Who loses wins?

From “ZIRP” to “NIRP” – just one small step that our Anglo-US friends have not hesitated to take!

These acronyms strangely resemble the onomatopoeias of cartoon stories but actually stand for extremely serious interest rate strategies implemented by central banks in recent years. The “ZIRP” (Zero Interest Rate Policy), was introduced two to three years ago, while the “NIRP” (Negative Interest Rate Policy), represents the rare ability that a number of eurozone countries now have of asking their creditors for money.

For the first time in its history*, on 9 July 2012, France raised debt at negative interest rates with levels of -0.005% for three months and -0.006% for six months! In so doing, France followed its major neighbour Germany, which had been borrowing at negative rates for several months already, with a number of panicking investors even accepting to do so for a two-year period.

We would underscore the irony of the situation: just four months ago, the markets were worried about the ability of a newly socialist France to borrow on attractive terms. Few of us would then have bet that the current situation could have taken hold in France!

Apart from the hitherto-unseen technical situation on short-term rates markets, this event prompts reflection on a wider scale. As US economist, John Kenneth Galbraith constantly stated “sooner or later, the idiots will be separated from their money”. With the “NIRP”, the amounts at stake could very well prove him right on a major scale… The NIRP causes genuine difficulties in allocating savings: what clear-thinking investor would agree to lose part of their investment from the outset?

The new government that has little experience in financial affaires has bizarrely made the most of this period to increase the ceiling level on the Livret A savings account, the French people’s favourite risk-free investment which for once, is actually paying far more than any other investment, while at the same time, condemning annuities and annuitants. This is a surprising way of encouraging savers to take risks again….

So what should we do to allocate our capital in order to prepare for our retirement serenely?

An objective view on the economic situation enables us to reflect on a few winning and promising solutions.

The first solution is obviously to accept that a minimum amount of risk needs to be taken. We continue to encourage you to lend your savings to companies that we consider sustainably solvent and whose bond issues carry attractive rates for investors.

During this period of extreme aversion to risk, another more paradoxical solution would be to invest in the shares of these major groups that are global leaders in their sector. Viewed very positively by the market, these groups are managing to borrow at extremely low rates: 1.6% for SIEMENS over seven years and just 2.4% for VOLKSWAGEN over 10 years! These major industrial groups have found themselves in the hitherto unseen and very comfortable position of being able to finance high-growth projects at rates that have never been so beneficial.

This new and passionate trend entitled strategic carry trade provides a major competitive edge, and a clear advantage that should prompt us to entrust more capital to companies that are benefiting from it.

Let’s forget the acronyms and simply remember that, in this backdrop of low rates that is uncomfortable for savers, opportunities are multiplying for companies. All we need to do is exploit these possibilities and lend to those that are unjustly struggling to borrow and buy shares in those that are finding it so easy to do.

with the participation of Marc CRAQUELIN

*Source Bloomberg