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Super Thursday: 80 months of record low interest rates

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
05/11/2015

UK interest rates will stay lower for even longer – no big surprises there. Indeed, the Bank of England’s second Super Thursday announcement , which sees the release of the latest Monetary Policy Committee (MPC) meeting minutes, the quarterly inflation report and the bank declare its hand on interest rates, was little different from the first one.

At the previous meeting, only one of the nine MPC committee members voted in favour of a rate rise. Once again Ian McCaffery was the only dissenter. He argues that while inflation might be virtually non-existent at present, it could come back with a vengeance once the temporary factors that have kept a lid on prices, notably sinking food and fuel prices, fall out of the equation.

But with the global outlook wobbly, UK growth slowing and a persistent environment of no-inflation, McCafferty is a lone voice. The Bank of England today stressed that while growth in advanced economies has continued and broadened, a more abrupt slowdown in emerging economies remains a big concern.

In a global world, the fortunes of developing and developed markets are closely intertwined, and as growth in the former slows, global demand and trade will follow suit, putting downward pressure on prices, entrenching the ‘ice age’ conditions of low rates.

This backdrop of low growth, low inflation and low interest rates is not going away any time soon. The best we can do is to understand what is driving this environment and how to structure our investment portfolios accordingly.

Here are three things you should know about low inflation, low growth and low interest rates:

  1. Central banks can’t print people

Central banks might have kept the wheels of equity markets greased thanks to quantitative easing and loose monetary policy, however this hasn’t managed to kick start economic growth enough to write home about.

The reason for this, in a word, is demographics. In most of the developed world, populations are ageing and the working population is shrinking. And there’s very little central banks can do about that – they can ‘print’ artificial liquidity but they can’t print people.

As populations age, savings grow and spending shrinks, because the segment of the population which tends to save more – retirees and soon-to-be retirees – swells. Meanwhile, the working population shrinks which reduces investment spend. If savings are persistently high compared with investment, you have an environment of ‘too much money chasing too few assets’ and it stands to reason that interest rates, the key variable that equilibrates savings and investment, must be correspondingly low.

  1. The search for income will continue

With savings likely to exceed investment demand for the foreseeable future, it is very likely that rates will stay low compared with history. Persistently low interest rates mean investors will continue to search for decent returns. This is further underpinned by demographic change – as we near retirement our focus shifts to preserving capital and drawing an income from our accumulated wealth, which further boosts the demand for investments providing a regular income.

Equity income funds in particular will continue to hold appeal for those looking at lengthy retirements – the combination of dividend income and the defensive nature of dividend-paying stocks can be very attractive.

  1. Growth will come at a premium

While lower for longer interest rates will boost the case for equities and equity income funds, they will also put a premium on growth. Anyone seeking decent returns will need to look to the stock market but in particular companies that boast strong cash flows, don’t rack up debt and have pricing power – these are all features of quality companies.

Quality investing is about brand power, pricing power, strong cash flows and balance sheets. But it’s also about sustainability of returns – whether a company can continue to sell its products and make decent returns regardless of what happens in the wider world. In recent years, companies that have been the best at achieving this, for example Facebook and Google, have tended to be relatively ‘capital-lite’ and focused on growing consumer markets, with a clear edge in terms of innovation.

As Clyde Rossouw manager of the Investec Global Franchise fund, puts it: “Good businesses are more expensive than they have been in the past, but ironically far more valuable in today’s world.” Rossouw seeks out these quality companies alongside investors like Nick Train of the CF Lindsell Train UK Equity fund and Terry Smith of the Fundsmith Equity fund.

Maike Currie is associate investment director at Fidelity International.