especially as the other economic areas would probably continue their expansive monetary policy. Then fears of recession would be justified: The euro would appreciate appreciably, and exports from the euro zone would become more expensive. Growth rates would shrink or turn negative and some companies would run into refinancing problems, as would probably some real estate buyers. Therefore, the ECB will try to stimulate and maintain the doping of the economy for as long as possible.

Does the big money printing have no effect?

It is unlikely that such an enormous supply of liquidity would have any effect on an economy or an economic area. In Germany, for example, real estate price inflation occurred in the past 15 years. Now, however, there is no overall imbalance. To do this, the velocity of money would have to increase, wages would have to rise significantly, and considerably more loans would have to be granted. At present credit growth in Germany is at 1.7% - not a worryingly high rate.

The victims are banks and savers

In this situation the entire banking landscape continues to come under pressure. The banks lack income from lending business and maturity transformation. Due to the extreme monetary policy of recent years and the imploded yields on virtually all quality bonds in the euro zone large parts of the banks' own holdings are already showing negative yields. In addition, the business models of insurance companies, which also encounter negative interest rates for new investments in life and annuity insurance, could also be affected. The entire old-age provision sector is affected as there is no longer any risk-free interest rate. In order to reach a green branch at all in old age, much more must be saved than before.

What can investors do?

It will take a long time for interest rates to return to levels that are still attractive even after inflation has been deducted. If previous generations were characterized by saving money as securely as possible and earning decent interest for it the current generation must rethink and become a generation of material assets.

Indeed, today's investors have no choice but to invest in forms of investment with stronger fluctuations. These include above all equities, but also interest-bearing securities from regions where there is still interest, such as the developing countries or China. Interest rates have by no means disappeared everywhere. It is advisable to invest globally in order to take advantage of opportunities wherever possible. Active managed, balanced mixed funds such as the DJE - Zins & Dividende remain a preferred instrument here. Such funds can look for interest where returns can still be found and combine them with steady returns from corporate dividend payments and price gains on the stock market.


Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care, the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.