The Motley Fool

What if interest rates stay low forever?

As all investors would (or at least should) know, interest rates are at record lows, both in Australia and across the advanced economies of the world. This has had some interesting effects on the ASX that have become apparent throughout 2019 so far.

But according to the Australia Financial Review, this could actually be the new ‘normal’ for our economy – driven by demographic changes and risk and reward calculations.

As our population ages and there is less labour market participation, the level of saving will likely increase throughout the economy. This will also be accompanied by a higher demand for less risky assets such as bonds and cash instruments as retirees typically have less appetite for risk. Both of these trends will likely see increased downward pressure on interest rates for the foreseeable future.

This isn’t too difficult to contemplate – Japan has been dealing with low or negative interest rates for decades now, and bond yields in many European countries are also currently negative.

And if the Reserve Bank of Australia (RBA) undertakes a program of quantitative easing down the road, which is unlikely but not impossible (according to the RBA), this will only amplify these trends.

What will this mean for ASX investors over the next few years?

It’s likely that shares will continue to be revalued higher and higher. Most valuation methods for stocks rely on what’s known as a ‘risk-free rate’ – this is typically what an investor can expect from a government-issued bond (a risk-free investment). If interest rates stay low, the risk-free rate will also remain low, pushing up the valuations of other ‘risker’ investments like shares.

Shares that offer large or stable dividends like Transurban Group (ASX: TCL), Sydney Airport Holdings Pty Ltd (ASX: SYD), Goodman Group (ASX: GMG) and Commonwealth Bank of Australia (ASX: CBA) will be particularly affected. Some of these shares are already known as ‘bond proxies’ as they are the ‘safest’ high-yielding assets outside the government bond market and their appeal will only increase over time if rates stay low.

Foolish takeaway

Despite the major markets shifts that are likely if rates stay low, I think that if investors stick to core investing principles and look for high-quality companies, things will work out fine. Chasing yield for yield’s sake is a more dangerous path, as is chasing hot growth stocks just to get above-market returns. The middle path is a well-worn, but steady road in the end.

So why not check out some of our favourite high-quality, blue chip shares here!

Our Top 3 Blue Chip Shares for 2019 – NOW AVAILABLE!

You’re invited! For a limited time, The Motley Fool Australia is giving away an urgent new investment report detailing our 3 TOP BLUE CHIP SHARES to own in 2019.

So if you like trustworthy, stable, high-performing companies that pay fat fully franked dividends – we’ve got you covered!

Stock #1 is a beloved old Australian company turning its attention to high-margin businesses... and rapidly returning cash to shareholders with its hefty dividend...

While Stock #2 is an online powerhouse that’s rapidly gaining market share all around the globe... poised for years (or even decades) of tremendous growth...

Even better, Stock #3 offers a whopping 6.5% grossed-up dividend! Which beats the rates on term deposits right out of the water – and offers the potential for capital gains, too.

You can discover all three shares inside our new report right now. To scoop up your FREE copy, simply click the link below right now. But you will want to hurry – this free report is available for a LIMITED TIME ONLY!


Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.