The Big Picture
Over the last few years, governments around the world have continued to lower interest rates by doing quantitative easing (QE). This has been done with a view of stimulating economies and avoiding stock market crashes.
Their ideas have been based on classical economics – that the consumer has unlimited wants. The theory being that the consumer will spend and consume more if he has more money available, and that way stimulate economy. Today this is not necessarily the case. Lack of confidence in the markets and economies breeds conservatism when it comes to spending. The cheap money is not being spent in a way it was intended when it was created. Consumers would rather save it for an uncertain future.
So, what effects have low interest rates had on the economy at large and how does it affect pensioners and other savers?
One thing that still holds true as far as I am concerned is that there is no free lunch.
Who is going to pay ultimately for all this QE?
With interest on cash assets not giving a real return, pensioners and investors have been pushed to invest in the equity markets to try and participate in dividend payments. This has driven the prices of equities up and a lot beyond the fundamentals.
At first investors do not mind, they see big capital gains as the shares gather higher prices. However, when prices for shares reach what I call “top of the climb”, then investors feel the pinch.
With no capital gains, expensive shares which give little dividend return for the price of the share, the prognosis is not good for investors who want to see a real return that they can live off. Furthermore, certain equity markets prices have been driven up a lot beyond their fundamentals and with no fundamentals to support them, they have become a ‘pyramid structure’ waiting to fall. This is what may be seen in the FAANG shares. Bitcoin may also be an example.
However, there are some areas in the market that still have potential, are not overpriced and whose P/E ratios are still reasonable and offer a reasonable return on investments. To a greater extent these markets may protect you from the fall.
Pensioners and savers who are unwary of the true situation will be affected and it will cost them.
Bottom line: –
Investors are paying for all the quantitative easing.
The companies may not have changed – they are making similar earnings as before. E.g., a company pays R5.00 per share per year, but now the investors are paying R200.00 per share not R100.00.
In the past for every R1 million invested in an investment portfolio, you could expect a R10 000.00 return per month. Today that same investment portfolio may only yield R5 000 or even less return per month. That is where the real cost is.
Real rate of return has declined to exceptionally low levels. Index funds and a lot of mundane unit trusts will not do well in this investment environment. It is also important not to become married to yesterday’s winners.
This is not the time to be in index funds.
This is the time to be with forward thinking and effective fund managers. That is why we are constantly reviewing unit trusts and their markets…
All the Best,
Nick Russell
Certified Financial Planner CFP®
Please note: This article does not constitute advice