Investment Planning for Negative Interest Rates

Published / Last Updated on 08/10/2020

We already know that the Bank of England is in consultation about the ramifications of moving to negative interest rates (in short they pay banks and financial institutions to borrow money).  This means that it becomes even cheaper to borrow money in a bid to stimulate the economy in a post Brexit and coronavirus world.

Another consequence of this will be that the pound will weaken.  We need to be mindful of this when planning our pensions and investments portfolios.

A weak £ will mean:

FTSE 100 stocks may be more attractive as many FTSE 100 companies earn their profits overseas, so when those profits are converted to sterling, the profits appear larger.

Overseas equity funds and overseas bonds may be suitable investment homes because if you invest in overseas funds today, when and if interest rates fall or go negative in the UK and the pound weakens, that fact that you are already invested in overseas stocks means that even if the equity funds invested in overseas have not gone up or down, your sterling based converted value will have gone up because sterling is weaker.

Gold and precious metals are also similar in terms of the fact that they are ‘safe haven’ investments in times of turmoil, but also the fact that they are usually $ priced, funds may rise in value in the same way that overseas equities would do on a weaker £.

We also suggest smaller companies funds and in particular in emerging sectors such as green energy.  The UK, Europe and North America all have ambitious ethical, socially responsible and governance projects and this emerging sector will be a growth area as many seek to remove away from reliance on the ‘petrodollar’.

Boris Johnson this week has said that he wants the UK to become to ‘wind power’ what Saudi Arabia is to oil.  Could there not be a bigger ‘signpost’ to where the growth sectors are?

Looking ahead to inflation:

Low and negative interest rates are designed to stimulate economies.  This will drive inflation up.  Even the US Federal Reserve said two weeks ago that it would no longer be setting interest rates to manage inflation.  It said that inflation would run higher than normal for ‘a period of time’.  Inflation devalues government borrowing without ever having to repay the debt.  5%pa compounded inflation over 10 years is over 60% inflation.  This would mean debt has been devalued by over 60% if that were the case.

Inflation is coming, so consider index linked funds to hedge for inflation.  Property is also perhaps a longer term ‘bet’ for inflation rather than an immediate plan for negative interest rates.  Inflation equals wages will rise equals property prices will rise.

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