Investing your bank deposit? What you need to know?
Written by Peter Brown & David Flynn of Baggot Investment Partners.
Here is the bad news first. Interest rates are not coming back for a long time. In fact, they are going to go lower first.
Trump and his tariffs are causing a global slowdown and that is causing the US Federal Reserve to about turn, from looking to raise rates this year, to cut them, starting in the next few months. Some say Trump engineered this u-turn with the tariff policy but whether that is the case, I am not so sure. It would indicate some deep long term strategic thinking on his part, something I am not sure he is capable of. Either way, the US Central Bank is about to enter a dovish cycle of lower interest rates to offset the economic slowdown felt by tariff policy.
That matters big time for us as it will weaken the dollar, which is damaging for Japanese, Chinese and European exports. It has been the policy of the ECB to keep the Euro low as we try to get Italy and France through the recessionary cycle to a growth cycle. So far that has failed miserably and now the German economy is slipping back to low-growth also. So at any cost, the Euro will be discouraged from rising and Central bank policies will be focused on that. Mirrored by Japan and China.
Central Banks are about to become Super Dovish.
More rate cuts and wait for it, more printing money. Today, German 10-year bond yields are -0.25% while the Irish 10yr bond rate is +0.3%. Decent yields are impossible to get and we are unlikely to see an improvement for many years.
For the purposes of comparing Bonds and Equities, placing a value on Bonds as we would for stocks, Irish 10 Year Bonds are trading at a Price to Earnings Ratio of 329.
In German 10 Year Bonds, you actually pay about one quarter of 1 percent (0.25%) to the German Government in order to lend them money! That’s right; imagine if the bank paid you to borrow money from them. To get a positive yield, you have to buy German 20 Year Bonds, which are trading at a Price to Earnings Ratio of 613.
What is really scary for depositors is inflation. Your monies although relatively safe from market swings are losing buying power over time. The rate of inflation is critical, presently inflation is somewhat benign, but over the long run, an investor is certain to lose 15-20% buying power in a decade. That is a disaster for depositors or retirees living off a lump sum.
Most people are depositors rather than investors because they are fearful. Fear of losing money and they are right to be wary. The investing market is awash with risky ventures and bad investment products, not to mention excessive fees. But there are alternatives to deposits, here are two to consider.
Dublin city center, walk to work type properties are still relatively cheap and can offer yields in excess of 7% net of management charges. You have to be prepared to buy in unfashionable areas which can deliver capital appreciation over time. Rental demand is high and unlikely to wane. Check out some of the areas deemed unfashionable in the past and prices for rentals are soaring. For those planning to live off a lump sum, this is a secure source of income. Of course, all the relevant checks and searches are vital and require a degree of effort but there is a yield out there.
Royal Dutch Shell, a diversified Oil & Gas company trades on a Price to Earnings ratio of 11.1 and pays a dividend yield of 5.75%. It has a very strong balance sheet (strong financial health) and low net debt levels.
Roche Holding AG, a Healthcare and Pharmaceutical company trades on a Price to Earnings ratio of 14.3 and pays a dividend yield of 3.31%. It also has a very strong balance sheet (strong financial health) and low net debt levels.
Rio Tinto, a diversified mining company trades on a Price to Earnings ratio of 10.5 and pays a dividend yield of 5.68%. It also has a very strong balance sheet (strong financial health) and low net debt levels.
You can contact Peter Brown & David Flynn at email@example.com or Dflynn@baggot.ie