What are Negative Interest Rates?

The Bank of England (BoE) has been gearing up banks for the potential of negative interest rates for sometime now. BoE policy maker Silvana Tenreyro said a while back that the evidence from other countries with negative rates was “encouraging”. Rates currently stand at 0.1% and the BoE whilst playing down suggestions of negative rates have definitely left the door open for the possibility. They have looked into the prospect of negative rates to ensure they could introduce them if necessary.

What do negative interest rates mean for you?

Interest rates are used by high street banks to determine how much they need to pay savers for their deposits as well as how much interest they charge on mortgages and loans. The BoE reduces interest rates when it wants to stimulate the economy: the lower the rate, the more incentive there is to spend and less there is to save. The same will therefore be expected to happen if rates go negative. 

Does this mean I will be charged to keep money in the bank?

Yes. If rates go negative, banks will have to pay in order to hold cash deposits. The likely scenario being that they will pass these costs onto the consumer, as we have seen in Switzerland, Denmark and Japan. This means that the decade of low interest rates we have seen is likely to continue, if not get worse.

I have a variable rate mortgage, will the bank pay me interest on my loan?

This is highly unlikely, regrettably. Mortgage borrowers do not see any benefit in practice as the negative rates only tend to get passed onto savers. The best mortgage borrowers could hope for is a further reduction in their interest rate.  

How will this affect stocks?

Lower rates can have a positive impact on the price of stocks. With the scope narrowing for savers as to where best to put their money, stocks could see a boon from this. Bond rates do the opposite and slide, with the possibility of some government bonds turning negative too, as we are already seeing. You do have to bear in mind that this isn’t how things work in practice. Negative rates are generally the product of weak growth and or a recession, which are all products of a very weak economy. So any initial boost seen in the stock markets could be tempered with the stark reality that the economy is not looking very good. Although, I am of the view that the BoE are far more reactive than proactive, and I don’t think anyone would be shocked to learn we were in a recession if rates went negative.

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What is Quantamental Investing?

Over the last ten years, active managers have found it increasingly difficult to beat benchmarks. It’s arguable that the markets have become harder to outperform, due to everyone having all of the information all of the time. Larry Fink, BlackRock CEO described it well in the New York Times back in March 2017:

“The democratisation of information has made it much harder for active management”. “We have to change the ecosystem—that means relying more on big data, artificial intelligence, factors and models within quant and traditional investment strategies.” 

What Larry Fink is describing here is both the problem and the solution. Yes, the democratisation of information has made it far harder for active managers to have an “edge” over one other. In order to regain this edge, models that constantly analyse vast amounts of data and distil it into useable information could be the way forward. If you take select metrics from individual stocks, for example Sales, EBITDA, Earnings, Cash Flow & Book Value, and input these into a quantitative model that will analyse select stocks against these criteria, you will have a powerful information set.

You can then take this fundamental analysis and combine it with quantitative factor assessment. This type of investment has now broadly come to be known as Quantamental Investing.

Factor based-quantitative investing is being seen as the investment strategy of the future, because these strategies have delivered excess returns. Research from Morningstar shows that, over the past 20 years, broad market factors—such as valuation, growth, quality and momentum— have driven about 65% of a global equity manager’s relative returns.

Cube Capital offer a Quantitative/Quantamental strategy

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It’s always hard to give outlooks and predictions, take 2020 as a prime example! Anyone looking at investment strategies for retirement or SIPP drawdowns last year might have got somewhat of a shock at the end of March. In this short video, founding partner Robert Craig listens to portfolio advisor Paul Sedgwick’s outlook for 2021, where he includes 5 key areas to keep an eye on and how he’ll be looking to navigate the Total Return Balanced Portfolio for the year ahead. With lots of investors asking what the best investment strategy in UK will be and the best ISA investments for 2021 it’s interesting to hear what Paul has to say. Having worked in investment advisory services for a long period of time Paul knows better than most about how to navigate markets to give the best investment strategy for long term growth.

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Robert speaks with portfolio advisor, Paul Sedgwick, about 2020. It’s hard to boil down into a brief review what 2020 meant for investors, without straying off topic into wider the human factors that affected us all. Paul’s succinct review of the year sticks to the stock market and economy, providing a thoughtful synopsis. 

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