Threat of negative rates will prompt investors to top-up portfolios
The threat of negative interest rates from the Bank of England will encourage market-savvy investors to boost their UK stock exposure.
On Thursday, all eyes were on the Bank of England as it announced it is leaving interest rates unchanged at 0.1%, and keeping its quantitative easing (QE) agenda.
Indeed, as I explain on my YouTube channel in this video and in The Independent, amongst others, for now, the central bank has avoided moving into negative interest rates, instead making the decision that the less risky step is to keep its £895 billion quantitative easing programme.
That said, it remains crystal clear that as the Bank attempts to boost the coronavirus-hit economy, negative interest rates are certainly not off the table.
Should the Bank of England eventually move into negative rates, as has already happened in the EU and Japan, this would be its first time doing so since the Bank was founded in the 17th century.
Concerns certainly remain over whether negative rates would reach the primary objective of supporting the economy.
This is due to the move potentially being viewed by consumers and investors that the economy is in a hazardous position and, therefore, could lead to a steep drop in consumer and investor demand.
Of course, the debate surrounding negative interest rates’ ability to help the ‘real economy’ will carry on, but there can be no doubt that they would help to boost financial asset prices.
As such, with this now their main focus, investors will be seeking to top-up their portfolios before the next round of cuts takes place, and the likely subsequent price increase. These investors will be looking to make the most of the lower entry points now before the next significant rally.
Furthermore, people with savings in the bank are getting no return due to the ultra-low interest rates, so the possibility of negative rates will give them more reason to increase their exposure to stocks.
I believe that with the economy as it is, and the hints from the Bank of England, rate cuts are on the horizon and it’s becoming a lot clearer that the quantitative easing agenda is not viable.
This will drive up financial asset prices, so many investors will be looking to get ahead of the curve and grow their wealth. As always, the best way to boost portfolios is to make sure they are sufficiently diversified across asset class, sector, region and currencies.