AND THE RISE OF ALTERNATIVE ASSETS
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.
Let’s take a few steps back. What do these words even mean?
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.
Bad news for:
Savers: lower interest rates give a smaller return from saving, leaving less disposable income.
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.
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
Great question! Alternative assets can include anything from the following:
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.
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