Photos: Peter Kruppa

Too much money stas­hed away

Mark Dittli, editor-in-chief of the digital financial medium The Market, shares his thoughts with The Philanthropist on the financial markets at the start of the new decade, revealing what might be the game-changing event that makes low interest rates a thing of the past.

The decade of extre­mes on the finan­cial markets has come to an end. At the start of 2010, when the global economy had just come out of the worst reces­sion since the war, nobody would have predic­ted that the stock markets would enjoy a boom lasting more than ten years. Or that across large swathes of the world, zero inte­rest or nega­tive inte­rest would become the norm, with count­ries such as Switz­er­land, Germany, France or Japan issuing bonds at nega­tive inte­rest rates. Even ten years ago, nega­tive nomi­nal inte­rest was seen as frankly impossible.

Mark Dittli, Mana­ging Direc­tor and Editor-in-Chief of «The Market»

Fore­casts are difficult

This expe­ri­ence should humble every commen­ta­tor and stake­hol­der invol­ved in the finan­cial markets when, once again, it’s time for us to issue our fore­casts for the coming decade. In all honesty, we do not know how prices are going to deve­lop on the markets. All we can do is try to grade the aspects that can be obser­ved objec­tively, and use them to work out future scena­rios that could poten­ti­ally come to bear.

There is no doubt that current inte­rest rates, lower than they have ever been before, are the most important of these aspects under obser­va­tion. It is very likely that they were caused by a global surplus of savings capi­tal, or insuf­fi­ci­ent global demand for invest­ment capi­tal – but even that is an inter­pre­ta­tion. This may well be down to demo­gra­phic deve­lo­p­ments or the decli­ning capi­tal inten­sity of the service economy.

As the risk-free inte­rest rate serves as the central anchor for every valua­tion calcu­la­tion rela­ting to the finan­cial markets, the low inte­rest level encou­ra­ges prices for riskier invest­ments, such as corpo­rate bonds, shares or real estate, to keep heading northwards.

How long inte­rest rates will remain low is a tricky ques­tion. The honest answer? We don’t know. At the moment, we’re hearing incre­asing numbers of banks and asset mana­gers say that inte­rest rates will ‘remain low perma­nently’. This could be the case, but it sounds dange­rously simi­lar to the words of the respec­ted Ameri­can econo­mist Irving Fisher. Towards the end of the summer of 1929, he said that the US stock market had reached a ‘perma­nently high’ level. Just a few weeks later, it expe­ri­en­ced the biggest crash in America’s econo­mic history.

Thin­king in scenarios

That’s why it’s important to think about scena­rios. Yes, it may well be that inte­rest rates do stay at their present low level. In this case, inves­tors of all types will be forced to move into the riskier areas of the finan­cial markets if they want to achieve appe­al­ing returns. This is a parti­cu­larly major chall­enge for insti­tu­ti­ons that want to main­tain the value of their invest­ments, while also needing a cash flow to finance their work. Shares in high-quality compa­nies with solid balance sheets are the sweet spot in this scena­rio, but these compa­nies alre­ady come with a hefty price tag, unfort­u­na­tely. In Switz­er­land, Nestlé is one exam­ple. They offer stable divi­dend returns of around three percent, and as a result, they are fast beco­ming a repla­ce­ment for ‘secure’ bonds in the market.

At the same time, we need to consider that inte­rest rates might not remain low perma­nently. Of course, at the moment it might be hard to imagine what could push inte­rest rates up. But that is exactly what a careful inves­tor needs to do: think about situa­tions that might seem unthinkable.

The ‘game-chan­ger’ event that might raise inte­rest rates is some­thing that hardly anyone thinks possi­ble today, namely an unex­pec­ted increase in infla­tion, trig­ge­red, for exam­ple, by incre­asing wages or a boost to the price of oil. In this scena­rio, the bond markets would suffer first, parti­cu­larly bonds with a long dura­tion, while shares and real estate would always offer a certain amount of protection.

Who knows? In ten years, maybe we’ll look back on the 2020s and ask how on earth, in late 2019, we thought that inte­rest rates would remain perma­nently low.

Mark Dittli has been a busi­ness jour­na­list for 20 years. He spent six years as editor-in-chief at Finanz und Wirt­schaft, and five years as a corre­spon­dent in New York. He also wrote for the online maga­zine Repu­blik for a good year. Now, he is CEO and editor-in-chief at The Market, a new digi­tal medium that he laun­ched a year ago. It is targe­ted at inves­tors, offe­ring gradings, analy­ses and opini­ons on what’s happe­ning in the finan­cial markets. The Market is a joint venture between its foun­ding team and the NZZ media group.

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