Investment | 12 April, 2019

Invest in the current socio-economic environment

Alberto Villasán Investment and Markets Director

Structural changes in the socioeconomic environment cause changes in the levels of central bank rates

All of us, in one way or another, are affected almost every day by trendy concepts such as demography, technology, productivity, globalisation or indebtedness. All these elements are present in one way or another in all the economies of the main countries, although they are especially evident in the more economically developed areas.

These elements have a relevant influence on our lifestyle and in many cases imply an improvement or a leap in quality. However, economically speaking, they all have a common factor: deflation pressures.

  • Negative demographics and high indebtedness mean lower expenditure and, as a consequence, containment in price levels.
  • Technology, so fashionable in recent years, results in an increase in productivity, which makes it possible to manufacture at lower costs and reduces the price of products.
  • Globalisation makes it possible to manufacture the same products, for less money, in other geographies

 

This absence of inflationary pressures, together with lower consumer spending and lower economic growth, has a decisive influence on the Central Banks’ rate levels.  In the United States, Europe and Japan, rate levels remain structurally low as a direct consequence of the aforementioned factors.

There are investors who think that the rates will rise as the economic situation does. However, the situation does not seem so clear given that the global economy has been fully expanding for almost 10 years (one of the longest in history) and almost no country has managed to raise its rates except for the United States, where the Federal Reserve itself seems to be changing its discourse, giving rise to a much looser scenario.

The importance of long-term bonds in the current environment

From the perspective that it is very likely that rates will not rise significantly during the next few years, and that it is even possible that they will go down in times of economic weakness, we think that the current moment represents a good opportunity for conservative investors in USD. Buying bonds of high credit quality in the long term, with maturities between 7 and 25 years and annual returns between 3.5% and 5.5% in that period of time.

In a context of structurally low or negative rates, we believe that ensuring long-term return should be a strategy to apply in almost all portfolios to a greater or lesser extent.

Even for deposit investors, who could see their main source of return reduced insofar as central bank reduce the policy rates.

And even for more dynamic investors, we think this is a very suitable choice for a part of their assets; they will be collecting an interesting return while waiting for other opportunities to appear, given that one of the main characteristics of these bonds is immediate liquidity and high security.