Can there ever be an end to zero interest rates? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Can there ever be an end to zero interest rates? 

A  A  A
In this issue:
» China property bubble is about to burst
» Are retail investors flocking to equities?
» Yellen needs to be clearer on Fed policies
» Are you a growth or a dividend investor?
» ...and more!

It is an inarguable fact that post the 2008 global crisis, there has been considerable distortion in the way markets and asset prices have been behaving. A large part of the reason has been attributed to the loose monetary policies of central banks especially in the US, Europe and Japan. These economies seem to be caught in a vicious cycle. The central banks kept the interest rates close to zero hoping that it would kick start their respective economies. That has not turned out as per plan. And yet the only solution that these banks seem to offer is low interest rates for an extended period of time.

Can anything be done to revive rates? As per an article in Mint, interest rates (adjusted for inflation) have been falling for three decades now. The problem is that while a central bank may choose to cut rates during a slowdown, if it does not work, there is no further headroom to reduce rates. This is because nominal interest rate cannot fall below zero.

Now to solve the problem of low interest rates, one needs to understand why they have been low in the first place. But here there seems to be many differences of opinion. Some have blamed it on a surge in savings especially in the emerging markets. But this seems to be a faulty argument since it is not the emerging markets that have interest rates close to zero. Instead it is advanced economies like the US and Eurozone, with a dearth of savings, that have had historically low interest rates. Besides, since 1980, global savings have fluctuated between 22% and 24% of world gross domestic product (GDP), with little tendency to trend up or down.

The other much bigger problem is the slowdown in innovation and capital spending. There is no doubt that for growth to reach the next level, there has to be considerable headway made when it comes to innovation and investing in capital projects. Indeed, one of the primary reasons that made the US a superpower in the 20th century was its innovative and entrepreneurial spirit. Economies across the world need to focus on capital building to stimulate growth.

The other thing that needs to be done is to spruce up investments not just in the private sector but in the public sector as well. This would be in education, infrastructure, research and the like all of which have the potential to create jobs and aid growth.

Only when growth begins to pick up from these long term measures, can we expect some healthy rise in inflation. And this in turn will favour higher interest rates and better yields for investors.

Do you think that the global economy will continue to witness zero interest rates for a considerable period of time? Let us know in the Equitymaster Club or share your comments below.

--- Advertisement ---
Are These 5 Blue Chips Part Of Your Portfolio?
The biggest test of a business is its resilience in tough economic environments.

The 2008 global financial crisis is a recent example of such an economic situation.

And there have been many more like it before.

But these 5 Blue Chips have survived them all and continue to keep creating long term wealth for investors.

They could be the stable anchors of your portfolio... the star performers!

And they could give you double or even triple digit returns in the long run.

Get full details on these 5 stocks in our Special Report: Equitymaster's Top 5 For 2020.

Click here to find out how you can claim your copy today...

01:36  Chart of the day
FY14 is a year that the Indian auto industry would clearly like to forget. Other than two-wheelers which managed to record some growth, the rest of the segments saw volumes declining. Given the slowdown in the economy, high inflation and firm interest rates, demand for passenger vehicles (PVs) remained tepid. The fall in volumes was much steeper for commercial vehicles (CVs) as industrial and construction activity remained sluggish leading to lower freight rates. Whether FY15 will turn out to be a better year will depend on what measures the new government announces to bolster growth. From a longer term perspective, growth for automobiles is very much there. But once the uncertainty surrounding the elections dies down and a new government comes into power, perhaps we will see the demand getting unleashed.

Will this fiscal see a revival for the Indian auto industry?
*Passenger vehicles, **Commercial vehicles

Tall skyscrapers, unsold inventories and deserted streets are a common sight in ghost cities of China. Many believe this is a signal that Chinese property bubble is as ripe as a mango. And it is about to burst soon. While real estate constitutes only 16% of China's GDP its repercussions on the dragon nation's growth prospects cannot be emphasized enough.

With property discounts returning in tier 3-4 cities there is a fear that slowdown has set its foot forward. And if the fear materializes than the repercussions on the wealth of an average Chinese could be huge. It may be noted that Chinese have huge investments in property. Majority of their wealth is tied up in real estate. Hence, a fall in property markets means wealth erosion for Chinese. This may also raise the risk of NPAs in the banking system, if developers are unable to pay off their debt amidst declining property prices. While this has raised the risk of mortgage crisis like situation seen in US, the comforting factor is that Chinese mortgages are not bundled into securities and sold to investors. This reduces the risk of contagion and sub-prime crisis like situation as witnessed during the housing bubble burst in the US.

'Euphoria' as defined by the Merriam Webster dictionary is a feeling of great happiness and excitement. This is a word that would not be a misfit to describe the sentiments in stock market investing currently; especially those of retail investors. For a while now, this section of investors has remained out of the action as investor participation was low. However, as reported in the Mint, broking firm Motilal Oswal Financial Services Ltd has highlighted that the average daily turnover of retail investors in cash equities increased by 32% on a month on month basis in March 2014. The figure stood at Rs 75.4 bn. For the nine month period ending May 2008, the average daily turnover stood at about Rs 100 bn. As such, the participation on a relative basis is less. But in any case, it seems to be on the rise in recent times; and we cannot help but associate this with the overall frenzy over the elections. With index valuations in the not so comfortable territories at the moment, this trend seems to be no different from earlier periods i.e. of retail investors buying into stocks not cheap valuations. We suggest investors to be cautious - all the more as this section of investors is believed to be dabbling in stocks in the mid and small-sized companies.

Even as the US economy is witnessing moderate recovery, the job scenario remains far from optimistic. As per Fed Chairman Janet Yellen, a full recovery in the markets is likely to take another two three years. As such, for now, the Fed is likely to continue low interest rates. It is important to note here that while Fed has started the tapering program, its benchmark short-term rate stands at a record low near zero since late 2008. But what has caught everybody's attention is a statement from her that suggested that the rates will remain low for around 6 months. This is earlier than the consensus expectation that rates will be hiked until late in 2015. Any hike in the rates is likely to raise borrowing costs. The stock markets are also likely to react negatively to the move.

We believe that Fed needs to communicate its policies more clearly. An uncertainty about the timing of US rate hike is likely to make global markets more volatile. This will further lead to a slowing down in investment. If that happens, Indian stock markets won't be untouched either.

Should you be a growth investor or a dividend investor? The former focuses on prospective investments with high earnings growth potential, but lays little focus on dividends. The latter looks for cash cows that would generate stable dividend receipts. But what if you can have the best of both the approaches? Yes, we are referring to dividend growth investing, which is like eating the cake and keeping it too. If you were to look at Warren Buffett's investment track record, you would find many investments that fit into this category. In fact, an article in points out some insightful data from the current Berkshire Hathaway portfolio. Of the 43 publicly owned companies in the portfolio, 32 companies pay dividends. It is worth noting that over three-fourth of the total portfolio value is accounted by the top 8 companies. And all of these are dividend payers.

What is the secret behind dividend growth companies? These are typically businesses that have strong long term growth potential and are cash generating machines. In other words, the incremental capital required to grow these businesses is minimal. So if you want to be a successful dividend growth investor, zero down stocks that have these basic characteristics and buy them when they're available at a bargain price.

The Indian stock markets continued to soar higher in the post noon session. At the time of writing, the benchmark BSE-Sensex was up by 246 points (+1.1%). All sectoral indices were trading in the green led by realty and auto stocks. Most of the Asian stock markets, barring China and Japan, were trading firm. Majority of the European markets have opened the day on a strong note.

04:56  Today's investing mantra
"I think you should read everything you can. In my case, by the age of 10, I'd read every book in the Omaha public library about investing, some twice. You need to fill your mind with various competing thoughts and decide which make sense." - Warren Buffett

Editor's note: Kindly note that there will be no issue of The 5 Minute Wrapup on April 18 and April 19, 2014.
Today's Premium Edition
A concept that can help avert stock valuation blunders!
How to make a marked difference in the way one approaches stock valuation....
Read On...Get Access
Recent Articles:
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
Insider at It Again. This Time Stealing from Buffett and Berkshire
August 12, 2017
What is Equitymaster Insider Ankit Shah stealing from Berkshire's success?

Equitymaster requests your view! Post a comment on "Can there ever be an end to zero interest rates?". Click here!

2 Responses to "Can there ever be an end to zero interest rates?"


Apr 18, 2014

Sir, We only knows that our recounting minister shows zero interest in managing the Indian economy.



Apr 18, 2014

All these solutions of the US & Wesrern worlds do not work any more and are a mere theoretical expectations.

Who will consume if there is none to consume? tell me?. Most of thge countriues in the DEveloping have almpst become self sufficient in producing white goods & otrher stuff which is used to be supllied by the WEst in the Past. Buyer markets are satuated by competitive stuff by the DEveloping countries at derth cheap rates.
The only way is follow Canada, Norway. Fill your Country with Rich & middle class Master F'krs who can produce population over night with 4 to 6 wives, then only the Economy may move forward. Does this sound perfect, practical solution & Logic. If you have a better solution pl mention,. If so why it took so long for developed economies to improve ther Economy.

Equitymaster requests your view! Post a comment on "Can there ever be an end to zero interest rates?". Click here!


Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407