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. themarket.ch
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.
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. themarket.ch