How investors should think about low interest rates
In this week’s video insight Tim discusses how investors should think about extremely low interest rates. In theory, these very low rates of interest increase the value of financial assets like equities. However, Tim identifies three key points investors should keep in mind.
To read more on this topic, you can read Roger’s recent blog If rates are low forever, can asset prices fall?
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Victor
:
As interest rates decline, so too does earnings growth and inflation expectations. In the DCF calculation, use low growth rates for the earnings and a discount rate of around 8.2%. I don’t think anyone wants to enter an investment with expectations of a return less than 8.2%. I think as interest rates get so low, growth rates will also get so low that index valuations will decline causing a fall in the indices. Look at the FTSE100 and DAX30 indices, they have been going sideways to down with low interest rates. The US, European and Australian markets have gotten so overvalued with the decline in interest rates that when the realization of low growth hits, a precipitous decline will result. Now is the time to sell your shares, not buy.