Multi-manager verdict: What are the consequences of negative interest rates?


Ben KumarBen Kumar is investment manager at Seven Investment Management

Three years ago negative interest rates were seen as the fevered imagining of an economist, unlikely to be allowed out into polite society.

Yet at the start of 2016, both the Bank of Japan and the European Central Bank took their benchmark rates below zero – and show no signs of reversing that decision in the immediate future. This strange new world presents investors with a few problems. For a start, in Excel, the formula that works out a bond price is unable to provide a price once yields turn negative. Given that most German bonds are now on negative yields, this can be something of a modelling headache.

Aside from the calculation issue, investors also have to evaluate whether it is worth paying for the privilege of lending. Again, take Germany, where the 12-month bond has a yield of -0.45 per cent. Buy the bond for 100 today, and the best-case scenario at maturity is that you get 99.55 back. The only way you make money is if someone else is willing to buy your bond before the end of its life at an even greater expense to themselves.

One side-effect of negative rates is some unloved assets begin to look like reasonable investments once more. Traditionally, holding gold as a diversifier came at a cost, either of storing and insuring it, or paying a money manager to do so. That was often unattractive in a world where interest was paid on cash acc-ounts. Now though, in places such as Germany and Switzerland, that relative trade-off begins to look a lot more interesting.

Evan-Cook-Simon-700x450.jpgSimon Evan-Cook is senior investment manager at Premier multi-asset funds

As investors, not economists, we are primarily concerned with any impact negative interest rate policy may have on future returns. On this front, we believe negative interest rates look most likely to simply extend the recent conditions, in which risk assets have produced underwhelming total returns. It seems to us that quantitative easing allowed them to “borrow” returns from the future, and negative interest rates only extend this environment. Such assets have already re-rated to fair value, so we should not realistically expect further re rating from here.

There is a risk those who have the money, and are meant to now spend or invest it rather than pay to keep it in a bank, will instead be spooked by this high-profile policy and further tighten their purse strings.

This is uncharted territory, and we must guard against overconfidence on its likely outcome. We should also allow for other factors – be they known or unknown – to combine with negative interest rates to change that outcome.

On this basis, the fall in oil prices has a better chance of providing the economic stimulus intended by negative interest rates. It is more likely to benefit those with a higher propensity to spend, and therefore seep into the wider economy.

Regardless, we reiterate our belief that current valuations do not suggest that outsize future returns are likely, and recommend investors maintain modest expectations.

WEB_DecJan_Philbin, RichardRichard Philbin is chief investment officer at Harwood Multi-Manager

Negative interest rates ultimately cannot be a good thing. There has to be a cost of capital and without that, the fundamental principle behind capitalism gets lost along the way. Negative interest rates will force savers to spend; they will change the “value” of money and it will cause unknown issues further down the line.

Commerce is global, we operate in a glo-bal economy, with free-floating currencies and international trading partners, meaning external factors need to be considered too.

Having a negative interest rate policy will make servicing national debt more manageable, but increasing the national debt is not the answer. Unless debt is written off, it needs to be repaid – delaying the repayment only increases the burdens for future generations.

Low or negative interest rates will keep certain companies and industries alive longer than they should by delaying their demise and increasing both complacency and inefficiency – thus altering the way these businesses are perceived and “growth” is achieved. It is all quite worrying.

Negative interest rates in a closed economy could work, but with the free movement of capital across the world, bubbles can, and will, occur.

On the other hand, for borrowers, a low cost of capital could be seen as the impetus to create new industry as the risks are lower due to the reduced cost burden. This could be the springboard to normality.