Fed & Zero Interest Rates

In August, Fed announced a new playbook, that would keep short-term interest rates at near-zero at least until 2023. Long term interest rates were also reduced to less than 1% earlier this year. The Fed is relying on two tools primarily – a slowdown in asset purchases and the targets set for inflation (2%) and reducing unemployment rates before increasing the interest rates. 

Without getting into the debate of Monetary Vs Fiscal policy and the steps that need to be taken, we took a bait at analyzing the effect of Zero interest rates on the Investments in different sectors for the next 5 years.

Changes in short-term interest rates will change the risk dynamics of asset allocation. Some of the key trends that we anticipate are: 

Banks: With interest rates at near-zero, the profitability of the banks will be a point of discussion. 

Real Estate: Even though Covid-19 has impacted investments in the luxury space, we expect tremendous growth in the housing and RE sector in the US. We are anticipating investment inflow into Single and Multi-Family RE. Refinancing will become an important tool, investors will look to borrow short term debt and continue to restructure that debt till interest rates rise.

Manufacturing: Another vertical which could benefit a lot is Manufacturing.  With de-globalization trends accelerating and industries moving closer to their customer base, zero interest rates should considerably aid the manufacturing industry. 

Infrastructure: Every investor we speak to agrees to the notion that the American infrastructure needs a revamp. This is a 5 trillion dollar opportunity that could be exploited by investors by leveraging the zero/low-interest rates. Low-interest rates will allow for accelerated infrastructure spending in the US.  

Corporates: Cheaper debt will increase corporate profits. These profits could be utilized by reinvesting in the business for expansion purposes or to give shareholders a larger pay-out. In addition, we anticipate an increase in spending on digitization and automation.

Emerging Economies (India):

The US Fed rate determines the cost of capital across the globe.

Currency: Indian Rupee (INR) might see an appreciation in the short-term, but the zero interest rates will have a negative impact and the currency is more likely to depreciate in the longer term.

Investments: With cheaper capital available, a larger proportion of funds are likely to be allocated to emerging economies in search of higher yields.

Conclusion: In addition, we anticipate there will be a larger allocation to private markets and the COVID has made families realize the need to invest and adopt digital. 

Furthermore, we see an increased interest in Private Debt as an asset class among the Global Family Office community.

If you are seeing trends in any specific sector, we would be glad to chat with you.

Acknowledging Abhishek Mehta, who contributed to this article. Abhishek leads Business Development efforts at SoHo Ventures.

Disclaimer: The information is not intended to be used for investment purposes.