Investing In Low-Interest Rate Environment And Unconventional Monetary Policy

Investing In Low-Interest Rate Environment And Unconventional Monetary Policy

At the time when the entire world is going through the nightmare of coronavirus amid slowing global economy, central banks are adopting accommodative policy of lowering down the interest rates, coupled with unconventional measures to stimulate growth and recover from the economic fallouts all over the world. 

Coronavirus has been a massive blow to the equity markets globally with valuations gone for a toss and volatility-induced panic selling dominating the markets. Further, lockdowns and social distancing measures have led to supply disruptions and demand crunch for businesses. Households are reeling under lack of clarity on wage payments and panic buying.

Amidst widespread fiscal and monetary stance, prudent investment decisions, tapping the “buy at dip” philosophy and not “loosing the calm” attitude may help the market participants in reaping decent benefits or atleast not incurring losses. 

Central Banks Step Into Unconventional Policy League

In addition to slashing interest rates, Central banks are increasingly going for unconventional monetary policy tools to revive economic activity and improve credit flow amid the virus outbreak. These are tools other than interest rates to affect the economy through various transmission channels.

There can be factors that can hinder the normal transmission of monetary policy. Some of them can be when interbank rates fall to zero or there is a shortfall of credit in the economy. During these times, unconventional policies are useful.

The US Federal Reserve took charge by reducing the interest rates to near zero on 15 March 2020 to fuel the US economy. In addition to this, it also promised to buy at least US$500 billion in Treasury and at least US$200 billion in related mortgage bonds.

Fed also combined efforts with 5 other central banks- The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank to enhance liquidity via 7-day US dollar swap line arrangements. On 20 March 2020, the respective central banks settled on increasing the occurrence of 7-day maturity operations from weekly basis to daily. The operations were to be effective from 23 March 2020 to the end of April.

The European Central Bank (ECB) went for an emergency purchase of sovereign and corporate assets of US$820 billion until 2020 on 18 March 2020. Talk about interest rates, ECB held its main deposit rate at -0.5% in its monetary policy meeting on 12 March. It rather expanded its asset purchase program by $135 billion and committed to offer new loans to banks and other liquidity facilities at more promising rates.

Central banks of Japan and Korea joined other banks and eased policy rates following emergency meetings on 16 March 2020, a day after the Fed announced its rate cut to zero. 

Bank of Japan announced the expansion of its purchase of stocks, bonds, assets and provision of zero interest, one-year loans to companies that are out of cash. However, it left its interest rates unchanged at -0.1%. On 23 March 2020, the government announced stimulus measures worth $137 billion which will be financed in part by deficit-covering bonds to improve the economy rout caused by the virus outbreak.

Bank of Korea reduced rates to 0.75% and cut the seven-day repurchase rate by 50 bps to combat the economic damage from coronavirus followed by swap arrangements with the Fed on dollar liquidity.

People’s Bank of China provided banks with a targeted cut of 0.5-1 percentage points from their original level in their reserve ratio requirements and additional 1 percentage point cut in joint-stock banks on 16 March 2020, expected to release 550 billion yuan of liquidity into the system. The one-year loan prime rate was held the same at 4.05% in its policy meeting on 20 March 2020.

Reserve bank of New Zealand reduced its official cash rate to 0.25% from 1% on 16 March 2020. On 23 March 2020 It also announced the purchase of government bonds up to NZ$30 billion over the next 12 months as negative effects of the virus continue to distort economic activity.

While, Reserve Bank of Australia lowered its cash rate to a record-low of 0.25% to prevent the economic damage due to coronavirus. In addition, the central bank has introduced 3-year $90 billion funding facility to support SMEs. The Bank also targeted the 3-year government bond yield at 0.25% and increased exchange settlement balances.

RBA has bought government bonds worth $5 billion on 20 March 2020 and local government bonds worth $4 billion on 23 March 2020.

On the fiscal front, the Federal Government has announced a stimulus package worth A$189 billion collectively to help the economy recover by keeping people in jobs and business.

ALSO READ: Major Banks in Long-Term: Weathering the Corona Storm

 

Sectors To Benefit From Low-Interest Rates

While long term investors may see the present selloffs in the stock markets as an attractive opportunity to buy high-grade stocks at deep discount, they may consider analysing fundamentals of certain sectors that seems to be better positioned amidst low interest rate regime.

 

ALSO READ: Are ASX Growth Shares Better Option to Buy in a Low Interest Rate?

Utilities operate in a highly regulated environment with a stable demand for the product. They prove to be a steady source of income when other asset classes offer lower yields. This sector is considered to be defensive, implying lower interest rates will impact the sector positively.

One may look at historical performance, anticipated future earnings, outlook amidst Covid outbreak, earnings guidance along with other fundamentals to take a sound investment decision. 

Healthcare sector generally performs well in the rate cut environment as they are seen as stable assets. In an uneasy economic atmosphere, healthcare stocks are desirable as they tend to have a track record of constant revenues and high dividends. A slowdown in the economy does not affect this sector as people will persist in using health services.

The current virus pandemic seems to be benefitting players in healthcare realm involved in providing essentials like santiser/masks/ventilators along with those who are exploring opportunities in the virus cure race.

ALSO READ: Recession Pro-Scenario: Tips for Safeguarding/Building Portfolio During Bear Market

Consumer staples: If the cost of debt on loans and credit cards is on a lower side, consumers will have more disposable income in their hands. More income implies more money to spend on consumer staples. Stocks in this sector are considered to be safe in uncertain times.

Amidst the current pandemic and global lockdowns, panic buying has surely supported retailers, e-commerce players and supermarkets. One may consider taking an investment stance in the space considering the demand-supply dynamics, stock availability and the earnings projection and business impact depicted by these companies.

Commodities: Gold’s safe haven stance viz-a-viz latest sell-off to switch to US dollars has to be considered before venturing into the yellow metal space 

Dividend payers: Beefing passive income via quality  blue-chip dividend stocks seems to be a good idea as they tend to be more defensive. They are significant source of constant income when returns from the equity market are at risk. People who are near their retirement can look to invest in dividend stocks for the yield. Investors can further reinvest their dividends which can support in building wealth.

Real estate, utility, telecom and healthcare/pharma can be some themes for stock selection in this regard.

Investors are hereby advised to look at stocks with robust balance sheet, strong fundamentals and stable cash flow within different sectors based on risk appetite and industry outlook to make wise investment decisions in order to protect themselves from the drowning effect of coronavirus pandemic.


Disclaimer
This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice. 

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