Looming negative interest rates triggering investors to take action

Nigel Green

Negative interest rates are on the horizon and, as a result, investors are eyeing opportunities to bolster their portfolios to get ahead of the likely direction of travel and grow their wealth.

The Federal Reserve is doing almost whatever it takes to prop-up the faltering U.S. economy – including parachuting $2.3trn in via a raft of emergency measures.

Whilst another tool is at the central bank’s disposal, that of negative rates, it remains controversial. However, against a backdrop of dismal economic data including unemployment approaching 40 million, there is a growing consensus that they are looming.

Indeed, rate options, which gauge monetary policy forecasts, implied earlier this month a 23% likelihood that the key federal funds rate will drop below zero by the end of 2020, according to BofA Securities data.

It’s not only the U.S. which is appears to be moving towards an era of negative interest rates.

The Deputy Governor of the Bank of England also suggested that the UK may be headed toward negative interest rates.

This approach would have been unthinkable at the beginning of 2020. But, as we know, the world has changed due to the fallout of the pandemic, which has crushed both supply and demand across all countries and almost all sectors.

As such, as central banks around the world attempt to improve their economies, it can be reasonably expected that more and more of them will take a dramatic change of policy course and take rates to below zero - like their peers in Europe and Japan.

The European Central Bank (ECB) first ‘went negative’ with rates, to -0.1%, in 2014 to tackle the crisis in the eurozone by bolstering economic activity. Currently it is at its lowest in history at -0.5%.

The Bank of Japan (BoJ) was the first central bank to move to a zero interest policy in 1999.

Neither the BoJ nor the ECB have managed to hike rates back into positive ground.

There is real concern regarding the efficacy of negative interest rates on boosting economies.

This is because they could be perceived by consumers and investors that the underlying economies are fundamentally weak and, as a result, trigger a fall in consumer and investor demand.

However, what is not up for debate is that negative interest rates will serve to increase financial asset prices.

As such, savvy investors will now be looking to top-up their portfolios before the next round of cuts and the likely subsequent price increase. Quite sensibly, they are taking advantage of the lower entry points now before the next major rally.

Plus, those with savings are already being hit hard due to the ultra-low interest rates. Negative rates will offer them more reason to increase their exposure to stocks and other investments.

Whether people like it or not, with the economic situation and the growing hints from central banks, it seems increasingly likely that more rate cuts are inevitable. The officials understand that it is not sustainable to just keep printing more and more money.

With this in mind and to get ahead of the curve, many investors are now actively seeking buying opportunities to grow their wealth.

Nigel Green is CEO and founder of deVere Group, one of the world’s largest independent financial advisory and fintech organisations.


Financial Markets