Negative interest rate policies (NIRP) are being adopted by central banks around the world. And it’s quickly becoming the “new abnormal.”
The move to NIRP shows how desperate policy makers are becoming in their quest to stimulate economic growth. But to date, NIRP has produced few tangible benefits.
The only “stimulus” negative rates have produced so far in Japan is to the safe industry. Sales of safes at hardware stores have doubled, and safes have disappeared off many store shelves.
Obviously, the Japanese aren’t planning to pay banks for the privilege of holding their money. Instead, they’ll store cash in safes at their residences.
Investing in the “New Abnormal”
But as I said before, NIRP is the “new abnormal.” I suspect the “mad scientists” at central banks will continue their experimentation on global financial markets and economies. Already, over $7 trillion of sovereign bonds globally trade at negative rates. In other words, at a guaranteed loss if held to maturity.
Eventually, I expect even the Federal Reserve will go negative.
How should one invest in this new environment while staying relatively safe?
It’s a tough call, even for me, with my 30 years of experience. This is new to all of us.
But here though are some places I think will benefit as rates go lower:
At the top of the list is government bonds. As rates go lower and lower, the value of existing sovereign bonds will rise. The best bet right now is U.S. Treasuries. The U.S. 10-year is still yielding 1.75%. That looks astronomical when compared to negative government bond yields in Europe and Japan.
A good proxy for U.S. Treasuries is the iShares 20+ Year Treasury Bond ETF (TLT). This ETF should continue to appreciate if long rates in the United States sink to what I expect to be about 1% in 2016.
~Real Estate Stocks
A big winner should be real estate stocks. Just look at Japan.
Right after the Bank of Japan pushed rates into negative territory, real estate stocks soared.
These companies can now get paid to borrow funds. That means an even greater return on investment as prices for prime office space in Tokyo rise 10% this year, which is the forecast.
Japan is also experiencing a tourism boom, thanks to China, resulting in a shortage of hotels. Again, real estate developers should benefit.
A bonus for Japanese REIT investors is that the Bank of Japan is buying REITs as part of its QE program. An interesting play on Japanese real estate would be the WisdomTree Japan Hedged Real Estate ETF (DXJR).
Similar upward moves are already happening in European property stocks. The same will likely happen here in the U.S., as well, as rates drop.
As I’ve related to readers before, gold should continue to benefit. Add NIRP, various currencies’ race to the bottom, and the growing loss of confidence in central bankers, and you get a very positive cocktail for gold prices.
A big minus for gold is that the anti-gold crowd always said gold pays no interest or dividend. That’s true, but in the world of NIRP, it’s a plus.
With rates going negative around the world, some corporate bonds and emerging market bonds should also benefit. But you have to be careful where you step.
With corporate bonds, stick with investment grade. I expect yields of some corporate bonds to go negative eventually. In Europe, for example, some bonds of Nestle S.A. (NSRGY) have a negative yield.
But you’ll need to actually look at the portfolio of any bond ETF or mutual fund you’re thinking about buying. I expect some investment grade bonds will turn to junk in this slow global economic environment. Just think of what’s happened in the oil patch.
Funds firms like BlackRock and Templeton are now recommending emerging market bond funds. The big plus is that these bonds have already been decimated and therefore offer very juicy yields.
But not all emerging markets are created equal. Investors should look for funds that have positions in countries like Mexico, India, China, Indonesia, and the Philippines. Avoid exposure to Turkey, Brazil, Venezuela, and South Africa.
Another prime beneficiary of negative interest rates will be dividend-paying stocks. But again, investors need to watch their step.
We’ve seen a rush into utilities stocks. But the business model of many of these firms is breaking down. Lower electricity usage, for example, is squeezing the utilities’ incomes. And that will put pressure on future dividend payouts.
For dividends, I’d stick with the highest-quality consumer name stocks, and avoid volatile sectors like financial stocks.
Names like Coca-Cola Co. (KO) and Johnson & Johnson (JNJ) come to mind. Microsoft Corp. (MSFT) should also be a safe bet. And when energy stabilizes, Exxon Mobil Corp. (XOM) should be a good choice, as well.
Bottom line: In this “new abnormal,” investors will have to take a long, hard look at what investments will work and what investments will no longer work.