"You shall not lend him any money at interest, nor shall you give him his food at usury." It is written in Leviticus. But not even the Bible goes so far as to require the creditor to pay interest to the debtor so that he takes his money.
Yet this is what negative nominal interest rates mean that prevail in the euro area, in Japan, Switzerland, Denmark and Hungary. Sweden has just left this club, but who knows how long they will be out.
Sometime in 2019 nearly $18 trillion in bonds they offered (sic!) a polar yield (in the sense of the North Pole). And the United States is believed to be only one recession away from having to bring its cost of borrowing below zero (so to speak). Never in the millennial history of money has the interest rate been so low.
Why have rates fallen so much? And what are the consequences for investors? fromanalysis conducted for Ceresio investors two explanations emerge for the drop in interest rates and a suggestion on which assets to favor in financial investment.
The first explanation belongs to the school which believes that it is excessive savings (saving gluten as Ben Bernanke called it, before becoming President of the FED) the cause of the drop in the natural interest rate, i.e. the rate that guarantees full employment and stability in consumer prices. This lawsuit has been invoked multiple times by both Mario Draghi, when he headed the ECB, both from Jerome Powell in press conferences concluding FED meetings.
The excess savings, then, derives mainly from the lengthening of life, which imposes more saving for old age, by the greater weight of emerging countries, which have higher thrift, on the world economy, by the lower dynamics of productivity, which causes profits to decline and reduces the accumulation rate, and by cut public investment. According to a study by the Bank of England, these three factors have caused 400 of the 450 basis points of declines in the natural interest rate over the past 30-35 years.
The second explanation, on the other hand, states that the interest rate is the price of money, which is not only a means of exchange and a measure of value, but also a tool in which to hold savings. Jonh M. Keynes, the greatest economist ever, teaches. So the interest rate is decisively influenced by the central banks.
In either case, however, low rates are meant to last a very long time. On the one hand, because the structural factors mentioned above will not change anytime soon; barring an improbable backlash from governments that vary a major infrastructural investment plan. On the other, because central banks are determined to bring inflation close to, if not above, their 2% target so as to ward off the specter of deflation.
Given this picture, which financial assets to invest in? In three: shares, shares, shares. Which are the only titles to give a largely positive return: the dividend yield (distributed earnings as a percentage of share prices) is 2% in the US, over 2% in Japan, over 3% in the Eurozone and 4% in the UK.
But aren't shares expensive? Yes. The CAPE, i.e. the ratio of stock prices to earnings adjusted for the economic cycle, according to the formula invented by Nobel laureate Robert Shiller, is at 30 for the main Wall Street index. One of the highest values in the historical series starting from 1881. Much higher than that was in September 1929 and December 1999, i.e. shortly before the bursting of two large bubbles.
However, today is different precisely because it is low rates that push stock market multiples up. In fact, ten-year government bond rates are lower than dividend yield, slightly in the USA, a lot in Japan, the Eurozone and the UK. On the other hand, in the world of financial managers there is a widespread belief that TINA to stocks, that is there is no alternative to actions. Furthermore, excess savings will continue to flow, in large part, to the stock market.
Putting more stocks in the portfolio, to have a higher overall return, implies accept a greater fluctuation in its value, because stock market volatility rises when their high price is based on low rates rather than on rosier prospects for economic growth.
Finally, it is necessary to carefully observe the three variables that could change the scenario: inflation, economic growth and political uncertainty. More inflation, less growth and more uncertainty would cause stock prices to fall. But today they do not appear on the horizon, even when using a good telescope.
And since we're at Christmas, when we're all becoming a little more altruistic, it's better to buy shares in companies that have a good social and environmental balance, as well as an excellent economic balance. Also because the accounts add up, in the sense that those who care about society and the environment also get better profits. Doing good is good for your wallet. Best wishes for a prosperous 2020.
