On July 1, 2014 the Finance Forum on the subject of the interest turnaround and asset management takes place at the University of Liechtenstein as a new event series for actors of the financial center of Liechtenstein. Assistant Prof. Dr. Georg Peter and Prof. Dr. Marco J. Menichetti, Department of Business Administration, Banking and Financial Management, in their expert comment on the challenges of the current low interest rate environment and a possible turnaround.Comments on the interest turnaround and asset management
by Assistant Professor Georg Peter and Professor Marco J. Menichetti*
In all major currency zones, since the autumn of 2008 the central banks have been raising liquidity to hitherto unheard-of heights. The aim was to avoid a liquidity squeeze on the money markets and at the same time to steer the real economy out of recession on the basis of monetary policy stimuli. With the help of these sometimes unconventional measures on the part of the guardians of the currency, base interest and market interest rates were forced down to a historic low – fundamentally a situation from which borrowers stood to benefit, while investors, on the other hand, have been faced with major challenges.
The challenge of cheap money
The latest decision of the ECB Council to sink the base rate of interest in the euro zone to 0.15%, and to introduce for the first time a negative penalty rate of interest at the Central Bank for bank deposits, has triggered vehement discussion. This is because measures of this kind not only affect investors in the European Union, but could also have far-reaching consequences for the international capital and currency markets.
On the other hand, the impact on relations between the euro zone and the Swiss franc has been kept within limits, as a result of the minimum exchange rate policy of the Swiss National Bank which has been in force since 6 September 2011. At the same time, cheap money and the low opportunity costs reduce the yields that can be expected on loans, as well as on shares. Investors have been challenged to adapt to this unfamiliar playing field, and put individually customised strategies in place.
Preparing for the turning point
Many market players are expecting a gradual reversal of the trend – what is referred to as an ‘interest turnaround’. This seems already to be coming into view on some markets. Whereas the economic situation in Europe does not permit us to rule out a further relaxation of monetary policy in the short term, in the United States, above all, the cutting back of loan purchases by the FED has had the result that in certain areas of the interest structure a rise in the rates can be made out. So the crucial question is whether we are likely to have to adjust to a phase of low interest in the middle term, or whether a reversal of the trend may gradually be making itself felt.
As an interest turnaround would have far-reaching consequences for the overall economy in general, and in particular for the financial markets, the important thing is to confront possible interest rate scenarios – both globally and on the European markets – in full awareness, so as to avoid being given an unpleasant surprise when the rates change.
* Assistant Professor Georg Peter and Professor Marco J. Menichetti
work together at the Chair of Business Management, Banking and Financial Management of the University of Liechtenstein. They teach on the BA, MA and Ph.D. courses as well as in executive education. Their research relates on the one hand to the field of empirical capital market theory and market microstructure, on the other to investment strategies in asset management and the management of currency risks.
The Finance Forum on the subject of the interest turnaround and asset management will take place on Tuesday, 1 July 1914, from 2.00 to 7.00 pm, at the University of Liechtenstein.
Further information and bookings: www.uni.li/finanzforum.