The artificially low interest rates are becoming more and more of a problem for private investors. Interest income which is below the rate of inflation threatens our prosperity: It destroys savings and hinders the accumulation of private pension assets. In addition, the belief that low interest rates alone are sufficient to stimulate economic growth is a misconception. On the other hand, there is no doubt that low interest rates increase inflation in the long term. More and more investors are realizing that the "low interest rate environment" and the "investment crisis" are related. The only ones benefiting from the low interest rates are debtors.
Savers, including our life insurance customers, as well as investors, are confronted with a situation which is unprecedented in this form. For years, interest rates have been at an historically low level - and that, according to the latest announcements from the central banks, is where they will stay. Sustained low interest rates, however, are not only a blessing. They have more serious consequences than the term might initially suggest.
Diversification and alternative investments as a way out
Investors are finding it very hard to generate returns which allow them to at least retain their capital, let alone to build up adequate wealth for retirement. This is compounded by the fact that almost all asset classes are offering equally low returns. The result is that investors are parking their money in savings accounts, thereby destroying their assets. Or they are buying products which are unsuited to their risk profile. Blinded by high-interest coupons, more and more private investors are reaching for bonds issued by small-and-medium sized companies. But assessing the risk associated with these bonds is virtually impossible for these investors, who run the risk of total losses as a result.
Low interest rates not only put pressure on savers and investors. They also entail a whole range of other risks. These include the effect of driving property prices up, a trend that results, sooner or later, in higher rents, and, ultimately, in inflation.
So what can be done? There is no perfect solution for escaping from the investment crisis. Diversification, however, is one option. However, it is not sufficient to simply spread investments over different asset classes. Systematic diversification across asset classes, countries, regions and currencies is what is required. This also applies to insurers, such as Allianz.
Insurers and pension funds are facing particular challenges. They are limited from the outset in their choice of investment opportunities, due to regulatory requirements. The reason why the share of equity investments among insurers and pensions funds is so low is not because investments in shares are not worthwhile, but rather because this is dictated by the regulators. Alternative investments offer a way out of this dilemma. Investments in, for example, real estate and renewable energies, but also in infrastructure projects, currently yield higher returns than conventional investments.
Coming off the "low interest" drug
To ensure prosperity, Europe needs to find its way back to a sustainable growth path. However, it is wrong to hope that this can be achieved simply with the help of artificially low interest rates. Rather, a whole range of measures is necessary in order to achieve higher growth again in Europe. This includes simplifying complex regulations for the corporate sector, streamlining the state apparatus, privatizing key sectors of the economy and promoting the industries of the future. On the regulatory side, a banking union must be promoted, and efforts made to push ahead with free trade.
Whilst low interest rates benefit only a few, and harm many, economic growth benefits everyone: the state, debtors, savers and investors. It is time to widen our horizons and not to simply rely on the "low interest" drug for growth.
