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Topsy-turvy: A third of us would withdraw money from our accounts and stuff it under our bedroom mattress if rates turn negative

What should investors and savers do if interest rates turned negative?

New research just published by financial giant Aegon suggests that a third of us would withdraw money from our savings accounts and stuff it under our bedroom mattress. But many more – 42 per cent – would use it as an impetus to save less and invest more. 

The findings come amid ongoing speculation that the Bank of England might cut interest rates to below 0.1 per cent in order to revitalise the UK economy.

Last week, its monetary policy committee decided to stick for the time being with a base rate of 0.1 per cent, but a New Year cut cannot be ruled out. 

In theory, negative rates are a stimulatory measure. They encourage consumers to spend rather than save while they incentivise banks to lend cheap money to businesses – the economy’s engine. 

Azad Zangana is senior economist and strategist at wealth manager Schroders.

He says: ‘The idea behind negative rates is to get money flowing out of banks and into the economy in the form of loans and mortgages. Negative rates should encourage borrowing, while discouraging savings.’ 

As Aegon’s research confirms, negative rates – or the mere threat of them – can encourage people to invest more. 

There are steps investors and savers can take that should stand them in good stead if zero or negative interest rates are introduced. 

1.

Work out the Chances of negative rates 

The Bank of England has already asked banks to report on their ‘operational readiness’ to deal with zero or negative interest rates. But finance bosses have warned The Old Lady of Threadneedle Street that such an interest rate strategy may not work. 

Only a few days ago, Amanda Murphy, head of commercial banking at HSBC UK, told the Treasury Select Committee that the Bank of England ‘has to carefully consider whether negative interest rates have the desired outcomes’.

Duncan MacInnes is investment director at asset manager Ruffer. He believes the Bank won’t pull the trigger on negative rates. 

He says: ‘In August 2019, Mark Carney [the then Governor of the Bank of England] said negative interest rates were ‘not an option’.

Now, his successor, Andrew Bailey, says the Bank is ‘not there yet’. As a result we still think the Bank is reluctant to go down the negative interest path.’ Darius McDermott, managing director of investment adviser Chelsea Financial Services, agrees, saying negative interest rates are ‘not at all certain in the UK yet’. 

But, more importantly for investors, he reckons that many factors that go into picking stocks in the current low interest rate environment would still apply if rates turned negative.

These include a search for replacement income (dividend income) and the continuing attraction of growth businesses that borrow at low rates today in order to generate strong revenues tomorrow.

2. Think about the market’s reaction

If interest rates do turn negative, it would affect the value of assets in different ways.

Holding cash would earn little reward and there is even a chance savers may have to pay to keep cash in the bank. Also, if negative rates drove down yields on Government bonds, investors might be tempted to seek riskier assets in the hope of a better return. 

Jason Hollands, a director at wealth manager Tilney, says those in search of a real return (one above inflation) from their savings would be ‘pushed up the risk curve into corporate bonds and equities’.

But he warns that the value of such assets would not be guaranteed and would fluctuate. 

McDermott also says negative rates would be a ‘positive’ for the value of gold. He says: ‘Gold is a much safer store of value than cash at this point.

Also, negative interest rates would mitigate the Achilles heel of gold – namely its inability to earn interest or produce an income. Suddenly a major disadvantage becomes an asset.’ 

Some specific types of bond may work well in a negative interest rate environment.

Peter Spiller, veteran manager of investment trust Capital Gearing, likes TIPS (Treasury Inflation-Protected Securities). These US Treasury bonds, he says, protect investors from the decline in the purchasing power of their money. 

‘It is very hard to invest at the moment,’ admits Spiller.

‘I don’t envy smaller investors doing it on their own.’

3. Find the funds that will benefit

Having weighed up how negative rates might impact your investment portfolio, the next step is to ensure you have the right investment funds. 

Teodor Dilov, fund analyst at wealth manager Interactive Investor, rates investment fund M&G Global Macro Bond because of its ability to scour the world for the most attractive bonds. 

He explains: ‘The fund boasts solid performance over the medium term, generating a total return of 44 per cent over the past five years.

Although the annual dividend is low, at one per cent, dividends are paid quarterly.’

Dilov also suggests Fidelity Global Dividend, an investment fund with ‘a well-diversified and relatively low risk equity portfolio and an income focus’. 

Its annual income is equivalent to just over three per cent, with income paid quarterly. 

Tilney’s Hollands recommends that those who are used to holding large cash reserves should take the opportunity now to consider investing more. 

He says: ‘I urge people to think carefully about whether they have the right balance between cash savings and investments – and to consider funnelling some cash they are unlikely to need over the medium term into investments that have the potential to deliver better returns.’ 

These investments, he says, include corporate bonds, index-linked bonds, absolute return funds, real assets such as gold and infrastructure – and equities. 

He recommends investment trusts Personal Assets and Ruffer – both listed on the London Stock Exchange and which invest across a broad range of equities, index-linked bonds, gold and cash. 

Hollands describes the pair as ‘investments that could be used as one-stop shops for the modest investor wanting to invest across a range of asset classes, beat inflation and preserve their capital’. 

What’s more, McDermott believes low or negative interest rates could benefit ‘growth’ stocks and industry disruptors. 

Funds to take advantage from this, he predicts, would be AXA Framlington Global Technology and Baillie Gifford Global Discovery. 

If negative interest rates are introduced by banks in the near future, Ruffer’s Duncan MacInnes says they would confirm what we all know already: ‘that we live in a topsy-turvy, messed up world’. 

By planning for them now, even though they may not happen, you give yourself the best chance of protecting your long-term wealth.