Watch Andrew Macken, Montaka CIO, summarize both the parts of the whitepaper in this short video. Low interest rates have been a fact of life in large developed economies for the past decade – and counting. The prospect of sustainably low longterm “risk-free rates” of interest has driven required returns down, and boosted prices, in many financial asset classes. Yields on government and corporate bonds, and capitalization rates on real estate, have fallen. The same has not been true for the aggregate equity market…yet.
In Part I of this two-part whitepaper series, we considered the likely drivers of low interest rates that are currently being observed, particularly around demographics, indebtedness, technology, globalisation and the structure of the international monetary and financial system. We looked to Japan as an example of a major economy that may hold some lessons about the future for the rest of the world. Read Part I here.
In Part II, we consider the consequences of such a protracted low-rate environment on asset prices – in particular on equity prices. We observe that,
notwithstanding a significant recent reduction in global interest rates, the market-implied required return for equities has remained relatively stable. Consequently,
we believe the equity market offers investors attractive risk-adjusted returns on average. Finally, we consider what long run effects this low rate environment may have on our societies more broadly. Read Part II here.