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Negative global interest rates – the investment implications

Today only 3% of the global bond market can offer excess yields.
Strong dividend-paying investments are likely to serve investors best in the years ahead, writes the author. Image: Michele Limina, Bloomberg

The yield of a country’s 10-year government bond provides important insight into its economic prospects. Above-average yields on the debt of reliable borrowers typically represent an expectation of above-average inflation and strong GDP growth. Very low yields imply the opposite. 

Twenty years ago, over half of the global bond market boasted yields in excess of 5%. Today, only 3% are still able to offer those kinds of yields, and as much as a quarter of the global bond market is offering negative yields. In Germany, yields are negative all the way from cash deposits to 30-year bonds. In Switzerland, negative yields extend all the way out to 50 years.

The message from the bond market is clear – investors need to consider the investment implications of a prolonged period of low inflation and weak global growth. 

Investment implication No 1: Dividends will become increasingly sought-after

With cash and bonds offering investors very little in the way of yield, investors are likely to turn to dividend-paying equities for income. The chart below highlights the yield differential between Nestlé (a Swiss multinational) and the Swiss 30-year government bond.

Source: Marriott

The current 2.6% yield differential is unusually high and unlikely to persist, considering that both investments pay out income in Swiss francs and exhibit similar levels of price volatility. This presents downside risk to bond investors and upside potential for dividend investors.  

Investment implication No 2: Favour defensives over cyclicals

Companies which produce goods and services that consumers can’t go without have the ability to increase prices without sacrificing volumes, even when times are tough. As such, a low growth environment favours businesses operating in ‘defensive’ industries (such as food, beverages and healthcare) over more cyclical companies like resource and energy stocks. 

The chart below highlights how Nestlé has been able to consistently increase its dividends throughout the various economic cycles, including the great recession of 2008/9.

Source: Marriott

Investment implication No 3: Quality is key

A company’s brand, business model and balance sheet are all put to the test when economic growth is subdued. Based on our experience, the businesses that tend to come out on top have the following qualities:

1.       Size and scale

2.       Market-leading brands

3.       Geographic diversification

4.       Low debt levels

5.       High free cash flow

Coca-Cola, for instance, is the market leader in multiple non-alcoholic beverage categories, generates sales in more than 180 different countries, boasts a market cap of over $200 billion and has an A1 credit rating – qualities that have helped underpin 57 consecutive dividend increases.

Best place to be invested

The investment implications of a prolonged period of low inflation and weak global growth suggests that the world’s top dividend-paying investments are likely to serve investors best in the years ahead. Not only are the dividend yields of high quality companies like Nestlé and Coca-Cola significantly higher than bond yields, ‘defensive’ products and strong balance sheets suggest they will continue to increase dividends despite tough conditions.

The chart below highlights the relationship between dividend and capital growth over the long term.

Source: Marriott

Reliable dividend growth and an acceptable yield to reinvest should ensure inflation-beating returns from these investments in a world of negative interest rates.

Duggan Matthews is chief investment officer at Marriott.


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Negative interest rates make no sense apart from you paying someone a fee to look after your money. One can withdraw the money in cash, put it in a bank vault and withdraw exactly the same nominal amount at any suitable time in the future.

The current interest rate regime is indicative of a deflationary collapse. This is exactly what happened in the GFC and it never went away. What causes this ? simply using irredeemable debt as money. The debt can only grow as money used to extinguish it is created by another act of borrowing. The US Fed tried to inflate the economy with QE xxx but the bond speculators outwitted them- the money went back into the bond market where risk free profits awaited. This increased bond prices and depressed interest rates causing more deflation.

The US Fed has one of three options: default as did Roosevelt and Nixon, print interest free money and destroy the value of the dollar or re monetise gold, the only form of money that nobody owes. My bet is China will beat the USA to the latter.

When the yield on developed-market debt is around zero, the search for yield forces the yield on all industries and investment opportunities to zero. Negative interest rates in safe-haven bonds eventually lead to negative cash flows at companies in emerging markets. When the Fed and the ECB buy an unlimited amount of government debt, they increase the price of the bonds and decrease the yield. The search for yield spreads this phenomenon across the globe. The largest international pension funds support the capital appreciation of companies with a positive dividend-yield until the yield evaporates. When the yield is near, or at zero, they keep on investing for capital appreciation.

An investor buys a company for the yield it offers. A speculator is in search of capital appreciation. The action of Reserve Banks changes investors into speculators and turns pensioners into gamblers.

Interest rates tell us a lot about perceived safety of the banking system. The new bail-in regulations that treat depositors as creditors in case of a bank-failure, forces depositors into the safety of government debt. Negative interest rates prove that investors and pension funds do not trust the banking system. They are willing to pay for the safety of bonds because they expect to be bailed-in at their favourite bank.

Interest rates in developed markets are at record-lows. This means that the level of distress at the too-big-to-fail international banks is at record-highs.

Sensei, presumably these bail-in regulations are not applicable to South Africa. Recall that this was done in Cyprus some years ago.

So where to put ones “cash” if withdrawing from equities?

Bonds give a nice yield in SA but capital losses can occur particularly after downgrade and Cyril sticking to EWC, possible prescribed assets and “free” medical treatment. What about SA Retail bonds…. I fancy these as no capital swings, bail-in risk zero and a fairly decent rate of return. imho Guvmint will not default on these.

SA banks appear to be in relatively better shape than the offshore banks that have been far too reckless at times. Fixed deposit in a bank account, Money Market accounts? Which is better, which is more susceptible to “bail-ins” ?

It is tough now.

pacaratac, SA is a member of the IMF and therefore, the bail-in regulations of the IMF are valid for us. A local depositor will be treated as a creditor in the event of a banking crisis. The Reserve Bank will refund the amount of one hundred thousand rand per individual per account. Our banking system used to be the healthiest in the world, but the incompetence of the ANC government brought this fact into question.

The combined risks of the loss of purchasing power and bail-in regulations make gold a relatively safe alternative to a savings account.

The bail-in risk for a bank deposit makes any investment on the JSE relatively safe in comparison.

Many thanks Sensei.

Looks like “cash” via a money market then better than a fixed deposit directly in a bank. FDs offer only a marginally better rate over 12 months.

Vaults are more expensive than a small negative rate.

Did you figure out that amazing revelation yourself?

Actually the outcomes are terrifying. Zero bonds pushes people into equities which are treated as bonds. Divis can be cut and equities are inflated as everyone searches for yield. 2008 was also a search for yield.
Negative rates cause banks to slowly go bankrupt, debt levels are massive because of qe stimulation. Equities are propped by cheap debt and all the investors are in equities.
In the end it blows up. No wonder investors are putting gold bars in swiss vaults..

Put another way, BTC, crypto/DCX10 and gold have a zero yield. Better than or equal to 97% of all debt on earth?? Bullish.

Over supply of debt. After the year 2 000, with easier systems to generate control over debt, every company/individual started lending money on every kind of product of service they provide. Companies and individuals climbed on this debt-vehicle, in a sense they became banks. Loading the borrowers with uncontrolled inflating debt. This not the Fed or Banks fault as such, this situation started when companies/individuals outside the bank system climbed on this credit bus. The debt bus is overloaded now, and will continue until it breakdown, until then hold on, this deflation situation will get worse.

When a governments income generation through all sorts of taxes becomes too small they start boosting inflation which enables them to repay bonds with cheap money. If this income is still too small the EU politicians came up with a brilliant concept of directly robbing the hard earned savings of the voters through negative interest rates.

End of comments.





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