Low interest rates are a nightmare for savers. The money on their accounts dwindles from year to year because the fees they pay are usually more than the interest they receive. And after deducting inflation the real loss is even greater. So, what can one do to at least preserve value?
Bunds with a maturity of ten years are regarded throughout Europe as a benchmark investment among the fixed-income securities. Bund yields are currently slightly negative. Deducting the moderate inflation rate leaves a negative real return of 1.4%. Extrapolated over ten years, this would destroy around 14% of savers’ capital stock.
But it is not only the German bond market that has a negative real return. In around half of the world’s thirty largest government bond markets investors are currently losing money in terms of loss of purchasing power. The situation is no better with respect to corporate bonds. Those seeking an acceptable return will find little in the bond markets – except for the USA, where government bonds with a ten-year maturity offer a yield of 2.1% and where corporate bond yields are also somewhat higher than in Europe. However, investments in the United States involve a currency risk, which may destroy any interest income.
Things do not look a lot better outside the bond segment. Real estate is very expensive and the valuation in the equity markets is also somewhat higher than the historical averages. Not a lot needs to go wrong to frustrate investors’ already meagre return expectations – unless they have enough staying power to ride out potential share-price setbacks. The high dividend payments will remain pivotal for shareholders in the coming twelve months (DAX: 3.4%, Euro Stoxx 50: 3.8%). They are becoming increasingly important in an environment of weak profit growth. Dividends provide investors with a fixed income which exceeds the return on bonds more significantly than it has for a long time. This does at least provide some compensation for waiting for better economic times.
The picture of low return expectations is hardly likely to change fundamentally in the coming years. The much vaunted “Japanese paradigm” – a mixture of high national debt, zero interest rates, an ageing society and low economic growth – places heavy demands on politicians and central bankers. It is tempting simply to keep interest rates low.
These days it is apparent that the general interest rate level affects the prices of investment assets – including shares and real estate – just as gravity affects people: The lower interest rates are, the higher asset prices are and conversely. The central banks will doubtless remain very expansionary until the end of the 2020s and possibly beyond this. This helps the companies and thus share prices, too. Investors can in turn use this to their advantage, but they need to be patient.
Equity investors’ excessive focus on the interest rate policy of the big central banks is detrimental to their own investment success. ECB presidents such as Duisenberg, Trichet and Draghi come and go. Investors remain, as do companies such as Daimler, BASF and Allianz. And a successful company, such as Adidas or Amazon, adds value. Their founders had long-term entrepreneurial visions – it is possible they never paid any attention to bond yields.
Whether a share is purchased or not should depend on an understanding of a company’s business model, the quality of its management and the share price. The interest rate level is usually irrelevant. Things look different for companies with excessive leverage if they are not able to withstand a possible increase in interest rates because interest charges become too onerous. Investors can best avoid this problem by investing exclusively in companies with low debt levels.
A good solution for risk diversification, meanwhile, is the purchase of funds or investment certificates. Although funds are somewhat more expensive than direct investments in terms of management fees, the risk is reduced thanks to their broader investment universe. Investment certificates do not incur any management fees, so that for many of these investments genuine preservation of capital is a feasible undertaking by way of ordinary distribution.