Everyone is interested in the interest rates , developed world has negative real rates and the nations in the Europe has high interest rates attracting people to invest and put their money into investments(to buy the debt).
Well when we talk about the -ve rates its because of 2 reasons, interest rates is the rate for buying the money in the market if the money is cheap the rates are low if the money is expensive its high {so this is like anything we buy in the markets good or services}, its balances the demand to save with business desire to invest.So a low real rate may simply be a sign that both consumers and businesses are feeling cautious.
But the rates are also influences by the bank through active monetary policy (ideal one - passive monetary policy is different) at present when the monetary authorities are intervening at both the short and long end of the yield curve. Central banks want rates to be low to encourage business investment, and to discourage consumer parsimony.
In both cases, low rates are associated with a weak economy. If the economy is strong, businesses will be eager to expand and will compete for savers’ capital, bidding up rates.Though its true that this growth and expansion would bring in inflation in the economy (push up wages and the prices ) then the autorities would raise rates.
The implications of low rates for the stockmarket are therefore double-edged. Investors may well be encouraged to shift their money out of cash, and into equities. If share prices rise as a result, then the wealth effect will boost consumer confidence and the economy. But if low rates are an indication that future economic growth will be weak, then profits growth will be slow. That should discourage investors from buying shares. Which factor should be more important in the long run? The Barclays Capital Equity-Gilt Study shows Treasury-bill yields and real US equity gains (or losses) dating back to 1926. So it is possible to test to see whether low real rates have been associated with good or bad times for shares. The answer is pretty unequivocal. In the 33 years where real yields have been negative, the average gain from equities has been 2.3%; in the years when real yields were positive, the average gain was 6.2%. Another way of slicing up the data is to divide them into quintiles. In the lowest-yielding quintile (the years when real rates were most heavily negative), the market showed an average decline of 2.7% a year; in the highest-yielding, the market made an average gain of 7.4% (see chart). That is a ten-percentage-point spread in favour of a positive real-interest-rate environment. A third approach is to look at the best and worst years for the market, and examine the level of real rates at the time. The gaps are not as large but they are still suggestive. Between 1926 and 2011 the best years (the highest-returning quintile) for the stockmarket occurred when real rates averaged 1.2%; in the worst years, real rates averaged only 0.8%. Could this time be different? One possibility is that central banks are overestimating the scale of economic weakness, and keeping interest rates too low as a result. That might be good for corporate profits, but excessively loose monetary policy would also lead to higher inflation. So how are equity markets affected by inflation? In years when the annual inflation rate has been falling, the real return from American stocks has been 9.6%; in years when it has been rising, the real return has been minus 1.1%. So past experience suggests a sudden jump in inflation would not be great for the stockmarket. The other possibility is that central banks have not done enough: monetary policy is still too tight. In that case, the economy will be even weaker than is currently expected and profits will presumably be lower than forecast. It is hard to see how that scenario can be very bullish for equities either. Perhaps none of this would matter if the bad news was already reflected in share prices. The biggest bull markets have started when shares looked cheap. But on two crucial measures—the cyclically adjusted price-earnings ratio (as calculated by Robert Shiller of Yale University) and the dividend yield—the American stockmarket looks more expensive than the historic average. Some people may think that low real rates will ignite an equity bull market. But history does not suggest that will be the case.
Well when we talk about the -ve rates its because of 2 reasons, interest rates is the rate for buying the money in the market if the money is cheap the rates are low if the money is expensive its high {so this is like anything we buy in the markets good or services}, its balances the demand to save with business desire to invest.So a low real rate may simply be a sign that both consumers and businesses are feeling cautious.
But the rates are also influences by the bank through active monetary policy (ideal one - passive monetary policy is different) at present when the monetary authorities are intervening at both the short and long end of the yield curve. Central banks want rates to be low to encourage business investment, and to discourage consumer parsimony.
In both cases, low rates are associated with a weak economy. If the economy is strong, businesses will be eager to expand and will compete for savers’ capital, bidding up rates.Though its true that this growth and expansion would bring in inflation in the economy (push up wages and the prices ) then the autorities would raise rates.
The implications of low rates for the stockmarket are therefore double-edged. Investors may well be encouraged to shift their money out of cash, and into equities. If share prices rise as a result, then the wealth effect will boost consumer confidence and the economy. But if low rates are an indication that future economic growth will be weak, then profits growth will be slow. That should discourage investors from buying shares. Which factor should be more important in the long run? The Barclays Capital Equity-Gilt Study shows Treasury-bill yields and real US equity gains (or losses) dating back to 1926. So it is possible to test to see whether low real rates have been associated with good or bad times for shares. The answer is pretty unequivocal. In the 33 years where real yields have been negative, the average gain from equities has been 2.3%; in the years when real yields were positive, the average gain was 6.2%. Another way of slicing up the data is to divide them into quintiles. In the lowest-yielding quintile (the years when real rates were most heavily negative), the market showed an average decline of 2.7% a year; in the highest-yielding, the market made an average gain of 7.4% (see chart). That is a ten-percentage-point spread in favour of a positive real-interest-rate environment. A third approach is to look at the best and worst years for the market, and examine the level of real rates at the time. The gaps are not as large but they are still suggestive. Between 1926 and 2011 the best years (the highest-returning quintile) for the stockmarket occurred when real rates averaged 1.2%; in the worst years, real rates averaged only 0.8%. Could this time be different? One possibility is that central banks are overestimating the scale of economic weakness, and keeping interest rates too low as a result. That might be good for corporate profits, but excessively loose monetary policy would also lead to higher inflation. So how are equity markets affected by inflation? In years when the annual inflation rate has been falling, the real return from American stocks has been 9.6%; in years when it has been rising, the real return has been minus 1.1%. So past experience suggests a sudden jump in inflation would not be great for the stockmarket. The other possibility is that central banks have not done enough: monetary policy is still too tight. In that case, the economy will be even weaker than is currently expected and profits will presumably be lower than forecast. It is hard to see how that scenario can be very bullish for equities either. Perhaps none of this would matter if the bad news was already reflected in share prices. The biggest bull markets have started when shares looked cheap. But on two crucial measures—the cyclically adjusted price-earnings ratio (as calculated by Robert Shiller of Yale University) and the dividend yield—the American stockmarket looks more expensive than the historic average. Some people may think that low real rates will ignite an equity bull market. But history does not suggest that will be the case.
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