Yields despite low interest rates

Skylines - iussue 5/2014

Savings books are generating no interest, while share prices are trading at record levels. So should you be investing more in shares? Skylines asked the experts for their advice.

By the end of March this year, Austrians had parked more of their money in savings books - some 216 billion euros, to be precise - than ever before. Here's the catch, however: due to the low interest rates that have been offered on savings accounts in recent years, these assets are steadily declining in value, once inflation is taken into account. Back in 2007 - in sharp contrast to today - savings accounts seemed a copper-bottomed investment. At that time, a typical savings account containing 100,000 euros, with a commitment of one year, would generate interest of 4,580 euros.

Due to the sharp fall in interest rates in recent years, however, that same savings book would earn you just 540 euros today (correct as at March 2014). Alfred Reisenberger, Head of Investments at Valartis Bank, says the following: "Savers need to realise that by leaving their money in savings accounts, they are letting it be destroyed." Constantin Veyder-Malberg, Chief Executive of Capital Bank, is in full agreement: "Investors are having to adjust to a new reality. The days when a one-year savings book would earn its owner interest of two percent or more are over, and will be for some years to come. Taxes and inflation are steadily chipping away at the capital base. This is not set to change in the foreseeable future."
While savers are generating no financial rewards whatsoever, then, investors who put part of their money in shares have been in exactly the right place for years now, as prices on the world's key stock markets have risen sharply since March 2009. Most prominent amongst these are the world's leading stock market, New York's Wall Street, and the Deutsche B?rse in Frankfurt. Prices at both these institutions have reached historically high levels. So should savers be withdrawing their assets as a result and doing everything they can to move into shares? Such a strategy would actually be bordering on the suicidal, according to Robert Zadrazil, Manager of Private Banking at Bank Austria: "Stock market valuations are certainly no longer as attractive as they were a few years ago, and to describe them as exaggerated or euphoric would be a mistake."
Chair of the Executive Board of Kathrein Privatbank, Susanne H?llinger: "The stock markets are in a long-term upward trend. Double-digit annual price increases tend to be the rule rather than the exception during phases like this." When it comes to the valuation of shares, H?llinger argues that a number of different indicators are currently just above the historic averages. H?llinger: "You should only err on the side of caution when valuations reach an extremely high level."
Despite this, the domestic fi nancial experts say, investors should not move into shares without a safety net. Christian Ohswald, Manager of Private Banking at RLB Noe-Wien: "Stock markets have not overheated yet. But I would advise investors to be more cautious than might usually be the case." When it comes to share investments, the expert recommends investors to provide for strict stop-loss limits. Ohswald continues: "Umbrella funds and asset management from professionals provide support." Manfred Huber, Chair of the Executive Board at Eurambank, says the following about caution: "I advise against blindly buying shares." In selected fi elds, however, such as technology or shares in the health sector, Huber sees good opportunities for taking advantage of rising prices. Huber is sceptical about secure government bonds: "The low interest rates, and the risk of change in this rate, are both arguments against buying."
While shares are a key component of asset development, the experts say, they are not a cure-all. Wolfgang Traindl, Manager of Private Banking at Erste Bank: "Spreading your money across a range of different instruments is, and remains, the magic formula when it comes to investing money." Accordingly, the investment deposits of the Private Banking Department of Erste Bank are designed to be as broad as possible. Depending on the client's appetite for risk, the proportion of shares in the mix ranges between 20 and 30 percent. Robert Zadrazil, Manager of Private Banking at Bank Austria, once again: "To avoid losses of purchasing power on short-term investments in very secure asset classes, investors are prepared to take a higher risk." This is reflected in the way the balanced deposits of Bank Austria are distributed, with just over one-third of the money invested in shares, and one-third in bonds. Private Banking Manager Zadrazil has this to say: "Bank Austria has reduced its weighting of shares in recent months. Despite this, shares still play an important role in its asset management."
Capital Bank's Chief Executive, Constantin Veyder-Malberg: "The low-interest environment is making it difficult to spread your money across a range of investment classes. You can transform an enemy into a friend, however. The ECB is not keeping interest rates this low just for fun. It wants to achieve something by sticking to this policy." This goes for all the other measures put in place by the ECB in June, the experts say. First and foremost, policymakers are aiming to bring inflation closer to the target figure of around two percent. To do this, though, will require economic growth and a stable financial centre. Veyder-Malberg: "We know what the ECB is aiming to do with this. Even the German Bundesbank has had to acknowledge that Europe needs a more aggressive monetary policy."
This would suggest inflation is set to rise in the medium term, capital market interest rates will remain low, and pressure on the euro will increase. This scenario, on the other hand, supports share markets. As Susanne H?llinger, Chair of the Executive Board of Kathrein Privatbank, puts it: "To achieve the target investment of preserving their real assets in the current low-interest environment, investors are going to have to be prepared to invest in high-risk securities as well. For conservative investors, though, secure forms of investment will remain an important component of portfolios. Alternatives are government bonds offering lower profitability, securities issued by developing economies in local currency, and shares."

The asset distribution of Valartis Bank has similar features. Head of Investment Alfred Reisenberger: "Anything up to 70 percent of the deposits of conservative clients is made up of bonds. The bandwidth ranges from government securities to high-interest bonds. Around 20 percent is made up of shares." The expert is focusing on a mix of European securities from the Eurostoxx 600 Index and global shares, added through funds.
In addition to this - and despite its suffering a price fall of around 30 percent last year - gold should not be completely written off as part of your investment portfolio. Erste Bank expert Traindl puts it like this: "Five to ten percent of your money can be invested in gold. This proportion serves as a security position if other investment categories come under pressure." This is likely to happen if interest rates rise. Traindl again: "Over the years, shares and bonds have had a tendency to develop in opposite directions during phases of rising interest rates. This automatic movement no longer applies. After the next change of interest rates, both stock markets and bond markets will come under pressure. When that happens, gold makes a good buffer." It'll be some time before that change of rates becomes a reality, however. Investment expert Reisenberger: "It will take around two more years for interest rates to start rising again in Europe."

Investors are advised to be cautious when putting their money into property. Head of Investment Reisenberger: "Because prices have risen sharply, the yields that can be achieved with property are no longer attractive." The Chief Executive of Capital Bank, Veyder-Malberg, concurs: "Many investors have fled into property while interest rates have been so low. This boom is now over. The new-build projects in major centres of population are being held up, and the prices are already stagnating. And irrespective of how quickly you manage to build up your assets with property or other investment strategies, you would be well-advised to optimise your tax burden."