How to invest in a negative rate world

How to invest in a negative rate world

As central banks around the world have been forced to adopt unconventional policies in an effort to stimulate economies and provide extra monetary stimulus, negative interest rates is a concept investors are having to get used to.

The European Central Bank (ECB) looks set to cut interest rates further into negative territory on Thursday and the Bank of Japan surprised markets by edging below zero in January. This has only compounded the struggle for investors who are on the search for yield.

Other negative interest rate policy (NIRP) adopters include Sweden's Riksbank, which cut its main repo rate last month to -0.5 per cent and the Swiss central bank, which also lowered rates to -0.75 per cent. The Federal Reserve has also warned banks they need to at least prepare for the possibility of negatively yielding Treasury rates.

NIRPs are meant to encourage banks to shy away from holding onto cash and instead lend it out to the real economy to encourage growth. It's also aimed at helping consumers and firms pay down debt, without extra cost. But it also creates other anomalies in markets, which can make life pretty difficult for investors in search of returns and income, with trillions of government bonds now offering negative yields.

CNBC speaks to analysts and investors about how they are tackling the shift from zero interest rates (ZIRP) to NIRP.

Equities (kind of)

With limited options, equities are still worth looking at using a selective, fundamental approach, according to the global head of Croci investment & valuation Group at Deutsche Bank, Francesco Curto. Although he warned that the return on equities wasn't that compelling when accounting for their risk profile.

Meanwhile, Ewen Cameron Watt, senior director of BlackRock Investment Institute, told CNBC, that he saw "some value" in some of the consumer-based businesses in Europe.

"We see some value in some of the higher quality American franchises, as a consequence of the pullback. But not quite as much value as 3 or 4 weeks ago," he added.

Gold

Gold bears' major criticism of the yellow metal has often been its lack of yield or income, but in a world where rates are offering less than zero, gold looks more attractive.

"Gold is an interesting asset. So what is happening today, is in a world where safe assets have negative yield, by simply having zero yield has a competitive advantage to other assets," said global head of flow strategy and solutions at Societe Generale, Kokou Agbo-Bloua.

"We have seen a lot of gold trades with contingencies, so you can buy a call option of gold with a contingency that the oil price will go lower. This is an interesting take on more of the same risk aversion driving asset prices and being used as a portfolio hedge," he added. A call option is a type of derivative that gives investors the option to buy an underlying asset if it reaches a certain price.

Corporate bonds and high yield

"If you are in a world that isn't going to recession and US high yield is over 9 per cent and European high yield is over 6 per cent and there is no risk of (a) significant rise in interest rates this side of the Atlantic … surely there has to be an opportunity in the reach for (the) yield sector, so we do like the high yield sector," said the head of the UK investment office at UBS Wealth Management, Bill O' Neill.

BlackRock's Watt added that his team focus on a company's capital structure.

"Investment grade bonds got very cheap a few weeks ago and you were being paid to take them. A few weeks ago, high yield got quite cheap and you were being paid to take them. Those aren't quite as strong opportunities, but those rallies in the low risk end of the capital structure have supported the higher end of the market," Watt said.

Financials

"We like the European banks as they offer the greatest potential for a re-rating. The difficulty here is not a solvency risk, just more of a malaise in terms of the earnings outlook. But the sector is cheap," O'Neill said, particularly if you are a private investor not subject to benchmarks.

"We are not prepared to jump in wholesale at this stage, what we have been saying to clients is keep to your target weight and don't let your position drift down. If you look at a 12-month view, we do expect risk assets, equities to outperform safe-haven assets," he said.

Blackrock's Watt added that there's a major opportunity in banking and insurance sector in Europe.

"There will be opportunities in the restructuring," he said.

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