Low, falling and negative interest rates point to
very weak expected returns from shares
over the next few years.
Negative long term interest rates mean the holders of those instruments:
Are prepared to pay the issuers (the Governments) to hold their money till maturity ( that is, a reverse of what normally happens ) – this points to a view that security of investment has become a prominent feature with investors;
Acknowledge now that they will incur a loss on maturity – this points to a view that security of investment has become a prominent feature with investors.
Falling long term interest rates mean:
Economic growth and inflation are expected to be very subdued;
The comparative returns available from shares (a competing long term investment) must also be seen to be weak over the longer term;
Returns available from superannuation funds, that invest so heavily in long term interest-bearing securities, must be expected to be weak going forward.
Falling Interest Rates and Share Prices : 2000 -2002 and 2007-2008
During both the above periods of seriously falling prices, interest rates actually declined very substantially.
So, declining interest rates can attempt to support share prices only to a particular extent.
I believe that we are going into a period similar to
2000 to 2002 for share prices
Obviously, one should refrain from buying shares at these elevated prices. A sustained savings program over the next 18 to 24 months appears appropriate.
This is how expensive markets are, as expressed by another noted analyst, John Hussman [www.hussmanfunds.com]
So, according to the above analysis (which can be seen to have a superb accuracy record) one may expect a ‘portfolio’ return of less than 2% per annum over the next 12 years, given current very expensive shares, property and bond prices … not worth the risk .. save your money instead.