With interest rates at historic lows, the search for profits by investors is becoming more difficult and is unlikely to improve in the short term.
The condition of the world’s economy means that interest rates in the UK, the Eurozone, Japan and the US are unlikely to increase – and if they don’t, then when will they and who benefits?
When rates were first cut in 2008 to their current levels it looked to be a temporary move to save the global economy.
Since then, investors and big businesses have borrowed huge amounts in bonds to help create cheap finance for the coming years.
Indeed, the situation means that multinational companies are able to borrow money more cheaply than many European governments.
The result is global corporate bond issuance has rocketed past the £1.3 trillion mark, which is the highest level since 2009.
Investment spree
Low interest rates were meant to generate an investment spree, which in turn was meant to spur growth, but this has not happened.
While there may be signs of a revival in growth in America, things are still looking bleak in other parts of the world.
The Eurozone, for instance, recorded another drop in manufacturing, according to the purchasing managers’ index, and unemployment is now 12% – the highest figures since reporting started in 1995.
Lower interest rates also enable firms to substitute the debt for equity which in turn boosts earnings per share though this is more attractive to those executives who have share options.
Last year, British firms forked out 3.1% of the country’s GDP to buy back their own shares.
The supply of cheap money also enables firms to buy the companies and the value of takeovers is now soaring.
Yields and profits
Economic analysts are now predicting that interest rates will remain low for a long time to come – some are predicting that it will be at least another 18 months before the world’s economy picks up again.
Those who will benefit from this are those who can access credit – anyone who is credit-worthy will be able to get cheap money while those who are not credit-worthy are locked out of the system.
One of the downsides is that the financial industries, particularly pension providers, have inherited heavy liabilities –private pension funds have plunged into a £90 billion black hole – and need strong assets with high yields to offset them.
Such profits are hard to come by and, as such, many financial firms are changing their business models in a bid to generate profits that will meet their liabilities.
That means a private investors are rethinking their investment strategies in the search for yields and profits.
