The View | Negative interest rates highlight mismatch between advisor and client investment horizons
Negative interest rates are not just creating unprecedented uncertainty in investment portfolios and signalling another financial crisis. But eight years of near zero rates are also challenging how clients invest and the relationship between them and wealth managers.
Today there is US$11.7 trillion invested in negative yield sovereign debt. This includes US$7.9 trillion in Japanese government bonds and over US$1 trillion in both French and German sovereign debt. James Grant of Grant’s Interest Rate Observer lamented, “If these are the first sub-zero interest rates in 5,000 years, is this not the worst economy since 3000 BC?”
The signals given off by sub-zero rates are confusing. Negative rates are supporting risky assets, which explains why the stock markets have reached historical highs. The bull market in equities is not a sign of general prosperity for the entire population. For example, the yield curve for Swiss bonds is sub-zero for the next 30 years, suggesting that investors expect negative rates to persist for some time.
Investors have to be careful not to fall into the intellectual and trading trap of believing that future investing and investment management conditions will be similar to the past. Economic theory says zero rates are the floor in monetary policy as rates must rise. Negative yield bonds certainly represent a poorer investment than cash.
If negative yields continue to spread like a plague then some savers and depositors will not countenance the certainty of compounding losses. They will likely hoard cash, which returns zero per cent. However, a move to cashless economies –a virtual digital confiscation of liquid assets, will prevent hoarding and radically reshape society.
Perhaps monthly statements should be converted to one statement every five years to prevent clients from panicking
A mismatch between advisors’ performance and their clients’ expectations ultimately lead to a break up. An investment horizon of less than five years probably means you aren’t suited for traditional wealth managers or private banks.