10 ways to make money in an era of record-low interest rates

Photo of Nathan Bell By Nathan Bell

min read

Have a plan, be patient, and wait for opportunities in volatile markets.

Debt is acting like an anchor on economic growth. During recessions, weak companies are supposed to go broke, while the strong are supposed to take their market share and emerge even stronger. The end result is a healthy, dynamic economy where investors earn adequate returns for investment risk.

Unfortunately, money printing, and zero and negative interest rate policies have kept too many poor operators in business, leading to an oversupply of just about everything.

Economics 101 says too much supply means lower prices, hence the global fears of deflation (falling prices). It’s ironic that the very policies designed to save us from deflation are actually deflationary. The shale oil boom, which turned to bust and initially caused the oil price to fall more than 75 per cent, is a prime example of a deflationary outcome that would never have surfaced had explorers and producers not had access to cheap and plentiful debt.

To jumpstart their economies, central banks globally are reducing interest rates, as that’s really all they can do. Interest rates are a blunt tool, but in the short term they can have a very powerful impact on asset prices, exports (as the currency falls in response), spending and borrowing. Once that phase is over, though, investment and activity falls, as investment returns do not justify the risks.

You are left with a system running well below its potential as people save harder to make up for low investment returns (in contrast to spending their money, which is what central banks want), and companies and governments alike spend more money on interest repayments from their huge debt piles.

When debt is high, deflation can be disastrous as falling prices and revenues make it much harder to repay debt used to juice up shareholder returns with lousy acquisitions, buybacks at high valuations, and unsustainable dividends. People then lose their jobs and once-brave speculators turn into turtles.

Will interest rates in Australia hit zero?

That is why zero interest rates are a possibility, if not probability, in Australia.

Australia’s interest rates are at record lows to increase economic activity and produce a lower currency to stimulate exports as the resources boom peters out. The housing market has picked up the slack, but our consumer debt levels are now the highest in the world.

The Reserve Bank is following the same playbook as other major central banks and you need to think about how you would deal with interest rates at or near zero in years to come.

The central banks are almost out of tricks, but the repercussions are still gathering steam. It promises to be painful.

Earning an 8 per cent annualised return from current valuations would be a terrific outcome for the typical portfolio, but I expect many will lose money by buying high-yield products that promise more risk than return. Paying any price for fast-growing stocks usually ends badly, as will paying over the odds for high-yield stocks.

So how can you make money over the next decade?

  1. Be patient. Over the next decade there will be some fantastic buying opportunities. Markets are becoming more volatile after a period of relative calm. Like used cars, there will always be under-valued stocks. Today’s subset of opportunities is not the only one you have to pick from. Think about what tomorrow might bring.
  2. Treat volatility as your best friend. It provides more opportunities to buy low and sell high.
  3. Make sure to have some cash ready for great opportunities. Don’t worry that it is earning next to no interest. The interest is irrelevant; the bargains you will be able to buy with it is what will distinguish your returns.
  4. Don’t wait for GFC Mark II before buying. While the future may rhyme, the next downturn could look much different.
  5. Focus on valuations and not the macro-economic environment. The worse the economic outlook gets, the more likely it is there will be bargains right under your nose. But remember, if it’s well known, it’s in the price.
  6. Never put yourself in a position where you will be a forced seller – at the worst possible time, or where you will get emotional about your finances. Remember the sharemarket owes you nothing and only you are responsible for protecting your savings. Do not shirk the responsibility.
  7. Consider your mix of domestic and overseas shares. Self Managed Superannuation Funds (SMSF) reportedly have less than 2 per cent of their assets overseas, which seems risky given the threats to the Australian economy over the next five years. Some currency exposure may also cushion your returns in a downturn if the Australian dollar tumbles, giving you more ammunition to buy low.
  8. Make sure you are not over leveraged or too exposed to a single theme – such as housing, through your home, investment properties and bank shares.
  9. Be more active than you have been in investing to pick up undervalued stocks. A portfolio of banks and large resources companies will not repeat its performance over the past 24 years since our last recession.
  10. Have a plan. Identify what you would like to own and at what price, and act without emotion. The secret to a happy life is low expectations; anything better is a bonus.

(Editor’s note: Do not read the following ideas as stock or sector recommendations. Do further research of your own or talk to a licensed financial adviser before acting on the themes in this story).

Peters MacGregor has been finding value in companies offering broadband services in the US and Latin America through Liberty Broadband and Liberty Lilac, respectively. Regardless of the macro environment, broadband data usage will continue to grow rapidly and so possibly will prices as people upgrade to faster and higher-quality services.

The reason these stocks become under-valued is that they are complicated. Right now, if a company is simple to analyse or the investment case is well-known, it is probably fully valued. So analysing what is unpopular will eventually lead to superior returns.
If interest rates head toward zero in Australia it will probably trip many investors up. Think about what mistakes they are likely to make, avoid them, and make sure you take good opportunities when you see them and hang on.

Do not wait for perfection, because it never comes. As someone said to me recently, successful investing is about accumulating ones and twos, not aiming to hit a six with every shot.

About the author

Nathan Bell is head of research at Peters MacGregor Capital Management

Follow: @PetersMacGregor.

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