ENJOY THE FALL OF INTEREST RATES

AND THE RISE OF ALTERNATIVE ASSETS

Low interest rates are on all of our minds. They favour borrowers - but they punish anyone looking for adequate returns on their cash. And with interest rates falling close to below zero, it can feel like a rollercoaster. 

How can you safely invest whilst also earning adequate returns, we hear your ask?

It's a question posed by many. Here, at Nebula Ventures we strongly believe that the answer is jumping into the world of Alternative Investments. Some of the world’s most prestigious finance managers have been investing in alternative asset classes for decades. Why? Because the world of alternative assets are secured (asset backed) and are fixed income investments.

low Interest rates 101

We know that investing in a low yield environment can feel both daunting and overwhelming, so we’ve  set out a 101 on all-things interest rates and investments, without the financial jargon (don’t worry, we’ve included this for you as well).

What are interest rates?

Interest rates are a tool of monetary policy, set by a country’s central bank and used as a benchmark for business and consumer borrowing.

But what is the purpose of low interest rates?

Put simply, lower interest rates make it cheaper to borrow. The purpose? To encourage spending and investment, thereby stimulating economic growth. This means that more jobs become available, living standards are improved for all of us and new investment in infrastructure  and technologies expand.  

If lower interest rates stimulate the economy, why is everyone so worried? 

Well, it depends on who you are. We look into the different impacts of low interest rates in more detail below.

Generally though, the concern stems from low interest rates being at the expense of savers. If you are lending money, keeping your savings in bonds, or just sitting on cash in a bank account, you’ll get a lower return on this money when interest rates are low. This hits hardest if you don’t have other forms of income to rely on, like if you are retired.

financial jargon, without the jargon.

Let’s take a few steps back. What do these words even mean? 

Alternative investments are any financial asset that does not fall into one of the conventional investment categories (including stocks, bonds, and cash). Common categories of alternatives include private equity or venture capital, hedge funds, real property, commodities and debt.
A bond, referred to as a fixed income instrument (this is is because bonds traditionally paid a fixed interest rate (coupon) to debt holders), represents a loan made by an investor to a borrower, typically a corporate or the government.
This is how the central bank of a country controls the supply of money and interest rates to influence economic growth, employment and prices.
Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies.
Investment in debt is also a large market in the alternatives space. The term is typically applied to debt investments which are not financed by banks and are not issued or traded in an open markets. Within the private debt market, investors lend to investee entities to finance specific projects or assets, in the same way that banks lend to such entities.
Real assets are physical or tangible assets that have intrinsic value such as real estate, oil, precious metal and commodities. Luxury and collectable goods also fall into this category, including wine, art, jewellery, rare coins, and even baseball cards.
A form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.
Yield is a measure of cash flow that an investor is getting on the money invested in a security. Put another way, it is a financial ratio that indicates how much a company pays in dividend or interest to investors, each year, relative to the security price.

WHAT DOES IT MEAN FOR ME?​

It depends on which side of the coin you’re on – low interest rates can be a blessing or curse.

Good news for:

Borrowers: it’s cheaper to borrow money to finance investment  in both physical and financial assets.

Homeowners: lower interest rates reduce the monthly cost of mortgage repayments, leaving homeowners with more disposable income.

Asset prices: low interest rates make it more attractive to buy assets, such as houses. This is likely to cause a rise in house prices.

Economic growth.

Bad news for:

Savers: lower interest rates give a smaller return from saving, leaving less disposable income.

"But I'm a saver!

how can I earn an adequate return through a safe fixed investment?"

We hear you, loud and clear. And there’s good news! The declining interest rates has led to an exciting growth in alternative assets, with depositors looking for ways to generate safe, but adequate returns for their portfolios.

According to Preqin (a credible source of financial data, see below two graphs), the alternative asset industry is primed for growth, which is being driven by investors’ desire for improved yields.

data snapshot

But, don’t take our word for it!

Prequin predicts that the alternative assets industry will grow to reach $14 trillion in size by 2023 and that 84% of investors plan to increase their allocation to alternatives over the next five years. Alongside the pursuit of higher returns, a contributory driver is the significant shrinkage in many key global public markets over the past two decades. 

Source: Prequin, November 2018

What alternative opportunities exist for me?

Great question! Alternative assets can include anything from the following: 

  • private equity or venture capital;
  • hedge funds;
  • real property;
  • commodities (such as precious metals and fine art);
  • cryptocurrency; and
  • debt.

Which asset you choose to invest in will determine how easily accessible it is, how safe it is, the returns it generates and its liquidity.

to learn more about nebula ventures' series on alternative investments, click the button below.

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